Fiscal Policy Strategy Statement

The Fiscal Policy Strategy Statement (FPSS) is a key component of India’s fiscal transparency and accountability framework. It is a statutory document presented to Parliament every year along with the Union Budget, in accordance with the provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The statement outlines the broad policy priorities, strategic objectives, and fiscal stance of the government for the medium term, providing insights into how fiscal policy will be used to promote economic stability and growth.
The FPSS serves as an important policy communication tool, ensuring that the government’s fiscal actions are consistent with its declared objectives of fiscal discipline, macroeconomic stability, and sustainable development.

Legal and Institutional Framework

The requirement to present the Fiscal Policy Strategy Statement arises from Section 3(1)(b) of the FRBM Act, 2003, which mandates the Central Government to lay before Parliament three important fiscal documents each year along with the Annual Financial Statement (Union Budget):

1. Medium-Term Fiscal Policy (MTFP) Statement
2. Fiscal Policy Strategy Statement (FPSS)
3. Macroeconomic Framework Statement (MEFS)

The FPSS thus forms one of the three pillars of fiscal reporting envisaged under the FRBM framework. It reflects the government’s fiscal philosophy and its approach to achieving specified fiscal targets under the Medium-Term Fiscal Policy Statement.

Objectives of the FPSS

The primary objectives of the Fiscal Policy Strategy Statement are as follows:

• To outline the government’s fiscal strategy and policy stance for the upcoming financial year and the medium term.
• To explain deviations, if any, from previously set fiscal targets and justify corrective measures.
• To establish the relationship between fiscal policy and the government’s broader macroeconomic goals, such as growth, employment, inflation control, and external stability.
• To enhance transparency by providing Parliament and the public with a clear understanding of fiscal priorities.
• To promote accountability by setting measurable goals for fiscal management and public expenditure efficiency.

Components and Structure of the FPSS

The Fiscal Policy Strategy Statement generally contains an analytical discussion of the government’s policy stance under major fiscal heads. Its structure typically covers the following components:

1. Fiscal Policy Objectives and Priorities

This section lays out the overall policy direction for the forthcoming year, highlighting key fiscal goals such as:

• Reducing fiscal and revenue deficits.
• Managing public debt sustainably.
• Enhancing capital expenditure for infrastructure and productivity.
• Improving efficiency in subsidy delivery and public sector management.
• Strengthening tax buoyancy through reforms and compliance measures.

2. Fiscal Strategy and Policy Stance

The government outlines its strategy for balancing short-term growth objectives with long-term fiscal prudence. It discusses the stance of fiscal policy — whether expansionary (stimulus-oriented) or contractionary (austerity-oriented) — depending on prevailing economic conditions.
For example:

• During economic downturns, the FPSS may justify higher fiscal deficits to stimulate demand.
• During periods of growth, it may focus on deficit reduction and debt consolidation.

3. Revenue Policy Strategy

This section focuses on the approach to taxation and revenue mobilisation, including:

• Broadening the tax base and improving compliance.
• Enhancing the efficiency of the Goods and Services Tax (GST) system.
• Rationalising direct taxes through reforms such as corporate tax simplification.
• Increasing non-tax revenues through dividends, disinvestment, and user charges.
• Strengthening tax administration through digital initiatives like e-assessment and data analytics.

4. Expenditure Policy Strategy

The government’s expenditure priorities are outlined, distinguishing between revenue expenditure (such as salaries, pensions, and subsidies) and capital expenditure (infrastructure, asset creation, etc.). The FPSS usually highlights:

• Rationalisation of subsidies using Direct Benefit Transfer (DBT).
• Reorientation of expenditure towards growth-inducing sectors.
• Containing non-developmental and administrative expenditure.
• Focus on outcome-based budgeting to improve expenditure quality.

5. Deficit and Debt Management Strategy

This section provides the roadmap for fiscal consolidation, specifying:

• The targeted levels of fiscal deficit, revenue deficit, and primary deficit.
• Plans for debt sustainability, including limiting the public debt-to-GDP ratio.
• Approaches to reduce off-budget liabilities and contingent risks.
• Coordination between fiscal and monetary policies to ensure stability.

6. Policy on Borrowing and Liabilities

The FPSS elaborates on the government’s borrowing strategy, including domestic and external borrowings, issuance of government securities (G-Secs), and debt repayment policies. It aims to ensure that borrowing is used productively and remains within sustainable limits.

7. Evaluation of Fiscal Risks

A critical section of the FPSS assesses potential risks that could affect fiscal performance, such as:

• Global economic volatility.
• Commodity price fluctuations (especially crude oil).
• Exchange rate movements.
• Natural calamities or pandemics.
• Changes in interest rates and inflation trends.
• Contingent liabilities of public sector enterprises.

This section is important for anticipating fiscal pressures and preparing contingency plans.

Interrelationship with Other FRBM Documents

The FPSS complements the other two mandatory fiscal statements:

• The Medium-Term Fiscal Policy (MTFP) Statement sets quantitative fiscal targets (for fiscal deficit, revenue deficit, and debt).
• The Macroeconomic Framework Statement (MEFS) provides projections of growth, inflation, savings, and investment.

Together, these three statements form a comprehensive disclosure framework ensuring transparency in fiscal planning and execution.

Importance of the Fiscal Policy Strategy Statement

The FPSS holds significant importance for policymakers, investors, and the general public as it:

• Serves as a strategic guide for fiscal management.
• Promotes transparency and credibility in budgetary operations.
• Facilitates parliamentary oversight on government’s fiscal decisions.
• Assists investors and credit agencies in assessing fiscal sustainability.
• Strengthens policy coordination between fiscal and monetary authorities.

By presenting a coherent fiscal strategy, the FPSS enhances the predictability and effectiveness of government finances.

Evolution and Practical Application in India

Since its introduction under the FRBM Act, the FPSS has evolved in scope and content. Early versions focused mainly on deficit reduction strategies, while recent editions have expanded to address broader macroeconomic challenges, including growth stimulation, climate financing, and social sector spending.
For instance:

• During 2008–09, the FPSS justified a fiscal expansion to counter the global financial crisis.
• Post-2012, it emphasised fiscal consolidation through revenue enhancement and expenditure control.
• After 2020, amid the COVID-19 pandemic, the FPSS adopted a growth-oriented fiscal stance, focusing on infrastructure investment and welfare support while committing to a gradual return to fiscal discipline.

Recent FPSS documents have also highlighted initiatives such as:

• National Infrastructure Pipeline (NIP) for capital formation.
• Asset Monetisation Programme for non-debt capital receipts.
• Fiscal federalism and higher devolution to states under the Finance Commission.

Challenges and Criticism

Despite its significance, the FPSS faces certain practical challenges:

• Implementation Gaps: Deviations from fiscal targets often occur due to unanticipated economic shocks.
• Quality of Disclosure: Some analysts argue that the FPSS tends to be descriptive rather than analytical.
• Off-Budget Liabilities: Borrowings by public agencies sometimes obscure the true fiscal position.
• Limited Parliamentary Scrutiny: Detailed examination of FPSS content in Parliament remains limited.

Nevertheless, it remains a key document ensuring transparency and medium-term fiscal vision within the government’s budgetary process.

Contemporary Significance

In the current context of post-pandemic recovery and fiscal realignment, the FPSS plays a crucial role in balancing fiscal prudence with developmental needs. It signals the government’s policy intent to investors, rating agencies, and international financial institutions.
Looking ahead, future FPSS documents are expected to focus increasingly on:

• Green fiscal policy and climate financing.
• Digital public infrastructure and innovation-driven growth.
• Fiscal sustainability and debt transparency.
• Inclusive development and social spending efficiency.