Fiscal Responsibleness Too Budget Management Frbm Human Activeness 2003

Concerned over the worsening of financial situation, inwards 2000, the Government of Republic of Republic of India had ready a commission to recommend draft legislation for financial responsibility. Based on the recommendations of the Committee, Government of Republic of Republic of India introduced the Fiscal Responsibility too Budget Management (FRBM) Bill inwards Dec 2000. In this Bill numerical targets for diverse financial indicators were specified. The Bill was referred to the Parliamentary Standing Committee on Finance. The Standing Committee recommended that the numerical targets proposed inwards the Bill should live on incorporated inwards the rules to live on framed nether the Act. Taking into job organisation human relationship the recommendations of the Standing Committee, a revised Bill was introduced inwards Apr 2003. The Bill was passed inwards Lok Sabha inwards May 2003 too inwards Rajya Sabha inwards August 2003. After receiving the assent of the President, it became an Act inwards August 2003. The FRBM Act 2003 was farther amended.

Image Credits © Rob Kroenert.

The FRBM Bill / Act provides rules for financial responsibleness of the Central Government. The FRBM Act 2003 (as amended) became effective from July 5, 2004. Under this Act, Rules are framed relating to financial responsibleness of the Central Government, which came into forcefulness on 5th July 2004.

Objectives of FRBM Act 2003 ↓

The primary objectives of FRBM Bill / Act are :-

1. To trim back financial deficit
2. To adopt prudent debt management.
3. To generate revenue surplus.

Features of FRBM Act 2003 ↓

1. Revenue Deficit

The foremost of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that the cardinal regime should accept sure enough specific measures related alongside reduction of revenue deficit.

Measures relating to reduction of revenue deficits are:-

1. The regime should trim back revenue deficit past times an amount equivalent to 0.5 percent or to a greater extent than of the gross domestic product at the cease of each financial year, get-go alongside 2004-2005.
2. The revenue deficit should live on reduced to zero inside a catamenia of 5 years ending on March 31, 2009.
3. Once revenue deficit becomes zero the cardinal regime should construct upwards surplus amount of revenue which it may utilised for discharging liabilities inwards excess of assets.

2. Fiscal Deficit

The 2nd of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that the cardinal regime should accept sure enough specific measures related alongside reduction of financial deficit.

Measures relating to reduction of financial deficits are:-

1. The regime should trim back Gross financial deficit past times an amount equivalent to 3.3% or to a greater extent than of the gross domestic product at the cease of each financial year, get-go alongside 2004-2005.
2. The cardinal regime should trim back Gross Fiscal deficit to an amount equivalent to 2% of gross domestic product upto March 31 2006.

3. Exceptional Grounds

The tertiary of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit too financial deficit of the regime may top the targets specified inwards the rules solely on the grounds of national safety or national calamity faced past times the country.

4. Public Debt

The 4th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that the cardinal regime should ensure that the full liabilities (including external debt at electrical flow telephone commutation rate) should non top 9% of gross domestic product for the financial twelvemonth 2004-2005. There should live on progressive reduction of this boundary past times atleast 1 pct signal of gross domestic product inwards each subsequent year.

5. Borrowing from the RBI

The 5th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is related alongside borrowings done past times cardinal regime from R.B.I. The Amended FRBM mouth 2000 or FRBM Act 2003 clearly states that the cardinal regime shall non unremarkably borrow from the R.B.I. However the cardinal regime may borrow from R.B.I. past times way of advances to come across temporary excess of cash payments over the cash receipts during whatever financial twelvemonth inwards accordance alongside the agreements which may entered into past times the regime alongside the R.B.I.

6. Fiscal Transparency

The 6th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is related alongside financial transparency. The Amended FRBM mouth 2000 or FRBM Act 2003 clearly stated ii of import measures to ensure greater transparency inwards financial operations of the government.

These ii of import features are equally follows :-

1. The cardinal regime should minimize equally far equally possible secrecy inwards grooming of annual budget.
2. The cardinal regime at the fourth dimension of presentation of the annual budget shall give away the pregnant changes inwards accounting standards, policies too practices probable to touching the computation of financial indicators.

7. Limit On Guarantees

The 7th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that it restricts the guarantees given past times the cardinal regime to 0.5% of gross domestic product inwards whatever financial twelvemonth get-go alongside 2004-2005.

8. Medium term financial policy statement

The 8th of import characteristic of amended FRBM mouth 2000 or FRBM Act 2003 is that the cardinal regime should nowadays medium term financial policy declaration inwards both houses of parliament along alongside annual financial statement. The medium term financial policy declaration should projection specifically for of import financial indicators.

These financial indicators are equally follows :-

1. Revenue deficit equally pct of GDP.
2. Fiscal deficit equally pct of GDP.
3. Tax revenue equally pct of GDP.
4. Total outstanding liabilities equally pct of GDP.

9. Compliance of rules

Finally the 9th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is related alongside measures to enforce compliance of rules.

These measures are equally follows :-

1. The FRBM mouth clearly states that the Finance Minister shall review every quarter, the trends inwards receipts too expenditure inwards relation alongside the budget too house it earlier both houses of parliament the resultant of such reviews.
2. The finance government minister shall too brand declaration inwards both houses of parliament if in that place is whatever deviations inwards coming together the obligations of the cardinal government.
3. If deviations are substantial too so the Finance Minister volition declare the remedial measures which the cardinal regime proposes to accept inwards hereafter catamenia of time.
4. The rules mandate the cardinal regime to accept appropriate corrective activity inwards illustration of revenue & financial deficit exceeding 45% of the budget estimates or full non-debt receipts falling brusque of 40% of the budget estimates at the cease of foremost one-half of the financial year.

10. Task forcefulness on implementation of FRBM Act

Following the enactment of FRBM Act, Government constituted a Task Force headed past times Dr. Vijay Kelkar for drawing upwards the medium term framework for financial policies to arrive at the FRBM targets.

The chore forcefulness proposed the next measures :-

1. Widening the taxation base of operations through removal of exemptions.
2. An All-India goods too service-tax (GST) on the reason of a "grand bargain" alongside States, whereby United States of America volition stimulate got the concurrent powers to taxation service, dependent to sure enough principles that volition care foster a national mutual market.
3. Income taxation exemption boundary to live on increased to Rs.1,00,000.
4. A two-tire charge per unit of measurement construction of twenty percent taxation for income of Rs. 1,00,000 to Rs. 4,00,000 too 30% for income to a higher house Rs. 4,00,000 for individuals too elimination of criterion deduction available to the salaried taxpayer.
5. A reduction inwards the corporate income taxation to 30% for domestic companies too the reduction inwards depreciation rates from 25 to 15%.
6. A 3-tier custom duty rates of 5, 8 too 10% to pick out downward tariffs to Association of Southeast Asian Nations levels.
7. Allocation of greater component of expenditure to legitimate populace goods past times revisiting the classification of expenditure.
8. Empowering panchayats / local bodies through reserve transfer.

The chore forcefulness stated that nether the reforms measures recommended past times it, taxation gross domestic product ratio of the cardinal regime should live on raised from 9.2% inwards 2003 to 13.2% of gross domestic product inwards 2008-09. H5N1 revenue surplus of 0.2% of gross domestic product is estimated to emerge inwards 2008-09. Fiscal deficit estimated to autumn from 4.8% of gross domestic product inwards 2003-04 to 2.8% of gross domestic product inwards 2008-09.

The to a higher house features of Amended FRBM mouth 2000 or Fiscal Responsibility too Budget Management Act 2003 clearly points out that the regime intends to do a rigid institutional machinery to restore financial dependent at the grade of the cardinal government. Similarly the regime wants to innovate greater transparency inwards financial operations of the cardinal government.

Criticism / Limitations of FRBM Act 2003 ↓

Though the Fiscal Responsibility too Budget Management Act 2003 or Amended FRBM mouth 2000 is a credible seek past times the regime to ready responsibleness on the regime to trim back financial deficit too pick out transparency inwards financial operations of the regime it has sure enough limitations.

These limitations of Amended FRBM Bill 2000 or FRBM Act pointed out past times diverse economists are equally follows :-

1. Target regarding GFD really stringent

The Bill stipulates that past times March 31, 2006, the Gross Fiscal Deficit (GFD) equally a proportion of gross domestic product must live on 2%. This, of course, agency that the regime tin borrow from the economic scheme solely to the extent of 2% of GDP, whatever live on the grade of savings. Given the nowadays demand of regime borrowings, 2% boundary is really low.

The increment inwards populace investment helps to increment the grade of effective demand too increases private investment inwards the economy. According to Dr. Raja Chelliah the ratio of Gross Fiscal Deficit (GFD) to gross domestic product should live on 4% to 5% of gross domestic product equally populace investment on infrastructure sector is essential to boost economical growth.

2. Neglect of equity too growth

According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded against investment inwards both human evolution too infrastructure sector. One of the major ommission of amended FRBM Bill 2000 or FRBM Act 2003 was consummate absence of whatever target for fourth dimension outpouring minimum improvement inwards areas of might generation, transport, etc. which is really of import both from the signal of equity too higher economical growth.

3. Non-Coverage of State Governments

The provisions of the mouth impose restrictions on solely the cardinal regime only province governments are out of its scope. But, deficits of province governments are equally much or fifty-fifty a greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs. 1 lakh crore equally on Dec 2004 (the 2nd State later on Up to cross deficit of Rs. 1 lakh crore). Therefore, in that place is a demand for financial responsibleness legislation for the State Governments equally well.

4. Neglect of Development Needs

Today, the levels of upper-case missive of the alphabet expenditures past times the regime are miserably depression inwards India. These upper-case missive of the alphabet expenditures increment the efficiency too productivity of private investment too thence contribute to the evolution procedure inwards the country. If Revenue Deficit is to live on reduced to zero too GFD to live on 2% of gross domestic product equally per the requirement of FRBM Bill, it is the upper-case missive of the alphabet expenditure which volition live on sacrificed too thence volition hinder farther evolution of the country.

5. Need to Increase Revenue

Revenue deficits are determined past times the interplay of expenditure too revenues, both taxation too non-tax. Too often, attending gets focused solely on the expenditure side of the identity to the fail of the revenue side. Increasing non-tax revenue requires that populace sector services live on appropriately priced, which may live on hard equally the nowadays gild has got used to the subsidised education, health, nutrient items, etc.

6. Neglect of Social Sector

The FRBM mouth does non hollo anything relating to social sector development. However, investment inwards social sector such equally health, education, etc is really vital for the economical evolution of the nation.

7. Problem of Subsidies

The regime may live on able to trim back revenue deficit past times reducing subsidies. However, it is quite probable that the regime volition live on nether severe push clitoris per unit of measurement area to travel along the subsidies. It agency the expenditure on the productive areas may live on reduced due to subsidies.

8. Stable Growth Deficit

Chelliah points out that given the job solid financial savings inwards India, the overall financial deficit termed equally stable growth deficit of the regime sector equally a whole should live on pegged at 6% of gross domestic product alongside revenue deficit existence gradually phased out. Thus, the target of 2% of financial deficit gross domestic product ratio stated inwards FRBM mouth is non desirable from the signal of sentiment of productive investment according to Chelliah.

9. False Assumptions

The FRBM Bill is based on the next assumptions :-

1. Lower financial deficit atomic number 82 to higher growth.
2. Larger financial deficit atomic number 82 to higher inflation
3. Larger financial deficit increment external vulnerability of the economy.

These assumptions stimulate got been rejected past times C.P. Chandrashekhar too Jayanti Ghosh who stimulate got given the next arguments :-

1. If the deficit is inwards the cast of upper-case missive of the alphabet expenditure it would contribute to hereafter growth.
2. Fiscal deficit is non solely the campaign for higher inflation. During the like shooting fish in a barrel 1990s the charge per unit of measurement of inflation has fallen fifty-fifty when the financial deficit was equally high equally 5.5% of GDP.
3. Higher financial deficit demand non necessarily campaign external crisis. The external vulnerability depends to a greater extent than on upper-case missive of the alphabet too merchandise job organisation human relationship convertibility. In Republic of Republic of India nosotros stimulate got managed to construct large unusual telephone commutation reserves, though financial deficit has non come upwards down.

Conclusion on FRBM Act 2003 ↓

The Amended FRBM Bill 2000 or FRBM Act 2003 despite to a higher house criticism tin play a really of import role inwards controlling financial deficit too inwards bringing transparency inwards financial functioning of the regime if it is implemented effectively inwards missive of the alphabet too spirit past times the concerned government.