Budget 2012: Tripped by global crisis in 2008, FRBM yet to recover

Running huge fiscal deficits was a 'given' in the days of Licence Raj. However, the need to improve the fiscal health of the economy started getting serious policy attention only after liberalisation and structural reforms, post 1991.

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After several years of deliberation and debate by policy makers, the Fiscal Responsibility and Budget Management Act, or FRBM, was passed in 2003. The Act, among other things, sought to restrict fiscal deficit to 3% of GDP by focusing on revenue raising measures and expenditure reforms. Besides, revenue deficit was also sought to be eliminated.

The government was serious and was successful in consolidating its finances for a few years and also in achieving the targets stipulated in the Act. The Act was also adopted by various state governments and many of them had succeeded in fiscal consolidation.

However, after the global financial crisis of 2008, things started going off the mark as the government had to resort to massive stimulus to revive the economy, which was badly affected by the global financial meltdown in 2008. Almost four years after the stimulus, even as the central bank has unwound monetary stimulus, there has been little success in unwinding the fiscal stimulus completely.

The finance minister has proposed to introduce amendments to the FRBM Act as part of Finance Bill, 2012. However, given that 2013-14 is going to be a crucial year from the political perspective, with general elections due in 2014, its success may not be certain.

Also read: Budget 2012: A tale of dire times, broken promises & more

(Contributed By Gayatri Nayak, Sangita Mehta, Anita Bhoir & Ruchira Roy)