There is a need to reform the country's fiscal management law in order to have a counter cyclical impact in the economy. Examine (200 Words)
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IAS Parliament 3 years
KEY POINTS
· When output falls below the economy’s potential, the government must add to aggregate demand and stimulate economic activity. This is called a counter-cyclical fiscal policy.
· The FRBM legislation was enacted to avoid wastefulness of financial resources. To achieve this, bounds were imposed on deficit measures (fiscal or revenue deficits and debt were capped at certain proportions of gross domestic product).
· Fiscal policy by means of a parameter often used by the International Monetary Fund (IMF) called the fiscal impulse.
· The fiscal impulse measures the change in fiscal stance, which, in turn, is a measure of the fiscal balance adjusted for business cycles, and shows whether fiscal policy is expansionary or contractionary.
· Fiscal policy generally responds a year after an economic slowdown, when the new annual budget has an opportunity to make a course correction.
· Data for 15 complete fiscal years since the FRBM Act came in, only on four occasions has the fiscal policy been counter-cyclical since 2004-05.
· While retaining the numerical bounds on fiscal deficit, leeway can be granted to achieve the target averaged over a couple of years, instead of each year individually.
· Some provision can be made to modulate growth of expenditure such that the constituent components coupled with their multiplier values.
