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.

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.

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.

Legacy Editor Changed status to publish March 15, 2024