© 2017 IJRAR November 2017, Volume 4, Issue 4 www.ijrar.org (E-ISSN 2348-1269, P- ISSN 2349-5138) IJRAR19D2428 International Journal of Research and Analytical Reviews (IJRAR) www.ijrar.org 309 GLOBAL FINANCIAL CRISIS AND INDIAN FISCAL HEALTH: A CRITICAL REVIEW Priyanka Nain, Smita Sharma Research Scholar, Assistant Professor Department of Economics, Panjab University, Chandigarh, India Abstract: Fiscal consolidation is generally represented by decrease in major deficit indicators. Fiscal Responsibility and Budget Management (FRBM) act was enacted in August 2003, which came to force in July 2004. It was believed that a deliberate stress on deficit reduction will eventually lead to decrease/control of public debt. FRBM required government to undertake appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 31st March 2008 and thereafter build up adequate revenue surplus. When FRBM was introduced in India in 2003, the financial crisis of 2008 as well as related complications which the world economy faced were nowhere in sight. India had just started on the path of fiscal correction when recession hit the world economy. Present study aimed to empirically analyse the link between global financial crisis and India’s fiscal health in context of Fiscal Responsibility and Budget Management act (FRBM) act, 2003. The success of FRBM was mainly because of increased revenues and decreased expenditures. The recession decreased revenue resources on one hand and as government increased expenditures and concessions under fiscal stimulus, deficits started increasing. Post 2007 period was followed by economic downturn and hence expansionary fiscal measures were taken. The study concludes that for the post- FRBM time period, there was reduction in all deficit indicators till 2007 but the trend got reversed after 2008 recession. Index Terms – Global Financial Crisis, Fiscal Health, FRBM. I. INTRODUCTION Fiscal consolidation is generally represented by decrease in major deficit indicators. Tobin (1963) 1 while differentiating between internal debt management and fiscal policy stressed that total debt is the net accumulation of past deficits and surpluses of the government. Tarapore (2002) 2 further elaborated this by saying that the fiscal effect of debt depended on the rate at which debt was changing rather than the absolute size of debt itself. Fiscal Responsibility and Budget Management (FRBM) act was enacted in August 2003, which came to force in July 2004. Objective of the act was to provide rule based fiscal consolidation and to lead the fiscal indicators towards long term sustainability. It was believed that a deliberate stress on deficit reduction will eventually lead to decrease/control of public debt. FRBM required government to undertake appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 31st March 2008 and thereafter build up adequate revenue surplus. Parliament further amended target date for the elimination of the revenue deficit to 2008-09. When FRBM was introduced in India in 2003, the financial crisis of 2008 as well as related complications which the world economy faced were nowhere in sight. Though the task force on FRBM had stressed on the need to accumulate primary surplus so that the unforeseen cyclical events can be countered, India had just started on the path of fiscal correction when recession hit the world economy. An economic crisis always acts as an eye opener for the prevailing economic policy. For instance, the 1991 economic crisis had forced India to go for comprehensive structural reforms in many aspects of economy, including fiscal aspect. The 2008 global financial crisis started with the bursting of the United States housing bubble. All over the world, the economies slowed during this period, credit tightened and international trade declined. To revive the economies, Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. II. Objective of the Study: Objective of current study is to empirically analyse the link between global financial crisis and India’s fiscal health in context of Fiscal Responsibility and Budget Management act (FRBM) act, 2003. To achieve the stated objective, time series data from various issues of Reserve Bank of India, ‘Handbook of Statistics on Indian Economy’ is used. Descriptive analysis of data is done with the help of tables and graphs as per need and averages and percentages are also used to make comparisons clear and easier. Further, the modified ‘Domar debt sustainability’ methodology as suggeste d by Rangarajan and Srivastava (2005) 3 is used to analyze medium term debt sustainability. III. Data Analysis: An analysis of trends in revenue and expenditure for central government is shown in table 1. The Indian fiscal situation was becoming worrisome by the second half of 1990’s. 4 As discussed earlier, interest payments constituted nearly 37 percent of revenue expenditure and 47 percent of revenue receipts in 1996-97. After further deterioration till 2001-02, fiscal situation of the central government started improving, and the fiscal deficit as well as revenue deficit and primary deficits as ratio to GDP started showing improvement. This improvement persisted even after FRBM act 2003, though during the post FRBM phase reduction was higher. Table 1 shows the performance of Indian fiscal indicators before and after FRBM act. Here total fifteen year period from 1992 till 2007 has been taken, to depict the pre-2008 crisis period. These figures seem to show that FRBM act has shown remarkable success in controlling the fiscal indicators of the central government. Before reaching at such a conclusion, it is important to see how the reduction was achieved and whether this type of reduction can be sustained in the long run or not.