FRBM Act 2003
In 1980s, India saw a sharp deterioration of the fiscal situation, which ultimately culminated in the balance of payments crisis of 1991. Within a decade of economic liberalisation, the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000. At that time, a need to institutionalize a new fiscal discipline framework. The FRBM Bill 2000 was introduced by previous NDA government in the parliament to institutionalize the fiscal discipline at both the centre and state level. However, the bill took three years to become an act and during this process, it lost most of its teeth.
Under the Fiscal Responsibility and Budget Management Act (FRBMA) 2003, both the Centre and States were supposed to wipe out revenue deficit and cut fiscal deficit to 3% of GDP by 2008-09, thus bringing much needed fiscal discipline. Originally, the FRBM bill had given annual numerical targets as well. But in the process of making it a law, the annual targets were dissolved and the act simply said that the Centre will take appropriate measures to eliminate revenue deficit by March 31, 2008. The act left the annual numerical targets to be formulated by the Central Government in the form of FRBM rules under the FRBM Act 2000.
However, the NDA government (which passed this act) was replaced by UPA in 2004. The UPA-I Government notified the FRBM Rules in July 2004. As Parliament is the supreme legislative body, the Act and the Rules legally bind the Finance Ministers and Governments. The key provisions of the Act as well as FRBM rules are as follows:
- Every year the government will bring down revenue deficit by 0.5% and eliminate it by 2007-08.
- Every year, the government will bring down fiscal deficit by 0.3% and bring it down to 3% by 2007-08.
- Total liabilities of the Union Government should not rise by more than 9% a year.
- Union Government would not give guarantee to loans raised by PSUs and State governments for more than 0.5% of the GDP in aggregate.
- Union Government would place three more documents along with the budget documents viz. Macroeconomic Framework Statement, Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.
- At the end of second quarter, the Finance Minister would make a statement on the trend of fiscal indicators and corrective measures taken thereof.
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 last few years, the act has been largely neglected.
Central Government is required to lay before both Houses of Parliament the following documents: (1) Medium Term Fiscal Policy Statement (2) Fiscal Policy Strategy Statement and (3) Macro Economic Framework Statement along with Annual Financial Statement and Demand for Grants.
Critical Analysis of the FRBM Act
The act was passed to make the central government and finance minister accountable to parliament for fiscal discipline. However, due to lack of an autonomous Fiscal Management Review Committee (as proposed originally) the act more or less became like a Directive Principle of State policy which is not enforceable via courts. Its mandate was diluted and even today we find both revenue deficit and fiscal deficits in budget documents.
Why Government deviated from path of fiscal correction?
The government deviated from the path of fiscal correction in the wake of the global financial crisis and unanticipated changes in the prices of oil and fertilizers in 2008-09. In those days, the subsidy bill shot up and government needed to issue fertilizer and oil bonds to raise money from market. Further, in 2008-09, the government also included a fiscal stimulus package to revive the economy and this led India’s fiscal deficit to go up to 6.5%.
A huge fiscal deficit forced the government to relax the FRBM targets and subsequently ask the 13th finance commission to rewrite the whole plan for fiscal consolidation.
In 2010-11, Government gave further blow to this act by including the concept of Effective Revenue Deficit in the budget documents. In Budget 2012-13, the finance act changed the FRBM act and dumped the centre’s commitment to eliminate the revenue deficit. Instead, it brought in a new commitment of eliminating the effective revenue deficit rather. The amended rules extended the time for elimination of Effective revenue deficit by March 2015 and bringing down fiscal deficit to 3% by March 2017. Currently we have 2.9% revenue deficit and 4.1% fiscal deficit.
From the above discussion, it appears that the FRBM act and the rules framed for fiscal discipline was an exercise in futility. The government wants fiscal consolidation but is not ready to pay the short term costs. Increasing taxes to raise revenue is painful, while cutting subsidy has political costs to the ruling parties. In summary, the experience with FRBM has been of shifting goalposts and bypassing the spirit to achieve fiscal consolidation.
Where is the problem?
The problem lies in the act itself. The FRBM rules can be simply amended by gazette notification. They lack transparency and adequate monitoring and compliance by the government. The Economic Survey 2013-14 had recommended for a new FRBM act with teeth. Further, there are some other approaches which can help:
- Move the annual numerical targets from FRBM rules (which are framed and amended by central Government at whim by gazette notification) to the FRBM act itself (so that at least a parliamentary approval is needed to make changes)
- Do away with the ambiguous concept of the Effective Revenue Deficit which is nothing but a jugglery to rewrite revenue expenditure as capital expenditure.
The FRBM Committee Report of 2000 had recommended an autonomous Fiscal Management Review Committee (FMRC) which would conduct an annual independent and public review of FRBM compliance. The current act lacks that, and there is a need to institute an independent review and monitoring of implementation of the FRBM law.