What is FRBM Act 2003?
Under the Fiscal Responsibility and Budget Management Act (FRBMA) 2003, both the Centre and States were supposed to wipe out revenue deficit and cut fiscal deficit to 3% of GDP by 2008-09, thus bringing much needed fiscal discipline.
Why do we need a new Act?
- We need a new Act because the existing FRBMA has proved ineffective
- It was suspended with impunity in 2009, for several years, during which the fiscal deficit went out of control
- There was also non-transparency which allowed the deficit to be seriously understated
What fiscal targets should we adopt?
- Fiscal rules should focus on macroeconomic stability and the relevant targets for this are the fiscal deficit, the primary deficit, and the debt/GDP (gross domestic product) ratio
- Since the fiscal deficit and debt ratio are our weak points, our fiscal rules should try to correct both
Are the proposed targets reasonable?
- The committee has recommended reducing the Centre’s debt to GDP ratio from 49.4% in 2016-17 to 40% by 2022-23. The states’ debt ratio is targeted to remain at around 20%. The combined debt of the Centre and the states is targeted to go down from 68% in 2016-17 to 60% by 2022-23.
- The 60% debt target for the Centre and the states combined is an improvement from 68% in 2016-17, but it is still much above the average of about 40% for similarly rated emerging market countries
- However, since our growth rate is also much higher, a 60% debt ratio may be accepted as a reasonable target.
- Perhaps the new Act should explicitly allow adjustment of the medium-term fiscal deficit targets once every two years, to reflect revisions in the expected medium-term growth rate