Introduction
Fiscal consolidation refers to strategies adopted by the government to reduce its fiscal deficit and stabilize public debt. In India, the Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2003, serves as the legal framework guiding this discipline.
Over the years, the Act has undergone multiple amendments to accommodate economic realities—from global financial crises to the COVID-19 pandemic. With ballooning deficits and rising public debt, India now faces urgent questions:
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Is the current FRBM framework still viable?
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What should be the roadmap for sustainable fiscal management?
Key FRBM Act Targets (Original and Revised)
| Indicator | Original Target (2003) | N.K. Singh Committee Recommendation (2017) | Present Status (2024–25 BE) |
|---|---|---|---|
| Fiscal Deficit (Centre) | 3% of GDP | 2.5% of GDP by FY23 | 5.1% (FY25 BE) |
| Debt-to-GDP (Centre + States) | No target | 60% (40% Centre + 20% States) | ~81% (2023-24 RE) |
| Revenue Deficit | Eliminate by FY08 | Remove target | 2.0% (FY25 BE) |
💡 Fiscal Deficit (FD) = Total expenditure - (Revenue receipts + Non-debt capital receipts)
The Need for Review
1. Changing Economic Realities
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COVID-19 crisis disrupted fiscal math; deficit peaked at 9.2% in FY21.
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Need for infrastructure push, welfare spending, and capital expenditure in post-COVID recovery phase.
2. Rising Debt Concerns
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Debt-to-GDP ratio nearing precarious levels (~81%), creating long-term sustainability risks.
3. States' Fiscal Space
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States increasingly rely on market borrowings.
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FRBM limits often constraining their capacity for counter-cyclical spending.
4. Lack of Flexibility in the Act
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No real-time triggers or counter-cyclical mechanisms built into the original FRBM.
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Ineffective enforcement and repeated amendments reduce credibility.
Review Mechanisms: Key Committees and Recommendations
🔹 N.K. Singh Committee (2017) Highlights
| Area | Recommendation |
|---|---|
| Debt-to-GDP target | 60% (Centre 40% + States 20%) by FY23 |
| Fiscal deficit glide path | 3% by FY20; escape clause of 0.5% |
| Fiscal Council | Independent Fiscal Council to monitor compliance |
| Transparency | Clear off-budget borrowing disclosures |
🔹 15th Finance Commission (2021)
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Suggested medium-term fiscal frameworks (MTFF).
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Allowed flexibility in borrowing during extraordinary crises.
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Pushed for greater transparency in contingent liabilities and off-budget borrowing.
Recent Fiscal Trends and Consolidation Path (2020–25)
| Year | Fiscal Deficit (% of GDP) | Notes |
|---|---|---|
| FY21 | 9.2% | Pandemic stimulus, low revenue |
| FY22 | 6.7% | Gradual recovery |
| FY23 | 6.4% | Moderate Capex push |
| FY24 | 5.8% (RE) | Capex > ₹10 lakh crore |
| FY25 | 5.1% (BE) | Targeting 4.5% by FY26 |
➤ Key Reforms Supporting Consolidation:
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Capex focus to boost multiplier effects
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Privatization/Disinvestment push (though slow)
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Better GST collections and widening of tax base
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Rationalization of subsidies (esp. fertilizer and fuel)
Challenges in Fiscal Consolidation
❗ Growth vs Discipline Dilemma
High capital expenditure needed for infrastructure, but constrained by fiscal targets.
❗ Off-Budget Borrowings
Borrowings by PSUs or through special purpose vehicles remain outside budget books, violating transparency principles.
❗ Political Economy
Pre-election years often see populist schemes, making discipline difficult.
❗ State-Centre Coordination
States face fiscal stress, and divergence from aggregate targets (20% debt ceiling) is a concern.
What Needs to Change in FRBM Act?
✅ Institutionalize an Independent Fiscal Council
To monitor compliance, publish real-time assessments, and flag deviations.
✅ Update Targets with Greater Flexibility
Shift from rigid numbers to range-based targets (e.g., 4–5% fiscal deficit range).
✅ Counter-Cyclical Framework
Allow automatic relaxations during economic slowdowns, with built-in conditions.
✅ Improve Transparency
Mandatory on-budget disclosures of all borrowings, guarantees, and liabilities.
✅ State Involvement
Create a joint debt management framework with states, monitored under a revised FRBM umbrella.
Global Examples to Learn From
| Country | Fiscal Rule | Unique Feature |
|---|---|---|
| Germany | "Debt Brake" | Structural deficit limit with escape clause |
| UK | Office for Budget Responsibility | Independent body with real-time budget assessments |
| Chile | Structural surplus rule | Based on long-term GDP and copper price trends |
India can draw lessons from these models to embed fiscal responsibility with flexibility and credibility.
Conclusion
India’s fiscal consolidation journey must balance prudence with pragmatism. While the FRBM Act was a bold reform, its rigid targets and weak enforcement limit its relevance in today’s dynamic macroeconomic environment.
A modernized FRBM framework, supported by:
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Real-time data monitoring,
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A strong fiscal council, and
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More transparent budgeting,
can ensure that India sustains high growth without compromising on fiscal sustainability.
Sustainable public finance is not just about reducing deficits—it's about building resilience for the future.