Fiscal responsibility budget management act


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Fiscal responsibility budget management act

  2. 2. The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline,reduce the country’s fiscal deficit, and improve macroeconomic management and theoverall management of the public funds by moving towards a balanced budget. TheUnited Progressive Alliance (UPA) government had notified the FRBM Rules in July2004. The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will bethe duty of the Union government to stick to the deficit targets. The main purposewas to eliminate revenue deficit of the country (building revenue surplus thereafter)and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.However, due to the 2007 international financial crisis, the deadlines for theimplementation of the targets in the act was initially postponed and subsequentlysuspended in 2009. Basically FRBM Act was introduced because the debt burden oncountry’s economy was increasing and the interest payments were alone consuming50% of government revenue.The Fiscal Responsibility and Budget Management Bill (FRBM Bill) was introducedin India by the then Finance Minister of India, Mr.Yashwant Sinha in December,2000. The bill highlighted the poor state of the Government finances at Union as wellas state level. The FRBM bill was introduced with the broad objectives of eliminatingrevenue deficit by 31 Mar 2006, prohibiting government borrowings from the ReserveBank of India three years after enactment of the bill, and reducing the fiscal deficit to2% of GDP (also by 31st Mar 2006). Further, the bill proposed for the government toreduce liabilities to 50% of the estimated GDP by year 2011.Now it is very clear that neither of the targets have been met. One of the majorreasons for this was that the Finance ministry was only required to conduct thequarterly review of the receipts and payments of the Government and place thesereports before the parliament. Any deviations from the targets were approved by theparliament apart from this there was no other measure to ensure the compliance ofthe act. Although the government was able to cut the fiscal deficit to 2.7% of GDPand revenue deficit to 1.1% of GDP in 2007–08, the International financial crisis of2008 forced the government to suspend the deadline for implementation of targets.The fiscal deficit rose to 6.2% of GDP in 2008-09 against the target of 3% set by theAct for 2008-09. Now the government had announced a path of fiscal consolidationstarting from fiscal deficit of 6.6% of GDP in 2009-10 to a target of 3.0% by 2014-15.Many economists, including Lord Keynes, had advocated the need for small fiscaldeficits to boost an economy, especially in times of crisis. What it means is thatgovernment should raise public investment by investing borrowed funds. Thisexercise is also called pump-priming. The basic purpose of the whole exercise is toaccelerate the growth of an economy by public intervention. Hence, there is nothingfundamentally wrong with a fiscal deficit, provided the cost of intervention does notexceed the emanating benefits. The darker side of the story is that the borrowedfunds, which always remain on tap, have to be repaid. And pending repayment,these loans have to be serviced. Ideally, the return on investment from the projects,
  3. 3. in which the borrowed money was invested, should be higher than the cost ofborrowing. In that situation, fiscal deficit will not pose any problem. However, thegovernment spends money on all kinds of projects, including social sector schemes,where it is impossible to calculate the rate of return at least in monetary terms. So,one will never know whether the borrowed funds are being invested wisely. Apartfrom that the government has now reached to the stage where the borrowed moneyis used to service the past loan. According to budget figures (revised estimates for2003-04) the government borrowed Rs 1, 32,103 crore. The interest payment duringthe year was Rs 1, 24,555 crore i.e. around 94% of the borrowed funds are beingused to pay interest for past loans. This is what is called the debt trap, where one iscompelled to borrow to service past loans.The FRBM Act initially introduced four fiscal indicators to be projected in the mediumterm fiscal policy statement. These are revenue deficit as a percentage of GDP,fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and totaloutstanding liabilities as percentage of GDP. The Finance Bill 2012 gave legalrecognition to a new concept called Effective revenue deficit which is defined as thedifference between revenue deficit and grants for creation of capital assets. RevenueDeficit is defined in the act as the difference between the revenue expenditure andrevenue receipts which indicates increase in liabilities of the Central Governmentwithout corresponding increase in assets. The recent amendment in FRBM act hasmandated total elimination of effective revenue deficit by 2015.In a federal set up like India, large amount of transfer of resources from the CentralGovernment takes place to States, local bodies and other scheme implementingagencies that are mandated to provide certain services. All of such transfers areshown as revenue/current expenditure in the books of Central Government.However, significant proportion of such transfers is specifically meant for creation ofcapital assets which are public goods in nature. In the present scheme of things,most of the public goods are being provided by States and sector specific bodies.Central Government’s role is limited to augmenting or providing resources to theseinstitutions as it can’t create these infrastructures directly (e.g. State or rural roads;irrigation infrastructure; power generation, transmission and distribution facilities;telecommunication networks, major ports or airports etc.). Since the CentralGovernment does not own these assets, the resources transferred even for creationof physical infrastructure are shown as revenue expenditure. So there is fault in theaccounting system. Needless to say that the Indian Government does not haveproper accounting system, this is also one of the major concerns.Since the act was primarily for the management of the governments behaviour, itprovided for certain documents to be tabled in the Parliament annually with regardsto the countrys fiscal policy. This included the following along with the AnnualFinancial Statement and demands for
  4. 4. o A document titled Medium-term Fiscal Policy Statement – This report was to present a three-year rolling target for the fiscal indicators with any assumptions, if applicable. This statement was to further include an assessment of sustainability with regards to revenue deficit and the use of capital receipts of the Government (including market borrowings) for generating productive assets. o A document titled Fiscal Policy Strategy Statement – This was a tactical report enumerating strategies and policies for the upcoming Financial Year including strategic fiscal priorities, taxation policies, key fiscal measures and an evaluation of how the proposed policies of the Central Government conform to the Fiscal Management Principles of this act. o A document titled Macro-economic Framework Statement – This report was to contain forecasts enumerating the growth prospects of the country. GDP growth, revenue balance, gross fiscal balance and external account balance of the balance of payments were some of the key indicators to be included in this report. o The recent amendment introduced Medium-term Expenditure Framework Statement along with the existing three FRBM statements. This new statement would provide certainty of allocation to Ministries and Departments over three year time frame. This would help Ministries/Departments in undertaking de-novo exercise for allocating resources on prioritized schemes and weeding out such schemes which have outlived their utility. This statement would set forth a three year rolling target for expenditure indicators with specification of underlying assumptions and risk involved.There are some other problems also which could create hindrance in achievement ofthe targets such as increasing subsidies. Because of the recently introduced FoodSecurity Bill the government is expected to bear a loss of Rs 35000 crore. Moreoverthe government has decontrolled the prices of the petrol but still the government isordering oil companies not to increase prices which will lead to more subsidies forpetroleum companies.Despite of all these there are some good news also. The commerce department hasreported that India’s trade deficit has narrowed to a seven-month low in April onweaker imports of gold, silver and petroleum. During the year 2011-12 thegovernment has achieved 99.65 of indirect tax collection target.Now conditions of US and European economies are crucial for Indian economywhich is beyond the control of Indian government. So let’s just hope for the