September 07, 2017

Handle With Care

By Kadambari Shah, Prakhar Misra

Kadambari Shah, Senior Analyst at IDFC Institute and Prakhar Misra in this Pragati article argue that FRBM Act is essential for maintaining fiscal prudence and should not be diluted. Read excerpts from the article below


"Owing to FRBM, the pressure was put on the government, and they couldn’t coerce the RBI to meet their spending needs and demands. As a result, the fiscal deficit, which was at 7.61% at the start of the 1990s and at 5.72% when the FRBM Act was implemented, dropped steadily by 0.5% each financial year to a low of 2.54% in 2007-08. Thereafter, the global financial crisis hit, and liquidity and solvency issues propped up all over the world. The government then rolled out expansionary schemes like the rural farm waiver grant scheme, MNREGA, and the revised salaries of public servants under the 6th pay commission to absorb the effects of the crisis. With this, the fiscal pressures were back on and the fiscal deficit target was suspended.


There are many criticisms to the FRBM. Some say it keeps in check the various states’ fiscal deficits but not the centre’s. The 14th finance commission stated that there should be a 3% target for the centre and a separate 3% target for states. Several even question whether the fiscal deficit targets should be a range or a fixed number. The biggest criticism, however, is that FRBM has no teeth. Ministers can always ‘pause and play’ the recommendations to suit their own needs and motivations – either political or personal.


While some of these criticisms are reevaluated by the N.K. Singh Committee Report, many still remain a concern. The Committee has recommended a medium term target of 2.5% by 2023. Arvind Subramanian, however, disagreed with this target, and said in his dissent note that the calculations don’t justify this number. The Committee has also recommended the establishment of a three-member Fiscal Council that will provide the state and central governments with fiscal forecasts to inform spending and collection. The Committee further recommends repealing the Act entirely, and enacting a ‘Debt and Fiscal Responsibility Act’ instead.


The Modi government is in a unique position to accept and enforce changes that it wants. FRBM, like any other policy has its merits and demerits, but the Act reminds us that democratic mechanisms that bring about transparency are indispensable to keep government institutions under check. That core tenet needs to be protected."


Read full article here

Topic : Transitions / In : OP-EDS
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