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Appraise the FRBM

Appraise the FRBM
Highlights

The State governments are often at the receiving end while seeking an increase in FRBM limit on fiscal deficit. The Fiscal Responsibility and Budget Management (FRBM) Act imposes a blanket 3 per cent limit on fiscal deficit. But, the fiscal expansion or contraction are/should not be arithmetical concepts. 

The State governments are often at the receiving end while seeking an increase in FRBM limit on fiscal deficit. The Fiscal Responsibility and Budget Management (FRBM) Act imposes a blanket 3 per cent limit on fiscal deficit. But, the fiscal expansion or contraction are/should not be arithmetical concepts.

The fiscal course of an individual or a business entity or even government should be determined by a host of factors especially the way the money is to be spent and how it could impact. A parent who spends beyond his/her means to educate a child cannot be called fiscally irresponsible even if it leads to debt.

Similarly, the government spending cannot be determined by artificial statistical calculations alone. This is not to sanction fiscal profligacy or undermine the dangers of fiscal bankruptcy.

The fiscal behaviour of a government is mandated by the popular verdict it receives. However, such undemocratic acts were necessitated by the reckless spending of successive governments driven by competitive political populism.

Often the government of the day that has a popular mandate to rule for only five years indulges in thoughtless fiscal practices leaving a legacy of debt to the government that follows. No doubt, the FRBM was enacted with a good intention to clean up public finances and make them sustainable.

This is why the FRBM Act envisages limiting the fiscal deficit and eliminating revenue deficit of the governments. The FRBM restriction can be enforced without impacting anyone or any sector if there is buoyancy in revenues. But, this is not always in the hands of any government.

In the eventuality of failing to meet revenue targets, the governments are forced to slash public expenditure hindering growth prospects thereby negatively impacting the future revenue accruals too. More worrisome is the fact that the grinding axe of fiscal austerity falls on the social sectors that addresses the concerns of the most vulnerable sections in the society.

Therefore, the sustainable deficit should be a much better fiscal management target rather than a fiscal deficit. But, the difficult task is to define and compute the sustainable deficit. The fiscal deficit is quantifiable and tangible. The government should evolve a methodology to measure the concept of sustainable deficit.

It can include aspects like debt to GDP/GSDP, debt to capital expenditure, the ratio between the debt servicing burden and the revenue collections. The specific features of debt like the maturity period and the rate of interest can also be taken into cognisance while arriving at the sustainable deficit.

Government often indiscriminately defines what capital and revenue expenditures are. Such erroneous positions can distort the concept of sustainable deficit. Therefore, the FRBM Act needs a comprehensive review.

Any exercise of fiscal management should not only be cautious but sensible and far-sighted. The act is sagacious only when it cuts down inessential spending and retains the essential expenditure.

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