Impact of FRBM Act on Public Debt and Fiscal Balance in India: Emerging Evidence

Abstract

The government expenditure has important role in generation of employment, increase social welfare and economic development of the nation. The government spending is financed mainly by revenue which includes the tax revenue and non-tax revenue. If there is deficit in the budget, the government takes borrowing from public to meet the gap between their revenue and expenditure. The government was facing a high level fiscal deficit. Indian economy was continuously facing problems in maintaining the fiscal balance and it was great challenge against macroeconomic stability. Therefore, fiscal imbalance situation forced the government to go for more borrowing by public which included both internal and external borrowings. The aim of the present paper is to examine the impact of the FRBM Act on public barrowing and fiscal balance in India. Also focused on trends and patterns of public expenditure, revenue mobilization, fiscal deficit and public debt after the introduction FRBM Act. The OLS Method used for test the empirical relationship between public debt and economic growth in India after the introduction of the FRBM Act. The OLS empirical results showed the FRBM Act have a significant effect on level of gross fiscal deficit at 1 percent level of significance but not statistically significant effect on level of public debt in India. GDP growth rate has a negative effect on the gross fiscal deficit at 5 percent level of significant. It shows when GDP growth rate is increasing fiscal deficit to GDP ratio is declining and vice-versa. Population growth has positive effects on gross fiscal deficit level at 10 percent level of significant. GDP growth rate and population growth rate does not have significant effects on level of public debt in India. Therefore, the study suggests that efficient debt management strategy is important for the sustainability of the budget, debt, and overall financial stability.