Public Finance: Deficits and FRBM

Section 3(1) requires the Central Government to lay, in each financial year, statements of fiscal policy before both Houses along with the Annual Financial Statement and the Demands for Grants: the Medium-term Fiscal Policy Statement, the Fiscal Policy Strategy Statement and the Macro-economic Framework Statement (statement 1). Today the first two are combined into a single 'MTFP cum FPS' document. Section 3(2) says the MTFP Statement shall set forth a three-year rolling target for prescribed fiscal indicators with specification of the underlying assumptions (statement 2). Statement 3 is wrong. The Finance Act, 2012 added a fourth statement, the Medium-term Expenditure Framework Statement, but expressly excluded it from Budget day: section 3(1B) requires it to be laid immediately following the session in which the other three were laid. In practice it comes in the Monsoon Session, after Parliament has passed the Budget, and it sets three-year rolling targets for expenditure indicators.

The Macro-economic Framework Statement (MEFS) is the statement that places the Budget in its macroeconomic setting. Section 3(5) requires it to assess the growth prospects of the economy with the underlying assumptions, and section 3(6) lists three specific assessments: the growth in GDP; the fiscal balance of the Union Government as reflected in the gross fiscal balance (the words 'revenue balance and' were omitted in 2018, in line with dropping the revenue deficit target); and the external sector balance of the economy 'as reflected in the current account balance of the balance of payments'. The current account is chosen because it captures the economy's net saving position with the rest of the world, combining trade, services, income and transfers, and therefore links directly to the fiscal deficit through the savings-investment identity. Reserves and the capital account show how that gap is financed rather than the balance itself, and the merchandise trade balance is only one part of the current account.

The table in the 2026-27 statement, laid on 1 February 2026, gives figures for RE 2025-26 and BE 2026-27 for six indicators: fiscal deficit (4.4 and 4.3 per cent of GDP), revenue deficit (1.5 and 1.5), primary deficit (0.8 and 0.7), gross tax revenue (11.4 and 11.2), non-tax revenue (1.9 and 1.7) and Central Government debt (56.1 and 55.6). So items 1 and 3 appear. Item 2 does not: the effective revenue deficit was dropped from the Act in 2018 and is no longer reported as a target indicator. Item 4 does not either. Although section 4(1)(b) still mentions a general Government debt endeavour of 60 per cent, the table reports only the Centre's own debt, because the Union Budget cannot set targets for the States. The revenue deficit continues to be reported even though it is no longer a statutory target, which shows that the table is a disclosure of fiscal indicators rather than a list of legal limits. These figures are time-sensitive and anchored to the 2026-27 statement.

The effective revenue deficit (revenue deficit minus grants for the creation of capital assets) was written into the FRBM Act by the Finance Act, 2012. The Fourteenth Finance Commission (report of 2015) argued against it, and among its recommendations on the fiscal framework was to amend the Act to omit the ERD target; the Fifteenth Finance Commission's report lists this recommendation. Arthapedia's summary of the Commission's reasoning gives two linked grounds: the ERD has no place in standard government accounting, and the Constitution itself recognises only expenditure on revenue account and other expenditure (that is, capital). A target built on a hybrid category also invited creative budgeting, because shifting items into 'grants for capital assets' could flatter the deficit. Statement-II thus supplies the very reason for the recommendation in Statement-I. The Finance Act, 2018 duly removed both the ERD and the revenue deficit targets.

Section 7 is the Act's compliance engine. Under section 7(2), whenever there is a shortfall in revenue or an excess of expenditure over pre-specified levels during a year, the Central Government shall take appropriate measures for increasing revenue and/or for reducing expenditure, including curtailing the sums authorised to be paid out of the Consolidated Fund under an Appropriation Act. The proviso then protects two categories: expenditure charged on the Consolidated Fund under clause (3) of Article 112 of the Constitution (such as the emoluments of the President, the salaries of Supreme Court judges and debt charges), and any expenditure required under an agreement or contract, or such other expenditure which cannot be postponed or curtailed. The logic is constitutional and legal: charged expenditure is not voted by Parliament and cannot be cut by an executive order, and contractual payments create binding obligations. Capital spending, subsidies and grants to autonomous bodies enjoy no such protection, which is why mid-year squeezes usually fall on them.

The Fiscal Policy Strategy Statement is the Government's own explanation of its choices for the coming year. Section 3(4) lists four required elements: (a) policies for the ensuing financial year relating to taxation, expenditure, market borrowings and other liabilities, lending and investments, pricing of administered goods and services, securities and activities such as underwriting and guarantees with budgetary implications (item 1); (b) strategic priorities in the fiscal area; (c) the key fiscal measures and the rationale for any major deviation in fiscal measures pertaining to taxation, subsidy, expenditure, administered pricing and borrowings (item 3); and (d) an evaluation of how current policies conform to the fiscal management principles in section 4 and the objectives in the MTFP Statement (item 4). Item 2 is invented. The FPS is a self-assessment by the executive; the CAG has no role in certifying it. The CAG's FRBM role comes only under section 7A, which lets the Government entrust it with periodic compliance reviews that are then laid before Parliament.

The Medium-term Expenditure Framework Statement was added by the Finance Act, 2012 (in force from 28 May 2012) so that the expenditure side of the Budget would also be planned over a multi-year horizon. Section 3(6A)(a) says it shall set forth a three-year rolling target for prescribed expenditure indicators with specification of underlying assumptions and risk involved (statement 1). Section 3(6A)(b) adds that it shall, inter alia, contain (i) the expenditure commitment of major policy changes involving new service, new instruments of service, new schemes and programmes (statement 2), and (ii) the explicit contingent liabilities in the form of stipulated annuity payments over a multi-year time-frame (statement 3). Annuity commitments arise, for instance, in projects where the Government agrees to pay a private developer fixed sums over many years; listing them shows future claims on the Budget that a single-year document would hide. The rules prescribe the expenditure indicators under section 8(2)(ba). All three statements are therefore correct.

Fiscal rules come in several families: headline deficit rules, debt rules, expenditure rules and cyclically adjusted (structural) balance rules. Many advanced economies use the last two because headline targets tend to be pro-cyclical, forcing cuts in a slowdown. Volume I of the Committee's report discussed these options. It recorded a unanimous view that targeting a cyclically adjusted deficit or an expenditure ceiling may not be practical in India at that time, because estimating potential output and the cyclical component needs reliable, timely data that India lacked, and because such rules are harder for Parliament and the public to monitor and enforce. The Committee therefore kept a simple combination: a debt ceiling as the anchor and a headline fiscal deficit path as the operational target, with an escape clause to handle shocks. Statement-II gives exactly the reason for Statement-I. The 2025-26 FRBM statement, which moved to a debt anchor with the fiscal deficit as the operational target, follows the same practical logic.