Fiscal Responsibility and Budget Management FRBM Act 2003

The FRBM Bill / Act provides rules for fiscal responsibility of the Central Government.

Objectives of FRBM Act 2003

The main objectives of FRBM Bill / Act are :-

1.      To reduce fiscal deficit

2.    To adopt prudent debt management.

3.    To generate revenue surplus.

Features of FRBM Act 2003 ↓

1. Revenue Deficit

The first important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should take certain specific measures related with reduction of revenue deficit.

Measures relating to reduction of revenue deficits are:-

1.      The government should reduce revenue deficit by an amount equivalent to 0.5 percent or more of the GDP at the end of each financial year, beginning with 2004-2005.

2.    The revenue deficit should be reduced to zero within a period of five years ending on March 31, 2009.

3.    Once revenue deficit becomes zero the central government should build up surplus amount of revenue which it may utilised for discharging liabilities in excess of assets.

2. Fiscal Deficit

 the central government should take certain specific measures related with reduction of fiscal deficit.

Measures relating to reduction of fiscal deficits are:-

1.      The government should reduce Gross fiscal deficit by an amount equivalent to 3.3% or more of the GDP at the end of each financial year, beginning with 2004-2005.

2.    The central government should reduce Gross Fiscal deficit to an amount equivalent to 2% of GDP upto March 31 2006.

3. Exceptional Grounds

The third important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit and fiscal deficit of the government may exceed the targets specified in the rules only on the grounds of national security or national calamity faced by the country.

4. Public Debt

The fourth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005. There should be progressive reduction of this limit by atleast one percentage point of GDP in each subsequent year.

5. Borrowing from the RBI

The fifth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with borrowings done by central government from R.B.I. The Amended FRBM bill 2000 or FRBM Act 2003 clearly states that the central government shall not normally borrow from the R.B.I. However the central government may borrow from R.B.I. by way of advances to meet temporary excess of cash payments over the cash receipts during any financial year in accordance with the agreements which may entered into by the government with the R.B.I.

6. Fiscal Transparency

The sixth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with fiscal transparency. The Amended FRBM bill 2000 or FRBM Act 2003 clearly stated two important measures to ensure greater transparency in fiscal operations of the government.

These two important features are as follows :-

1.      The central government should minimize as far as possible secrecy in preparation of annual budget.

2.    The central government at the time of presentation of the annual budget shall disclose the significant changes in accounting standards, policies and practices likely to affect the computation of fiscal indicators.

7. Limit On Guarantees

it restricts the guarantees given by the central government to 0.5% of GDP in any financial year beginning with 2004-2005.

8. Medium term fiscal policy statement

The eighth important feature of amended FRBM bill 2000 or FRBM Act 2003 is that the central government should present medium term fiscal policy statement in both houses of parliament along with annual financial statement. The medium term fiscal policy statement should project specifically for important fiscal indicators.

These fiscal indicators are as follows :-

1.      Revenue deficit as percentage of GDP.

2.    Fiscal deficit as percentage of GDP.

3.    Tax revenue as percentage of GDP.

4.    Total outstanding liabilities as percentage of GDP.

9. Compliance of rules

Finally the ninth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with measures to enforce compliance of rules.

These measures are as follows :-

1.      The FRBM bill clearly states that the Finance Minister shall review every quarter, the trends in receipts and expenditure in relation with the budget and place it before both houses of parliament the outcome of such reviews.

2.    The finance minister shall also make statement in both houses of
parliament if there is any deviations in meeting the obligations of the central government.

3.    If deviations are substantial then the Finance Minister will declare the remedial measures which the central government proposes to take in future period of time.

4.    The rules mandate the central government to take appropriate corrective action in case of revenue & fiscal deficit exceeding 45% of the budget estimates or total non-debt receipts falling short of 40% of the budget estimates at the end of first half of the financial year.

10. Task force on implementation of FRBM Act

Following the enactment of FRBM Act, Government constituted a Task Force headed by Dr. Vijay Kelkar for drawing up the medium term framework for fiscal policies to achieve the FRBM targets.

The task force proposed the following measures :-

1.      Widening the tax base through removal of exemptions

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2.    An All-India goods and service-tax (GST) on the basis of a "grand bargain" with States, whereby States will have the concurrent powers to tax service, subject to certain principles that will help foster a national common market.

3.    Income tax exemption limit to be increased to Rs.1,00,000.

4.    A two-tire rate structure of 20 percent tax for income of Rs. 1,00,000 to Rs. 4,00,000 and 30% for income above Rs. 4,00,000 for individuals and elimination of standard deduction available to the salaried taxpayer.

5.     A reduction in the corporate income tax to 30% for domestic companies and the reduction in depreciation rates from 25 to 15%.

6.    A 3-tier custom duty rates of 5, 8 and 10% to bring down tariffs to ASEAN levels.

7.     Allocation of greater portion of expenditure to legitimate public goods by revisiting the classification of expenditure.

8.    Empowering panchayats / local bodies through reserve transfer.

The task force stated that under the reforms measures recommended by it, tax GDP ratio of the central government should be raised from 9.2% in 2003 to 13.2% of GDP in 2008-09. A revenue surplus of 0.2% of GDP is estimated to emerge in 2008-09. Fiscal deficit estimated to fall from 4.8% of GDP in 2003-04 to 2.8% of GDP in 2008-09.

The above features of Amended FRBM bill 2000 or Fiscal Responsibility and Budget Management Act 2003 clearly points out that the government intends to create a strong institutional mechanism to restore fiscal discipline at the level of the central government. Similarly the government wants to introduce greater transparency in fiscal operations of the central government.