Rule-Based Fiscal Policy in India: An Assessment

Indian authorities enacted fiscal rules in terms of a legislation known as Fiscal Responsibility and Budget Management (FRBM) Act in 2003 both at the federal and provincial government level. The experience of fiscal management with rule-based fiscal legislation witnessed reasonable success. However, the onset of the global financial and economic crisis changed the course of direction as the governments took recourse to fiscal stimulus measures thereby putting a pause to the targets in the fiscal legislations. Thereafter, at the provincial level, the fiscal legislation continued in its original spirit but at the federal level, the Government of India (GoI) introduced amendments in 2012 and put in place a Medium Term Fiscal Adjustment road map. More importantly, the recommendations of Fourteenth Finance Commission (FC XIV) added a new dimension to fiscal legislation.

Against the above backdrop, the present paper attempts a critical evaluation the Indian perspective of FRBM. The paper concludes that there are evidences of creative accounting in case of central government with introduction of Effective Revenue Deficit (ERD). The state governments managed to adhere to the FRBM targets mainly due to incentives recommended by the finance commissions (FCs). Furthermore, the state governments failed to make provisions of higher capital out lays in a productive manner. Thus, a few policy options are suggested which include (a)withdrawal the concept of ERD which has no constitutional validity, (b) higher allocation of capital outlay with an emphasis on return on capital assets, (c) improvement of cash management, (d) integration of level of deficit with financing of deficit and (e) institutional arrangement for repayment of market borrowings.