FRBM law rethink: Aim for clarity in India’s fiscal policy framework

livemint.com:

India is moving towards a new fiscal policy framework. Finance minister Nirmala Sitharaman said in the Union budget announced earlier this month that after 2025-26, the government will try to keep the fiscal deficit at a level “such that the central government debt will be on a declining path as a percentage of GDP." What does this mean? India currently has a fiscal law that expects the Union government to keep its annual fiscal deficit below 3% of gross domestic product (GDP).

So government borrowing in any given year cannot exceed that limit, to rein in profligate budgeting. However, a rigid limit on government borrowing can be counterproductive in some situations.

For example, during a pandemic, when the treasury must step in to support a shrinking economy. The fiscal law thus has an escape clause that provides the government with some welcome flexibility in the way it conducts fiscal policy, rather than being tied to mindless austerity when it is least needed.

The design of our Fiscal Responsibility and Budget Management (FRBM) law, which got a stamp of approval from Parliament in 2003, is modelled on similar legislation in many other countries. Its passage was a remarkable moment in India’s political economy, when the political system decided to subject itself to legal boundaries for the conduct of fiscal policy, while also helping participants in the economy make better decisions because of more predictable government budgets.

There has since been a global shift to what is often called a second generation of fiscal rules. These have been based on the principle that what actually matters for a country is sustainable public finances over the medium term, rather than the bottomline of every annual budget—a focus on