What sort of new FRBM do we need
Singh committee to review the Fiscal Responsibility and Budget Management Act, 2003, has produced an excellent report on future reforms in this important area. The chief economic adviser in his dissent note had favoured a more gradual decline which would take the fiscal deficit down to 2% in 2022-23 and reduce the debt ratio more sharply to 35.7%. Perhaps the new Act should explicitly allow adjustment of the medium-term fiscal deficit targets once every two years, to reflect revisions in the expected medium-term growth rate. The committee has therefore recommended an “escape clause” which would enable departure from the fiscal deficit target in specific circumstances. The difficult issue here is whether fiscal deficit targets for individual states will be set equal to the average for all states, as has been the case thus far, or whether each state will have its own target reflecting its initial debt/GDP ratio and its growth potential.
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