The Fiscal Responsibility and Budget Management Act, 2003
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Table of contents
Introduction
The NK Singh Review Committee
- Role of the Council
- Debt to GDP ratio
- Review Committee
- Deviations
- Fiscal Council
- Debt trajectory for individual states
- Borrowings from the Reserve Bank of India
Objectives of FRBM act
Key features
Main provisions of the FRBM act
- Medium-term fiscal policy statement
- Fiscal policy strategy statement
- Macro-economic framework statement
Relaxation under FRBM act
Instances when FRBM applied
Recent Kerala fiscal deficit
Critical analysis
Introduction
Before understanding the Fiscal Responsibility and Budget Management Act, 2003 (hereinafter referred to as FRBM Act). Let us understand the meaning of Fiscal deficit. The gap between income and spending by the government, when spending is more than the income it is called a fiscal deficit. It can be calculated by the percentage of gross domestic product (GDP). The Fiscal Responsibility and Budget Management Act, 2003 was enacted on 26th August, 2003, with an objective for the responsibility of central government to ensure inter-generational equity in fiscal management. The central government has specified in the rules under its Fiscal Responsibility and Budget Management Act, 2003 (FRBM act), a fiscal deficit target of 3 percent, which is to be achieved by 2008-09.
The FRBM act has been enacted by the central government to take suitable measures to ensure greater transparency in its fiscal operations in the public interest. The central government shall endeavour to ensure that— (i) the general Government debt does not exceed sixty percent.; (ii) the Central Government debt does not exceed forty percent of gross domestic product by the end of the financial year 2024-2025.
The NK Singh Review Committee
The Committee proposed a draft Debt Management and Fiscal Responsibility Bill, 2017 to replace the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act). Major recommendations are as follows:
- Role of the Council: The role of the Council would include:
(i) preparing multi-year fiscal forecasts,
(ii) recommending changes to the fiscal strategy,
(iii) improving quality of fiscal data,
(iv) advising the government if conditions exist to deviate from the fiscal target, and
(v) Advising the government to take corrective action for non-compliance with the Bill.
- Debt to GDP ratio: A debt to GDP ratio of 60% should be targeted with a 40% limit for the center and 20% limit for the states.
- Review Committee: The central government shall establish a review committee to review the functioning and flaws of the bill.
- Deviations: The FRBM act provided a space for deviation from the targets in case of a national calamity, national security,center or other exceptional circumstances which have diluted the effect of the FRBM act.
- Fiscal Council: It proposed the creation of an autonomous Fiscal Council with a Chairperson and two members appointed by the center.
- Debt trajectory for individual states: Keeping in mind the fiscal prudence and health of the state the Debt should be the trajectory for individual states.
- Borrowings from the Reserve Bank of India: The draft Bill restricts the government from borrowing from the Reserve Bank of India except when:
(i) The centre has to meet a temporary shortfall in receipts,
(ii) Reserve Bank of India subscribes to government securities to finance any deviations from the specified targets, or
(iii) Reserve Bank of India purchases government securities from the secondary market.
Objectives of FRBM act
The FRBM Act provides for the following objectives:
- For the responsibility of central government to ensure inter-generational equity incenter fiscal management;
- Long-term macro-economic stability by removing fiscal impediments in the effective conduct of monetary policy;
- Prudential debt management consistent with fiscal sustainability through limits in central government borrowings, debt, and deficits;
- Greater transparency in fiscal operations of central government ;
- Conducting fiscal policy in the medium-term and for matters concerned with it.
Key features
The act is setting limits on the debts and deficits of the central government. It has limited the fiscal deficit to 3% of the GDP. The twelfth finance commission report, 2005-2010 also recommends debt relief, while the center’s tax-GDP ratio remains unaffected, the gross revenue receipts will be 13.13 percent of GDP in 2009-10 compared to 13.33 in terms of the figures, net revenue receipts will be 10.20 percent compared to 10.39 while revenue expenditure will be 10.20 percent of GDP compared to 10.39, the impact being felt on plan revenue expenditure. Capital expenditure will reach 3.47 percent of GDP in 2009-10 compared to 3.63 percent otherwise. The targets under the FRBMA are, however, expected to be met in terms of both the projections.
The FRBM act provides an institutional framework and binds the government to prudent fiscal policies. The central government has enacted the FRBM act in 2003, which had, under its rules, set the target for eliminating revenue deficit by 2007-08, and reducing fiscal deficit to 3 percent of GDP. The July 2004 budget has ensured that the target year is shifted to 2008-09. The states of Karnataka, Kerala, Tamil Nadu, Punjab, and Uttar Pradesh have enacted fiscal responsibility legislation. Many states have drawn up their medium term reform programs with specific monitorable targets in the context of the Medium Term Fiscal Reform Facility instituted on the basis of EFC’s recommendations. These changes are likely to contribute to more effective and transparent fiscal management.
The central government set up a Task Force for drawing up a medium-term framework for fiscal policies to achieve the objective of the FRBM act and to formulate annual targets indicating the path of adjustment as well as the required policy measures. The central government shall also provide suitable measures to ensure greater transparency in fiscal operations for public interest and minimise as far as possible practicable secrecy in the preparation of annual financial statements and demands for grants.
Several state governments have asked for debt relief particularly in COVID-19 pandemic many states are facing the issue of fiscal deficit such as Kerala which has been discussed later in this article.
Main provisions of the FRBM act
Under section 3 of FRBM act the central government to table the policy in parliament, following are the policy types:
- Medium-term fiscal policy statement: it shall be put forth a three-year rolling target for fiscal indicators
- Fiscal policy strategy statement: It is relating to taxation, expenditure, market borrowings and other liabilities, lending and investments, pricing of administered goods and services, securities and description of other activities such as underwriting and guarantees which have potential budgetary implications
- Macro-economic framework statement: It includes assessment of the growth prospects of the economy with specification of underlying assumptions.
Relaxation under FRBM act
Escape clause under Section 4 sub-section 2 of FRBM act provides exception; the centre may exceed the annual fiscal deficit target on the grounds mentioned hereafter:
(i) National Security
(ii) War
(iii) National calamity
(iv) Collapse of agriculture
(v) Structural reforms
(vi) Decline in real output growth of the quarter by at least three percentage points below the average of the previous four quarters.
Instances when FRBM applied
During the 2008-2009, global financial crisis the FRBM act was implemented when the fiscal deficit went to 6.2% from a goal of 2.7%. The central government relaxed 3.5% Gross State Domestic Product for 2008-2009 although in the year 2009-2010 the Gross State Domestic Product was 4%. The centre focused on creation of employment and public assets.
During the budget presentation of 2020-2021 due to Covid-19 pandemic FRBM was evoked once again. The government has adjusted the fiscal deficit target from 3.8% in 2019-2020 to 3.3% in 2020-2021.
Recent Kerala fiscal deficit
During 2020-2021, Kerala has borrowed Rupees 25,000 crore. Government is worried about the fact that the borrowing cap under The Fiscal Responsibility and Budget Management shall not impact its spending ability. Keeping in mind the impact of COVID-19 on livelihood and other economic activities Kerala government has announced a Rupees 20,000 crore worth package. It had to borrow Rupees 12,500 crore rupees in the financial year 2020-2021 (April-March). During the upcoming 11 months, the government will have to take due precautions of social distancing and other measures to prevent the further spread of coronavirus. It had to also look into the expenditure of the state for upcoming months.
Critical analysis
The FRBM act has multiple targets such as debt, fiscal deficit, and revenue deficit which makes it difficult to achieve them all therefore, a single objective, i.e. placing debt on a declining trajectory would have justified the purpose of this act. Other issues with the FRBM act is it has provided a space for deviation from the targets in case of a national calamity, national security or other exceptional circumstances which have diluted the effect of the FRBM act.