Introduction:
Fiscal stability entails the government’s ability to employ its fiscal policy to achieve long-term economic objectives, such as robust employment and growth rates.
The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2003, aimed to establish fiscal stability by promoting inter-generational equity, coordination, and transparency in fiscal operations.
Body:
Fiscal Stability Importance:
Sound fiscal stability instills confidence in the financial system, preventing crises like bank runs that can disrupt the economy.
Performance of Centre and States:
States’ Performance:
- State finances study by the Reserve Bank of India showed adherence to gross fiscal deficit limits since 2005.
- States follow fiscal responsibility legislation, maintaining gross fiscal deficit within 3% of GDP.
- Outstanding debt reduced from 31% (2005) to 27% of GDP (FY2020).
Centre’s Performance:
- The central government has struggled to adhere to fiscal deficit limits.
- Debt-to-GDP ratio surpassed 61.7%, surpassing the supposed 40% limit.
- Global financial crisis, pandemic, and geopolitical issues led to FRBM Act target delays.
Impediments to Fiscal Stability:
- Freebies: Political promises like free utilities, monthly allowances, and gadgets for votes lead to unanticipated fiscal pressures.
- Economic Crises: Global financial crisis, pandemic, and geopolitical tensions disrupted FRBM Act targets.
- Crude Oil Dependency: India’s 80% crude oil imports make it vulnerable to supply-side shocks.
- Unproductive Expenditure: Loan restructuring during business downturns.
- Excessive Revenue Expenditure: High salaries, pensions, maintenance costs vs. low capital expenditure.
- Subsidies: Substantial outflow for food, fuel, fertilizers.
- Low Income Tax Base: Limited revenue due to a small tax base.
- Taxation System Gaps: Envisioned Direct Tax Code not implemented.
- Corporate Sops and Tax Evasion: Favorable corporate treatment and tax evasion impact revenue.
Conclusion:
Fiscal stability encompasses both expenditure and revenue management. Distinguishing between productive and non-productive incentives is crucial. Efficient financial institutions and targeted fiscal stimuli during crises, such as the ongoing pandemic, are essential to ensure stability.