Government Kicks the Fiscal Responsibility Can Down the Road Again

Proposed amendments to the FRBM Act will ensure that the government can continue with its fiscally irresponsible policies

Through the Finance Bill, 2018 the government is seeking to amend the Fiscal Responsibility and Budget Management Act (FRBM Act) which will allow it to violate prudential financial norms. The FRBM Act was passed in 2003 to “ensure inter-generational equity in fiscal management and long term macro-economic stability” of the Central Government finances. The law intended to eliminate revenue deficit and bring fiscal deficit to under 3 percent of GDP by 2007-08. It has miserably failed to achieve its objectives. Both UPA governments and the current NDA administration have continued to renounce responsible management of government accounts.

With the proposed changes the government will not have to report its revenue deficit numbers, thus allowing it to hide from public scrutiny. It will also bring the fiscal deficit under 3 percent by 2020-21, a target that was supposed to be met a decade ago. Moreover, the government plans to achieve a healthy debt-to-GDP ratio of 40 percent by 2024-25. Far from improving the financial health of the country, the move seems politically motivated. It will ensure that the government to spend beyond its means till the 2024 Lok Sabha elections.

Apart from creating cost for the taxpayers, chronic overspending creates problems for our future generations, who will have to repay the debt the government is accumulating now. The interest payments for the existing debts are already more than 3.5 percent of GDP (₹ 5,90,000 crore as per 2018-19 budget estimates). This is expected to increase with additional government borrowings to finance populist vote-seeking schemes.

Debt is not inherently bad. It depends on why it is taken? If parents take loan for education of their children, it is a good debt as it is an investment into the child’s future, but if they take a loan to go on an expensive foreign vacation, it is a bad debt as it will not provide any returns in the future. Similarly, if the government borrowed within limits to strengthen the rule of law, or provide public infrastructure, we have no reason to worry. Unfortunately, our politicians are only interested in getting elected and re-elected and use public funds for buying votes. The future of the country and of our children is none of their concern.

The government should learn to stay within its means and stretch its legs according to the size of its blanket. By not doing that, it is sending us on a dangerous path which could lead us to a crisis similar to that of 1991. The Members of Parliament would be well advised to reject the proposed amendments to the FRBM Act and attain its original objectives.