PRELIMS 2021 KEYS RAJA sir cracking IAS Academy

Latest News

CURRENT AFFAIRS, WHATS NEW

Either Repeal or Revise the Country’s Fiscal Law

FRBM Act 2003

  • Mandatory Provision: The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:
    • Medium Term Fiscal Policy Statement: It lays down the limits on the size of the budget deficits for three years and targets for tax and non-tax receipts.
    • Macroeconomic Framework Statement: The macroeconomic framework gives the government’s outlook on growth prospects of the economy. 
    • Fiscal Policy Strategy Statement: It explains how the current policies follow sound fiscal management principles and give reasoning for any deviation from the deficit targets set by it under the FRBM Act.
  • Target for the Government: It sets a target for the Centre’s annual fiscal deficit ratio (FD) at 3% of gross domestic product (GDP). 
    • The states had to legislate their own FRBM Acts, limiting a state’s FD to 3% of its own GDP.
    • Continuing the path of fiscal consolidation, the Government intends to bring the fiscal deficit below 4.5 per cent of GDP by 2025-26.
  • Prohibition on Borrowing: The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.
    • The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit.

Challenges of FRBM Act, 2003

  • Reliance on Fixed Numbers:  Focusing on a fixed target for the fiscal deficit restricts the government from dealing with dynamic situations typical of market economies. 
    • The requirement to achieve a fixed target has prevented fiscal policy from being countercyclical when needed. 
  • Escape Clauses: The FRBM Act has also been criticized because of incorporating imprecisely defined fiscal deficit escape clauses and limited accountability in the event of missed targets.
  • Weak Linkage between Policy Setting and Implementation: This has hindered the ability to promptly and clearly adjust to changes in fiscal policy. 
    • The transparency and accountability framework has not been able to provide sufficient coverage or assessment of fiscal risks.
  • Lack of Debt Ceiling Law: India’s fiscal rules are mainly focused on traditional budget balance rules with no debt ceiling law.
    • Emerging best practices have moved toward a structural budget balance rule or an expenditure rule.
  • Insufficient Assessment of Fiscal Risks: There was no attempt to assess the potential fiscal risks.
    • For example: The impact of the announcement of the Pay Commission, the increase in commodity prices and the implications on fiscal policy, the implications of off-budget items such as contingent liabilities.

Suggestions

  • Need for flexible fiscal policies, combining public and private spending.
  • The arbitrary limits on budget deficits might not be the most effective approach. 

Time for Clearly defined Escape Clauses and Strengthening the enforcement of Fiscal Rules by

  • The establishment of independent fiscal councils
  • Full-fledged fiscal stability reporting, addressing the coverage of off-budget items like contingent liabilities
  • Improving linkages between fiscal policy and budget processes
  • Sharing of responsibilities and coordination within tiers of government for stabilization and sustainability
  • Introducing state credit ratings for measuring fiscal performance

FRBM Review committee recommended

·        The Committee headed by former Revenue Secretary, NK Singh was appointed by the government to review the implementation of FRBM.

·        The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.

·        Fiscal Council: The committee proposed to create an autonomous Fiscal Council with a chairperson and two members appointed by the Centre (not employees of the government at the time of appointment)

·        Deviations: The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified.

·        Borrowings: According to the suggestions of the committee, the government must not borrow from the RBI, except when:

o   The Centre has to meet a temporary shortfall in receipts

o   RBI subscribes to government securities to finance any deviations

o   RBI purchases government securities from the secondary market

It’s time to update the fiscal rules to be more flexible and coordinated, ensuring a balance between discipline and adaptability in managing the country’s budget.



POSTED ON 02-11-2023 BY ADMIN
Next previous

General Studies

Political Science and International Relations

Sociology

Some Reference Essays

List of previous year essay topics (1997-2019)

IAS GOOGLE is googled by the team of Raja Sir’s Cracking IAS Academy. Sources include The Hindu, Indian Express, pib.nic.in, Down To Earth, Economic Times, Vigyan Prasar, AIR and the like. IAS GOOGLE has been prepared in pace with emerging UPSC Trends.

LATEST NEWS

22 Nov
Atlantic Meridional Overturning Circulation(AMOC)
21 Nov
What were the events that led to the Quit India Movement? Point out its results. (Answer in 150 words) (UPSC IAS Mains 2024 General Studies Paper – 1)
21 Nov
Marriage as an institution has undergone a radical transformation from ‘ritual’ to ‘commercial’ in its outlook. Explain the factors behind this change.. (UPSC CSE Mains 2024 - Sociology, Paper 1).
21 Nov
Write approximately 150 words on "Locke’s views on Revolution". (UPSC CSE Mains 2024- Political Science and International Relations, Paper 1)

CATEGORIES

NEWSLETTER

Copyright © 2021 IAS Google. All Rights Reserved