India needs to move from an annual budget cycle to a medium-term fiscal framework for the economic and political sustainability of fiscal policy. Discuss.

The budget cycle in India corresponds with the annual financial cycle which gives estimates of expenditure & receipts of the government finances.

Along with the budget, the FRBM Act, 2003 also mandates a medium-term fiscal policy statement, a fiscal policy strategy statement, and a macro economic framework statement.

Recent reforms done in the Budgetary cycle:

  • Advancement of the Budget cycle to February 1.
  • The merger of the rail budget with the general budget.
  • The merger of planned and non-planned expenditure.

Issues with Annual Budgetary Cycle:

  • Absence of correlation between expenditure and actual implementation during the financial year.
  • Inadequate adherence to “multi-year” perspective and missing “line of sight” between plan and budget.
  • Ad-hoc project announcements which are not included in the budget are regularly made during the year.
  • Expenditure pattern remains skeed with “budget rush” during the last quarter.
  • Focus remains on inputs for projects, departments, and schemes without adequate analysis of outcome and other financial risks involved.
  • Delay in implementation of projects and focus remain on short-term goals.

Need for a medium-term fiscal framework:

  • To give effect to long-term planning, taking into consideration the long gestation period for various infrastructural and capital-intensive projects.
  • To have enough space to accommodate needs and time-based schemes and projects announced throughout the year without effective fiscal mismatch.
  • To avoid sudden and frequent changes in various macroeconomic fundamentals like inflation, interest rate, etc.
  • A medium-term fiscal framework with a three-year rolling plan can give scope for planning related to larger import expenses, e.g Petroleum, strategizing government’s subsidy bills.
  • It can also help plan sources of revenue and estimate appropriately fiscal deficit and debt sustainability.

Hence, the medium-term fiscal framework can help the government plan and strategize its revenue and expenditure without having to rush through various populist measures for economic and political sustainability.

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