Fiscal Responsibility and Budget Management Act

Fiscal responsibility implies a government pursues the appropriate level of government spending and tax to:

• Maintain sustainable public finances.
• Ensure fiscal policy aids the optimal rate of economic growth.
• Maintain appropriate levels of public investment.

This means that if the economic cycle is at a stage of ‘normal growth’ then government tax receipts must be greater than government spending. If a government is running a budget deficit, then it will be forced to cut spending or increase taxes to meet the shortfall.

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. The main purpose was 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 the implementation of the targets in the act was initially postponed and subsequently suspended in 2009. In 2011, given the process of ongoing recovery, Economic Advisory Council publicly advised the Government of India to reconsider reinstating the provisions of the FRBMA. N. K. Singh is currently the Chairman of the review committee for Fiscal Responsibility and Budget Management Act, 2003, under the Ministry of Finance (India), Government of India.

Enactment

The Fiscal Responsibility and Budget Management Bill (FRBM Bill) was introduced in India by the then Finance Minister of India, Mr.Yashwant Sinha in December 2000.

• Firstly, the bill highlighted the terrible state of government finances in India both at the Union and the state levels under the statement of objects and reasons.
• Secondly, it sought to introduce the fundamentals of fiscal discipline at the various levels of the government.

The FRBM bill was introduced with the broad objectives of eliminating revenue deficit by 31 March 2006, prohibiting government borrowings from the Reserve Bank of India three years after enactment of the bill, and reducing the fiscal deficit to 2% of GDP (also by 31 March 2006). Further, the bill proposed for the government to reduce liabilities to 50% of the estimated GDP by year 2011. There were mixed reviews among economists about the provisions of the bill, with some criticising it as too drastic. Political debate ensued in the country. Several revisions later, it resulted in a much relaxed and watered-down version of the bill (including postponing the date for elimination of revenue deficit to 31 March 2008) with some experts, like Dr Saumitra Chaudhuri of ICRA Ltd. (and now a member of Prime Ministers’ Economic Advisory Council) commenting, “all teeth of the Fiscal Responsibility Bill have been pulled out and in the current form it will not be able to deliver the anticipated results.” This bill was approved by the Cabinet of Ministers of the Union Government of India in February, 2003 and following the due enactment process of Parliament, it received the assent of the President of India on 26 August 2003. Subsequently, it became effective on 5 July 2004. This would serve as the day of commencement of this Act.

Objectives

The main objectives of the act were:

• To introduce transparent fiscal management systems in the country
• To introduce a more equitable and manageable distribution of the country’s debts over the years
• To aim for fiscal stability for india in the long run

Additionally, the act was expected to give necessary flexibility to Reserve Bank of India for managing inflation in India.

Fiscal management principles

The Central Government, by rules made by it, was to specify the following:

• A plan to eliminate revenue deficit by 31 March 2008 by setting annual targets for reduction starting from day of commencement of the act.
• Reduction of annual fiscal deficit of the country
• Annual targets for assuming contingent liabilities in the form of guarantees and the total liabilities as a percentage of the GDP

Features of the FRBM Act

• It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
• Macroeconomic Framework Statement
• Medium Term Fiscal Policy Statement and
• Fiscal Policy Strategy Statement
• It was proposed that the four fiscal indicators i.e, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as a percentage of GDP, and total outstanding liabilities as a percentage of GDP be projected in the medium-term fiscal policy statement.