Eco Survey Calls for Relaxing FRBM for Centre

Target Deferred Again: Relaxing FRBM Deadlines

A sharp number leaps out: 3%. This was the fiscal deficit ceiling mandated for March 31, 2021, under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Yet, five years later, achieving this has not even entered the horizon of plausible fiscal planning. The Economic Survey 2025-26 has now argued for further delays, recommending that stricter fiscal discipline targets remain sidelined until at least 2031. This recalibration, the Survey suggests, is the price for uninterrupted public investment in a high-growth recovery phase. Pragmatic? Or risky fiscal exhaustion disguised as strategy?

Why This Relaxation Breaks From Pattern

India's commitment to fiscal consolidation has always been intermittent, but the continuous deferrals of FRBM targets since 2021 mark a departure from its prior approach. The pandemic year saw a fiscal deficit spike to an alarming 9.2% of GDP. Since then, the Centre has worked its way back to a projected 4.4% by March 2026. These efforts to halve the fiscal deficit in five years, born out of necessity rather than design, are now being celebrated in the Economic Survey as benchmarks of prudence.

The break is not just in timelines but also in tone. When the FRBM Act was introduced in 2003, it carried an austere commitment to debt reduction, limiting the Centre's debt-to-GDP ratio at 40% and the overall general government debt to 60%. In sharp contrast, the Survey now touts a reality in which India has only managed to claw back a 7.1 percentage point reduction in its debt-to-GDP ratio post-2020. The NK Singh Committee's recommendation of 2.5% fiscal deficit and a robust Fiscal Council to check deviations are now little more than advisory relics.

The Institutional Machinery Behind the Delay

The FRBM Act itself, enacted in the early 2000s, relied on rigidity and hard numbers. Section 4(1), for example, mandates reductions to meet a fiscal deficit ceiling of 3%. But this rigidity was loosened as early as the 2008 financial crisis, when fiscal rules were unceremoniously flouted in the name of stimulus. Post-pandemic, this ad hocism has entered new terrain: restructuring the fiscal roadmap to accommodate long-term infrastructural spending by 2031.

The legal architecture faces serious neglect. A core proposal made by the 2026 NK Singh Committee—to establish an independent Fiscal Council—has yet to materialize. Such an institution, with an explicit mandate for fiscal oversight and strict conditions under which deviation from targets could be permitted, would have acted as a buffer against continuous fiscal expansion. The Finance Ministry's repeated evasion of this recommendation signals a wariness towards transparency and an aversion to being held accountable for fiscal lapses.

Fiscal Prudence or Delusion?

Behind the numbers presented in the Economic Survey is a set of unsettling questions. True, the Centre has seen its fiscal deficit moderate significantly since 2020, but in no small part due to suppressed spending on subsidies during recovery. As for the vaunted growth in public investments, the lion’s share has been funded through borrowings, not revenue. The central government’s debt continues to hover well beyond 50% of GDP, breaching FRBM's recommended limit with little realistic pathway to recovery.

Moreover, while the Economic Survey heaps praise on the Centre's fiscal "discipline," it acknowledges the precarious state of state finances. A combined state debt of close to 30% of GDP, coupled with reliance on off-balance-sheet borrowing techniques like loans from electricity boards, increasingly blurs the line between prudence and accumulation of hidden liabilities. The Survey says little about intergovernmental financing reforms, a gap that risks significant structural inefficiencies in resource deployment.

The Comparative Contradiction: South Korea’s Approach

Contrast this with South Korea, which faced similar pandemic-driven fiscal pressures. By 2024, South Korea enacted legal reforms tightening its debt ceiling to 60% of GDP, with mechanisms in place for real-time parliamentary oversight. While growth-focused borrowing was embraced during the crisis, it was done under clear time limits and subject to a structured consolidation path. Fiscal rules were institutionally upgraded to prevent electoral politics—an ever-present temptation in India—from interfering in strategic decision-making. No such institutional reform has been prioritized in India's ongoing fiscal concessions.

Uncomfortable Questions the Survey Avoids

Several critical issues remain unsaid. For one, how resilient is India’s fiscal roadmap to external macroeconomic shocks, such as a potential oil price spike or industrial slowdown? The delayed commitments under the FRBM Act have hollowed out credibility in fiscal discipline—crucial for maintaining low-cost borrowing in global capital markets.

Then there’s the regressive nature of fiscal compromises. With the bulk of Centre borrowing siphoned off as interest payments (26% of revenue receipts in FY25-26), what is left for welfare or state transfers? Too often, the risks of deferred fiscal balance are borne heavily by social sector programs, adding to inequality.

Finally, this repeated push for public investment raises the specter of regulatory capture. Who exactly benefits from state-spurred capital expenditure when it is increasingly managed through large-scale PPPs (Public-Private Partnerships)? Without auditing mechanisms akin to South Korea’s parliamentary oversight or the EU’s Stability and Growth Pact, India risks devolving into an accountability void in its fiscal governance.

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