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- It is a continuous and a medium to long term exercise by the government which is aimed at reducing the underlying fiscal deficit to a manageable level.
- One of the core objectives of fiscal consolidation is reduction of revenue deficit to near zero.
- It is aimed at better aligning of receipts and expenditure of the government to reduce the public debt levels as debt-to-GDP ratio is one of the parameters which is gauged by international financial institutions and global rating agencies.
- Some of the steps which can lead to fiscal consolidation are rationalisation of subsidies, disinvestment, moving away from freebies, increasing the tax base etc.
Fiscal Responsibility and Budgetary Management Act, 2003 (FRBM Act)
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- It was brought to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds.
- It advocates for a balanced budget and strengthen fiscal prudence.
- It calls to reduce the fiscal deficit and reach 3% levels and most importantly, eliminate effective revenue deficit to zero.
Recommendations of the N.K. Singh committee to review the FRBM Act (In 2016)
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- Replacement of FRBM Act with Debt and Fiscal Responsibility Act
- Focus on debt levels as new parameter rather than fiscal deficit.
- Government Debt Limit: 60% of GDP (40%: Central Government; 20%: State Government)
- Fiscal Deficit: 2.5% by 2022-23; Revenue Deficit: 0.8% by 2022-23
- Fiscal Glide Path to have a certain degree of flexibility in fiscal deficit targeting
- Escape clause (deviation upto 0.5% of GDP allowed): In case of calamity, structural Reforms, national security concerns etc.
- Borrowing from RBI under specific circumstances
