Fiscal Federalism and FRBM Framework -

Context

The Economic Survey 2025–26 supports delaying strict FRBM fiscal targets for the Centre.
Rationale given is need for policy flexibility amid volatile geopolitical and geoeconomic conditions.
Survey simultaneously flags deteriorating fiscal health of States due to revenue and expenditure pressures.

Centre’s Fiscal Performance

Centre’s fiscal deficit peaked at 9.2% of GDP in 2020–21 during the pandemic.
Deficit is projected to decline to 4.4% of GDP in FY26.
This aligns with commitment to halve the pandemic-era deficit within five years.
Survey notes emphasis on improving expenditure quality alongside higher capital spending.
Fiscal consolidation achieved without legislative compulsion under FRBM framework.

FRBM Framework and Credibility Concerns

FRBM Act target of 3% deficit by March 2020 has been repeatedly deferred.
Survey acknowledges public perception demanding restoration of strict fiscal discipline.
Only one successful achievement of the 3% target since 2003 is noted.
Repeated slippages have weakened India’s fiscal credibility in financial markets.
Post-COVID consolidation restored trust among investors and credit-rating agencies.
Survey stresses importance of maintaining this restored credibility.

States’ Worsening Fiscal Position

States in revenue surplus declined from 19 in 2018–19 to 11 in 2024–25.
Collective revenue deficit rose from 0.1% to 0.7% of GDP.
Survey links deterioration to lower revenues and rising expenditure, including cash transfers.
Warns that persistent deficits constrain long-term fiscal sustainability at subnational levels.

Key Policy Implication

Calls for balanced fiscal flexibility for the Centre.
Simultaneously urges greater fiscal discipline and revenue strengthening among States.

Full form: Fiscal Responsibility and Budget Management Act, 2003
Objective: Ensure fiscal discipline, inter-generational equity, and long-term macroeconomic stability.
Focus: Guide Central Government towards sustainable deficit and debt management.

CAG Role: Mandatory annual compliance audit of FRBM provisions.
Mandatory Budget Statements (Laid Before Parliament)
- Macro-Economic Framework Statement: Economic outlook and assumptions.
- Medium-Term Fiscal Policy Statement: Fiscal targets and rolling projections.
- Fiscal Policy Strategy Statement: Policy stance and fiscal priorities.
Key Fiscal Targets
- Fiscal Deficit
  - Original target: ≤ 3% of GDP
  - Deadline: 31 March 2021
  - Actual (2023–24, CAG): 5.32% of GDP
  - Revised path: < 4.5% of GDP by FY 2025–26
- Public Debt Limits
  - General Government (Centre + States): ≤ 60% of GDP
  - Central Government: ≤ 40% of GDP
  - Deadline: End of FY 2024–25
  - Current (2023–24):
    - Central Government: 57% of GDP
    - General Government: 81.3% of GDP
- Additional Guarantees
  - Cap: ≤ 0.5% of GDP per year
  - Linked to: Consolidated Fund of India
FRBM Amendment, 2018:

Fiscal Federalism and FRBM Framework