Fiscal Responsibility and Budget Management Act
Encyclopedia
The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) was enacted by 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
. The main purpose was to eliminate revenue deficitRevenue Deficit is defined in the act as the difference between the revenue expenditure and revenue receipts which indicates increase in liabilities of the Central Government without corresponding increase in assets 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.
of India resulted in several radical changes to the Indian economy, including the process of economic liberalisation in India. Given, the deplorable financial condition of India, subsequent governments formed several commissions and laws to improve the financial situation of the country. By the year 2000, at the central government level, India was running total liabilities equivalent to 6 times its annual revenue.(12,000 billion rupees) Further 1,000 billion rupees of liabilities were being added every year. The interest payments alone were consuming one-thirds of the tax revenue (or 50% of the government revenue) of India due to increased Government borrowings to fund the persistently rising revenue deficits of the country. In the light of this need for change, the NDA
government of India introduced the Fiscal Responsibility and Budget Management Bill in year 2000 which subsequently went on to become the Fiscal Responsibility and Budget Management Act, 2003.
The Gramm–Rudman–Hollings Balanced Budget Act of the USA and Stability and Growth Pact
of the European Union
are widely considered the international forerunners to this act.
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 Mar 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 31st Mar 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 criticizing 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.Formerly Investment Information and Credit Rating Agency of India Limited(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.
Additionally, the act was expected to give necessary flexibility to Reserve Bank of India
(RBI) for managing inflation in India.
Since the act was primarily for the management of the governments' behavior, it provided for certain documents to be tabled in the Parliament
annually with regards to the country's fiscal policy. This included the following along with the Annual Financial Statement and demands for grants
:
The Act further required the government to develop measures to promote fiscal transparency and reduce secrecy in the preparation of the Government financial documents including the Union Budget.
(RBI) except under exceptional circumstances where there is temporary shortage of cash in particular financial year. It also laid down rules to prevent RBI from trading in the primary market for Government securities. It restricted them to the trading of Government securities in the secondary market after a April, 2005, barring situations highlighted in exceptions paragraph.
Four fiscal indicators to be projected in the medium term fiscal policy statement were proposed. These are, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP.
, criticized the act and its rules as adverse since it might require the government to cut back on social expenditure necessary to create productive assets and general upliftment of rural poor of India. The vagaries of monsoon
in India, the social dependence on agriculture and over-optimistic projections of the task force in-charge of developing the targets were highlighted as some of the potential failure points of the Act. However, other viewpoints insisted that the act would benefit the country by maintaining stable inflation
rates which in turn would promote social progress.
Some others have drawn parallel to this act's international counterparts like the Gramm-Rudman-Hollings Act
(US) and the Growth and Stability Pact (EU) to point out the futility of enacting laws whose relevance and implementation over time is bound to decrease. They described the law as wishful thinking and a triumph of hope over experience. Parallels were drawn to the US experience of enacting debt-ceilings and how lawmakers have traditionally been able to amend such laws to their own political advantage. Similar fate was predicted for the Indian version which indeed was suspended in 2009 when the economy hit rough patches.
In August 2009, IMF had opined that India should implement fiscal reform at the soonest possible, enacting a successor to the current act. This IMF paper was authored by two senior IMF economists Alejandro Sergio Simone and Petia Topalova and highlighted the shortcomings of the current law along with proposed improvements for a new version. It was also reported that the Thirteenth Finance Commission of India
was working on a new plan for reinstating fiscal management in India. The initial expectation for revival of fiscal prudence was in 2010-11 but was further delayed. Finally, the government did announce a path of fiscal consolidation starting from fiscal deficit of 6.6% of GDP in 2009-10 to a target of 3.0% by 2014-15 However, eminent economist and ex-RBI Deputy Governor, S.S.Tarapore is quick to highlight the use of creative accounting
to misrepresent numbers in the past. Furthermore, he added that fiscal consolidation is indeed vital for india, as long as the needs of the poor citizens are not marginalised. This need for financial inclusion of the poor while maintaining the fiscal discipline was highlighted by him as the most critical requirement for the 2011-12 Budget of India
. More recently, PMEAC has stated the need for reinstatement of fiscal discipline of the Government of India
, starting 2011–12 financial year.
highlighted the need for fiscal discipline at even the level of the states. This was to reduce the debt-to-GDP ratio of India. Reserve Bank of India
(RBI),in its role as the ultimate financial authority in India, was also a keen supporter of the concept and publicly highlighted the need for state level fiscal responsibility legislations in India. By 2007, the states of Karnataka
,
Kerala
, Punjab, Tamil Nadu
, Maharashtra
and Uttar Pradesh
are among those which have already legislated the required fiscal discipline laws at the state level.
Parliament of India
The Parliament of India is the supreme legislative body in India. Founded in 1919, the Parliament alone possesses legislative supremacy and thereby ultimate power over all political bodies in India. The Parliament of India comprises the President and the two Houses, Lok Sabha and Rajya Sabha...
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
Balanced budget
A balanced budget is when there is neither a budget deficit or a budget surplus – when revenues equal expenditure – particularly by a government. More generally, it refers to when there is no deficit, but possibly a surplus...
. The main purpose was to eliminate revenue deficitRevenue Deficit is defined in the act as the difference between the revenue expenditure and revenue receipts which indicates increase in liabilities of the Central Government without corresponding increase in assets 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
Economic Advisory Council
Economic Advisory Council to the Prime Minister of India is a non-constitutional, non-permanent and independent body constituted to give economic advise to the Government of India, specifically the Prime Minister. The council serves to highlight key economic issues facing the country to the...
publicly advised the Government of India
Government of India
The Government of India, officially known as the Union Government, and also known as the Central Government, was established by the Constitution of India, and is the governing authority of the union of 28 states and seven union territories, collectively called the Republic of India...
to reconsider reinstating the provisions of the FRBMA.
Background
The historical balance of payments crisis1991 India economic crisis
By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three...
of India resulted in several radical changes to the Indian economy, including the process of economic liberalisation in India. Given, the deplorable financial condition of India, subsequent governments formed several commissions and laws to improve the financial situation of the country. By the year 2000, at the central government level, India was running total liabilities equivalent to 6 times its annual revenue.(12,000 billion rupees) Further 1,000 billion rupees of liabilities were being added every year. The interest payments alone were consuming one-thirds of the tax revenue (or 50% of the government revenue) of India due to increased Government borrowings to fund the persistently rising revenue deficits of the country. In the light of this need for change, the NDA
National Democratic Alliance (India)
The National Democratic Alliance is a centre-right coalition of political parties in India. At the time of its formation in 1998, it was led by the Bharatiya Janata Party and had thirteen constituent parties. Its convenor is Sharad Yadav, and its honorary chairman is former prime minister Atal...
government of India introduced the Fiscal Responsibility and Budget Management Bill in year 2000 which subsequently went on to become the Fiscal Responsibility and Budget Management Act, 2003.
The Gramm–Rudman–Hollings Balanced Budget Act of the USA and Stability and Growth Pact
Stability and Growth Pact
The Stability and Growth Pact is an agreement among the 27 Member states of the European Union that take part in the Eurozone, to facilitate and maintain the stability of the Economic and Monetary Union...
of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
are widely considered the international forerunners to this act.
Enactment
The Fiscal Responsibility and Budget Management Bill (FRBM Bill) was introduced in India by the then Finance MinisterFinance minister
The finance minister is a cabinet position in a government.A minister of finance has many different jobs in a government. He or she helps form the government budget, stimulate the economy, and control finances...
of India, Mr.Yashwant Sinha
Yashwant Sinha
Yashwant Sinha is an Indian politician and a former finance minister of India and foreign minister in Atal Bihari Vajpayee's cabinet...
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 Mar 2006, prohibiting government borrowings from the Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
three years after enactment of the bill, and reducing the fiscal deficit to 2% of GDP (also by 31st Mar 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 criticizing 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.Formerly Investment Information and Credit Rating Agency of India Limited(and now a member of Prime Ministers' Economic Advisory Council
Economic Advisory Council
Economic Advisory Council to the Prime Minister of India is a non-constitutional, non-permanent and independent body constituted to give economic advise to the Government of India, specifically the Prime Minister. The council serves to highlight key economic issues facing the country to the...
) 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
President of India
The President of India is the head of state and first citizen of India, as well as the Supreme Commander of the Indian Armed Forces. President of India is also the formal head of all the three branches of Indian Democracy - Legislature, Executive and Judiciary...
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
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
(RBI) for managing inflation in India.
Content of the Act
33Since the act was primarily for the management of the governments' behavior, it provided for certain documents to be tabled in the Parliament
Parliament of India
The Parliament of India is the supreme legislative body in India. Founded in 1919, the Parliament alone possesses legislative supremacy and thereby ultimate power over all political bodies in India. The Parliament of India comprises the President and the two Houses, Lok Sabha and Rajya Sabha...
annually with regards to the country's fiscal policy. This included the following along with the Annual Financial Statement and demands for grants
Union budget of India
The Union Budget of India, referred to as the annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament...
:
- a document titled Medium-term Fiscal Policy Statement – This report was to present a three-year rolling target for the fiscal indicators The fiscal indicators was defined in this law as numerical ceilings and proportions to Gross Domestic Product, as may be prescribed for evaluation of the fiscal position of the Central Government. with any assumptions, if applicable. This statement was to further include an assessment of sustainability with regards to revenue deficit and the use of capital receipts of the Government (including market borrowings) for generating productive assets.
- a document titled Fiscal Policy Strategy Statement – This was a tactical report enumerating strategies and policies for the upcoming Financial Year including strategic fiscal priorities, taxation policies, key fiscal measures and an evaluation of how the proposed policies of the Central Government conform to the 'Fiscal Management Principles' of this act.
- a document titled Macro-economic Framework Statement – This report was to contain forecasts enumerating the growth prospects of the country. GDP growth, revenue balance, gross fiscal balance and external account balance of the balance of payments were some of the key indicators to be included in this report.
The Act further required the government to develop measures to promote fiscal transparency and reduce secrecy in the preparation of the Government financial documents including the Union Budget.
Fiscal management principles
The Central Government, by rules made by it, was to specify the following:- a plan to eliminate revenue deficit by 31 Mar 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
Borrowings from Reserve Bank of India
The Act provided that the Central Government shall not borrow from the Reserve Bank of IndiaReserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
(RBI) except under exceptional circumstances where there is temporary shortage of cash in particular financial year. It also laid down rules to prevent RBI from trading in the primary market for Government securities. It restricted them to the trading of Government securities in the secondary market after a April, 2005, barring situations highlighted in exceptions paragraph.
Exceptions
National security, natural calamity or other exceptional grounds that the Central Government may specify were cited as reasons for not implementing the targets for fiscal management principles, prohibition on borrowings from RBI and fiscal indicators highlighted above, provided they were approved by both the Houses of the Parliament as soon as possible, once these targets had been exceeded.Measures to enforce compliance
This was a particularly weak area of the act. It required the Finance Minister of India to only conduct quarterly reviews of the receipts and expenditures of the Government and place these reports before the Parliament. Deviations to targets set by the Central government for fiscal policy had to be approved by the Parliament. No other measures for failure of compliance have been specified.Targets and fiscal indicators
Subsequent to the enactment of the FRBMA, the following targets and fiscal indicators were agreed by the Central government:- Revenue deficit
- Date of elimination - 31 March 2009 (postponed from 31 March 2008)
- Minimum Annal reduction - 0.5% of GDP
- Fiscal Deficit
- Ceiling - 3% of the GDP by 31st Mar 2008
- Minimum Annal reduction - 0.3% of GDP
- Total Debt - 9% of the GDP (a target increased from the original 6% requirement in 2004-05)
- Annual Reduction - 1% of GDP
- RBI purchase of Government bonds – to cease from 1 April 2006
Four fiscal indicators to be projected in the medium term fiscal policy statement were proposed. These are, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP.
Jurisdiction
The residuary powers to make rules with respect to this act were with the Central Government with subsequent presentation before the Parliament for ratification. Civil courts of the country had to jurisdiction for enforcement of this act or decisions made therein. The power to remove difficulties was also entrusted to the Central Government.Criticism
Some quarters, including the subsequent Finance Minister Mr. P. ChidambaramP. Chidambaram
P. Chidambaram or Chidambaram Palaniappan, sometimes written Palaniappan Chidambaram is an Indian politician with the Indian National Congress and present Union Minister of Home Affairs of the Republic of India. Previously he was the Finance Minister of India from May 2004 to November 2008...
, criticized the act and its rules as adverse since it might require the government to cut back on social expenditure necessary to create productive assets and general upliftment of rural poor of India. The vagaries of monsoon
Monsoon
Monsoon is traditionally defined as a seasonal reversing wind accompanied by corresponding changes in precipitation, but is now used to describe seasonal changes in atmospheric circulation and precipitation associated with the asymmetric heating of land and sea...
in India, the social dependence on agriculture and over-optimistic projections of the task force in-charge of developing the targets were highlighted as some of the potential failure points of the Act. However, other viewpoints insisted that the act would benefit the country by maintaining stable inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
rates which in turn would promote social progress.
Some others have drawn parallel to this act's international counterparts like the Gramm-Rudman-Hollings Act
Gramm-Rudman-Hollings Balanced Budget Act
The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 and Budget and Emergency Deficit Control Reaffirmation Act of 1987 were, according to U.S...
(US) and the Growth and Stability Pact (EU) to point out the futility of enacting laws whose relevance and implementation over time is bound to decrease. They described the law as wishful thinking and a triumph of hope over experience. Parallels were drawn to the US experience of enacting debt-ceilings and how lawmakers have traditionally been able to amend such laws to their own political advantage. Similar fate was predicted for the Indian version which indeed was suspended in 2009 when the economy hit rough patches.
Suspension and reinstatement
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. However, given the international financial crisis of 2007, the deadlines for the implementation of the targets in the act were suspended. The fiscal deficit rose to 6.2% of GDP in 2008-09 against the target of 3% set by the Act for 2008-09. However, IMF estimated fiscal deficit to be 8% after accounting for oil bonds and other off budget expenses.In August 2009, IMF had opined that India should implement fiscal reform at the soonest possible, enacting a successor to the current act. This IMF paper was authored by two senior IMF economists Alejandro Sergio Simone and Petia Topalova and highlighted the shortcomings of the current law along with proposed improvements for a new version. It was also reported that the Thirteenth Finance Commission of India
Finance Commission of India
- About :The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state...
was working on a new plan for reinstating fiscal management in India. The initial expectation for revival of fiscal prudence was in 2010-11 but was further delayed. Finally, the government did announce a path of fiscal consolidation starting from fiscal deficit of 6.6% of GDP in 2009-10 to a target of 3.0% by 2014-15 However, eminent economist and ex-RBI Deputy Governor, S.S.Tarapore is quick to highlight the use of creative accounting
Creative accounting
Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules...
to misrepresent numbers in the past. Furthermore, he added that fiscal consolidation is indeed vital for india, as long as the needs of the poor citizens are not marginalised. This need for financial inclusion of the poor while maintaining the fiscal discipline was highlighted by him as the most critical requirement for the 2011-12 Budget of India
Union budget of India
The Union Budget of India, referred to as the annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February by the Finance Minister of India in Parliament...
. More recently, PMEAC has stated the need for reinstatement of fiscal discipline of the Government of India
Government of India
The Government of India, officially known as the Union Government, and also known as the Central Government, was established by the Constitution of India, and is the governing authority of the union of 28 states and seven union territories, collectively called the Republic of India...
, starting 2011–12 financial year.
States level fiscal responsibility legislations in India
The tenth plan of the Planning Commission of IndiaPlanning commission of India
The Planning Commission is an institution in the Government of India, which formulates India's Five-Year Plans, among other functions.-History:...
highlighted the need for fiscal discipline at even the level of the states. This was to reduce the debt-to-GDP ratio of India. Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
(RBI),in its role as the ultimate financial authority in India, was also a keen supporter of the concept and publicly highlighted the need for state level fiscal responsibility legislations in India. By 2007, the states of Karnataka
Karnataka
Karnataka , the land of the Kannadigas, is a state in South West India. It was created on 1 November 1956, with the passing of the States Reorganisation Act and this day is annually celebrated as Karnataka Rajyotsava...
,
Kerala
Kerala
or Keralam is an Indian state located on the Malabar coast of south-west India. It was created on 1 November 1956 by the States Reorganisation Act by combining various Malayalam speaking regions....
, Punjab, Tamil Nadu
Tamil Nadu
Tamil Nadu is one of the 28 states of India. Its capital and largest city is Chennai. Tamil Nadu lies in the southernmost part of the Indian Peninsula and is bordered by the union territory of Pondicherry, and the states of Kerala, Karnataka, and Andhra Pradesh...
, Maharashtra
Maharashtra
Maharashtra is a state located in India. It is the second most populous after Uttar Pradesh and third largest state by area in India...
and Uttar Pradesh
Uttar Pradesh
Uttar Pradesh abbreviation U.P. , is a state located in the northern part of India. With a population of over 200 million people, it is India's most populous state, as well as the world's most populous sub-national entity...
are among those which have already legislated the required fiscal discipline laws at the state level.