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        Fiscal                Economy Notes For 
        Consolidation         UPSC 
         
       
                        
       
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               Financial Consolidation is one of the most important topics for UPSC IAS Examination. 
               In this article on Fiscal Consolidation, we shall discuss its objectives, composition and aims/functions in 
               detail. This will be very useful for aspirants in the UPSC Prelims Exam. 
               Also, study about the 5 Year Plans in India from the linked article. 
               What is Fiscal Consolidation: 
                    •    Government actions (at both the national and subnational levels) focused at reducing deficits 
                         and debt accumulation are referred to as fiscal consolidation. 
                    •    As a result, the fiscal health of the government improves, as seen by a decreased budget 
                         deficit. 
                    •    Improved tax revenue realization and better directed expenditure are crucial components of 
                         fiscal consolidation as the budget imbalance falls below a tolerable level. 
                    •    Fiscal consolidation, or the central government's fiscal blueprint, is expressed in terms of 
                         financial criteria that must be satisfied in succeeding budgets. 
                    •    The Fiscal Responsibility and Budget Management (FRBM) Act lays out India's fiscal 
                         consolidation goals. 
                    •    Tax revenues are also boosted through broadening the tax base and eliminating tax 
                         concessions and exemptions, as well as boosting the tax GDP ratio. 
                    •    A range of factors, including the economy's strength, public debt and interest rate trends, the 
                         ease with which debt can be financed, and political decisions on taxation and expenditures, 
                         decides the optimal level of fiscal consolidation for any country. 
                    •    Increased economic growth also aids the government in collecting more tax revenue. 
                    •     Because decreasing government spending in India is limited, raising tax revenue is essential to 
                         accomplish fiscal consolidation. 
               Study about the Navratna Companies here. 
               Consolidating India's Budget: 
                    •    The gains made possible by India's early 1990s economic reforms could not be sustained for 
                         much longer. 
                    •    The combined budget deficit (of the center and the states) nearly surpassed 1991 levels in the 
                         year 2000, the year India experienced a catastrophic financial crisis. 
                    •    Sustaining debt was also becoming a big problem. 
                    •    In December 2000, the Indian government, led by Atal Bihari Vajpayee, introduced the Fiscal 
                         Responsibility and Budget Management (FRBM) Bill in Parliament, hoping that institutional 
                         support in the form of fiscal laws would aid in the definition of a future fiscal consolidation 
                         agenda. 
                    •    The revenue and expenditure initiatives taken by the government to achieve fiscal consolidation 
                         are listed below. 
                    •    Subsidies from the government should be more precisely targeted, and the Direct Benefit 
                         Transfer scheme should be expanded to incorporate more subsidies. 
                    •    Improving tax administration efficiency through, among other things, reducing tax evasion, 
                         increasing tax compliance, and lowering tax avoidance. 
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                    •    Tax revenues are also boosted through broadening the tax base and eliminating tax 
                         concessions and exemptions, as well as boosting the tax GDP ratio. 
                    •    Increased economic growth will also aid the government in collecting more tax revenue. 
                    •    Because decreasing government spending in India is limited, raising tax revenue is essential to 
                         accomplish fiscal consolidation. 
               The Evolution of India's Fiscal Consolidation Policy: 
                    •    In the years 2000–01, the Ministry of Finance devised the concept of Medium-Term Fiscal 
                         Reform Programs (MTFRPs). 
                    •    Its goal was to save squandered funds and improve tax administration management. 
                    •    MTFRPs failed to fulfill the required objective, worsening the fiscal position. 
                    •    The Eleventh Finance Commission (EFC) established the Budgetary Reform Facility (FRF) in 
                         2000 for fiscal adjustment. 
                    •    It was founded on the allocation of a 15% grant to governments in exchange for improved fiscal 
                         performance. 
                    •    To increase fiscal control, the Twelfth Finance Commission (TWFC) advocated a debt write-off 
                         mechanism for states, as well as drafting a fiscal responsibility statute in each state to reduce 
                         revenue and budget deficits. 
                    •    The Thirteenth Finance Commission recommended that two debt-relief measures be applied 
                         consistently across all states, including a 9% interest rate on loans to states from the National 
                         Small Savings Fund (NSSF). 
                    •    Debts owed to states by the federal government are being written off. 
                    •    Macroeconomics, on the other hand, demanded that statutory limits on the central government's 
                         borrowings, debt, and deficits be implemented right away. 
                    •    As a result, the FRBM (Fiscal Responsibility and Budget Management) Act was passed by the 
                         Indian government in 2003. 
               Study about the Priority Sector Lending (PSL) Scheme here. 
               What are the three tools of fiscal policy: 
                    •    The phrase 'fiscal' relates to the government's budget, which is short for 'budget.' 
                    •    Fiscal policy, as a result, is the use of government spending, taxes, and transfers to influence 
                         aggregate demand and, as a result, real GDP. 
               Spending by the government: 
                    •    Government spending has the potential to affect economic production. 
                    •    Because it includes the purchasing of goods and services for the benefit of the community, 
                         government expenditure is classified as Government Final Consumption Expenditure. 
                    •    Government Government investment on research and infrastructure with the objective of 
                         creating future benefits is referred to as gross capital creation. 
                    •    Transfer payments are government payments to individuals made through social welfare 
                         programs, student subsidies, and Social Security. 
                    •    Changes in taxation have an impact on average consumer income, and changes in 
                         consumption have an impact on real GDP. 
                    •    As a result, by modifying taxation, the government can influence economic output. Taxes can be 
                         changed in several ways. 
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               Self-Control in Money: 
                    •    Fiscal discipline in an economy refers to a state of optimal balance between government 
                         revenues and expenditures. 
                    •    If fiscal discipline is not maintained, government spending will surpass government earnings. 
                    •    The government would either have to borrow money from the central bank or finance the deficit. 
                    •    This could lead to a depreciation of the currency and inflation in the economy. 
               About the Fiscal Responsibility and Budget Management 
               (FRBM) Act: 
                    •    The Fiscal Responsibility and Budget Management Act (FRBM) creates a framework for fiscal 
                         accountability and management. 
                    •    At the end of each year, the fiscal deficit at the federal level must be lowered to 3% of GDP, and 
                         the revenue shortfall must be reduced by 0.5 percent of GDP or more. 
                    •    State governments agreed to set comparable goals to reduce the budget deficit to 3% of GDP 
                         by 2013–14 and eliminate revenue deficits. 
                    •    It compels the central government to publicize any changes in accounting standards, rules, or 
                         procedures to ensure openness in operations. 
                    •    The government is required to make pronouncements on medium-term fiscal policy, the 
                         macroeconomic framework, and the fiscal policy plan every fiscal year. 
                    •    This act also has an exception provision that allows the government to deviate from 
                         predetermined fiscal targets in the event of certain unforeseeable occurrences, such as internal 
                         turmoil or natural disaster. 
               Recommendations  of  the  15th  Finance  Commission  on 
               Fiscal Consolidation: 
                    •    The Union government should reduce its fiscal deficit to 4% of GDP by 2025-26, down from 
                         6.8% in FY22. 
                    •    Fiscal deficits in state governments should be 4% of GDP in 2021-22, 3.5 percent the following 
                         year, and 3 percent over the next three years. 
                    •    State government borrowing limits should be established at 4% of GDP in 2021-22, 3.5 percent 
                         in 2022-23, and 3 percent of GDP in 2023-24 through 2025-26. 
                    •    If states achieve the prerequisites for power sector reforms, additional borrowing of 0.5 percent 
                         of GSDP should be permitted. 
                    •    All centrally sponsored initiatives must be examined by a third party within a set time range, 
                         according to the law. 
               Fiscal Consolidation and Growth: 
                    •    According to the NSO's first forecasts, GDP in real terms by the end of 2021-22 will be 
                         INR147.5 lakh crore, just slightly higher than INR145.7 lakh crore in 2019-20. 
                    •    Two years of actual economic growth in India have been wiped out as a result of the three 
                         COVID-19 waves that have hit the country. 
                    •    At current prices, gross fixed capital formation (GFCF) as a proportion of GDP in 2021-22 will be 
                         29.6%, according to preliminary estimates. 
                    •    In India, capacity utilization is low. 
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