FISCAL CONSOLIDATION (Syllabus: GS Paper 3 – Economy)

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.