Medium-term Expenditure Framework (MTEF) Statement

The Medium-Term Expenditure Framework (MTEF) Statement is a crucial fiscal policy instrument introduced by the Government of India to enhance the predictability, transparency, and sustainability of public finances. It serves as a medium-term fiscal planning tool that links the annual budgeting process with the government’s long-term fiscal objectives, ensuring that expenditure commitments remain consistent with revenue projections and fiscal responsibility targets.
The MTEF Statement provides a three-year rolling outlook for expenditure, setting out future spending limits for major sectors and ministries. It is mandated under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, and plays a key role in strengthening fiscal discipline and policy coherence in India’s public financial management system.

Background and Rationale

India’s budgeting process traditionally followed an annual time horizon, which often limited the ability to plan expenditures beyond a single fiscal year. This short-term approach sometimes led to ad hoc spending decisions, inadequate resource allocation for long-term projects, and weak linkage between policy priorities and budgetary outcomes.
To address these challenges and improve fiscal management, the FRBM (Amendment) Rules, 2013 introduced the Medium-Term Expenditure Framework Statement as a key component of India’s fiscal policy architecture.
The rationale behind the MTEF is to:

• Strengthen the link between policy, planning, and budgeting.
• Enhance fiscal predictability by providing a medium-term perspective on government spending.
• Ensure that future expenditure commitments are aligned with the government’s medium-term fiscal targets.
• Facilitate better prioritisation of resources among competing demands.

The MTEF is thus intended to complement other fiscal policy statements, providing continuity between successive budgets and ensuring fiscal prudence over a rolling three-year horizon.

Legal and Institutional Framework

The Medium-Term Expenditure Framework Statement is a statutory requirement under Section 3(2) of the FRBM Act, 2003, as amended in 2013.
According to the provisions:

• The Central Government shall lay the MTEF Statement before both Houses of Parliament along with the Annual Financial Statement (Budget).
• The statement provides a three-year rolling target for expenditure, consistent with the Medium-Term Fiscal Policy (MTFP) Statement and Fiscal Policy Strategy (FPS) Statement.
• It specifies the aggregate expenditure ceiling and sectoral allocations, offering a clear projection of fiscal priorities.

The Ministry of Finance (Department of Economic Affairs) is responsible for preparing and presenting the MTEF Statement in coordination with other ministries and departments.

Structure and Components of the MTEF

The MTEF Statement provides a structured medium-term outlook on government spending and fiscal management. Its key components include:

1. Aggregate Expenditure Ceiling:
   • The statement sets the total permissible expenditure for the central government over the next three years, including both revenue and capital expenditure.
   • It ensures that the aggregate expenditure is consistent with the overall fiscal deficit and debt targets.
2. Sectoral Expenditure Allocations:
   • The MTEF outlines the projected expenditure for major sectors such as defence, education, health, infrastructure, agriculture, and social welfare.
   • It helps ministries plan multi-year programmes with greater financial predictability.
3. Revenue–Expenditure Linkages:
   • Projections are made in conjunction with expected revenue receipts to maintain fiscal balance.
   • The framework ensures that spending commitments do not exceed likely resources.
4. Fiscal Indicators and Targets:
   • It includes projections for key fiscal indicators such as fiscal deficit, revenue deficit, primary balance, and debt-to-GDP ratio.
   • These projections are consistent with the targets set in the Medium-Term Fiscal Policy Statement.
5. Assumptions and Risks:
   • The statement explains the assumptions underlying projections, such as expected GDP growth, inflation rate, and interest costs.
   • It also identifies potential fiscal risks that may affect future expenditure, including subsidy pressures, contingent liabilities, and macroeconomic shocks.

Linkages with Other Fiscal Policy Statements

The MTEF is one of the four major fiscal policy documents mandated under the FRBM framework, the others being:

1. Medium-Term Fiscal Policy (MTFP) Statement – provides projections of revenue, expenditure, and fiscal deficit for three years.
2. Fiscal Policy Strategy (FPS) Statement – outlines the government’s policy priorities for achieving fiscal objectives.
3. Macroeconomic Framework (MF) Statement – presents an overview of the macroeconomic outlook, including growth and inflation trends.

The MTEF complements these by focusing specifically on the expenditure dimension of fiscal policy, ensuring that spending plans are financially sustainable and aligned with medium-term fiscal objectives.

Role in Fiscal Management

The Medium-Term Expenditure Framework performs several vital functions in India’s fiscal governance system:

• Promotes Fiscal Discipline:By setting explicit expenditure ceilings, the MTEF restricts unsustainable spending growth and prevents fiscal slippages.
• Improves Budget Predictability:Ministries and departments gain greater certainty about their future budgetary allocations, enabling better project planning and implementation.
• Enhances Transparency:The publication of the MTEF makes government spending priorities visible to Parliament and the public, improving accountability.
• Strengthens Policy–Budget Linkage:It aligns expenditure allocations with national development priorities, such as infrastructure expansion, social sector investment, and poverty reduction.
• Facilitates Multi-Year Planning:The MTEF provides a foundation for multi-year budgeting and programme-based financial management.

Implementation and Process

The preparation of the MTEF involves several steps:

1. Baseline Estimation:The Ministry of Finance prepares baseline projections based on current expenditure levels and ongoing commitments.
2. Consultation with Line Ministries:Sectoral ministries provide inputs on future spending requirements based on policy priorities and project pipelines.
3. Integration with Fiscal Targets:Projected expenditures are reconciled with revenue forecasts and fiscal deficit limits prescribed under the FRBM Act.
4. Finalisation and Presentation:The final statement is presented to Parliament alongside the Union Budget, providing a multi-year perspective to annual fiscal planning.

Illustrative Content of the MTEF

A typical MTEF Statement includes:

• Aggregate expenditure projections for the next three years.
• Sectoral allocation tables for major ministries.
• Trends in capital and revenue expenditure.
• Comparison with previous MTEF projections.
• Macroeconomic assumptions underlying the estimates.

For instance, the MTEF Statement 2024–25, presented along with the Union Budget, might project expenditure ceilings for the fiscal years 2025–26 and 2026–27, based on anticipated revenue receipts, fiscal consolidation path, and economic growth outlook.

Challenges in Implementation

While the MTEF represents a significant advancement in fiscal planning, its effective implementation faces several challenges:

• Unpredictable Revenue Flows:Variations in tax collections or non-tax revenues can affect the credibility of medium-term projections.
• Expenditure Rigidities:Large shares of committed spending (such as salaries, pensions, and interest payments) limit flexibility in reallocating resources.
• Coordination Issues:Ensuring coherence among multiple ministries with diverse spending priorities can be complex.
• Political and Macroeconomic Uncertainty:Policy changes, electoral cycles, or external shocks (e.g., global oil price fluctuations) can alter expenditure paths.
• Capacity Constraints:Limited analytical capacity within ministries sometimes hampers accurate forecasting and medium-term planning.

Significance and Impact

The Medium-Term Expenditure Framework has strengthened India’s fiscal architecture by:

• Linking short-term budgeting with long-term fiscal sustainability.
• Enhancing accountability in the use of public funds.
• Enabling predictable funding for infrastructure and social sector programmes.
• Providing a transparent roadmap for expenditure rationalisation and fiscal consolidation.