November , 2019
Limitation on power of central government to take loans
14:33 pm

Dr. P K Agrawal

There is an Act known as the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which delineates responsibilities of the central government to ensure proper fiscal management and long-term macro-economic stability. This is by achieving sufficient revenue surplus and removing fiscal impediments to the development of the economy. It is to ensure effective conduct of monetary policy and prudential debt management. The Act puts statutory limits on borrowings or loans and debts and deficits so that fiscal sustainability is achieved.  It provides for greater transparency in fiscal operations of the central government including its commitments on borrowings by state governments in a medium-term framework so that no government unnecessarily binds its successor government for its prolific spending in populist measures or actions without financial propriety.

To ensure sustainability of the Indian economy, the Act has laid down certain principles for fiscal management as below:

a)            The central government shall take appropriate measures to limit the fiscal deficit 3% of gross domestic product by March 31,2021.

b)            The central government shall ensure that —

                (i)            the general government debt does not exceed 60%;

                (ii)           the debt does not exceed 40% of GDP by the end of financial year 2024-25.

The government should give additional guarantee with respect to any loan or security of the Consolidated Fund of India in excess of one-half per cent of gross domestic product in any financial year.

The Central Government shall endeavour to ensure that the fiscal targets specified above in clauses (i) and (ii) are not exceeded after stipulated target dates unless changed.

Meaning of fiscal deficit

Fiscal deficit means the excess of total disbursements fromthe Consolidated Fund of India excluding repayment of debt over total receipts into the Fund excluding the debt receipts during a financial year.

General government debt means the sum total of the debt of the central government and the state governments excluding inter-governmental liabilitises.

Way forward

The Act provides that the central government shall take appropriate measures for increasing revenue and reducing the expenditure including curtailing the sums authorised fromthe Consolidated Fund of India.

No deviation under the Act is permissible without the approval of the Parliament. Deviation can be allowed only in case of unforeseen circumstances or to honour an agreement or contract, which cannot be postponed or curtailed.

The central government will notify in the Official Gazette the rules or measures for carrying out the provisions of this Act in a fair and transparent manner. It shall not borrow from the Reserve Bank of India (RBI). It can borrow only by way of advances which shall be repayable as per the RBI Act,1934. It shall take suitable measures to ensure greater transparency in its fiscal operations in the public interest and minimise as far as practicable, secrecy in the preparation of the annual financial statement and demands for grant.

All these provisions are there so that financial health of the country is maintained irrespective of the government inpower at the Centre.

As the central government is a responsible government, no prosecution or other legal proceedings shall lie against them. It is expected that the government will have self-restraint or self- control to implement the Act in the interest of the country and see that the state governments and union territories do not violate the provisions of the Act. If a particular state government does not adhere to the advice of the central government to abide by norms of financial discipline, it may use its constitutional power and authority to bring back its functioning within the limitations under this Act. As a last resort, the President can declare financial emergency under Article 360 of the Constitution of India if a state indulges in financial impropriety such as by undertaking populist schemes only for political gains like distribution of television sets, necklaces, travel to holy places etc.

It is hoped that in a mature democratic India, such a contingency would not arise.

The author retired IAS officer and has authored 65 books. He is the managing partner of a New Delhi law firm, Vas Global. The views expressed are his own.


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