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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 expenditure in relation to budget and place the outcome of such reviews before both the Houses of Parliament.
• The Central Government should specify four fiscal indicators- Fiscal deficit as 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 statement along 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
A. 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 of Effective Revenue Deficit in 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.
B. 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 11.4-42.9 11.4-132.3 11.4-132.3s0-89.4-11.4-132.3zm-317.5 213.5V175.2l142.7 81.2-142.7 81.2z"/> Subscribe on YouTube