Mains-GS3-Economic Development, Mains-GS2-Governance
1. Kerala has demanded the Central Government for flexibility under the Fiscal Responsibility and Budget Management (FRBM) Act.
2. The demand is to ensure that the State’s finances are not adversely impacted in this financial year.
What is the FRBM Act?
1. The act was enacted in 2003 to make the Central government responsible for ensuring
a) Inter-generational equity in fiscal management
b) Long-term macro-economic stability.
2. It envisages the setting of limits on the Central government’s debt and deficits.
3. It mandates greater transparency in fiscal operations of the Central government and the conduct of fiscal policy in a medium-term framework.
4. It specifies the annual revenue and fiscal deficit goals over a three-year period.
a) Reduction in the fiscal deficit to 3% of GDP within a specified time frame. It has shifted from the initial goal of March 31, 2009, to March 31, 2021.
b) The 12th Finance Commission’s recommendations in 2004 linked debt relief to States with their enactment of similar laws to ensure that the States are financially prudent.
5. The States have enacted their own respective Financial Responsibility Legislation that sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficit.
How does FRBM relaxation work?
1. It contains an ‘escape clause’ for providing flexibility under some emergencies.
2. Under Section 4(2) of the Act, the Centre can exceed the annual fiscal deficit target citing grounds such as
a) National security
b) War
c) National calamity
d) Collapse of agriculture
e) Structural reforms
f) The decline in real output growth of a quarter by at least 3% points below the average of the previous four quarters.
Why should the targets be relaxed?
1. The COVID 19 pandemic along with lockdown can be considered as a national calamity.
2. It has led to a period of inactivity in the country as well as losses in the economy.
3. So, suspending both the Centre’s and States’ fiscal deficit targets is needed.
4. It can allow both the Union government and States to increase expenditure to meet the extraordinary circumstances.
When has it been relaxed?
1. There have been several instances of the FRBM goals being reset.
2. The most significant FRBM deviation happened in 2008-09 in the wake of the global financial crisis.