Fiscal Responsibility and Budget Management(FRBM) Act 2003

 Fiscal Responsibility and Budget Management(FRBM) Act 2003

The fiscal policy of an economy has been considered as the building block for enabling macro-environment by economists, policymakers and the IMF, alike. It does not only provide stability and predictability to the policy regime, but also ensures that national resources are allocated in terms of their defined priorities through the tax transfer mechanism. Unproductive government expenditures, tax distortions and high deficits are considered to have constrained the Indian economy from realising its full growth potential. At the begining of the fiscal reforms in 1991, the fiscal imbalance was identified as the root cause of the twin problems of inflation and the difficult balance of payments (BoPs) position.39 Since then the medium-term fiscal policy stance of the government has been on the following lines

(i) reducing the deficits (revenue and fiscal);
(ii) prioritising expenditure and ensuring that these resulted in intended outcomes; and
(iii) arugumenting resources by widening tax base and improving tax-compliance while maintaining moderate rates.

The fiscal consolidation which followed in 1991 failed to give the desired results as there was no defined mandate for it. Neither was there any statutory obligation to do so.41 This is why the Fiscal Reforms and Budget Management Act (FRBMA) was enacted on August 26, 2003 to provide the support of a strong institutional/ statutory mechanism. Designed for the purpose of medium-term management of the fiscal deficit, the FRBMA came into effect on July 3, 2004.

The FRBM Bill, 2000 was passed by the Parliament with all political parties voting in favour, and is considered a watershed in the area of fiscal reforms in the country.Main highlights of the FRBMA, 2003 are as given below:

42 (i) Gol to take measures to reduce fiscal and revenue deficit so as to eliminate revenue deficit by March 31, 2008 (which was revised by the UPA Government to March 31, 2009) and thereafter build up adequate revenue surplus.

 (ii) Rules to be made under the Act to specify annual targets for the reduction of fiscal deficit (FD) and revenue deficit (RD) contingent liabilities and total liabilities (RD to be cut by 0.5 percent per annum and FD by 0.3 percent p.a.).

(iii) FD and RD may exceed the targets only on the grounds such as national security
calamity or on exceptional grounds.

 (iv) Gol not to borrow from RBI except by Ways and Means Advances (WMAs).

 (v) RBI not to subscribe to the primary issue of the Gol securities from 2006—07 (it means that these government bonds/ papers will become market— based instrument to raise long-term funds by the government).

 (vi) Steps to be taken to ensure greater transparency in fiscal operations.

 (vii) Along with the Budget and Demands for Grants, the Gol to lay the following three statements
before the Parliament in each financial year:

(a) Fiscal Policy Strategy Statement (FPSS);
(b) Medium Term Fiscal Policy Statement (MTFPS); and
(c) Macroeconomic Framework Statement (MFS).

(viii) The Finance Minister to make quarterly review of trends in receipts and expenditurein relation to the Budget and place the review before the Parliament.

Follow up The FRBMA

The process of fiscal consolidation under FRBMA has been continuous and essentially an incremental one.Some of the important fiscal measures 43 that are being implemented by the government are as given below:

(i) reducing the peak rates of custom duties;
(ii) rectifying anomalies like inverted duty structure;
(iii) rationalising excise duties with a movement towards a medium CENVAT rate;
(iv) revisiting the tax exemptions;
(v) relying on voluntary tax compliance through taxpayer facilitation;
 (vi) introduction of state-level VAT for achieving a non-cascading, self enforcing, and harmonised commodity tax regime;
(vii) increasing productivity of expenditure through an outcome budget framework (which seeks to translate outlays into better outcomes through monitor able performance indicators);
 (viii) innovative financing mechanism like creation of Special Purpose Vehicle(SPV) for infrastructure projects; and
 (ix) states have also joined the process of fiscal consolidation in line with the Twelfth Finance Commission’s (TFC) recommendations and are complementing the efforts of the central government.

In 2006—07, in case of the central government, proposed reduction in revenue and fiscal deficits were put at 0.6 per cent and 0.5 per cent, respectively (higher than the FRBMA Rules), though the reduction suffered in 2005—06 due to higher devolution to states by the Centre on account of the TFC recommedations .44 States also showed considerable improvement (in fact, even better then the central government). The fiscal deficit of the states declined by 1.6 per cent post FRBMA from 4.5 per cent in 2003-04 to 2.6 per cent in 2006-07 of their GDP.Revenue deficit, on an aggregate basis, was budgeted to get eliminated by 2006—07, two years ahead of the target. (A strong incentive-based restructuring scheme of fiscal transfers to states suggested by the TFC appears to have succeeded.)45