FRBM Act 2003
The basic objectives of FRBM act are to remove deficit financing conditions, reduce burden of debt etc. to improve overall management of public funds and focus towards a balanced budget. The Act cast obligations on central govt to eliminate fiscal and revenue deficit in time bound manner to achieve long term macroeconomic stability.
- ‘Revenue Deficit’ – difference b/w revenue expenditure & revenue receipts which indicates increase in liabilities of central govt.
Fiscal Policy Statements
- The Central Govt shall prepare
Medium-term Fiscal Policy Statement – it set 3year target as per fiscal indicators such as balance b/w revenue receipts and expenditure & capital receipts including market borrowings for generating productive assets.
Fiscal Policy Strategy Statement – it shall contain
- Key policies of govt for next fiscal year related to taxation, lending & investments, borrowing, securities etc.
- Priorities of govt strategic policies in ensuing fiscal year;
- Any major deviation from key fiscal measures related to taxation subsidy, expenses etc;
- Evaluation of policies to achieve objectives of medium term fiscal statement.
The Macro-Economic Framework Statement – it shall contain an assessment related to –
- Growth in GDP and Fiscal balance of govt as per revenue & gross fiscal balance;
- External sector balance as reflected in Current A/c balance of BoP.
And lay them before both houses of parliament along with annual financial statement and demand of Grants.
Fiscal Management Principles
- The central govt shall take appropriate measures to reduce revenue & fiscal deficit, so as to eliminate revenue deficit by 31st march, 2008.
- Also govt shall make rules to set annual targets of reduction of Revenue & Fiscal deficit to eliminate revenue deficit by 2008. The targets may be undermined on grounds of national security/calamity or exceptional grounds as may be determined by govt.
- The Central govt shall maintain transparency in preparation of annual financial statement, demand of grants etc. by taking necessary measures as may be prescribed.
- The Govt shall not borrow from RBI but central govt can borrow from RBI to meet temporary excess of cash disbursement over cash receipts and RBI can sell & buy securities of govt.
- The Ministry of Finance shall review receipts & expenditure every quarter and place them before both houses of parliament. No deviation in meeting obligations on Central Govt under this act is permissible without approval of parliament except any deviation is permissible under this act.
- The Central shall make statement in parliament in case of breach of obligations cast on govt with explanation whether such deviation from obligation is related to budgetary outcomes or not. Also make a statement for remedy measures against such deviation.
- The Central govt has power to make rules such as annual targets, information related fiscal indicators etc. and laid them before houses of parliament for approval.
- No civil court has jurisdiction over any action taken by central govt for carrying out provisions of this act or for any non compliance against obligations cast by this act.
Fiscal Indicators – Revenue deficit, Fiscal deficit, Tax Revenue and Total outstanding Liabilities of govt as % of GDP are fiscal indicators that shall be included in Medium-term Fiscal statement for 3yr rolling targets and in Fiscal Policy Strategy statement for annual targets.
- Reduction of Revenue deficit at least by 0.5% of GDP at end of each financial year.
- Reduction of Fiscal deficit at least by 0.3% of GDP at end of each financial year.
- No additional liabilities (including external debt) more than 9% of GDP for financial year 2004-05 and thereafter reduction of 1% in each subsequent year.
- The Central govt Guarantees shall not exceed 0.5% of GDP from financial year of 2004-05.
Long term Targets
- Eliminate Revenue deficit by end of 31st March, 2008.
- Reduce Fiscal deficit to 3% of GDP by 31st March, 2008.
Measures to Enforce Compliance
- As per quarterly review of receipts & expenditure under FRBM act at end of 2nd quarter, if Fiscal/Revenue Deficit is >45% or Non-debt Receipts are >40% then govt shall take appropriate corrective measures to control deficit.
- Also Ministry in charge of finance ministry shall make a statement in parliament during session immediately after 2nd quarter about corrective measures taken to control fiscal/revenue deficit.
- Revenue Deficit – eliminate by 2015 and reduction of 0.6% of GDP every fiscal year.
- Fiscal Deficit – reduce to 3% by 2015 and reduction of 0.5% of GDP every fiscal year.
- If Fiscal or Revenue Deficit >45% shall be replaced by 60% to make a statement in parliament about corrective measures.
Budget 2012-13 – it purposes following amendments to FRBM act 2003:-
- ‘Effective Revenue Deficit’ – it excludes grants for capital assets from revenue expenditure.
- Medium Term Expenditure Framework Statement –provides target for expenditure or description of priority of expenditure etc. with measures to improve Tax/GDP ratio.