"It appears that the FRBM act and the rules framed for fiscal discipline was an exercise in futility". Discuss suggesting steps towards fiscal discipline with reference to FRBM Act 2003.

Model Answer:
The FRBM Act 2003 envisaged at:
Reducing revenue deficit; fiscal deficit; liabilities of the government; prohibiting the Union Government from guaranteeing to loans raised by PSUs and State governments and mandates fiscal consolidation. However, due to lack of an autonomous Fiscal Management Review Committee, its mandate was diluted and even today we find both revenue deficit and fiscal deficits in budget documents. The government deviated from the path of fiscal correction in the wake of the global financial crisis; the shortfall in subsidy bill forced government to borrow more and more from market, which increased the liabilities and interest to be paid by government. Also, government passed a fiscal stimulus package to revive the economy.Thus, violating the mandates of fiscal consolidation of FRBM act 2003.Furthermore, in 2010-11, Government gave further blow to this act by including the concept of Effective Revenue Deficit replacing revenue deficit in the budget documents. The amended rules did nothing except extending the time for elimination of fiscal deficit by years. Thus, we can say that that the FRBM act and the rules framed for fiscal discipline was an exercise in futility.
The problem in FRBM rules is that it can be simply amended by gazette notification and thus; has no provision of forceful enforcement with compliance. However; there are some other approaches which can help:

  • Move the annual numerical targets from FRBM rules (which are framed and amended by central Government at whim by gazette notification) to the FRBM act itself (so that at least a parliamentary approval is needed to make changes)
  • Do away with the ambiguous concept of the Effective Revenue Deficit which is nothing but a jugglery to rewrite revenue expenditure as capital expenditure.


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