Answer:-
Fiscal discipline in India is governed by the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which aims to ensure macroeconomic stability by controlling inflation, reducing fiscal deficit, and maintaining a sustainable debt-to-GDP ratio.
Need for Fiscal Discipline:
1.Budget Deficit Management:
FRBM targets fiscal deficit at ~3% of GDP and elimination of revenue deficit (earlier targets), ensuring prudent fiscal management.
2.Improved Global Credibility:
Enhances investor confidence, improving sovereign ratings (e.g., S&P, Moody’s), thereby increasing FDI and FPI inflows.
3.Efficient Public Spending:
Enables better allocation of resources towards infrastructure, healthcare, education, railways, etc.
4.Debt Sustainability:
Reduces debt burden and helps maintain adequate forex reserves, preventing balance of payments crises.
5.Prevention of Crowding Out:
Limits excessive government borrowing, ensuring availability of credit for the private sector.
6.Prepare for emergencies
e.g., heavy spending during COVID-19
Instruments of Union Government:
1.Fiscal Responsibility Framework:
Debt to GDP ratio ~60%
(40% Centre govt., 20% State govt.)
2.Budgetary allocations and grants to states:
e.g., Outcome budgeting, Performance budgeting
3.Finance Commission recommendations:
Distribution of taxes to states; tied and untied transfers
4.Control over state borrowings:
States need Centre’s consent if indebted to it; borrowing limits set as per state GSDP
5.GST framework:
GST Council (Article 279A)
6.Discretionary grants of Union government:
(Article 282)
7.Public finance management systems
8.Disinvestment and monetisation:
e.g., National Monetisation Pipeline (target ₹6 lakh crore by 2030)
Excessive Union Control weakens sub-national (state) government:
1.GST:
States surrendered taxation powers to Union; delayed GST compensation
2.Vertical fiscal imbalance:
Centre controls major taxes (Income tax, GST), while states handle expenditure-heavy sectors (health, education)
3.Dependence on central grants:
e.g., NE states, Bihar, Jharkhand → demand for special status
4.One-size-fits-all policy:
Ignores diverse needs of states (agriculture, soil, demographics etc.)
Way Forward:
(a) Strengthen GST Council and ensure timely GST compensation
(b) Increase untied transfers through Finance Commission
(c) Flexible borrowing limits linked to CapEx
While fiscal discipline is non-negotiable for macroeconomic stability, over-centralisation risks weakening federal balance. A calibrated approach ensuring both prudence and state autonomy is key to effective governance.