Fiscal Responsibility and Budget Management Act: An Indian Perspective

Abstract

Fiscal Policy intervention, in terms of changes in government spending or in taxes, or in taking recourse to borrowing from the central bank or from the market gained currency in the aftermath of Great Depression of 1930s, dominated the policy initiatives of the government world over for four decades. However, reliance on heavy government borrowing and spending to support economic growth had its own drawbacks resulting in vicious cycle of deficit and debt, high inflation rate, high interest rates, crowding out of private sector investment. As documented in the contemporary literature, there are evidences of deficit bias which are possibly contributed by political populist measures. With growing fiscal stress across countries, irrespective of the level of economic development, it is widely recognized that the discretionary fiscal policy would not always be effective in contributing to fiscal sustainability and stability. Consequently, many countries introduced medium-term fiscal consolidation programs, which were mostly followed by fiscal rules (with or without legislations).