Fiscal Responsibility and Budget Management Act

<<–2/”>a >p style=”font-weight: 400;”>Fiscal Responsibility and Budget Management Act

The FRBM Act 2003 in its amended form was passed by the government to bring fiscal discipline and to implement a prudent Fiscal Policy. High Fiscal Deficit was the one major macroeconomic problem faced by Indian economy around 2000. It was argued that high deficits lead to Inflation, reduces consumption, result in a crowding out of the private sector Investment, rising Unemployment and falling living standards of the people. Thus arose a need to institutionalize a new fiscal discipline framework.

Features of FRBM Act:

The Revenue Deficit should be reduced to an amount equivalent by 0.5% or more of GDP every year, beginning with the financial year 2004-05 and eliminate revenue deficit by March, 2009,
The fiscal deficit should be reduced by 0.3% or more of the GDP every year, beginning with the financial year 2004-05and bringing it down to 3% of GDP by March 2009.
The Central Government should not provide guarantees in excess of 0.5% of GDP in any financial year, beginning with 2004-05
The Central Government should not assume additional liabilities in excess of 9% of GDP for financial year 2004-05 and progressive reduction of this limit by at least 1 % point of GDP in each subsequent year
The RBI should not subscribe to primary issues of Central Government Securities from the year 2006-07.
The Finance Minister to make a quarterly review of trends in receipts and expenditurein relation to budget and place the outcome of such reviews before both the Houses of Parliament.
The Central Government should specifyfour fiscal indicators- Fiscal deficitas a Percentage of GDP; Revenue deficit as a percentage of GDP; Tax revenue as a percentage of GDP; Total outstanding liabilities as percentage of GDP.
The Central Government should place in each financial year before houses of Parliament three statements-Medium Term Fiscal Policy Statement; Fiscal policy strategy statement; Macro-economic Framework statementalong with Annual Financial Statement and Demands for grants.
The FRBM Act States that the Central Government shall not borrow from RBI except by way of means and advances to meet temporary excess of cash disbursements over cash receipts.
The revenue and fiscal deficit may exceed the targets specified in Rules only on grounds of national security or national calamity or such other exceptional grounds as the Central Government may specify

FRBM- The Impact and Limitations

Impact on deficits

FRBM act has been violated more than adhered to since its enactment.

Since its enactment, the act has been paused for four times including a reset of the fiscal deficit target in 2008-09 following the global financial crisis.
In 2010-11, Government replaced revenue deficit with the concept ofEffective Revenue Deficitin the budget documents.
In Budget 2012-13, the finance act changed the FRBM act and it brought in a new commitment of eliminating the effective revenue deficit. The amended rules extended the time for elimination of Effective revenue deficit by March 2015 and bringing down fiscal deficit to 3% by March 2017.
The Act has helped on the issues relating to Fiscal Consolidation due to the mandatory medium-term and strategy statements which are required to be presented annually before Parliament. Implementing the Act, the government had managed to cut the fiscal deficit to 2.7% of GDP and revenue deficit to 1.1% of GDP in 2007–08.

Impact on development

Has the law been successful to ensure that the Growth momentum is maintained, without either significantly fueling inflation or curtailing socio-economic welfare expenditure?

While we notice a drastic fall in deficits, it has largely been on account of reductions in critical sectors of the economy.The Union Government’s development expenditure as proportion of GDP declined in the post FRBM era from 7.49% in 2002-03 to 6.42 % in 2005-06.
An analysis of revenue account of the development expenditure by states shows that in almost all sectors there has been a decline in the post FRBM era. In case of Education, it declined from around 2.5 % of GDP in 2002-03 to less than 2.2 % of GDP in 2005-06. In Health sector, the decline has been from 0.6% to 0.49 % and in agriculture, from 0.67 % to 0.58 %. In overall Social sectors, it declined from 4.5 %of GDP to 4.16 % of GDP during the period.

Thus the act and its rules are adverse to social sector expenditure necessary to create productive assets and general upliftment of rural poor of India.

Impact on credit growth

Further the FRBM Act ignores the possible inverse link between fiscal deficit (fiscal expansion) and bank credit (monetary expansion). That is, if credit growth falls, fiscal deficit may need to rise and if credit rises, fiscal deficit ought to fall — to ensure adequate Money-supply-2/”>Money Supply to the economy.

Data on money supply growth, bank credit and GDP establishes that, in the last six years, both money supply growth and credit expansion have halved absolutely and in relation to GDP growth. Even the combined fiscal deficit (fiscal expansion) and credit growth (monetary expansion) as a percentage of GDP has halved from 17.4 per cent in 2009-10 to 8.8 per cent, which is less than Nominal GDP growth. Thus the FRBM Act has not only reduced fiscal deficit but also starved the growing economy from much needed investment.

FRBM Act as a borrowed concept

The 3 per cent fiscal deficit limit which emerged from the famous Maastricht Treaty to form the European Union (EU) in 1992 was applied to Indian context without any modifications.

Fiscal deficit is the quantum amount a nation borrows to meet expenditure. As long as we restrict borrowing to investment needs it does not seem logical to say why a nation should borrow only 3 per cent of its GDP to make investments. The investment needs are independently determined by the structural developments in the economy, its stock of capital and its planned growth profile.

Thus the FRBM Act has faced numerous hurdles in its implementation and has become a subject of animated debate. It is in this context the Finance Minister’s Budget proposal to have a committee to review the implementation of the FRBM Act is right step to ask the question whether the law has served the purposes for which it was envisaged.

The Way Forward

The politics of Sound finance in a globalised financial Environment is well understood. The FRBM Act has the potential of ensuring macro-economic stability provided it is revised to needs of Indian economy. Further, there are some other approaches which can help:

The possibility of adopting a target range rather than a specific number which would give the necessary policy space to deal with dynamic and volatile situations such as the one India currently faces
Aligning the monetary and fiscal economies so that if bank credit growth falls, fiscal deficit may need to go up.
An autonomous Fiscal Management Review Committee (FMRC) which would conduct an annual independent and public review of FRBM compliance.
Move the annual numerical targets from FRBM rules (which are framed and amended by central Government at whim by gazette notification) to the FRBM act itself
Do away with the ambiguous concept of the Effective Revenue Deficit which is nothing but a jugglery to rewrite Revenue Expenditure as Capital Expenditure.

Besides, it must also be ensured that Resources gained from this fiscal reset are utilized imaginatively for creation of long-term public assets and putting the country back on her growth tracks.

The Fiscal Responsibility and Budget Management Act (FRBM Act) is an Act of the Parliament of India enacted in 2003. The Act was enacted with the objective of ensuring fiscal discipline and transparency in the management of public finances. The Act sets out a number of principles and rules that the government must follow in order to achieve these objectives.

The objectives of the FRBM Act are to:

Ensure macroeconomic stability
Promote sustainable economic growth
Reduce fiscal deficit and debt
Improve Transparency and Accountability in fiscal management

The principles of the FRBM Act are:

Fiscal responsibility: The government must ensure that its fiscal deficit and debt are at sustainable levels.
Transparency: The government must disclose all relevant information about its fiscal position in a timely and accurate manner.
Accountability: The government must be accountable to the public for its fiscal performance.

The coverage of the FRBM Act is the entire central government, including all its ministries, departments, and agencies. The Act also applies to state governments, but they are not subject to the same strict fiscal rules as the central government.

The fiscal responsibility rules set out in the FRBM Act are:

The central government must limit its fiscal deficit to 3% of GDP.
The central government must limit its debt to 60% of GDP.
The central government must maintain a revenue surplus of 2% of GDP.
The central government must not borrow from the Reserve Bank of India.

The budget management rules set out in the FRBM Act are:

The central government must prepare a medium-term fiscal policy statement every year.
The central government must prepare a detailed budget every year.
The central government must publish a mid-year review of its budget every year.

The reporting and audit provisions of the FRBM Act require the central government to report on its fiscal performance to Parliament and to the Comptroller and Auditor General of India (CAG). The CAG is responsible for Auditing the central government’s accounts and for reporting on its compliance with the FRBM Act.

The offences and penalties provisions of the FRBM Act provide for penalties for non-compliance with the Act. The penalties include imprisonment and fines.

The transitional provisions of the FRBM Act allow the central government to phase in the implementation of some of the Act’s provisions.

The repeals and Savings provisions of the FRBM Act repeal certain existing laws and save certain other laws from being repealed.

The definitions section of the FRBM Act defines a number of terms used in the Act.

The FRBM Act has been successful in achieving some of its objectives. The central government’s fiscal deficit and debt have declined since the Act was enacted. However, the Act has not been able to prevent the central government from borrowing from the Reserve Bank of India. The Act has also been criticized for being too complex and for not being effective in controlling the central government’s spending.

Despite its shortcomings, the FRBM Act has been an important step in improving the management of public finances in India. The Act has helped to improve transparency and accountability in fiscal management. It has also helped to reduce the central government’s fiscal deficit and debt. The Act is likely to continue to play an important role in the management of public finances in India in the years to come.

What is the Fiscal Responsibility and Budget Management Act?

The Fiscal Responsibility and Budget Management Act (FRBM Act) is an Act of the Parliament of India enacted in 2003. The Act provides for a framework for fiscal responsibility and budget management in the country. The Act aims to ensure that the government’s fiscal policy is sustainable and that the budget is prepared and executed in a transparent and accountable manner.

What are the objectives of the FRBM Act?

The objectives of the FRBM Act are to:

Ensure that the government’s fiscal policy is sustainable.
Promote fiscal discipline.
Improve transparency and accountability in fiscal management.
Promote macroeconomic stability.

What are the key provisions of the FRBM Act?

The key provisions of the FRBM Act include:

A fiscal deficit target of 3% of GDP.
A revenue deficit target of 2% of GDP.
A debt-to-GDP ratio target of 60%.
A medium-term fiscal policy framework.
A fiscal responsibility council.
A Debt Management agency.

What has been the impact of the FRBM Act?

The FRBM Act has had a significant impact on fiscal management in India. The Act has helped to improve fiscal discipline and transparency. The government’s fiscal deficit and revenue deficit have declined significantly since the enactment of the Act. The debt-to-GDP ratio has also declined, although it is still above the target of 60%.

What are the challenges to the implementation of the FRBM Act?

The main challenges to the implementation of the FRBM Act are:

The global economic slowdown.
The slowdown in the Indian economy.
The rise in oil prices.
The increase in government expenditure.

What are the future prospects of the FRBM Act?

The future prospects of the FRBM Act are positive. The Act has helped to improve fiscal management in India. The government is committed to implementing the Act and achieving its objectives. The Act is likely to play a significant role in ensuring fiscal sustainability and macroeconomic stability in India.

The Fiscal Responsibility and Budget Management Act (FRBM Act) was enacted in India in 2003. Which of the following is NOT a provision of the FRBM Act?
(A) The government shall not borrow more than 3% of its GDP.
(B) The government shall not run a fiscal deficit of more than 3% of its GDP.
(C) The government shall not accumulate more than 4% of its GDP in debt.
(D) The government shall not spend more than 10% of its GDP on subsidies.
The FRBM Act was enacted to achieve which of the following objectives?
(A) To reduce fiscal deficit and debt.
(B) To improve fiscal transparency and accountability.
(C) To promote macroeconomic stability.
(D) All of the above.
The FRBM Act has been successful in achieving which of the following objectives?
(A) Reducing fiscal deficit and debt.
(B) Improving fiscal transparency and accountability.
(C) Promoting macroeconomic stability.
(D) All of the above.
The FRBM Act has been criticized for which of the following reasons?
(A) It has led to a decline in government spending on social sectors.
(B) It has made it difficult for the government to respond to economic shocks.
(C) It has made it difficult for the government to invest in Infrastructure-2/”>INFRASTRUCTURE.
(D) All of the above.
The FRBM Act has been amended several times since it was enacted in 2003. Which of the following is NOT a reason for the amendments?
(A) To make the Act more flexible.
(B) To make the Act more responsive to economic conditions.
(C) To make the Act more compatible with the requirements of the global financial system.
(D) To make the Act more compatible with the requirements of the Indian Constitution.
The FRBM Act is a landmark piece of legislation that has had a significant impact on the Indian economy. Which of the following is NOT a true statement about the FRBM Act?
(A) The FRBM Act has helped to reduce fiscal deficit and debt.
(B) The FRBM Act has improved fiscal transparency and accountability.
(C) The FRBM Act has promoted macroeconomic stability.
(D) The FRBM Act has made it difficult for the government to respond to economic shocks.
The FRBM Act has been successful in achieving its objectives, but it has also been criticized for some of its unintended consequences. Which of the following is NOT an unintended consequence of the FRBM Act?
(A) The FRBM Act has led to a decline in government spending on social sectors.
(B) The FRBM Act has made it difficult for the government to respond to economic shocks.
(C) The FRBM Act has made it difficult for the government to invest in infrastructure.
(D) The FRBM Act has made the Indian economy more vulnerable to external shocks.
The FRBM Act has been amended several times since it was enacted in 2003. The most recent amendment was in 2017. Which of the following is NOT a reason for the 2017 amendment?
(A) To make the Act more flexible.
(B) To make the Act more responsive to economic conditions.
(C) To make the Act more compatible with the requirements of the global financial system.
(D) To make the Act more compatible with the requirements of the Indian Constitution.
The FRBM Act is a landmark piece of legislation that has had a significant impact on the Indian economy. The FRBM Act has helped to reduce fiscal deficit and debt, improve fiscal transparency and accountability, and promote macroeconomic stability. However, the FRBM Act has also been criticized for some of its unintended consequences, such as a decline in government spending on social sectors and a difficulty in responding to economic shocks. The FRBM Act has been amended several times since it was enacted in 2003, most recently in 2017.