FISCAL CONSOLIDATION (Syllabus: GS Paper 3 – Economy)

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Context: The Chief Economic Advisor emphasized that the Centre's adherence to the fiscal consolidation path indicates its commitment to the medium-term glide path, a point which rating agencies should recently take note of.

Fiscal Consolidation

About: It refers to a series of government policies aimed at diminishing deficits and restraining the accumulation of debt. These policies are typically assessed as a percentage of nominal GDP.
Deficit Reduction Strategies: The reduction of deficits can be achieved through enhanced economic growth, resulting in increased revenues and reduced expenditures. Fiscal consolidation involves a dual approach of boosting income and trimming expenses.
Significance of Fiscal Deficit: The fiscal deficit stands as a pivotal indicator of the government's financial well-being. It mirrors the amount of government borrowing within a specific fiscal year.
Government's Dual Deficits: The two primary deficits of the government are the Revenue Deficit and the Fiscal Deficit, each playing a distinct role in financial management.

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT (FRBM ACT), 2003

About: The FRBM Act, 2003, establishes financial discipline to reduce fiscal deficit.
Aim: To introduce transparency in India's fiscal management systems.
The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.
Enacted: To introduce more equitable distribution of India's debt over the years.
The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

oMedium Term Fiscal Policy Statement

oMacroeconomic Framework Statement

oFiscal Policy Strategy Statement

FRBM Act exemptions: On grounds of national security, calamity, etc, the set targets of fiscal deficits and revenue could be exceeded.

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