Recasting India’s Fiscal Architecture for Viksit Bharat 2047 |Part I
Fiscal Rules and Responsibility in India
Constitutional Foundations of Fiscal Governance
India’s framework for fiscal responsibility is rooted in constitutional design rather than explicit numerical limits on deficits or debt. The Constitution establishes the procedural architecture of public finance through Articles 266 to 283, which govern the Consolidated Fund of India, the Public Account, and the Contingency Fund, and mandate that all public expenditure be authorised by the legislature. Articles 112 to 116 require the executive to present an annual financial statement and seek legislative approval for expenditure, reinforcing parliamentary control over public money.
Fiscal federal arrangements are defined under Articles 268 to 281, which govern the assignment and sharing of revenues between the Union and the States. Article 280 establishes the Finance Commission as a constitutional body to address vertical and horizontal fiscal imbalances. Importantly, the Constitution does not prescribe numerical fiscal targets. Instead, it relies on institutional checks, transparency, and legislative oversight to ensure fiscal prudence. Fiscal discipline in India has therefore evolved through statutory law and policy responses rather than constitutional mandate.
Fiscal Policy and the Developmental Role of the State
In the decades following Independence, fiscal policy was a central instrument of economic development. Public expenditure and borrowing were used to build infrastructure, expand basic services, and support industrialisation in an economy characterised by limited private capital. Fiscal deficits were widely viewed as necessary to finance development and accelerate growth.
Over time, however, persistent revenue deficits and rising public debt began to constrain macroeconomic stability and policy flexibility. By the late 1980s, fiscal imbalances had become a structural concern, culminating in the 1991 balance-of-payments crisis. Post-crisis reform debates increasingly emphasised the need to restrain discretionary fiscal expansion while preserving the developmental role of the state. This shift laid the intellectual foundation for a rules-based approach to fiscal management.
The FRBM Act: Objectives and Design
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 represented India’s first comprehensive attempt to institutionalise fiscal discipline through legislation. The Act sought to reduce the fiscal deficit, eliminate the revenue deficit, and improve transparency in fiscal operations. It mandated the presentation of key fiscal policy statements to Parliament, including the Medium-Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.
Following the Union framework, most States enacted their own fiscal responsibility laws, often guided by the recommendations of successive Finance Commissions. Numerical targets for fiscal deficits and debt ratios became the primary instruments of fiscal discipline across levels of government.
Initial outcomes were mixed. During periods of high economic growth, adherence to FRBM targets improved and headline deficits declined. However, compliance weakened during economic slowdowns. Reports of the Comptroller and Auditor General of India repeatedly highlighted the use of off-budget borrowings, public sector intermediaries, and accounting practices to meet formal targets without reducing underlying fiscal stress.
Reassessment of Fiscal Rules and the FRBM Review Committee
Recognising these limitations, the Government constituted the FRBM Review Committee in 2016, chaired by N.K. Singh. The Committee’s report marked a significant shift in thinking on fiscal responsibility. It argued that rigid annual deficit targets were ill-suited to an economy subject to growth volatility and external shocks.
The Committee recommended anchoring fiscal policy around a medium-term debt target, with fiscal deficit limits acting as operational tools rather than fixed endpoints. It also proposed clearly defined escape clauses to permit temporary deviations from targets under exceptional circumstances, such as severe economic downturns or national emergencies. In addition, the Committee recommended the creation of an independent Fiscal Council to provide objective analysis and enhance the credibility of fiscal policy.
These recommendations gained practical relevance during the COVID-19 pandemic, when both the Union and the States relaxed FRBM constraints to accommodate emergency spending.
State-Level Fiscal Responsibility and Structural Constraints
At the State level, fiscal responsibility legislation improved reporting standards and introduced greater uniformity in fiscal targets. Reserve Bank of India studies on State finances show that many States adhered to deficit limits during periods of stable growth. However, structural weaknesses persisted. Several States continued to run revenue deficits, indicating that borrowing was financing current expenditure rather than capital formation.
RBI and CAG analyses also point to rising contingent liabilities, including guarantees and liabilities of public sector enterprises, which remain outside headline fiscal indicators. These factors limit the effectiveness of FRBM frameworks in ensuring long-term fiscal sustainability at the sub-national level.
Fiscal Responsibility in the Context of
Viksit Bharat
The ambition of achieving Viksit Bharat by 2047 has renewed debate on the adequacy of existing fiscal rules. Large-scale investment in infrastructure, human capital, and climate resilience requires sustained public spending over extended periods. Recent Economic Surveys have argued that the quality and composition of expenditure, particularly higher capital spending, matter as much as compliance with numerical deficit targets.
Policy discussions increasingly suggest that fiscal responsibility should be understood in medium-term and developmental terms, rather than as strict annual compliance. Proposals for symmetric debt and deficit norms for the Union and States, supported by transparent medium-term frameworks, reflect this evolving perspective.
Sectional Assessment
India’s experience with fiscal rules shows that statutory targets and numerical limits have improved transparency and reporting discipline but have not eliminated underlying fiscal vulnerabilities. Constitutional provisions provide legitimacy and oversight, while the FRBM framework has shaped fiscal behaviour. However, repeated deviations, reliance on off-budget financing, and uneven State capacity highlight the limits of rule-based approaches in isolation.
For India’s long-term development objectives, fiscal responsibility must evolve from narrow deficit control towards a framework that supports sustainable growth, preserves fiscal space during shocks, and remains anchored in constitutional accountability.