Eco Survey Calls for Relaxing FRBM for Centre

Brief Context

Context The Economic Survey 2025-26 has argued in favour of a delay in strict fiscal targets for the Centre, such as those that had been set under the Fiscal Responsibility and Budget Management Act. Highlights of survey on Fiscal Targets After spiking to 9.2% of GDP during the pandemic year of 2020-21, the Centre’s fiscal deficit was on target to be 4.4% at the end of the current financial year, in line with commitment to halve the FY21 fiscal deficit in five years. India lowered its general go

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Syllabus: GS3/Economy

Context

• The Economic Survey 2025-26 has argued in favour of a delay in strict fiscal targets for the Centre, such as those that had been set under the Fiscal Responsibility and Budget Management Act.

Highlights of survey on Fiscal Targets

• After spiking to 9.2% of GDP during the pandemic year of 2020-21, the Centre’s fiscal deficit was on target to be 4.4% at the end of the current financial year, in line with commitment to halve the FY21 fiscal deficit in five years.
• India lowered its general government debt-to-GDP ratio by about 7.1 percentage points since 2020 while continuing to maintain high levels of public investment
• The FRBM Act’s fiscal deficit target of 3% of GDP by March 2021 has been repeatedly deferred by the government, and the Survey acknowledged that there is a “perception” that this target and framework must be reinstated.
  • Since the FRBM Act was first enacted in 2003, the 3% target has been achieved only once.

• In her last Budget, the Finance Minister had specified a new fiscal framework, under which the Centre would target bringing down its debt-to-GDP ratio to 50% with a 1% leeway above and below by March 31, 2031. 
  • The Survey has argued, it is the appropriate strategy for now, and can be revisited after this time period is over.
  • Once this target is met, and the fiscal deficit declines gradually, then a new FRBM target could be considered.
• State finances deteriorating: While praising the Centre for its fiscal prudence, the Survey however cautioned State governments against worsening finances.

What is the fiscal deficit?

• Fiscal Deficit is defined as excess of total budget expenditure (revenue and capital) over total budget receipts (revenue and capital) excluding borrowings during a fiscal year.
• Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Debt Creating Capital Receipts).

Implications of fiscal deficit

• Inflationary Pressure: Persistently high fiscal deficits lead to inflation as governments resort to central bank-issued money to finance the deficit.
• Crowding Out effect: When the government borrows a large portion of available funds from financial markets to finance its deficit, it crowds out private investment with reduced access to credit for businesses and individuals. 
• Reduced Fiscal Space: A high fiscal deficit limits the government’s ability to respond to economic shocks or crises. 
• Difficulty in borrowing: As a government’s finances worsen, demand for the government’s bonds begins to drop, forcing the government to offer to pay a higher interest rate to lenders. 

Benefits of lower fiscal deficit

• Improved Credit Ratings: Consistent deficit reduction enhances international credit ratings, lowering borrowing costs in global markets.
• Reduced Debt Servicing: Less spending on interest payments frees funds for development projects like infrastructure, education, and healthcare.
• Improved Balance of Payments: Lower reliance on foreign borrowing stabilizes the exchange rate and current account.
• Enhanced Investor Confidence: Signals fiscal discipline, attracting greater foreign and domestic investments.

Source: TH