A Reformist Thought to Fiscal Reform and Budget Management

Abstract

The Fiscal Reform and Budget Management (FRBM) Act 2003 (and its subsequent amendments) and similar fiscal responsibility laws were legislated to rein in fiscal deficits often driven by factors other than economic imperative. This paper shows that such laws have not promoted counter-cyclical fiscal policy because of a lacuna in design, viz. measurement of fiscal deficit-as-a-share of gross domestic product (GDP). The remedy lies in targeting the cyclically adjusted fiscal deficit-as-a-share-of potential GDP instead, which correctly reflects the true fiscal position, allowing elbowroom for appropriate fiscal action for macroeconomic-stabilisation. The paper discusses ways to institutionalise the same and way forward therein.