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Fiscal Policy: FRBM Act, Deficit Targets, and Fiscal Consolidation
July 19, 20265 min read
Fiscal Policy: FRBM Act, Deficit Targets, and Fiscal Consolidation
Introduction
Fiscal policy refers to the government's use of taxation and expenditure to influence economic activity. In India, the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 institutionalized fiscal discipline by setting targets for deficits and debt. Fiscal consolidation - reducing deficits and debt - has been a recurring policy objective, often tested by economic crises.
Fiscal Policy: Basics
Key Concepts
| Term | Definition |
|---|---|
| Revenue Deficit | Revenue expenditure - Revenue receipts (indicates borrowing for consumption) |
| Fiscal Deficit | Total expenditure - Total receipts (excluding borrowings) - indicates total borrowing requirement |
| Primary Deficit | Fiscal deficit - Interest payments (borrowing excluding past debt servicing) |
| Effective Revenue Deficit | Revenue Deficit - Grants for creation of capital assets (introduced in 2012) |
Fiscal Policy Objectives
- Resource mobilization - taxation and borrowing
- Resource allocation - expenditure priorities
- Stabilization - counter-cyclical demand management
- Redistribution - progressive taxation and welfare spending
- Economic growth - infrastructure and capital expenditure
FRBM Act, 2003
Background
- Persistent fiscal deficits in 1980s-1990s led to high public debt
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