Fiscal Deficit and FRBM

1. Fiscal Deficit
Prof. Nithin Kumar S
Assistant Professor
Department of Economics
J.S.S Banashankari Arts, Commerce and
Shantikumar Gubbi Science College
Vidyagiri, Dharwad - 580004

2. Meaning
• Fiscal deficit is the difference between the total
revenue and total expenditure of a government in
a financial year.
• Fiscal deficit arises when the expenditure of a
government is more than the revenue generated
by the government in a given fiscal year.
Pof. Nitin Kumar S 2

3. Calculation of Fiscal Deficit
• Fiscal deficit is calculated by subtracting the
total revenue obtained by the government in a
fiscal year from the total expenditures that it
incurred during the same period.
• Mathematically, it can be represented as
follows
• Fiscal deficit = Total Expenditure – Total
revenue (Excluding the borrowings)
Pof. Nitin Kumar S 3

4. Components of Fiscal Deficit
Government Revenue
Government Expenditure
Pof. Nitin Kumar S 4

5. Government Revenue
• It combines tax revenue (e.g., GST, custom
duties, corporation tax) collected by the center,
and non-tax revenue like dividends, profits,
and interest receipts.
Pof. Nitin Kumar S 5

6. Government Expenditure
• It includes capital spending, revenue
expenditure (salaries, pensions), infrastructure,
healthcare, interest payments, and grants for
capital asset creation.
Pof. Nitin Kumar S 6

7. Types of Deficit in an Economy
• A country can be in different types of deficit, and each deficit can
affect the economy in different manners.
• Fiscal deficit is also an indicator of various other economic
indicators like price stability, inflation etc.
• The three types of fiscal deficit that a country can find it in are:
1. Revenue Deficit
2. Fiscal deficit
3. Primary deficit
Pof. Nitin Kumar S 7

8. Revenue Deficit
• When the total revenue expenditure done by the government is more than
the revenue receipts held by the government, then a situation arises in
which the economy is said to be in revenue deficit.
• In such a situation, the government is rendered incapable of maintaining
its day to day tasks.
• In order to keep in operation, the government usually borrows money or
undertakes divestments or introduces more taxes to generate more
revenue.
Pof. Nitin Kumar S 8

9. Fiscal deficit
• The negative balance that is generated in the economy when the
country spends more than the money it makes is called a fiscal deficit.
• The fiscal deficit of a country is especially observed during the budget
meetings since it can affect various other factors of the economy like
growth, price stability and inflation in the country.
• If a country remains in fiscal deficit for too long, then the rating of the
country may also go down compared to its foreign counterparts.
Pof. Nitin Kumar S 9

10. Primary deficit
• Every borrowing of money leads to the payment of interest
over the money that the country has borrowed.
• The money that the government borrows to pay off this
interest is called the primary deficit.
• The primary deficit is a measure of the recovery of the
fiscal health of the country as a decrease in the primary
deficit directly correlates to an increase in the fiscal health
of the country.
Pof. Nitin Kumar S 10

11. Impact of Fiscal Deficit on Indian
Economy
1. Interest Rates and Borrowing Costs
2. Inflation
3. Crowding Out Effect
Pof. Nitin Kumar S 11

12. Interest Rates and Borrowing Costs
• Fiscal deficits can influence interest rates and borrowing
costs within an economy.
• When governments need to finance their deficits through
borrowing, it increases the demand for credit, potentially
driving up interest rates.
• Higher interest rates can impact businesses’ borrowing
costs, limiting their investments and affecting economic
growth.
Pof. Nitin Kumar S 12

13. Inflation
• Fiscal deficits have implications for inflation levels within an
economy.
• If governments finance deficits by printing money or excessive
borrowing from central banks, it can increase the money supply.
• This inflow of money can lead to inflationary pressures, eroding
purchasing power and impacting the overall economy, including
consumer spending and business investments.
Pof. Nitin Kumar S 13

14. Crowding Out Effect
• Large fiscal deficits can have a crowding out effect on private
investment.
• When governments borrow heavily to cover their deficits, they
compete with the private sector for available funds.
• This increased demand for borrowing can result in higher interest
rates and limited access to credit for private businesses, potentially
dampening private investment and economic growth.
Pof. Nitin Kumar S 14

15. Trends in Fiscal Deficit
Year Fiscal Deficit
2011-12 5.99
2012-13 6.60
2013-14 4.90
2014-15 5.91
2015-16 4.93
2016-17 4.10
2017-18 3.48
2018-19 3.44
2019-20 4.65
2020-21 9.50
2021-22 6.90
2022-23 6.40
Pof. Nitin Kumar S 15

16. 0
1
2
3
4
5
6
7
8
9
10
Trends in Fiscal Deficit
Fiscal Deficit
Pof. Nitin Kumar S 16

17. Fiscal Responsibility and
Budget Management -FRBM

18. Introduction
• The Financial Responsibility and Budgeting
Management Act (FRBM Act) was enacted by the
Indian Parliament to institutionalize fiscal stability,
reduce India's fiscal deficit, enhance macroeconomic
stability, and overall maintenance of public funds by
progressing toward a balanced budget and reinforcing
fiscal Conservation
Pof. Nitin Kumar S 18

19. • The main goal of the FRBM Act was to erase the country's revenue
deficit (and then construct a revenue surplus) and reduce the fiscal
deficit to a tolerable 3% of GDP by March 2008.
• However, due to the global financial crisis of 2007, the deadlines
for implementing the act's aims were initially postponed and then
suspended in 2009.
• In 2011, the Economic Advisory Council formally encouraged the
Government of India to explore reinstating the provisions of the
FRBMA, citing the ongoing recovery process
Pof. Nitin Kumar S 19

20. • N. K. Singh is the current Chairman of the Review Committee
for the Fiscal Responsibility and Budget Management Act, 2003,
which is overseen by the Ministry of Finance (India).
• Enactment of FRBM Act 2003 India's then-Finance Minister, Mr.
Yashwant Sinha launched the Fiscal Responsibility and Budget
Management Bill (FRBM Bill) in December 2000. The FRBM
Act was proposed due to high government borrowing, high fiscal
& revenue deficit, and high debt to GDP ratio.
Pof. Nitin Kumar S 20

21. • Under the declaration of purposes and reasons, the bill first
underlined the dire state of government finances in India, both at the
national and state levels.
• It also aimed to teach the foundations of budgetary restraint to
government officials at all levels.
• The FRBM bill was submitted with the broad goals of eliminating
the revenue deficit by March 31, 2006, preventing government
borrowing from the Reserve Bank of India for three years following
its enactment, and lowering the fiscal deficit to 2% of GDP by
March 31, 2006.
Pof. Nitin Kumar S 21

22. • The FRBM bill was submitted with the broad goals of
eliminating the revenue deficit by March 31, 2006,
preventing government borrowing from the Reserve
Bank of India for three years following its enactment,
and lowering the fiscal deficit to 2% of GDP by March
31, 2006.
• Furthermore, the plan called for the government's
liabilities to be reduced to 50% of the expected GDP by
2011.
Pof. Nitin Kumar S 22

23. Objectives of FRMB Act
1. Fiscal Discipline
2. Reduction of Fiscal Deficit
3. Reduction of Fiscal Deficit
4. Fiscal Transparency
5. Fiscal Transparency
6. Resource Allocation
7. Investor Confidence
8. Macroeconomic Stability
9. Improvement in Public Financial Management
10. Credibility in International Markets
Pof. Nitin Kumar S 23

24. Features of FRBM Act
1. Fiscal Targets
2. Medium-Term Fiscal Policy
3. Binding Nature
4. Fiscal Responsibility Statements
5. Debt Limitation
6. Transparency and Accountability
7. Fiscal Deficit and Revenue Deficit Reduction
8. Fiscal Deficit and Revenue Deficit Reduction
9. Contingent Liabilities and Off-Budget Transactions
10. Role of Fiscal Policy Statement
11. Fiscal Council
12. Exemptions and Escape Clauses
Pof. Nitin Kumar S 24

25. 1. Fiscal Targets
• The act sets specific fiscal targets to be
achieved over a stipulated period.
• These targets include reducing the fiscal deficit
and revenue deficit to predetermined levels.
Pof. Nitin Kumar S 25

26. 2. Medium-Term Fiscal Policy
• The FRBM Act emphasizes a medium-term
fiscal policy framework, which outlines the
government’s fiscal strategies and targets for a
period of five years.
Pof. Nitin Kumar S 26

27. 3. Binding Nature
• The fiscal targets set by the act are binding on
the government, which means that the
government is legally obligated to adhere to
these targets.
Pof. Nitin Kumar S 27

28. 4. Fiscal Responsibility Statements
• The act requires the central and state
governments to prepare and publish fiscal
responsibility statements detailing their
strategies and actions to achieve the fiscal
targets.
Pof. Nitin Kumar S 28

29. 5. Debt Limitation
• The act imposes limits on the levels of
government debt, both at the central and state
levels.
• This is aimed at ensuring that the
government’s borrowing remains within
sustainable limits.
Pof. Nitin Kumar S 29

30. 6. Transparency and Accountability
• The FRBM Act emphasizes transparency in
fiscal operations.
• It requires the government to present the
annual budget in a way that clearly displays
the impact of fiscal policies on fiscal
indicators.
Pof. Nitin Kumar S 30

31. 7. Fiscal Deficit and Revenue Deficit
Reduction
• The act aims to progressively reduce the fiscal
deficit and revenue deficit over time. It sets
targets for these deficits as a percentage of the
GDP.
Pof. Nitin Kumar S 31

32. 8. Zero Revenue Deficit Target
• The act seeks to eliminate the revenue deficit
over a period of time, signifying that the
government should generate sufficient revenue
to cover all its expenditures, excluding interest
payments.
Pof. Nitin Kumar S 32

33. 9. Contingent Liabilities and Off-
Budget Transactions
• The FRBM Act requires the government to
disclose contingent liabilities and off-budget
transactions, ensuring greater transparency in
fiscal reporting.
Pof. Nitin Kumar S 33

34. 10. Role of Fiscal Policy Statement
• The government is required to present a fiscal
policy statement alongside the annual budget,
outlining its fiscal policies and strategies to
achieve the targets set under the act.
Pof. Nitin Kumar S 34

35. 11. Fiscal Council
• The act allows for the establishment of a Fiscal
Responsibility and Budget Management
Council to provide recommendations and
assess the government’s compliance with the
fiscal targets.
Pof. Nitin Kumar S 35

36. 12. Exemptions and Escape Clauses
• The FRBM Act allows for certain exemptions
and escape clauses during exceptional
circumstances such as national security
concerns, natural calamities, and collapse of
agriculture.
Pof. Nitin Kumar S 36

37. N K Singh Committee
Nand Kishore Singh
(N.K Singh)
Pof. Nitin Kumar S 37

38. FRBM Act - N K Singh Committee
• In 2003, the Fiscal Responsibility and Budget Management (FRBM) Act was
passed, which established goals for the government to meet in order to eliminate
fiscal deficits. The targets were moved around a few times.
• The government formed a committee to evaluate the FRBM Act in May 2016, led
by NK Singh. The targets were seen to be overly rigorous by the government.
• According to the committee, the government should aim for a fiscal deficit of
3% of GDP in the years leading up to March 31, 2020, then reduce it to 2.8 % in
2020-21 and 2.5 % in 2023
Pof. Nitin Kumar S 38

39. Latest Changes in FRBM Act 2003
• The rolling targets for budget deficits were not included in recent
amendments to the FRBM Act Medium Term Fiscal Policy
Statement in both 2021-22 and 2022- 23.
• The government's goal in Budget 2022 is to reduce the fiscal deficit
to less than 4.5% of GDP by 2025-26
• The budget deficit target for 2022-23 is anticipated to be 6.4% of
GDP. It's a measure of how much money the government borrows to
cover its expenses
Pof. Nitin Kumar S 39

40. • The revenue shortfall for 2022-23 is expected to be 3.8% of GDP. It
describes the government's need to borrow money to cover expenses that
may not provide a profit in the future.
• According to the revised calculations, the fiscal deficit will be somewhat
higher than the budget forecast of 6.9%, while the revenue shortfall will be
lower at 4.7%.
• In 2022-23, the primary deficit objective is expected to be 2.8% of GDP.
• Interest payments have increased from 36% in 2011-2012 to 42% in 2020-
21. Budget predictions show that by 2022-23, this share will have risen to
43%.
Pof. Nitin Kumar S 40