Q.1 “A hard and fast control on the government’s fiscal freedom may be counterproductive to the economy”. In light of this statement, discuss the changing idea about the FRBM Act in the country.

Ans. Aimed at fiscal consolidation, India passed the fiscal responsibility and

budget management (FRBM) Act in 2003—soon states also passed their fiscal responsibility acts (FRAs) on the similar line. To the extent ‘exact’ follow-up to the FRBMA-linked targets are concerned, the performance has been mixed. The targets were exceeded many times due to fiscal escalations (either due to natural calamities or on exceptional ground), while many times they were better than the mandated figures. The implementation of the Act has also been postponed thrice by now. But this act brought the element of higher fiscal discipline among the governments, there is no doubt in it. In the past few years a view has emerged as per which binding the government expenditures to a fixed number may be counterproductive to the economy at large. Due to a hard and fast discipline regarding fiscal targets, some highly desirable expenditures by the government may get blocked, for example— expenditures on infrastructure, welfare, etc.

Accordingly, we saw the Government proposing (in 2016–17) two important changes in the FRBM mandate, namely—

(i) Provision of a ‘range’ as a target of fiscal deficit in place of a ‘number’; and

(ii) Linking ‘fiscal expansion or contraction’ with the ‘credit expansion or contraction’.

In this backdrop, an expert committee was set up by the Government which handed over its report to the Government by late January 2017. The report (which is still not in the public domain) will be carefully studied by the Government (as per the Union Budget 2017–18) and decisions will be taken later on.