Since its external crisis of the early nineties, India has witnessed a turnaround on most indicators of macro-economic performance. The process of economic reform, including widespread liberalization and reduction in protectionism, launched in 1991, and steadily pursued thereafter has yielded positive results by eliminating some longstanding structural rigidities, and created potential for higher growth.
Over the last decade or so India has made transition from an onerous trade regime to a market-friendly system encompassing both trade and current payments. Despite a decade of economic reform, there is still persistence of huge fiscal and revenue deficit thereby widening the gap between revenue and expenditure, forcing the political thinkers to enact a law for fiscal correction and ultimately during 2003-04, the Fiscal Responsibility and Budget Management Act was enacted and put into operation.
Under this law, both the Centre and States were to wipe out revenue deficit and cut fiscal deficit to 3% of GDP by 2008-09. The FRBM Act was enacted by Parliament in 2003 to bring in the much needed fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government notified the FRBM Rules in July 2004. As Parliament is the supreme legislative body, the Act and the Rules will bind the present and also the future Finance Ministers and Governments.
FRBM Act 2003
• FRBM Act 2003 came into force w.e.f. 5 July 2004.
• The Act required the Central Government to eliminate revenue deficit by March 2009 and to reduce fiscal deficit to 3% of GDP by March 2008.
• Under section 7 of the Act, the Central Government is required to lay before both Houses of Parliament Medium Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro Economic Framework Statement along with Annual Financial Statement and Demand for Grants.
FRBM Rules 2004
FRBM Rules also came into force w.e.f. 5th July 2004 Reduction of revenue deficit by 0.5% of GDP or more every year. Reduction of gross fiscal deficit by 0.3% of GDP or more every year. No assumption of additional debt exceeding 9% of GDP for 2004-05 and progressive reduction of this limit by at least one percentage point of GDP in each subsequent year.
No guarantee in excess of 0.5% of GDP in any financial year. Four fiscal indicators to be projected for the medium term. These include revenue deficit, fiscal deficit, tax revenue and total debt as % of GDP.
Greater transparency in the budgetary process, rules, accounting standards and policies having bearing on fiscal indicators. Quarterly review of the fiscal situation.
The Rules mandate the Central Government to take appropriate collective action in the case of revenue and fiscal deficits exceeding 45% of the budget estimates, or total non-debt receipts falling short of
40% of the budget estimates at the end of half of the financial year. The Rules also prescribe the formats for the mandatory statements.
Objectives of FRBM act
• Eliminate the revenue deficit by 31-03-2008.
• Reduce revenue deficit @ 0.5% or more of GDP at the end of each Financial year beginning from 2004-05.
• Reduce the fiscal deficit by @ 0.3% or more of GDP at the end of each financial year beginning from 2004 – 05.
• Restrict the guarantees for borrowings to 0.5% of GDP in any financial year
beginning from 2004 – 05.
• Reduce the possible progressive reduction of capital account liabilities.
• Improve the areas of fiscal transparency and to make it available to public domain.
• Improve fiscal planning and budget management.
• Identify major areas of achievement.
• Improve the review mechanism.
• Concentrate on the areas requiring greater attention.
• Disaggregated analysis of administrative expenditures.
• Retain minimum level of unspent balance.
Main Requirements of FRBM
1. Government to place before Parliament following three statements each year along with the Budget.
a. Medium Term Fiscal Policy
b. Fiscal Policy Strategy
c. Macroeconomic Frame work
2. Government to prescribe a ceiling on guarantees.
3. The Act prohibits the Centre from borrowing from the Reserve Bank of India i.e. it bans ‘deficit financing’ through Money creation. 4. The Finance Minister is required to keep Parliament informed through quarterly reviews on the implementation. The Act provides that no deviation shall be permissible “without the approval of Parliament”.
FRBM Strategy Results
India pulled back from grim fiscal crisis.
Central and consolidated deficit reduced sharply.
Improvements in the debt/GDP ratio and in debt dynamics. It paved the way for long-term thinking on the part of policy makers. Reduction of the consolidated deficit helped to free up resources for private investment, which played a key role in accelerating GDP growth.
By showing the private sector that government operated under rules rather than discretion, it increased confidence on the part of the private sector.
FRBM IN STATES
26 States have enacted their Fiscal Responsibility & Budget Management Acts (FRBMA).
Sikkim & West Bengal have not enacted their FRBMA.
1. New Zealand introduced a Fiscal Responsibility Act in 1994.This Act has been hailed by many experts as a model and from an economist’s point of view, it is conceptually and theoretically elegant. 2. In US, the first and radical legislative attempt to prescribe a ceiling on the deficit and then force the US Government to reduce it, was an object failure i.e. mandatory items like social security.
3. European Union and the Growth and Stability Pact of 1997.
The fiscal deficit and Government debt in India are higher than in many comparable emerging economies. But after implementation of the FRBM Act 2003, there is continuous fall in the fiscal and also revenue deficits. The main aim of this Act is to expose the fiscal position in the public. The most important thing to be noted is that the revenue receipts of both Centre and States are stable, which in turn resulted in collection of more tax
revenue (Apoteker et al, 2005). From the expenditure side, the share of interest payments and pensions are increasing continuously.