Fiscal Policy is a macroeconomic concept that refers to the government's use of public expenditure, taxation, and public borrowing to influence the nation's overall economic activity, growth, and stability. Its theoretical origin is rooted in Keynesian economics, which posits that government intervention can restore balance during periods of economic instability. The Budget, or the Annual Financial Statement, is the primary act through which fiscal policy is implemented in India.
The constitutional basis for the Budget is Article 112 of the Constitution of India, 1950, which mandates the President to cause a statement of estimated receipts and expenditure for every financial year to be laid before both Houses of Parliament. This statement must distinguish expenditure on revenue account from other expenditure, leading to the classification of the government's finances into Revenue and Capital Budgets.
A key mechanism governing India's fiscal discipline is the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which became an Act on August 26, 2003, and came into force on July 5, 2004. The FRBM Act was created to institutionalize fiscal discipline and ensure long-term macroeconomic stability after the combined deficits of the Centre and States reached unsustainable levels in the late 1990s. The Act mandates the Central government to lay three policy statements before Parliament annually: the Medium-term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Statement. The original FRBM Rules, 2004, specified the elimination of the revenue deficit and the reduction of the fiscal deficit to 3% of GDP by March 2008.
Fiscal policy connects closely to the Finance Commission (Article 280), which recommends the distribution of tax revenues between the Union and the States, a core component of the government's receipts. The framework has changed recently, with the government committing to a fiscal consolidation path, projecting the fiscal deficit to be 4.3% of GDP for the Financial Year 2026-27. The FRBM Act also prohibits the government from borrowing from the Reserve Bank of India (RBI) after 2006, thereby strengthening the independence of Monetary Policy.