Budget

India’s marginalised Parliament in Budgetary Affairs

Context: The budget is a crucial instrument for any democracy, reflecting a nation's priorities, economic vision and governance philosophy. In India, however, the role of Parliament in shaping the budget is minimal, leading to concerns about democratic accountability and fiscal discipline. 

Relevance of the topic:

Prelims: Budget process in India.

Mains: Role of executive and legislature in financial governance, transparency and accountability.

Budget

  • Budget is the estimated receipts and expenditure of the government of India in respect of each financial year (April 1 to March 31). 
  • Article 112 mandates that the President must present the Annual Financial Statement (Budget) before both the houses of the Parliament every financial year. 
  • The budget is prepared by the Budget Division, Department of Economic Affairs, Ministry of Finance. 
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Current State of Budgetary Process in India

  • Executive Dominance in Budget formulation: The Finance Ministry single-handedly crafts the Budget, keeping even Cabinet Ministers uninformed, until its presentation in the Lok Sabha. Unlike other legislative Bills, the Budget proposal is not subjected to thorough cabinet discussions before being introduced in Parliament. 
  • Weak Parliament Scrutiny: Parliament’s role in Budget formulation and scrutiny in India is mainly ceremonial. The executive monopoly over financial planning results in fragmented debates and limited oversight, weakening the core tenets of representative democracy.
    • Parliamentarians lack the power to amend or significantly influence budget proposals, effectively reducing their role to passive approval.
    • Rajya Sabha, despite its democratic credentials, has no substantive role in Budget discussions. 
    • Ironically, while India permits a Finance Minister to be a Rajya Sabha member, they lack the ability to vote on their (own) Budget proposals in the Lok Sabha. 

Way Forward: Reforms to strengthen Parliamentary oversight

1. Institutionalising pre-budget discussions: 

  • There should be a dedicated five to seven-days pre-Budget discussion period during monsoon session. 
  • Such a session will:
    • democratise the Budget-making process by allowing elected representatives to assess the nation’s fiscal health, voice public concerns, suggest equitable resource allocation, and engage in policy deliberations. 
    • encourage better coordination among subject committees, enhancing their ability to provide informed input. 
    • facilitate greater public involvement, fostering transparency and trust in financial governance. 

2. Establishment of a Parliamentary Budget Office (PBO): 

  • PBO is an independent, non-partisan institution that provides legislators with objective financial and economic analysis of the Budget.
  • Its primary function is to support Parliament in budgetary oversight, fiscal planning, and economic policymaking.
  • PBO would:
    • offer policy briefs to parliamentarians, enhancing informed decision-making ensuring legislative scrutiny is backed by objective research.
    • offer expert assessments of government spending, revenue forecasts, and the financial impact of policies. 
    • enhance Parliament’s capacity to hold the government accountable and foster evidence-based policy discussions. 

By integrating pre-Budget discussions and establishing a PBO, Parliament can transition from being a passive recipient of financial proposals to an active budget-influencing institution.  

Tax Cuts in Union Budget

Context: The Union Budget 2025 announced the biggest tax cuts for India’s middle class. While these cuts are expected to provide relief to a small section of taxpayers, they also pose risks related to revenue loss and fiscal consolidation.

Relevance of the Topic:Prelims: Trends in Budget- Taxation

Tax Cuts announced in Budget 2025: 

  • Expansion of Zero-Tax Bracket: Individuals earning between ₹7-₹12 lakh annually now get a complete tax rebate, which was previously applicable only for those earning below ₹7 lakh.
  • Increased Exemption limit: For those earning more than ₹12 lakh, the exemption limit has increased from ₹3 to ₹4 lakh.
  • Marginal Tax Rate reduction: All tax slabs have been adjusted in a way that reduces overall tax liabilities for individuals earning above ₹7 lakh.
  • Revenue Implications: The Finance Minister estimated that these tax cuts will lead to a revenue loss of ₹1 lakh crore, which is 8% of the direct income tax collection of ₹12.57 lakh crore. 

Logic behind Tax rebates

  • Despite the fall of 8% in the effective tax rate as a result of tax cuts, the Budget has estimated direct tax collection to go up by 14%.
  • This would require a 24% growth in taxpayers' income, which may or may not happen, depending on economic conditions.
  1. Optimistic scenario: The reductions in personal income-tax rates are set to:
    • boost middle-class purchasing power and consumption, which will be credit positive for corporates and financial sectors. 
    • benefit domestic manufacturers (particularly in automotive two-wheelers, passenger vehicles, and white goods sectors)
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  1. Pessimistic Scenario:
  • Projected revenue loss of ₹1 lakh crore due to income-tax cut would slow fiscal consolidation. If it is not offset by increased economic activity or higher GST collections, this would widen the fiscal deficit. 
  • If income growth remains subdued, tax buoyancy may not improve. The revenue shortfall could lead to cuts in government spending on welfare and development programs.

Impact of Tax Rebates on Fiscal Policy & Economic Growth

  • Government Expenditure Constraints: Under Fiscal Responsibility and Budget Management (FRBM) Act, the government cannot spend beyond a set deficit limit. This means:
    • Any shortfall in tax revenue could force cuts in government expenditure.
    • Fiscal policy could become pro-cyclical instead of counter-cyclical, worsening economic slowdowns.
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  • Fiscal Deficit Management:
    • In 2024, the government lowered its fiscal deficit target from 5% to 4.8%, primarily by cutting expenditures.
    • In 2025, the target has been further reduced to 4.4%, signaling fiscal contraction rather than expansion.
    • Many flagship government schemes have seen budget cuts to achieve this goal.
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  • Reliance on Private Sector Investment:
    • With government expenditure limited, the corporate sector is expected to drive economic growth.
    • However, despite previous tax cuts and capital expenditure boosts, private investment has remained weak.
    • Economic Survey 2025 indicates that global demand is uncertain, making exports an unreliable growth driver.

Is the Tax Cut Strategy Sustainable?

  • The government is betting on a trickle-down effect, assuming that increased disposable income will boost consumption, leading to higher corporate investment and job creation. However, if private investment does not pick up, the government could face a revenue crisis.
  • Cutting expenditures to maintain fiscal discipline could slow down economic growth, making recovery even harder.

Budget Analysis 2025: Highs and Lows

Context: The Union Budget 2025 certainly included many positive aspects like Tax cuts meant for the middle class, growth and expenditure estimates rooted in reality, etc. However, deviating from laying out a clear plan for meeting fiscal deficit targets raises concerns on the government's approach for fiscal consolidation.

Relevance of the Topic:Prelims: Key trends in Budget- Positives and Concerns. 

Positive Aspects of Budget 2025-26

  • Reasonable Growth projection: Budget has projected a nominal GDP growth at 10.1% for 2025-26.
    • Economic Survey 2024-25 had indicated a real GDP growth in the range of 6.3%-6.8% for 2025-26. This provides some buffer if growth picks up more.
  • Concession for Middle class: Budget 2025 raised the basic exemption limit to Rs. 4 lakh and extended full tax rebate for income up to Rs. 12 lakh.
  • Realistic assumptions for Tax Revenue growth:
    • Gross tax revenue growth is projected at a lower level of 10.8%.
    • There has been a fall in growth of Personal Income tax, from 25.4% in 2023-24 to 20.3% in 2024-25 (RE) and 14.4% in 2025-26 (BE).
      • This fall in growth in 2025-26 (BE) is partly due to the announced income-tax concessions. 
    • In the case of corporate income-tax, the growth in 2024-25 (RE) is quite low at 7.6%. This growth has been raised to 10.4% in 2025-26 (BE).
  • Non-Tax Revenues:
    • Non-tax revenues have been raised from ₹5.3 lakh crore (RE) to ₹5.8 lakh crore in 2025-26 (BE).
  • Addressing long-pending issues:
    • Budget 2025 proposed to introduce a new Bill to repeal and replace the Income Tax Act, 1961.  
    • This is intended to make it simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.
Positive Aspects of Budget 2025-26

Receipts in Budget 2025

  • Total receipt:
    • The total receipts other than borrowings are estimated at ₹34.96 lakh crore. 
    • The net tax receipts are estimated at ₹28.37 lakh crore. 
    • The fiscal deficit is estimated to be 4.4 per cent of GDP. 
  • Gross tax Revenues:
    • Growth in Government’s gross tax revenues (GTR) have trended downwards in recent years.
    • The buoyancy of GTR has fallen for three successive years from 1.4 in 2023-24 to 1.15 in 2024-25 (RE) and then to 1.07 in 2025-26 (BE).
    • As a result, growth in the Government of India’s GTR has kept falling from 13.5% in 2023-24 to 11.2% in 2024-25 (RE), and to 10.8% in 2025-26 (BE). 
  • Falling growth rate of GST:
    • Within the government’s tax revenues, the growth rate of Goods and Services Tax (GST) has also fallen from 12.7% in 2023-24 to 10.9% in 2025-26 (BE).
  • Shift of focus from Indirect to Direct taxes:
    • The structure of the government’s taxation has moved away from indirect to direct taxes. 
    • The share of direct taxes in the government’s GTR has increased from 52% in 2021-22 to 59% in 2025-26 (BE).
  • Better performance of Personal Income Tax:
    • Within direct taxes, it is personal income-tax which has performed better than corporate income-tax in terms of growth and buoyancy.
  • Non-Tax Revenues:
    • The main contribution has been in the form of dividends from the Reserve Bank of India and public sector companies, which together accounted for about ₹3.25 lakh crore in 2025-26. This is an increase of ₹35,715 crore over the revised estimates.

Expenditure in Budget 2025

  • The total expenditure is estimated at ₹50.65 lakh crore. 
  • Reduction in Expenditure-GDP:
    • Given the commitment to fiscal consolidation, the size of government expenditure as a percentage of GDP had to be reduced from 14.6% in 2024-25 (RE) to 14.2% in 2025-26 (BE). 
    • Growth in total expenditure, at 7.6% in 2025-26 (BE), is lower than the budgeted nominal GDP growth at 10.1%.
  • Improvement in the quality of government expenditure:
    • There has been a steady improvement in the quality of government expenditure as the share of capital expenditure in total expenditure has been improving.
    • This share has improved by 10% points over the period from 2020-21 to 2025-26 (BE).

Concerns on Budget 2025

  • Uncertainty over demand picking up: Impact of concessions given to middle class on demand depends on the marginal propensity to consume of the households.
  • Case for AI infrastructure:
    • Given the contemporary context, the Government has to build up large-scale Artificial Intelligence (AI) infrastructure in order to facilitate the adoption of emerging technologies. 
    • Global Comparison:
      • In this context, China has taken a clear lead. 
      • The United States has recently announced an investment of $500 billion for AI infrastructure. 
      • In the field of AI, India’s technology companies have failed to anticipate developments. 
    • India should push these companies for research and development, by offering some tax concessions, if necessary.
  • Less transparent fiscal health indicator:
    • Budget 2025 moved away from fiscal deficit as an indicator of fiscal prudence.
    • The practice of giving a glide path in terms of fiscal deficit is being discontinued.
      • Budget 2025 stated that from now on, the focus will be on reducing the debt-GDP ratio annually.
    • The glide paths are indicated in terms of alternative growth assumptions and alternative assumptions regarding mild, moderate, and high degrees of fiscal consolidation. 
      • This makes the whole exercise vague and non-transparent.
  • Challenge of large-scale government borrowing: A larger claim on the available investible resources by the government will make it difficult for private investment to pick up.

Case of RBI’s Repo Rate cut

  • The equity market has been on a downward trend for over four months, with major indices falling 10-13%, causing losses for retail investors, especially new entrants. 
  • The RBI in the latest Monetary Policy Committee (MPC) meetings has announced a 25 basis point rate cut in Repo rate, from 6.50% earlier to 6.25% now, to boost the market. Lowering interest rates would ease EMIs on home and consumer loans, providing relief.

Discontinuation of Sovereign Gold Bonds

  • The government has decided to discontinue Sovereign Gold Bonds (SGBs), which began in 2015.
    • The last issuance was in February 2023, with an outstanding amount of ₹4.5 lakh crore as of March 31, 2023. 
    • These bonds, with an 8-year tenor and interest of 2.75% (later reduced to 2.50%), provided returns indexed to 24-carat gold prices.
  • Rise in Gold Prices: Due to the sharp rise in gold prices (3.25 times since 2015), the actual cost of issuing SGBs turned out to be 12-13%.
    • This was much higher than the 6-8% cost of an 8-year government security (G-Sec). 
  • Unsustainability: In 2024-25, the government spent ₹18,500 crore on SGB redemptions, making the scheme financially unsustainable. 
  • Failure in reducing gold imports: SGBs failed to reduce the country’s reliance on physical gold imports, contrary to the government's expectations.

Government’s dependence on RBI Surplus

  • The government continues to rely on surplus transfers from RBI, government-owned banks, and financial institutions.
    • In 2025-26, the budgeted transfer is ₹2.56 trillion, up from ₹2.34 trillion in 2024-25.
    • The share of these transfers in net tax receipts has doubled from 4.5% in 2023-24 to over 9% in 2024-25.
  • This increase was driven by a sharp rise in the RBI’s surplus, largely due to exchange rate gains.
  • While RBI normally transfers its earnings to the government, its recent high earnings stem from frequent interventions in the forex market.
  • Such dependence on RBI's profits raises concerns about the central bank’s independence compared to global standards.

Maritime Development Fund & Indian Shipping Industry

Context: The Union Budget 2025 has announced Rs. 25,000 crore Maritime Development Fund for the shipping industry, among other incentives.

Relevance of the Topic:Mains: Budget- Maritime Sector; Indian Shipping Industry

Present status of Indian Shipping Industry

  • Cargo handling:
    • The cargo handled at major ports has only marginally increased from 1,071.76 million tons in 2016-17 to 1,249.99 million tons in 2020-21. (Ministry of Ports, Shipping and Waterways) This is a cumulative growth of 14.26% or an annual increase of just 2.85%.
  • Vessels handled: 
    • The number of vessels handled at these ports declined by 5.93%, from 21,655 vessels in 2016-17 to 20,371 in 2020-21.
  • Indian-registered fleet:
    • The number of Indian-registered ships has increased from 1,313 in 2016-17 to 1,526 in September 2024 — a cumulative rise of 16.77% and an average annual growth of 2.4%.
  • Gross tonnage:
    • It has grown from 11,547,576 GT in 2016-17 to 13,744,897 GT — a cumulative increase of 17.44% and an annual average growth of 2.5%.
  • Aging Indian fleet:
    • Average vessel age rose to 26 years in 2022-23. However, this has now improved to 21 years, with the addition of 34 relatively younger vessels (average age of 14 years) in 2024.
  • Declining Market share:
    • Indian shipping companies continue to lose market share to foreign-flag vessels in EXIM trade and to rail and road transport for domestic cargo movement.
  • Global ranking:
    • India’s global ranking in ship ownership declined from 17 to 19. This decline indicates that investments in port infrastructure alone have not translated into a stronger domestic shipping sector.

Progress under Sagarmala Initiative

  • As of September 2024, 839 projects requiring an investment of ₹5.8 lakh crore have been outlined, with 241 projects (₹1.22 lakh crore) completed, 234 projects (₹1.8 lakh crore) under implementation, and 364 projects (₹2.78 lakh crore) in various stages of development.
  • Focus areas:
    • Port modernisation (₹2.91 lakh crore)
    • Port connectivity (₹2.06 lakh crore)
    • Port-led industrialisation (₹55.8 thousand crore)
    • Coastal community development.
  • Impact of initiatives: GDP increased from ₹153 trillion in 2016-17 to ₹272 trillion in 2022-23, despite setbacks due to the COVID-19 pandemic.
  • EXIM growth: India’s EXIM trade grew from $66 billion in 2016-17 to $116 billion in 2022, reflecting a 77% cumulative increase.
  • Targeting Export-led growth: The government has set ambitious targets, aiming to achieve a $7 trillion economy by 2030, with exports projected to reach $2 trillion by 2030.

Sagarmala Programme: 

  • Sagarmala is a flagship initiative to transform India’s maritime sector. 
  • Aim: With India's extensive coastline, navigable waterways, and strategic maritime traderoutes, Sagarmala aims to:
    • Unlock the untapped potential of these resources for port-led development and coastal community upliftment.
    • Enhance the performance of the logistics sector by reducing logistics costs for both domestic and international trade.
    • Minimize the need for extensive infrastructure investments by leveraging coastal and waterway transportation, thus making logistics more efficient and improving the competitiveness of Indian exports.
  • Nodal Ministry: Ministry of Ports, Shipping and Waterways.
  • It has four main aspects associated with it, as given below:
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  • Overall set of projects are divided into 5 pillars and 24 categories as below:
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Challenges faced by the Shipping Industry

  • Capital Constraints and High Borrowing Costs:
    • Indian shipping companies face high borrowing costs, short loan tenures, and strict collateral requirements.
    • Unlike foreign counterparts, Indian ship-owners cannot use ships as collateral, making financing difficult.
    • Lenders do not fully understand the cyclical nature of the industry, leading to rigid loan restructuring policies.
  • Unfavourable Tax Policies:
    • Indian-flagged ships are subject to 5% IGST on purchase price, a tax not imposed on foreign vessels operating in Indian waters.
    • Indian ship-owners must deduct TDS on seafarers' salaries, whereas foreign vessels employing Indian seafarers do not have to.
    • These disparities make Indian vessels significantly less competitive.
  • Ship-building Challenges:
    • India spends close to $75 billion annually on leasing ships from outside.
      • Also, India owns just about 2% of the world’s total tonnage and has some 1,500 ships. 
      • With regard to shipbuilding, India currently has less than 1% share of the global market, which is dominated by China, South Korea and Japan.
    • India’s shipbuilding industry suffers from inadequate infrastructure, high input costs (especially steel), dependence on imports for spare parts, and delays in vessel deliveries. 
    • Customs duties on imported machinery increase production costs. Lack of skilled workforce reduces efficiency. These issues discourage ship-owners from investing in Indian shipyards.
  • Competition from Foreign-flagged Vessels:
    • Foreign-flagged vessels, often registered in tax havens, enjoy easier access to capital, lower borrowing costs, and lenient regulations.
    • Their ownership structures allow them to operate with minimal regulatory oversight, making them far more competitive than Indian-flagged ships.

Steps Taken by the Government

  • Maritime Development Fund (MDF):
    • A ₹25,000 crore fund aimed at improving access to capital for ship-owners. The government will contribute up to 49% to the fund and mobilise the rest from the private sector.
    • The fund will provide long-term and low-cost financial support for Indigenous shipbuilding and other blue water infrastructure projects. 
    • The fund aims to provide various forms of financial support, including debt, equity, viability gap funding (VGF), and buyer credit.
  • Ship-building clusters:
    • Facilitating ship-building clusters help to increase the range, categories and capacity of ships.
    • This will include additional infrastructural facilities, skilling and technology to develop the entire ecosystem.
    • This will not only improve overall infrastructural and logistical support for the export sector, but also help to save a huge amount of forex remitted in dollars to foreign shipping lines.
  • Infrastructure Status for Large Vessels: This status allows shipping companies to access benefits similar to those in other infrastructure sectors.
  • Customs Duty Exemption on Shipbuilding Spares: The government has extended this exemption for another 10 years.
  • Revamped Financial Assistance Policy: This includes credit incentives for shipbreaking and an extension of the tonnage tax scheme to inland vessels.

While these initiatives are steps in the right direction, they may not be sufficient given the capital-intensive nature of the shipping and shipbuilding sectors. Additionally, clarity is needed on how the ₹25,000 crore MDF will be mobilised and distributed over the coming years.

Way Forward

  • Long-Term Financing at Competitive Interest Rates: Indian Shipping industry requires loan tenures of 7-10 years with lower interest rates to facilitate ship acquisition and modernization.
  • Expansion of Shipbuilding Infrastructure: India must invest in new shipyards and modernise existing ones to build large vessels and reduce dependence on imports.
  • Tax Reforms to Level the Playing Field: Removing IGST on ship purchases and exempting Indian seafarers from TDS requirements will improve competitiveness.
  • Encouraging External Commercial Borrowings (ECBs): If strategically utilised, ECBs could help bridge the funding gap in the maritime sector.
  • Investment in Green Technology: To meet global emissions reduction targets, India must promote eco-friendly shipbuilding and retrofitting of existing vessels.

Taxation in India

Context: The Economic Survey 2025 projects India’s FY 2025-26 GDP growth at 6.3-6.8%. For Viksit Bharat, India has to grow 8% for at least 10 years. As India's per capita income rises and its democratic processes deepen, an increase in tax collections is anticipated in the country.

Relevance of the Topic: Prelims: Key trends in Taxation in India 

Why does Taxation become important in the present state of Indian Economy?

  • Inadequate consumption-led growth: Indian consumers are not spending enough on goods and services. This has led to weak demand in the economy.
  • Impact on Private investment: Dullness in demand has discouraged private firms from investing in creating new productive capacities. 
  • Constraints in exports-led growth: 
    • With Trump as the US President, US’s threat to impose tariffs can possibly lead to a global trade and currency war. 
    • With rising protectionism, threat of tariffs and competitive devaluations of currency, India cannot solely rely on exports-led growth.  
  • Necessity for government spending: With low private consumption expenditure and low private investment, the increase in government expenditure is the necessary condition for economic growth. But in order for the government to spend more, robust tax revenues are required. 

Role of Taxation

  • Reducing direct taxes like Income tax can increase disposable income for the tax payers and ensure household consumption expenditure.
  • Rationalising indirect taxes, like rationalising Goods and Services tax (GST) will make goods and services more affordable and thus, boost consumption expenditure. 
  • Tax-incentives and favourable policies for export-oriented sectors and firms can enhance their global competitiveness, invest in innovation and expand their operations.  
  • Efficient tax collection and broadening the tax-base can provide the government with sufficient tax revenue to increase expenditure. 

Scope of Taxation in India

1. Critical importance of tax revenues for Indian government:

  • The Indian government has a very high dependence on tax revenues -close to 80%. Comparable economies such as Brazil, Mexico and China are much less dependent on tax revenues. 
  • Cutting tax rates or collecting less taxes will force the Indian government to borrow more money from the market, thus competing with private firms for investible funds. This will drive up interest rates for everyone in the economy.
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2. Tax revenues as share of GDP: 

  • India ranks fairly low when total tax revenues as a share of total national GDP is concerned- well below 20%.
  • Most developed countries in Europe manage to raise much higher levels of revenues as a proportion of GDP.  This suggests that those countries are more efficient at raising revenues.
  • India’s government, despite being desperately dependent on taxation for their expenditure, is not able to target as wide a tax base.
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3. Tax revenues as a share of GDP versus GDP per capita:

  • India fits into a broad pattern where the richer a country, the more capable its government is in raising taxes as a percentage of the overall GDP. So, India is behind China, which, in turn, is behind the US. 
  • Older, more established economies are more efficient in raising revenues. 
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4. Income Tax vs. Taxes on Goods & Services:

  • Direct taxes such as personal incomes taxes are more progressive and just — i.e., the rich can be made to pay a higher rate of tax as against the poor. 
  • Indirect taxes such as the GST are regressive, since a poor person also pays at the same rate at which the rich pays. 
  • In India, both direct and indirect taxes roughly amount to around 7% (of the GDP) each. 
  • Richer developed countries use direct taxes more to raise much higher levels of taxation as against emerging economies such as China or Vietnam or India.
  • Indian taxpayers should expect higher tax collections, especially from direct taxes such as personal income taxes, as India becomes richer and the Indian government becomes more efficient in collecting taxes.
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5. Taxation in Electoral Democracies:

  • The higher a rank for a country in electoral democracy, the more tax revenues its government is able to raise. 
  • So, India does better than Bangladesh while it is behind Brazil, the US and Germany on both electoral democracy index as well as tax revenue collection (as a % of GDP). 
  • As India improves its electoral democracy ranking, we can expect higher tax collection.
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Conclusion

  • While it is true that, due to repeated economic shocks as well as the government’s inability to successfully kick-start a virtuous cycle of economic growth in the country, there are concerns that the Indian government is overtaxing citizens.
  • But, India’s tax revenues (as a percentage of GDP) is not as high as many of the developed countries, even though it funds a remarkably high proportion of central government’s spending. Moreover, as India becomes richer (in per capita income terms), and its democracy deepens, tax collection can be expected to go higher. 

Re-evaluating FRBM Act 2003

Context: The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to ensure macro-economic stability and inter-generational equity. The Act's rigid framework has been increasingly criticised for its limitations, especially during the times of economic crises. 

Relevance of the Topic: Prelims: Key features of FRBM Act, 2003. Mains: FRBM Act- Limitations, Reforms. 

Fiscal Responsibility and Budget Management (FRBM) Act, 2003: 

  • The Act aims to ensure a balance between government revenue and government expenditure. It set deficit targets for the Union and States to control their deficits. 
  • Objectives:
    • Ensuring fiscal discipline.
    • Efficient management of expenditure, revenue and debt.
    • Promoting macroeconomic stability.
    • Better coordination between fiscal and monetary policy.
    • Increasing transparency in the fiscal operation of the Government. 

Salient Features of Fiscal Responsibility and Budget Management Act, 2003

  • Section 4(1) of the FRBM Act provides that the Central Government shall:
    • Take measures to limit the fiscal deficit up to 3% of GDP.
    • Ensure that by the end of Financial Year 2024-25:
      • General Government debt does not exceed 60% of GDP.
      • Central Government debt does not exceed 40% of GDP.
    • Not give additional guarantees with respect to any loan on security of the Consolidated Fund of India in excess of one-half per cent of GDP, in any Financial Year.
    • Ensure that the fiscal targets are not exceeded after stipulated target dates.
  • Under Section 5 of the Act, except for certain circumstances, the Act does not allow the Central Government to borrow from the Reserve Bank of India (RBI).

FRBM Review Committee headed by NK Singh

The government believed the targets set by the FRBM Act were too rigid. In 2016, the government set up a committee under NK Singh to review the FRBM Act. Targets set by NK Singh Committee:

  • Debt to GDP ratio: 
    • The Committee suggested using debt as the primary target for fiscal policy.
    • It advocated for a Debt to GDP ratio of 60% with a 40% limit for the centre and a 20% limit for the states. 
  • Revenue Deficit Target: 
    • It should be reduced to 0.8% of GDP by March 31, 2023. The minimum annual reduction target was 0.5% of GDP.
  • Fiscal Deficit Target: 
    • The government should target a fiscal deficit of 3 percent of the GDP in the years up to March 31, 2020, cut it to 2.8 per cent in 2020-21.
    • It should be reduced to 2.5% of GDP by March 31, 2023. The minimum annual reduction target was 0.3% of GDP. 

FRBM Act – Escape Clause

  • The FRBM Act was amended in 2018, adding specific details that were given in Section 4(2).
  • If the escape clause is triggered, RBI is then allowed to participate directly in the primary auction of government bonds, thus formalising deficit financing.
    • Deficit financing refers to the method of financing the budget deficits — such as issuing bonds or printing more money.
  • FRBM Act Section 4(2), provides for a trigger mechanism to escape deficit control–related clauses in the act and the Government can over cross the targets in the following situations:
    • National Security / Act of War
    • National Calamity
    • If agriculture output and farm incomes collapse
    • Fall in real output/GDP growth rate beyond x%
    • Structural reforms in the economy with unanticipated fiscal implications. 
  • During the above trigger conditions:
    • The government may over cross/deviate from the fiscal deficit target by up to 0.5% of GDP, as recommended by NK Singh’s FRBM Review Committee. 
    • Individual State Governments may also do similar (E.g., overcross by 0.5% of GSDP), after amending the state FRBM Act accordingly.
  • The Finance Minister cited structural reform to escape the FRBM targets for 2019-20 and 2020-21.
  • In Budget-2021, FRBM was amended to provide a fiscal deficit target of 4.5% by 2025-26, as recommended by the 15th FC. 

Documents Mandated by FRBM Act

  • Macroeconomic Framework Statement: This statement provides an overview of the economy, including GDP growth, inflation, receipts and expenditure.
  • Medium-Term Fiscal Policy Statement: This statement sets out the government’s fiscal policy goals for the medium term.
  • Fiscal Policy Strategy Statement: This statement explains how the government plans for fiscal policy goals.
  • Medium-Term Expenditure Framework: This framework sets out the government’s spending plans for the medium term.

2024-25: Budget Estimates vs. Revised Estimates

  • Revenue Receipts: There is a decline in revenue receipts, which could increase the revenue deficit by 0.8% of GDP. This would mean the government is saving less, which negatively impacts economic growth.
  • Capital Expenditure: Capital expenditure is also expected to decline by 1.1% of GDP. This will slow down economic growth further.
  • Impact on Growth: The combined effect of the decline in revenue receipts, non-debt capital receipts, and capital expenditure has already contributed to a decrease in real economic growth from 8.2% in 2023-24 to 6.4% in 2024-25.
  • Fiscal Deficit: The decline in revenue receipts and capital expenditure, along with a drop in non-debt capital receipts, is expected to slightly increase the fiscal deficit-to-GDP ratio.

Way Forward

2025-26 Budget should aim to amend the FRBM targets by:

  • Eliminating the revenue deficit:
    • The government should aim to eliminate the revenue deficit by 2027-28. This will help increase savings and support economic growth.
  • Reducing the fiscal deficit to 3% of GDP:
    • The fiscal deficit should be reduced to 3% of GDP within the next three years.
  • Reducing the debt-to-GDP ratio to 50% over the next three years. 
    • The current rule of a 40% debt-to-GDP ratio is strict. 
    • The government should consider reducing it to 50% from the current 56.8% (estimated for 2024-25) over the next three years.
  • Introducing a rule to ensure that capital expenditure stays at 3% of GDP. 
    • The government often plans high capital expenditure in the budget but later reduces it, which distorts fiscal management. To fix this, the government should set a clear target for capital expenditure at 3% of GDP.