Amending the FRBM Act

The Union finance ministry is committed to reducing the government’s fiscal deficit from 6.9 per cent of gross domestic product or GDP in 2021-22 to 6.4 per cent in 2022-23. What’s more, the deficit is set to decline to 4.5 per cent by 2025-26. A reduction in the fiscal deficit by about two percentage points over three years may appear to indicate a slow pace of consolidation, but the government has nevertheless set a medium-term target for lowering the deficit.

Yet, there are questions about the way the fiscal consolidation plan has been outlined. Two specific questions have arisen. What about the promised amendment to the Fiscal Responsibility and Budget Management (FRBM) Act? And, more importantly, what is the glide path for fiscal consolidation in the next two years of 2023-24 and 2024-25?

Remember that the 2021-22 Budget had made a specific promise about an amendment to the FRBM Act. In her 2021 Budget speech, Finance Minister Nirmala Sitharaman had referred to the deviation from the targets set earlier. The law had mandated a fiscal deficit of 3 per cent of GDP by 2020-21. However, the Covid impact on the economy and government finances meant a slippage in the deficit to 9.5 per cent in 2020-21 and a projected deficit of 6.8 per cent of GDP in 2021-22. Ms Sitharaman had said: “Towards achieving Central Government fiscal deficit along the broad path that I have already indicated, I will be introducing an amendment to the FRBM Act.”
 

There was yet another promise made in the 2021 Budget. This was about presenting a medium-term glide path for fiscal consolidation. The Medium Term Fiscal Policy Cum Policy Strategy Statement, tabled along with the Budget for 2021-22, stated that one of the determinants of the Union government’s five-year expenditure plan was what the Fifteenth Finance Commission had recommended in this regard in its report submitted in November 2020. In view of both the uncertainty around Covid and the submission of the Finance Commission’s report just three months before the Budget presentation, the finance ministry was not able to place the Medium-term Expenditure Framework Statement for 2020-21 as mandated under the FRBM Act. Hence, no fiscal projections for the years 2022-23 and 2023-24 were presented along with that Statement.

A year later, when the 2022-23 Budget was presented, there was legitimate expectation that the finance ministry would outline both its medium-term fiscal projections and an action plan for amending the FRBM Act. However, the finance minister’s Budget speech on February 1, 2022, gave no indication of either.

She announced a minor slippage in the deficit target for 2021-22 at 6.9 per cent and set the target for 2022-23 at 6.4 per cent, which she said was “consistent with the broad path of fiscal consolidation announced by me last year to reach a fiscal deficit level below 4.5 per cent by 2025-26.” There was no mention of an amended FRBM law in the speech.

Instead, the Statements of fiscal policy, as required under the FRBM Act, provided an explanation on why there was no medium-term projection for the fiscal deficit in the next two years. They noted how the Covid pandemic had impacted the pace of global economic recovery. In view of that and the need to expedite India’s domestic economic recovery and cushion the people from deleterious socio-economic effects of the pandemic, the Statements argued that the government should retain “requisite flexibility to respond to emerging contingencies in full measure till the uncertainty eases”.

These Statements, therefore, provided justification for not outlining the medium-term fiscal deficit consolidation plan. The Statements reasoned that balancing the twin imperatives of growth and fiscal consolidation was of critical importance and, therefore, “medium-term fiscal projections have not been provided in this Statement.”

However, the Statements reiterated that the government would continue on its path of fiscal consolidation to attain a fiscal deficit-to-GDP level below 4.5 per cent by 2025-26 “through a fairly steady decline over this period.” Once again, the government gave the requirement of a medium-term projection for the deficit in 2023-24 and 2024-25 a go-by.

For two years running, the finance ministry has excused itself from providing a projection of its fiscal consolidation plan. Just setting a target of 4.5 per cent three-four years later is not the same as providing a glide path of fiscal consolidation to which the government should stand committed.

An amended FRBM Act or the medium-term fiscal consolidation plan would have been useful also for getting a sense of how the government planned to reduce its debt over the next few years. The Budget does mention that the fiscal deficit target of 4.5 per cent should be achieved in 2025-26. But there is silence on how the government intends to meet its debt reduction targets.

The FRBM Act had earlier mandated that the Centre would endeavour to limit the general government debt to 60 per cent of GDP and the Central government debt to 40 per cent of GDP, by March 31, 2025. The Centre’s debt was estimated at 59.9 per cent of GDP in 2021-22 and will go up to 60.2 per cent in 2022-23. Reducing it by 20 percentage points in two years is going to be a huge task. Already, the Centre’s interest liability is set to become as large as 43 per cent of its net revenues in 2022-23, up from 39 per cent in 2021-22.

Unfortunately, the government has ignored the need for amending the FRBM Act suitably to set targets under the changed circumstances. Medium-term projections for each of the coming few years, both on deficit and debt parameters, are extremely important. The uncertainty over economic growth in view of Covid is understandable. But in such a situation setting the goal posts for fiscal rectitude becomes even more important. Necessary changes in the FRBM Act and a provision of the deficit and debt reduction targets in the next couple of years brook no further delay.