Well over a decade after the Fiscal Responsibility and Budget Management (FRBM) Act kicked in both at the Centre and in the states, the government has announced a five-member committee to review the law in keeping with its budget promise. Besides reviewing the working of the FRBM, the committee has also been mandated to examine the feasibility of having a fiscal deficit range rather than a fixed number as a percentage of the GDP, as is the case now. It will also look at the prospect of aligning fiscal expansion or contraction with credit expansion or contraction in the economy. That is, the government wants the committee to review the law to see if it is possible to build in a provision for a counter-cyclical policy. The review comes at a time when successive governments have struggled to meet the targets set for fiscal consolidation. The experience of this fiscal management legislation for 12 years shows that there have been much greater attempts at fiscal discipline, especially among states, in a country which has had a long history of macro economic imbalances. It helped that soon after the notification and implementation of the law, in the first five years or so, starting 2004, the economic rebound during UPA 1 led to a secular reduction in both the fiscal and revenue deficit targets, adding to a demonstrable impact. But the true test of compliance with a legislation like the FRBM is when the economy is gripped by a slowdown, and governments are tempted to spend to sustain jobs and growth.
A review of some of the provisions of the law may certainly be warranted, especially the limiting of the fiscal deficit to 3 per cent of the GDP, which some economists consider arbitrary and more suited to the West where growth has tapered off. But the challenge for the committee would be not just to define a counter-cyclical policy but also to build it into law considering that few countries have such provisions in their fiscal legislation. The other potential danger lies in providing a wide range that could provide leeway to governments closer to re-election to abandon prudent fiscal practices. That’s why the 14th Finance Commission recommended a strong mechanism for ensuring compliance with fiscal targets and suggested an amendment to the existing FRBM Act to form an independent council to assess fiscal policy implications of budget proposals and their consistency with rules. Indeed, it had made out a case for replacing the FRBM with a Debt Ceiling and Fiscal Responsibility legislation by invoking Article 292.
Considering some of the hard won gains over the last few years and India’s record on fiscal prudence, hopefully, the N.K. Singh Committee would work on a set of recommendations that would lead to a conducive fiscal environment, which would help foster growth.