FRBM Act & Fiscal Deficit Developments (2024–26): Targets, Debt & Sustainability

FRBM Act & Fiscal Deficit Trends (2024–26): Targets, Debt & Sustainability

1. Why in News?

During 2024–26:

  • Fiscal deficit remained elevated compared to pre-pandemic levels

  • Government reiterated medium-term consolidation roadmap

  • Debate on debt sustainability intensified

  • Rating agencies and IMF flagged fiscal risks

Budget discussions heavily focused on deficit glide path.

2. What is FRBM Act?

FRBM = Fiscal Responsibility and Budget Management Act, 2003

Objective:

Ensure fiscal discipline, reduce deficit & improve macroeconomic stability.

It sets targets for:

  • Fiscal Deficit

  • Revenue Deficit

  • Public Debt

3. Key Fiscal Terms (Prelims Gold)

Fiscal Deficit:

Total expenditure – (Revenue receipts + Non-debt capital receipts)

Revenue Deficit:

Revenue expenditure – Revenue receipts

Primary Deficit:

Fiscal deficit – Interest payments

UPSC loves mixing these.

4. FRBM Targets

Originally:

  • Fiscal deficit target: 3% of GDP

  • Revenue deficit: eliminate gradually

After COVID:
Targets relaxed.
Glide path reintroduced gradually.

Know:
Targets are flexible during exceptional circumstances.

5. 2024–26 Developments

  • Govt aiming gradual consolidation

  • Emphasis on capex-led growth

  • Debate: Growth vs fiscal prudence

  • Rising debt-to-GDP ratio discussed

Important phrase:
“Fiscal consolidation roadmap”

6. Why It Matters?

High fiscal deficit can:

  • Increase inflation

  • Raise borrowing costs

  • Crowd out private investment

  • Impact sovereign ratings

But higher capex can:

  • Boost long-term growth

  • Improve infrastructure

  • Generate multiplier effect

UPSC loves this trade-off.

7. Static Linkage

  • Difference between fiscal & monetary policy

  • Ways government finances deficit:

    • Borrowing

    • Disinvestment

    • Monetisation (indirect)

  • Debt sustainability concept

8. Prelims Angle

Possible questions:

  • Which items are included in fiscal deficit?

  • Relationship between primary & fiscal deficit

  • FRBM year & objective

  • Exceptional clauses under FRBM

Statement-based trap likely.

9. Mains Angle

  • Is India’s fiscal deficit sustainable?

  • Capex vs revenue expenditure debate

  • Should FRBM targets be restructured?

10. RBI Grade B Angle

  • Impact of fiscal deficit on inflation

  • Coordination between fiscal & monetary policy

  • Government borrowing & bond yields

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