FRBM Act, 2003 - A Non-implemented Law


The objective of the Fiscal Responsibility and Budget Management (FRBM) Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.
The Main Provisions
(i) The revenue deficit as a ratio of GDP should be brought down by 0.5 per cent every year and eliminated by 2007-08;
(ii) The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every year and brought down to 3 per cent by 2007-08;
(iii) The total liabilities of the Union Government should not rise by more than 9 per cent a year;
(iv) The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5 per cent of GDP in the aggregate;
(v) The Union Government should place three documents along with the budget, namely, the Macroeconomic Framework Statement, the Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.
 (vi) The Finance Minister will have to make a statement at the end of the second quarter on the trend of fiscal indicators and corrective measures if they deviate from the budget estimates beyond the extent stipulated in the FRBM.
FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify.
Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy. The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit. The Act also requires the government to lay before the parliament three policy statements in each financial year namely Medium Term Fiscal Policy Statement; Fiscal Policy Strategy Statement and Macroeconomic Framework Policy Statement.
To impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to states through conditional debt restructuring and interest rate relief for introducing Fiscal Responsibility Legislations (FRLs). All the states have implemented their own FRLs.
Indian economy faced with the problem of large fiscal deficit and its monetization spilled over to external sector in the late 1980s and early 1990s. The large borrowings of the government led to such a precarious situation that government was unable to pay even for two weeks of imports resulting in economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. After a good start in the early nineties, the fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98. The Government introduced FRBM Act, 2003 to check the deteriorating fiscal situation.

Implementation of FRBM Act
The implementation of FRBM Act/FRLs improved the fiscal performance of both centre and states. The States have achieved the targets much ahead the prescribed timeline. Government of India was on the path of achieving this objective right in time.
The FRBMA, in its original form, envisaged eliminating revenue deficit and reducing fiscal deficit to 3 per cent of GDP by 2008. It gave an impression that the government was serious about adopting prudent fiscal management practices and ensuring fiscal discipline.
While eyebrows were raised in 2004 when the deadline was pushed to 2009 without any hiccup in Parliament, the government’s intentions could still be trusted.
Eventually, in 2009, all hopes were shattered when the revenue and fiscal deficits were recorded as high as 4.67 and 6.21 per cent, respectively, of GDP. The government took shelter behind the expenditure on account of fiscal stimulus, necessitated by the global financial meltdown, for missing the fiscal targets.
FRBM is Nowhere in Practice
The year-on-year increase in food and fertiliser subsidies during 2008-09 was 40 and 136 per cent, respectively. Many experts, including the 13th Finance Commission, demolished the government’s case and established that the fiscal stimulus was not solely responsible for non-compliance with deficit targets, and pay revision, farm debt waiver, and food and fertiliser subsidies added substantially to the fiscal burden.
It must be noted that 2009 was also an election year. Such populist measures do not serve the country well in the long term.
The FRBMA provided that no deviation from the targets could happen without approval of Parliament. The targets could be exceeded only in case of national security, national calamity and other such exceptional grounds as specified. Further, in case of a deviation, the finance minister was required to suggest and implement remedial measures to increase revenue and reduce expenditure.
From 2009 to 2012, the government was in continual non-compliance with FRBM targets. Never did it manage to eliminate revenue deficit or reduce fiscal deficit to 3 per cent of GDP.
The justifications provided in the name of fiscal stimulus and financial meltdown continued for around four years and not even once was there an attempt to block approval of deviations in Parliament.
Target Diluted
What transpired post-2012 is even more surprising and deeply disturbing. Following the Budget speech for 2012-13, certain amendments to the FRBMA were introduced that postponed attaining the fiscal deficit of 3 per cent of GDP by 2017, and targeted achieving revenue deficit of 2 per cent GDP by 2015.
Consequent amendments were made to the rules in May 2013. This meant substantial dilution and deference of the deficit targets. The 13th Finance Commission had laid down a fiscal road map and suggested certain amendments to the FRBMA such as reforms in mid-term statements, elimination of revenue deficit by 2015 and explanation of shocks requiring relaxation of targets. None of these were accepted.
The amendments to FRBMA were passed again without a glitch. Any deliberations on the proposed amendments could have highlighted that they ratified fiscal malpractices of the government, and need substantial overhaul.
High fiscal deficits heighten inflation, increase the risk of external sector imbalances and dampen private investment, growth and employment.


Thursday, 15th Jan 2015, 08:38:03 AM

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