FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT 

Kerala faces significant fiscal stress, meaning its government struggles to meet its expenditure with its revenue. 

• High fiscal deficit: Kerala has a high fiscal deficit, which is the difference between its revenue and expenditure. This indicates the government spends more than it earns, requiring borrowing to bridge the gap.
• Debt burden: The state has a high debt-to-GDP ratio, which is the total debt compared to the size of its economy. This increasing debt burden raises concerns about future repayment ability and limits spending on essential services.
• Limited revenue generation: While Kerala's tax effort (ratio of tax collected to GDP) is considered above average, it still struggles to generate enough revenue to meet its needs.
• Causes: Several factors contribute to Kerala's fiscal stress, including:
  • High social welfare spending: The state prioritises social programs, leading to high expenditure on healthcare, education, and pensions.
  • Stagnant economic growth: Limited economic diversification and a slowdown in some sectors restrict revenue growth.
  • Dependence on central government transfers: Kerala relies heavily on financial assistance from the central government, making it vulnerable to fluctuations in central transfers.

• Impacts: Fiscal stress can have negative consequences for Kerala's development:

  • Limited investment in infrastructure: Reduced funds for infrastructure projects like roads, bridges, and power plants can hinder economic growth.
  • Crowding out private investment: High government borrowing might compete with private sector borrowing, limiting investment opportunities.
  • Reduced service delivery: Fiscal stress can impact the quality and accessibility of public services like healthcare and education.

Current Situation

• Kerala is categorised as one of the five most indebted states in India by the Reserve Bank of India (RBI).
• The debate continues how to address the issue. Some advocate for stricter fiscal discipline and exploring new revenue sources. Others emphasise the need for increased central government support and economic reforms to boost revenue generation.

• Article 293 (1) empowers states to borrow money for their functioning, but with limitations set by their respective legislatures. This ensures responsible borrowing and prevents excessive debt accumulation by state governments.
• Article 293 (2) allows the Central Government to provide loans to state governments.
• Article 293 (3) restricts states from raising loans without the Central Government's consent if they already have outstanding loans or guarantees from the Central Government. This provision aims to ensure states manage their finances responsibly and avoid excessive debt.
• Article 293 (4) A consent under clause (3) may be granted subject to such conditions, if any, as the Government of India may think fit to impose.

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) is a crucial piece of legislation in India that aims to achieve fiscal discipline by the government. 

Objectives

• Reduce India's fiscal deficit: The act sets targets for the government to gradually bring down the fiscal deficit, which is the gap between its revenue and expenditure.
• Improve macroeconomic management: By ensuring responsible borrowing and spending, the FRBM Act aims to promote economic stability and growth.
• Enhance transparency in fiscal operations: The act mandates the government to present medium-term fiscal policy statements, promoting greater transparency in budgeting and debt management.

Key Provisions

• Fiscal deficit targets: The act originally laid out a roadmap for reducing the fiscal deficit to 3% of GDP (Gross Domestic Product) by March 2008. This target has been revised over time.
• Fiscal policy statements: The government is required to present three statements to the Parliament along with the annual budget
  • Medium-Term Fiscal Policy Statement (MTFPS) outlines the fiscal roadmap for the next three years, including revenue and expenditure projections.
  • The Fiscal Policy Strategy Statement (FPSS) document focuses on the medium-term fiscal strategy for achieving the deficit targets.
  • Macroeconomic Framework Statement (MFS) statement presents the government's assessment of the overall economic situation and its implications for fiscal policy.
• Fiscal responsibility rules: The act empowers the government to frame rules for achieving the fiscal deficit targets. These rules may specify measures for curtailing expenditure, improving revenue collection, and managing public debt.

Criticisms and Challenges

• Balancing fiscal discipline with growth: Critics argue that a rigid focus on deficit reduction might hinder government spending on essential sectors, impacting economic growth.
• Achieving targets: The government has not always been able to meet the stipulated deficit targets due to various factors like economic slowdowns or unforeseen circumstances.
• Flexibility: Debates exist regarding the need for flexibility in the act to accommodate economic emergencies or unforeseen circumstances.

Significance

Despite the challenges, the FRBM Act has played a significant role in promoting fiscal discipline and transparency in India's public finances. It has helped to:

• Reduce the fiscal deficit over time, leading to greater macroeconomic stability.
• Increase awareness of fiscal issues and promote public debate on budgetary matters.
• Provide a framework for medium-term fiscal planning and debt management.

States in India can sometimes borrow beyond the FRBM (Fiscal Responsibility and Budget Management) Act limits but with some restrictions. 

FRBM Act and Borrowing Limits: The FRBM Act sets targets for the government to gradually reduce the fiscal deficit (the gap between revenue and expenditure). These targets apply to both the central government and state governments.

Exceptions for States

• Legislative Flexibility: State legislatures can set their own borrowing limits within the FRBM framework. This allows some flexibility for states based on their specific circumstances.
• Central Government Loans: Article 293 (2) of the Indian Constitution allows the Central Government to provide loans to state governments. In critical situations, the central government might offer loans exceeding the FRBM limits to support states.
• Natural Disasters and Emergencies: In unforeseen circumstances like natural disasters or national emergencies, states may be allowed to borrow beyond the FRBM limits to meet immediate needs. However, this usually requires approval from the central government.

Restrictions on Borrowing Beyond Limits

• Article 293 (3) of the Constitution: This provision restricts states from raising loans without the central government's consent if they already have outstanding loans or guarantees from the central government. This discourages excessive borrowing and ensures some level of control.
• Loan Conditions: The central government may impose conditions on loans exceeding FRBM limits. These conditions could involve stricter fiscal discipline measures or reforms from the state government.

These recommendations are typically part of fiscal discipline measures to ensure responsible borrowing and debt management by state governments.

• 2021-22: 4% of GSDP: This recommendation implies that for the fiscal year 2021-22, state governments are advised to keep their net borrowing within 4% of their respective Gross State Domestic Product. This limit serves as a guideline to prevent excessive borrowing that could strain state finances.
• 2022-23: 3.5% of GSDP: For the following fiscal year 2022-23, the recommended net borrowing limit is lowered to 3.5% of GSDP. This reduction indicates a gradual tightening of fiscal discipline, aiming to curb borrowing and promote fiscal sustainability.
• 2023-24 to 2025-26: 3% of GSDP: The subsequent years from 2023-24 to 2025-26 see a further reduction in the recommended net borrowing limit to 3% of GSDP. This signifies a sustained effort to limit state borrowing and manage public debt within manageable levels relative to the state's economic output.