Medium-term Fiscal Policy (MTFP) Statement

The Medium-Term Fiscal Policy (MTFP) Statement is a key fiscal policy document mandated under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. It provides a three-year rolling framework that outlines the Government of India’s fiscal policy objectives, targets, and projections for revenue, expenditure, and fiscal indicators. The MTFP Statement forms an integral part of India’s fiscal responsibility framework, aiming to ensure fiscal discipline, transparency, and long-term macroeconomic stability.
It is presented to Parliament every year along with the Union Budget, offering a medium-term perspective on the government’s fiscal trajectory and its consistency with the overall goals of sustainable growth and fiscal prudence.

Background and Purpose

The FRBM Act, 2003, was enacted to institutionalise fiscal discipline and reduce fiscal deficits in a rules-based manner. It requires the central government to present a set of fiscal policy statements to Parliament each year, including:

1. Macroeconomic Framework Statement (MF Statement)
2. Medium-Term Fiscal Policy (MTFP) Statement
3. Fiscal Policy Strategy (FPS) Statement
4. Medium-Term Expenditure Framework (MTEF) Statement

Among these, the MTFP Statement serves as the core fiscal planning document, presenting rolling targets for key fiscal indicators for the budget year and the following two years.
Its primary purpose is to:

• Provide a three-year roadmap for fiscal management.
• Guide annual budget formulation within a consistent fiscal policy framework.
• Ensure that revenue and expenditure projections are aligned with medium-term fiscal consolidation goals.
• Promote transparency and accountability in fiscal operations.

Legal Mandate and Presentation

Under Section 3(2) of the FRBM Act, 2003, the Central Government is required to lay before Parliament, along with the Annual Financial Statement (Union Budget), the Medium-Term Fiscal Policy Statement.
According to the Act, the MTFP must include:

• The government’s fiscal objectives for the medium term.
• Three-year rolling targets for key fiscal indicators.
• An explanation of how the fiscal targets are consistent with macroeconomic assumptions and policy priorities.

The statement is prepared by the Ministry of Finance (Department of Economic Affairs) in consultation with other departments and forms part of the Budget documents presented annually.

Components and Structure of the MTFP Statement

The Medium-Term Fiscal Policy Statement typically contains projections and targets for the following major fiscal indicators over a three-year horizon:

1. Revenue Deficit as a Percentage of GDP:
   • Indicates the extent to which government revenue receipts fall short of revenue expenditure.
   • The MTFP sets a declining trajectory to move towards eliminating the revenue deficit.
2. Fiscal Deficit as a Percentage of GDP:
   • Represents the total borrowing requirement of the government.
   • The statement sets out the government’s plan to reduce fiscal deficit to sustainable levels over the medium term.
3. Tax Revenue and Non-Tax Revenue Projections:
   • Provides estimates of gross tax revenue, direct and indirect taxes, and non-tax revenue for the next three years.
   • Based on expected economic growth, tax policy reforms, and improved compliance.
4. Total Expenditure and Capital Outlay:
   • Projects both revenue and capital expenditure.
   • Aims to ensure adequate capital spending to support infrastructure and growth, while controlling revenue expenditure.
5. Debt and Liabilities:
   • Presents targets for general government debt and ensures consistency with debt sustainability parameters.
6. Assumptions Underlying Projections:
   • The MTFP specifies assumptions regarding GDP growth, inflation, interest rates, exchange rate, and global economic conditions that underpin fiscal projections.

Methodology and Projections

The projections in the MTFP are prepared using macroeconomic models that integrate fiscal, monetary, and growth variables. The process involves:

• Assessing current fiscal trends based on the previous year’s actuals.
• Incorporating policy changes announced in the Budget.
• Estimating future revenue buoyancy and expenditure needs.
• Aligning fiscal targets with the Medium-Term Expenditure Framework (MTEF) and FRBM goals.

The statement also includes a sensitivity analysis to highlight potential risks that may affect fiscal outcomes, such as fluctuations in oil prices, global growth, or changes in domestic demand.

Linkage with Other Fiscal Policy Statements

The MTFP Statement complements other FRBM-mandated fiscal policy documents:

• The Macroeconomic Framework Statement provides the broad macroeconomic context (growth, inflation, balance of payments) within which fiscal policy operates.
• The Fiscal Policy Strategy Statement outlines the government’s strategic priorities for achieving fiscal targets.
• The Medium-Term Expenditure Framework Statement focuses on the expenditure side, providing sectoral allocations consistent with the MTFP projections.

Together, these documents create a comprehensive fiscal policy framework that links short-term budgeting with long-term fiscal sustainability.

Role and Importance

The MTFP plays a vital role in shaping India’s fiscal management by:

• Providing a Medium-Term Fiscal Roadmap:It outlines how the government intends to achieve fiscal consolidation over a multi-year horizon, ensuring policy continuity.
• Enhancing Fiscal Discipline:The statement acts as a commitment device, binding the government to adhere to pre-specified deficit and debt targets.
• Promoting Transparency and Accountability:By disclosing projections and underlying assumptions, it allows Parliament and the public to evaluate fiscal performance against stated targets.
• Guiding Budget Preparation:The MTFP serves as a fiscal anchor for annual budget formulation, ensuring that budget estimates are consistent with long-term fiscal goals.
• Strengthening Monetary–Fiscal Coordination:By providing clarity on fiscal policy stance, it helps the Reserve Bank of India (RBI) in designing complementary monetary policy actions.

Key Fiscal Indicators in the MTFP

The MTFP typically outlines the government’s targets for the following key indicators:

These targets are indicative and are reviewed annually based on prevailing economic and fiscal conditions.

Challenges in Implementation

Despite its importance, the effective implementation of the MTFP framework faces certain challenges:

• Revenue Volatility:Tax collections are sensitive to economic cycles and policy changes, leading to deviations from projections.
• Expenditure Rigidities:Committed expenditures such as salaries, pensions, and interest payments limit flexibility in achieving fiscal targets.
• Global Economic Shocks:External factors such as commodity price volatility, geopolitical tensions, and pandemics can derail fiscal projections.
• Political Economy Factors:Populist spending pressures and electoral cycles may sometimes lead to fiscal slippages.
• Data and Estimation Issues:Inaccurate forecasting or delays in data availability may affect the reliability of projections.

Significance in Fiscal Governance

The MTFP Statement is a cornerstone of medium-term fiscal planning in India. It provides Parliament, investors, and international agencies with a clear view of the government’s fiscal policy stance and credibility.
Its significance can be summarised as follows:

• Acts as a fiscal anchor for medium-term policy decisions.
• Reinforces India’s commitment to fiscal consolidation and debt sustainability.
• Encourages responsible budgeting and prudent public spending.
• Enhances fiscal policy credibility in domestic and international markets.