MENTORSHIP PROGRAMME

Economy Mains Workbook

TOPIC - Government
Budgeting
 21 GOVERNMENT BUDGETING
Introduction 1: Budgeting is the strategic forecasting of government revenue and expenditures over a defined period,
subject to regular review and adjustment. This vital process, overseen by the Budget division of the Department of
Economic Affairs, meticulously assesses resource availability and allocates funds to prioritize initiatives crucial for
national development.
Introduction 2: The Annual Financial Statement, or budget, is a crucial fiscal plan detailing revenue, expenditures, assets,
and liabilities for a set period, crafted by the Budget Division of the Department of Economic Affairs to drive strategic
government activities.

Introduction 3: According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual
Financial Statement (AFS). It is a statement of the estimated receipts and expenditure of the Government in a financial
year (which begins on 01 April of the current year and ends on 31 March of the following year).

Objectives of Budget:

● Reallocation of resources
● Reducing inequalities in income and wealth
● Contributing to economic growth
● Bringing economic stability
● Managing public enterprises

Significance of Budgeting

1. Political Significance:
● The budget stands as the primary legislative control mechanism, mandating prior authorization for tax collection and
expenditure. It ensures fiscal accountability and oversight.
● It also serves as an administrative tool for coordination, streamlining operations, and curbing duplication and
wastage through justified estimates and expenditure regulation.
● Overall, budgets are pivotal for maintaining governmental financial control and ensuring transparency.
2. Economic Implications:
● Budgets facilitate the redistribution of resources in alignment with socio-economic needs, fostering economic
stability and growth.
● Governments leverage budgetary tools to incentivize investment through allowances and tax concessions, and may
intervene directly in production processes to stimulate economic activity.
● Increased government expenditure, facilitated by the budget, injects disposable income into the economy, fostering
economic growth.
● Moreover, budgetary measures aim to stabilize business cycles, fostering financial stability and managing public
enterprises efficiently for social welfare.
● Additionally, budgets strive to mitigate regional disparities by encouraging investment in underdeveloped areas,
promoting equitable development.

3. Social Impact:
● Budgetary measures target reducing income and wealth disparities by levying taxes on the affluent and channeling
funds into welfare programs for the disadvantaged.
● Public sector industries, supported by budget allocations, play a vital role in generating employment opportunities
and bolstering economic activity.

Issues in Budgeting process as per 2nd ARC

Budget Planning and Allocation:

1. Inadequate Planning: Budget estimates lack practicality due to poor planning, leading to ineffective allocation of
resources.
2. Disconnect between Policy, Planning, and Budgeting: Absence of links between policy formulation, planning, and
budgeting hampers coherent decision-making and resource allocation.
3. Skewed Expenditure Patterns: Uneven expenditure distribution, particularly with a surge in spending in the last
quarter, reflects poor fiscal discipline and planning.
4. Short-Term Populism over Long-Term Perspective: Insufficient adherence to long-term perspectives leads to short-
term populist measures, undermining sustainable development goals.

Budget Execution and Management:

1. Weak Expenditure Control: Insufficient oversight results in poor expenditure control, leading to inefficiencies and
wastage of funds.
2. Underfunding for Operations and Maintenance: Inadequate allocation for operations and maintenance undermines
the sustainability of infrastructure and services.
3. Discrepancy between Budget Formulation and Execution: Budget execution deviates from the formulated budget,
indicating a lack of alignment and accountability.
4. Unreliable Flow of Budgeted Funds: Funds allocated in the budget may not reach agencies and lower levels of
government reliably, hindering effective implementation.
5. Inefficient Management of External Aid: Poor management of external aid leads to inefficiencies and undermines
the intended impact of aid programs.
6. Inadequate Accounting Systems: Inadequate accounting systems compromise financial transparency and
accountability.
7. Inadequate Cash Management: Weak cash management practices contribute to financial inefficiencies and liquidity
challenges.
8. Insufficient Financial Reporting: Inadequate reporting of financial performance hinders transparency and
accountability in budget management.

Way forward

● Reforms in Financial Management System: To enhance transparency, accountability, and streamline government
structure while eliminating corruption. Example: The Public Financial Management System tracks funds released under all
Government of India plan schemes and provides real-time expenditure reporting at all levels of program implementation.
● Medium-term Plan/Budget Frameworks: Align annual budgets with medium-term developmental plans and
accounting mechanisms for clear visibility and coherence. Example: The FRBM Act includes provisions for a medium-
 term expenditure framework.
● Prudent Economic Assumptions: Avoid overly optimistic projections to ensure realistic and achievable budget targets.
● Top-down Budgeting Techniques: Shift from traditional bottom-up budgeting to a top-down approach where desired
outcomes determine the required resources.Example: Outcome-based budgeting introduced in India in 2005-06.
● Transparency and Simplicity: Budget documents should be straightforward, easy to understand, and accessible to
the public. Example: The 2021 Budget increased transparency by including off-budget items during the pandemic. The
Finance Minister acknowledged off-balance-sheet borrowings of 0.8% of GDP in the 2020 budget.
● Adopting Modern Financial Management Practices: Utilize modern tools such as accrual accounting, IT, and
financial information systems to improve decision-making and accountability.Example: The government will use
data analytics, AI, and machine learning to launch MCA 21 3.0, which includes e-scrutiny, e-consultation, compliance
management, and e-adjudication.
● Realistic Budgeting: Ensure projections made in the budget are accurate and credible to maintain the integrity of the
budgetary process.

Types of government budget:

Capital Budget Revenue Budget

It includes the Capital Receipts and Capital Expenditure. It consists of the Revenue Expenditure and Revenue Receipts.

Capital Receipts indicate the receipts which lead to a decrease Revenue Receipts are receipts which do not have a direct
in assets or an increase in liabilities of the government. impact on the assets and liabilities of the government.
It consists of: It consists of the money earned by the government
(i) the money earned by selling assets (or disinvestment) through tax (such as excise duty, income tax) and non-
such as shares of public enterprises, and tax sources (such as dividend income, profits, interest
receipts).
(ii) the money received in the form of borrowings or
repayment of loans by states.

Capital Expenditure is used to create assets or to reduce Revenue Expenditure is the expenditure by the
liabilities. government which does not impact its assets or
It consists of: liabilities.

(i) the long-term investments by the government on For example, this includes salaries, interest payments,
creating assets such as roads and hospitals, and pension, and administrative expenses.

(ii) the money given by the government in the form of

loans to states or repayment of its borrowings.

It is non-recurring in nature. It is usually a one-time It is recurring in nature (on a yearly basis).

expenditure for a long period of time.

1. Components of Capital Budget

1. Capital Receipts: These are the receipts that lead to a decrease in assets or an increase in liabilities of the govern-
ment. In India, capital receipts mainly include:
» Disinvestment proceeds: Money earned by selling assets like shares of public enterprises.
» Borrowings and loans: Funds received through borrowings or repayment of loans by the government or states.
2. Capital Expenditure: This refers to the expenditure incurred by the government that leads to the creation of assets or
reduces liabilities. The components of capital expenditure in India include:
» Investments in infrastructure: Long-term investments made by the government to create assets such as building
roads, bridges, hospitals, schools, etc.
» Loans to states: Funds provided by the central government to the states or repayment of its own borrowings.

2. Components of Revenue Budget:

1. Revenue Receipts: These are the receipts that do not directly impact the assets or liabilities of the government. In
India, revenue receipts primarily consist of:
» Tax revenues: Money earned through various taxes imposed by the government, such as excise duty, income tax,
 GST, customs duty, etc.
» Non-tax revenues: Income generated through sources like dividends from public sector undertakings, interest
receipts, profits from government enterprises, fees, fines, etc.
2. Revenue Expenditure: This refers to the day-to-day operational expenses incurred by the government. The compo-
nents of revenue expenditure in India include:
» Salaries and pensions: Payments made to government employees, including salaries, allowances, and pensions.
» Interest payments: Payments of interest on loans and debts.
» Subsidies: Financial support provided by the government to individuals or sectors to promote economic activities
or alleviate hardships.
» Administrative expenses: Costs associated with running the government machinery, such as maintenance, office
expenses, and other administrative costs.

Types of Budgeting process

1. Zero based Budgeting:

In zero-based budgeting (ZBB), a government department constructs its budget as if no prior budgets exist, necessitating
justification for all expenses to be included. Every operation and activity is scrutinized from scratch to determine its value
in terms of taxpayer money, with new spending goals established each year.
This approach, first advocated by British budget authority Edward Hilton Young, was initiated in India’s Department of
Science and Technology in 1983. The Railways Ministry adopted ZBB for its financial planning in 2016-17.

2. Gender Budgeting
Gender budgeting is not a separate budget but a component within the general budget, where the Finance Minister
presents a distinct expenditure document outlining women-specific schemes, targets, and commitments.
What is the Timeline of Gender Budgeting in India?
● 2001: Then Finance Minister of India, in his Budget speech, makes a special reference. National Institute of Public
Finance and Policy (NIPFP) analyses the Union Budget 2001-02 from a gender perspective for the first time.
● In 2005-06, The Gender Budget was first introduced, when the Expenditure Division of the Ministry of Finance issued
a note on gender budgeting as a part of the Budget Circular.
● Part A of the note reflects Women Specific Schemes, which have 100% allocation for women.
● Part B of the note reflects Pro-Women’s Schemes, where at least 30% of the allocation is for women.
● In 2007, the Department of Expenditure issued a charter outlining the composition of Gender Budgeting Cells (GBCs)
and their functions.
● In 2010, the Planning Commission clarified that in place of the Women Component Plan, the Ministry of Finance and
MoWCD should adopt Gender Responsive Budgeting or Gender Budgeting only.
● Gender budgeting in states: In 2021, the MoWCD stated that 27 states/UTs had adopted Gender Budgeting.

Significance behind gender budgeting (GB) includes:

1. Social Impacts:
● Eliminating Prejudice: Gender budgeting (GB) aims to create a more gender-equal society by funding programs and
schemes that reduce or eliminate existing gender biases.
● Women Empowerment: Allocating financial resources through gender budgeting has been identified as a powerful
tool for ensuring women’s empowerment.
● Eliminating Gender Inequalities: GB is crucial for reducing gender inequalities, leading to significant improvements
in social, educational, health, and economic indicators.
● Achieving Social Goals: Gender inequality affects various areas of human development, threatening progress across
the 2030 Agenda for Sustainable Development. GB helps address this.
2.Political Impacts:
● Gender-Responsive Participation: GB increases gender-responsive participation in the budget process, ensuring
equal involvement of women and men in budget preparation.
● Assessment Tool: Gender budgeting serves as a tool to assess how well sector policies address gender issues and gaps,
thereby aiding the implementation of gender-sensitive policies and programs.
3. Economic Impacts:
● Accounting for the Unpaid Care Economy: GB can highlight the often overlooked “unpaid” care economy, making it
statistically visible.
● Public Expenditures with Gender Implications: The rationale for GB stems from recognizing that national budgets
impact men and women differently, based on resource allocation patterns.
● Inclusive Growth: GB restructures the budget to ensure public spending increases gender equality, enhancing the
efficiency and effectiveness of policies, and promoting inclusive and sustainable growth.
● Better Resource Distribution: GB addresses specific issues affecting women, such as security, exemplified by
budgetary allocations under the Nirbhaya Fund.

Challenges
1. Quantum of gender budgeting and fiscal marksmanship: India’s gender Budget remains in the range of 4 - 6% of the
total expenditure and less than 1% of its GDP. It also lacks fiscal marksmanship, which is the accuracy of budgetary
forecasting.
2. Concentrated in 5 key ministries: Around 90% of gender budgeting is concentrated in five ministries. When it comes
to livelihood, MGNREGA is the biggest scheme in gender budgeting.
3. Areas like transportation, water collection and water security remain ignored.
4. Post-Covid-19 approach: The last Budget failed to address critical areas highlighted by pandemic in 2021-22 and 2022-
23, despite the disproportionate impact of Covid-19 on women.
5. Budget Link to Schemes Instead of Outcomes: The budgeting process is often linked to schemes rather than out-
comes. For example, in the 2015-16 budget, funds were allocated for infrastructure maintenance under the Ministry of
Health & Family Welfare, but there was little data on the impact of these funds on reducing female mortality rates.
6. Limited to a Few Schemes: There are only a few “big budget” women-exclusive schemes from the Ministry of Wom-
en and Child Development, such as the Nirbhaya Fund and the Beti Bachao Beti Padhao campaign, which also face
issues of non-utilization of funds.
Global Best Practices:
1. Needs-based Gender Budgeting: Specific sectors are prioritised to bridge prevailing gender gaps. For instance, Rwanda
targets spending towards provision of basic sanitation facilities for improving school enrolment and retention. The United
Kingdom introduced tax-free universal child care to make it easy for new mothers to re-join work. South Korea increased
funding for programs aimed at reducing the burden of domestic work on women.
2. Gender-assessed Budgets: Gender disaggregated impact assessment of allocations is conducted. Iceland legally
mandates that the Ministry of Finance
ensure the Budget Bill lay out its impact on gender equality. Canada provides a gender-based impact analysis of the Budget.
Uganda trains Finance Ministry officials to produce gender disaggregated data, to undertake the budget’s gender-based
impact assessment.
3. Gender-informed resource allocation: Increasing gender equality is the metric to determine budgetary allocations
across all ministries. For instance, Sweden created a framework for gender-sensitive allocations at each stage of their
budget process.

Way forward
● Applying a gender lens to Budget: Nobody is saying that make exclusive schemes, but include a gender perspective to
government schemes uniformly.
● Track gender disaggregated data: To determine who is benefiting from government schemes.
● Decentralization: Empowering officials at district level and panchayat level who deal with ground realities on a day-
to-day basis.
● Improve targeting: Funds needs to be targeted towards priority sectors,which suffer from the deepest gender
inequalities. These sectors should be determined by rigorous research to ensure that targeted spending creates a
virtuous cycle, and has a multiplier effort on women’s living standards.
● Create a ranking for state-level gender budgets: States should be ranked on the quality of gender budgets, impact
analyses, and gender audits of these allocations.
● Improve accountability: In line with the recommendations of the Planning Commission’s Working Group on
Women’s Agency and Empowerment made in 2012, it is recommended that the Outcome Budget should be gender
mainstreamed. Gender audits of centrally sponsored schemes and flagship programmes should be undertaken to
measure impacts. This also necessitates increased efforts for the collection of gender disaggregated data at national,
state and district levels.

Data on Women
Data
1. Women constitute 48% of India’s population.
2. WEF’s Global Gender Gap Index 2020 rank - 112/153
• According to the report, it will take nearly 100 years to close the gender gap across politics, economic, health and
education.
3. Literacy- female = 65%; male = 80% (2011 census)
4. Males get more medical care compared to women.
5. Son meta preference (less opportunity to come to the world) is highly prevalent
6. Child marriage = 27% (UNICEF)
7. Female labour force participation rate = 26% (Niti Aayog)
8. Gender pay gap = 34% (ILO)
9. Glass ceiling- existent in all sectors
10.Feminization of informal sector and de-feminization of formal sector.
11.Female representation in Parliament = 149th in the world
12. Women in Lok Sabha (17th LS) = 14%
3. Performance Budgeting
It is a technique for preparing the annual budget that allocates funds based on the qualitative outcomes of various
schemes and programs. Rather than focusing on the outlay or output, this method emphasizes the estimated outcomes
of each initiative.

Example:
● Outlay: Money allocated for school infrastructure
● Output: Number of schools built
● Outcome: Increase in literacy rate

Performance budgeting, also known as outcome budgeting, prioritizes the results of government programs. For instance,
under Swachh Bharat Abhiyan, the focus would be on the behavioral change achieved through the campaign rather than
merely the number of toilets constructed.
This approach makes government programs more result-oriented. Performance budgeting documents display the
physical dimensions of the financial budget, indicating the actual performance in the previous year, the current year’s
achievements, and the targeted outcomes for the next year.
Introduced in the 2005-06 Budget, all ministries are required to prepare outcome budgets to ensure target-oriented
budgeting. However, performance budgeting has its limitations. It can be challenging to determine standard unit costs,
especially for social programs that necessitate a multipronged approach.

Aspect Performance Budgeting Outcome-Based Budgeting

Focus Overall performance of programs and activities Final outcomes and impacts of programs

Metrics Mix of output and outcome metrics Primarily outcome metrics

Emphasis Efficiency and effectiveness of resource Effectiveness in achieving desired

allocation societal results

Process Sets performance targets and compares Defines desired outcomes and measures
actual results their achievement

Example Allocating funds to build a number of schools Allocating funds to improve literacy rates

Documentation Reports on physical and financial Highlights intended and actual societal
performance impacts

Objective Improve efficiency and effectiveness Ensure budget allocations achieve

measurable benefits

Measurement Includes outputs (e.g., number of schools Focuses on outcomes (e.g., increase in
built) literacy rates)
 Introduced in Performance Budgeting introduced in Often associated with modern, strategic
various forms over time public management

Challenges Balancing output and outcome metrics Accurately measuring and attributing
outcomes

Ministries/Departments All ministries prepare performance reports All ministries required to prepare
outcome budgets

Annual Requirement Yes, includes targets for previous, current, Yes, focuses on long-term results and
and next year societal changes

Cost Efficiency Evaluates the cost-efficiency of delivering Evaluates the effectiveness of spending
outputs in achieving outcomes

Significance
● Better service delivery.
● Effective Decision-making.
● Evaluation of programme performance and results.
● Communicating programme goals.
● Improving programme effectiveness.
● Make budgets cost-effective.
● Fix accountability.
● Aid better scheme management.

Challenges and Reforms Needed in Outcome Budgeting in India

Challenges Reforms Needed Examples

Vague Outcome Develop clear, measurable, and time-bound Instead of "improved education," define
Definitions outcome indicators. a target like "increase student learning
outcomes by 10% in core subjects within 2
years."

Weak Monitoring and Establish robust monitoring and evaluation Regularly track healthcare service
Evaluation frameworks with data collection and periodic utilization rates to assess the impact of
progress assessments. health insurance programs.

Limited Transparency Increase public access to budget documents, Develop online portals for citizens
performance reports, and data sets. to access budget information, track
Encourage citizen participation in budget program progress, and submit feedback.
discussions.

Data Gaps Invest in data collection infrastructure, Collaborate with universities to

strengthen statistical capacity, and improve develop methodologies for collecting
data sharing between departments. and analyzing data relevant to specific
outcome indicators.

Resource Allocation Align budgetary allocations with program Increase funding for programs with
Mismatch outcomes and performance. Allocate demonstrably positive outcomes (e.g.,
resources based on evidence from monitoring skill development) and reallocate
and evaluation. resources away from programs with
limited impact (e.g., generic subsidies).

Capital Expenditure

Introduction 1: Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical
assets such as property, plants, buildings, technology, or equipment.This type of financial outlay is made by Government/
companies to increase the scope of their operations or add some future economic benefit to the operation.
Introduction 2: Expenditures that either create physical or financial assets or reduce financial liabilities include
loan disbursements by the government (both internal and external), loan repayments (capital portion), and long-term
investments in infrastructure projects such as roads, schools, and hospitals.

CAPITAL EXPENDITURE OUTLAY FOR THE NEXT YEAR IS BEING INCREASED BY 11.1 PER CENT TO RS 11,11,111
CRORE, WHICH WOULD BE 3.4 PER CENT OF THE GDP

Importance/Significance of Capital Expenditure:

Reviving the Economy:
In India, the capital expenditure multiplier is around 2.45, whereas the revenue expenditure multiplier is 0.99 (RBI
Bulletin). Thus, a ₹1 crore increase in capital expenditure boosts GDP by ₹2.45 crores, while the same increase in revenue
expenditure raises GDP by only ₹0.99 crores.
Crowding-in Private Sector Investment:
Government spending on capital assets stimulates demand for goods and services produced by private sector entities.
Transition from Consumption to Investment-Driven Economy:
As recommended by the Economic Survey 2023, shifting the focus from consumption-driven to investment-driven growth
is essential.
Enhancing Debt Sustainability:
The Economic Survey highlighted that India should focus on its capacity to repay rather than the quantity of public debt.
This capacity depends on the interest rate-growth differential (IRGD).
Addressing Infrastructure Gaps:
The lack of autonomy hinders the ability of public sector undertakings (PSUs) to invest and grow, leading to poor
performance. For example, after disinvestment, Maruti Udyog gained operational autonomy and experienced remarkable
growth.
Reducing Logistics Costs and Boosting ‘Make in India’:
Increased capital expenditure can reduce logistics costs from 12%-14% of GDP to the global benchmark of 8%-10%, thereby
supporting the ‘Make in India’ initiative. ( World Bank Logistics Performance Index Reports))
Boosting Employment Creation:
Higher capital expenditure creates more employment opportunities, enabling people to earn their livelihoods and
increasing demand in the economy.
Concerns/Challenges
● Economic Uncertainties
» Uncertain Multiplier Effect: The expected multiplier effect may not materialize if the private sector hesitates to
invest due to fears of lower GDP growth rates and reduced returns.
» Crowding Out Private Investment: Higher government borrowings could crowd out private sector investment.
● Immediate Needs
» Neglect of Immediate Needs: Some economists argue that the government prioritizes capital asset creation over
providing immediate benefits such as cash transfers, free ration, education, and healthcare to the people.
● Implementation Challenges
» Time Lag Issue: Increases in capital expenditure do not have an immediate impact on the economy, leading to
delays in economic benefits.
» Time and Cost Overruns: Infrastructure projects often face time and cost overruns, which can lower the rate of
return and render projects financially unviable.
» Poor Asset Quality: Low-quality asset creation can lead to higher recurring maintenance costs.

Way Forward:
1. Balanced Approach:
» Integrate Immediate Needs: Allocate funds for both capital projects and immediate needs like healthcare and
education, ensuring short-term relief and long-term growth.
2. Improving Coordination:
» Enhance Inter-Departmental Coordination: Establish regular meetings and joint task forces among government
departments to avoid delays and improve project efficiency.
3. Enhancing Data Collection:
» Develop Gender-Disaggregated Data Systems: Improve data collection for gender-sensitive policies. Currently,
only 28% of necessary gender-disaggregated data is available globally.
4. Private Sector Engagement:
» Foster Public-Private Partnerships (PPPs): Encourage PPPs to leverage private sector resources, reducing public
financial burden and enhancing capital expenditure impact.
5. Monitoring and Evaluation:
» Strengthen Monitoring: Create an independent body for real-time project tracking to ensure timely completion
and adherence to quality standards.
6. Addressing Time Lag:
» Accelerate Implementation: Streamline approval processes and use digital platforms to reduce the time lag
between expenditure and economic impact.
7. Mitigating Economic Uncertainties:
» Ensure Policy Stability: Provide clear, consistent policy signals to boost investor confidence and attract foreign
direct investment.
8. Improving Debt Management:
» Focus on Sustainability: Enhance debt management strategies to maintain a healthy debt-to-GDP ratio and
ensure debt sustainability.
9. Addressing Infrastructure Gaps:
» Increase Autonomy of PSUs: Grant greater operational autonomy to public sector undertakings (PSUs) to improve
investment and growth.
10. Enhancing Quality of Asset Creation:
» Implement Quality Controls: Introduce stringent quality control measures and regular audits to ensure high
standards in asset creation.
11. Boosting Employment:
» Promote Labor-Intensive Projects: Prioritize projects that create jobs, enabling people to earn livelihoods and
boosting demand in the economy.
Conclusion 1: Capital expenditure in India catalyzes economic growth, fosters employment, and enhances welfare.
Strategic investments in infrastructure, healthcare, and education lay the groundwork for inclusive development, ensuring
a prosperous future for all citizens.
Conclusion 2: Capital expenditure in India lays the groundwork for comprehensive progress, serving as a cornerstone
for economic advancement, fueling growth, job creation, and societal well-being. Through prudent allocation, the nation
fortifies its economic foundation, fostering growth, employment opportunities, and social progress, propelling towards
sustainable development and elevating living standards for all citizens.
Conclusion 3: A gender-sensitive budget translates gender-specific commitments into financial allocations. With women
constituting approximately 48% of India’s population, their inclusion is crucial. Effective implementation of this measure
will mitigate gender-based inequalities.

Fiscal Responsibility and Budget Management

Introduction 1: The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 establishes a legal and institutional
framework for fiscal consolidation. It mandates the Central government to reduce fiscal and revenue deficits and enhance
overall public fund management, ensuring a balanced budget. This Act holds both the current and future governments
accountable for adhering to fiscal consolidation measures.
Introduction 2 : The FRBM Act of 2003, enacted by Parliament, seeks to enhance India’s fiscal discipline, institutionalize
fiscal deficit management, and improve macroeconomic and public fund management towards achieving a balanced budget.

Original Target: FRBM Act envisioned a gradual reduction in the fiscal deficit to 3% of GDP by 2008-09.
Current Status: The Union Budget for 2021-22 announced a target of reducing the fiscal deficit to 6.8% of GDP, down from
the revised estimate of 9.5% in 2020-21. However, the Budget also stated the government’s intention to achieve a fiscal
deficit of 4.5% of GDP by 2025-26.

Objectives of FRBM Act (Why the FRBM Act was Needed in India)
1. Fiscal Consolidation:
● Reduce Fiscal Deficits: The primary objective was to bring down the fiscal deficit, the gap between government
expenditure and revenue. This aimed to:
» Reduce Reliance on Borrowing: By spending less than it earns, the government wouldn’t have to rely heavily on
borrowing, leading to a lower debt burden.
» Improve Creditworthiness: Lower deficits enhance India’s creditworthiness in the global market, potentially
attracting lower interest rates on borrowings.
2. Enhance Transparency and Accountability:
● Clear Fiscal Targets: The Act established a framework for setting clear and time-bound targets for deficit reduction.
This improved transparency in government budgeting.
● Focus on Long-term Sustainability: By setting long-term fiscal goals, the FRBM Act aimed to promote responsible
budgeting practices and ensure long-term financial sustainability.
3. Promote Inter-generational Equity:
● Sustainable Debt Levels: High fiscal deficits can lead to unsustainable public debt burdens. The FRBM Act aimed to
ensure that the government doesn’t burden future generations with excessive debt.
● Long-term Growth: By controlling fiscal deficits, the FRBM Act aimed to create a more stable macroeconomic
environment conducive to long-term economic growth and development.
4. Macroeconomic Stability:
● Control Inflation: High fiscal deficits can contribute to inflationary pressures. The FRBM Act aimed to control deficits
and promote price stability.
● Stable Interest Rates: Lower fiscal deficits can lead to lower government borrowing, potentially resulting in lower
interest rates and improved business conditions.
● Exchange Rate Stability: Fiscal discipline promotes confidence in the economy, leading to a more stable exchange rate.
5. Enable Effective Monetary Policy:
● Reduced Crowding Out Effect: By controlling its borrowing needs, the government reduces competition with private
entities for loanable funds. This allows the central bank to implement its monetary policy more effectively.
 Arguments in favour of Effectiveness Arguments against Effectiveness

Initial Deficit Reduction: The FRBM Act did Deviations from Targets: The government has deviated from
lead to a decline in fiscal deficits in the initial the original FRBM targets on several occasions, citing factors
years. From a high of over 8% of GDP in the like economic slowdowns or emergencies. This undermines the
early 2000s, deficits were brought down to credibility of the Act’s framework.
around 3% of GDP by 2007-08. High Debt Levels: Despite some deficit reduction, India’s public
Enhanced Transparency: The Act introduced debt remains high as a percentage of GDP. This suggests the Act
a framework for setting clear and time-bound may not have been entirely successful in controlling government
fiscal targets, improving transparency in borrowing.
government budgeting. Limited Impact on Spending: Critics argue that the Act primarily
Investor Confidence: The Act’s initial success focuses on deficit reduction through revenue enhancement, not
in reducing deficits likely improved investor necessarily controlling government spending.
confidence in India’s fiscal management. Random target: The Act prescribes a target fiscal deficit of 3% of
State-Level Fiscal Responsibility: The FRBM GDP for the centre but with no explicit justification for the number.
Act has inspired similar legislation at the state No enforcement mechanism: There is no mechanism like fiscal
level. Many states have enacted their own accountability council to review fiscal performances under the act.
Fiscal Responsibility Acts Also, the limits set under the Act have been mostly violated.
Conclusion 1: The FRBM Act has demonstrably brought fiscal discipline to the forefront of Indian government policy. It
established clear benchmarks to measure progress. However, the recommendations of the N.K. Singh Committee deserve
consideration. Looking ahead, the FRBM Act needs to adapt to evolving economic realities. This might involve revising specific
targets or incorporating new metrics to ensure its continued effectiveness in promoting responsible fiscal management.
Conclusion 2: The FRBM Act is crucial for India’s fiscal discipline and stability. Enhancing resource mobilization and
fiscal prudence can further reduce fiscal deficits and promote sustainable economic growth

Key Features of Budget 2024-25