INTRODUCTION
‘Money is the pivot around which whole economic science clusters”.[1]
– Prof. Marshall
In India, the government of India and state government engineers the budget and fiscal policies of their jurisdiction thereby stimulating the impact on various macroeconomic parameters estimating the anticipated receipt, and anticipated expenses weighing the goal of achieving economic and overall success of the nation. The practices world over has postulated the tradition of providing for the fiscal deficit to finance growth, solve the problems in question and fulfill democratic aspirations.[2] India is not an exception to this notion. Over time this practice leads to the compounding of debt year on year creating a ruckus in its pay-out options. To acknowledge these situations don’t trigger India and that Fiscal discipline is maintained, the Indian parliament passed the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
Before gaining an understanding of this topic, certain verbatim is described herein is briefed. In Budget, Revenue Deficit is the difference between revenue expenditure and revenue income. Effective Revenue deficit is the revenue deficit plus grants devolution for capital creation. A fiscal deficit is an excess of total expenditure over total receipts. Primary deficit is obtained by subtracting the sum of interest on borrowing from fiscal deficit
WHY FRBM ACT WAS NEEDED?
Acknowledgement of public finance utilization, management, and an audit is imperative as through election the citizen entrust the purse of the nation and labour to fill the state coffers. Since 75 years of Independence, except 1970s budget Indian economy had not yet registered any fiscal surplus[3]. The fiscal deficit represents not just excess expenditure but also highlights a question, How does the government tally the excess expenses against income? Moderate and strategically planned deficiency is required so to avoid deflation in the economy and promote stable growth across diverse sectors within a sustainable inflation rate. Post 1991 economic policy reform, India experienced a spike in market borrowings to finance the budgetary gap between 1999-2000 due to a market-oriented price discovery mechanism and the introduction of a system of auctions for central government securities in 1992[4]. Total liabilities of India stood at Rs .1179492.95 (in crores) as of 31st March 2001[5]. Scanning Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 ( USA)[6], Stability and Growth Pact (SGP) (EU)[7] this development at the international front to assure inter-generational equity in fiscal management, shape the resilient, strong economy with transparency in government accounting FRBM Act,2003 was put forth and passed in India by the then Finance Minister Mr. Yashwant Sinha.
JOURNEY OF FRBM ACT, 2003
To ensure fiscal discipline, and fiscal consolidation and achieve the objective of these act targets for the distribution of debt was set to achieve them year by year. The act provides indicators to assess the progress, i) fiscal deficit as a percentage of GDP; (ii) revenue deficit as a percentage of GDP; (iii) primary deficit as a percentage of GDP; (iv) tax revenue as a percentage of GDP; (v) non-tax revenue as a percentage of GDP; and (vi) Central Government debt as a percentage of GDP[8]. It mandates the parliament to put forth, The Medium Term Fiscal Policy Statement, Fiscal Policy strategy statement, and The Macroeconomic Framework Statement along with the financial statement while presenting the budget[9]. Originally, the target was set to reduce fiscal deficit to 3% of GDP by annually reducing 0.3% up to 31st March 2009. To reduce revenue deficit completely by 31st March 2009 by annually reducing 0.5%[10]. Also, to brake the practice of RBI purchase of government securities by 1 April 2006. However, this novel provision had tied the government by way of legislating the target. However, in exceptional circumstances like national security, national calamity, or as may be specified by the government, it can deviate from set targets[11]. No courts have jurisdiction to question the non-adherence of this target[12]. However, India was not successful in achieving those targets due to the global financial crisis of 2007 but the move in this direction led to a spectacular figure of below 5 % deficit despite global knee-jerk[13].
To revamp fiscal hygiene, in 2012 an amendment was passed lubricating the targets. As per the amended target by 31st March 2015, it was set to achieve a 3% Fiscal Deficit and 0% Revenue deficit by way of annual reductions of 0.3% and 0.5% respectively[14]. The concept of Effective Revenue Deficit was coined. In addition to the budgetary and FRBM statement, the Medium Term Expenditure Framework Statement was made mandatory to furnish explaining the assumption and associated risk of expenditures[15]. Again the goal was not achieved and the act was amended further for attainment in 2018. Further by the budget 2018-19, goals were extended to achieve by 2021[16]. The reason for such non-achievement is also imperative to study because any change in the economy is the result of policy decisions and global development. National Food Security scheme, Demonetisation, GST reforms, waiver of farm loans, Defence budget, tax collection, and many others dwindle the planned targets.
An outbreak of coronavirus demanded the urgent need to invest in medical and social safety infrastructure resulting in a paradigm shift of adopting countercyclical policy from FRBM targets. At present, in the union budget, the 2023-2024 Finance Minister has affirmed the achievement of a fiscal deficit of 6.5% of GDP in 2022-23 and expects 5.9% for the financial year (FY) 2023-24 and reaching towards 4.5% in 2025-26[17].
N.K Singh Committee was formed to review the FRBM Act, 2003[18]. The committee in its broad recommendation has recommended replacing the act with the Debt Management and Fiscal Responsibility Bill, 2017[19]. The public Debt to GDP ratio should be considered a medium-term stethoscope. Establishment of a Fiscal council suggesting fiscal plans, and data collection. RBI is allowed to purchase government securities from the secondary market. Synergize fiscal and monetary policy. State governments should also follow fiscal discipline[20].
CONCLUSION
FRBM Act, 2003 is a novel innovation to administer and bind the government in undertaking reforms to stabilize the mounting debt and venture for new opportunities to raise income. In the aftermath of this act, many positive signals are worth appreciating in the journey of fiscal consolidation like the Deregulation of petrol and Diesel prices, ensuring target delivery of money transfer by DBT (Direct Beneficiary Transfer), disinvestment, the establishment of Expenditure Management Commission[21]. Parliament canteen subsidy is abolished[22]. Note, still, India standing liability is over 1.87 lakh crore (September 2022)[23] Indian policymakers should adhere to strict mechanisms like FRBM and strive for a balanced budget reducing fiscal slippage and profligacy.
Author(s) Name: Bhadraka Nitish Kishor (Parul University, Vadodara)
Reference(s):
[1] Alfred Marshall, Principles of Economics (8th edition, Macmillan and Co., 1920) 3
[2]‘Budget Deficit by Country as Percentage of GDP’ (World Atlas) <https://www.worldatlas.com/articles/the-largest-deficits-in-the-world.html> accessed 19 February 2023
[3] ‘Union Budget: India’s fiscal deficit explained in 10 charts’ (The Times of India, 03 January 2021) <https://timesofindia.indiatimes.com/business/india-business/union-budget-indias-fiscal-deficit-explained-in-10-charts/articleshow/80599832.cms> accessed 19 February 2023
[4] Ramesh Jangili, et. al, ‘States’ Fiscal Performance and Yield Spreads on Market Borrowings in India’ (RBI, 21 January 2023) <https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=20995> accessed 19 February 2023
[5] ‘Debt position of Government of India’ (India Budget) <https://www.indiabudget.gov.in/budget_archive/ub2000-01/rb/annex5.pdf> accessed 19 February 2023
[6] ‘Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987’ (Congress Gov) <https://www.congress.gov/bill/100th-congress/house-joint-resolution/324> accessed 19 February 2023
[7] ‘Stability and Growth Pact’ (Economy Finance) <https://economy-finance.ec.europa.eu/economic-and-fiscal-governance/stability-and-growth-pact_en> accessed 19 February 2023
[8] Fiscal Responsibility And Budget Management Act 2003, s 5
[9] Fiscal Responsibility And Budget Management Act, 2003, s 4
[10] Fiscal Responsibility And Budget Management Act 2003, s 3
[11] Fiscal Responsibility And Budget Management Act 2003, s 4(2)
[12] Fiscal Responsibility And Budget Management Act 2003, s 11
[13] Shankar Acharya, ‘India’s fiscal deficits: A short history’ (Rediff, 17 march 2017) <https://www.rediff.com/business/column/column-indias-fiscal-deficits-a-short-history/20170317.htm#:~:text=India%E2%80%99s%20fiscal%20deficit%20%28Centre%20and%20states%20combined%29%20has,matched%20by%20no%20other%20sizable%20nation%20on%20earth> accessed 19 February 2023
[14] Fiscal Responsibility And Budget Management Act 2003, s 3
[15]‘What is medium-term expenditure framework statement’ (Business Standard) <https://www.business-standard.com/about/what-is-medium-term-expenditure-framework-statement#:~:text=The%20medium%2Dterm%20expenditure%20framework,(FRBM)%20Act%2C%202003> accessed 19 February 2023
[16] Fiscal Responsibility And Budget Management Act 2003, s 3
[17]‘Union Budget: Centre vows to bring fiscal deficit below 4.5%’ (The Times of India, 02 February 2023) <https://timesofindia.indiatimes.com/articleshow/97538586.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst> accessed 19 February 2023
[18] ‘Recommendations of the NK Singh (FRBM Review) Committee’ (India Economy, 27 August 2017) <https://www.indianeconomy.net/splclassroom/recommendations-of-the-nk-singh-frbm-review-committee/#:~:text=Recommendations%20of%20the%20NK%20Singh%20%28FRBM%20Review%29%20Committee,5.%20Escape%20Clause%20to%20accommodate%20counter%20cyclical%20issues%3A> accessed 19 February 2023
[19] Ibid
[20] Ibid
[21]‘Recommendation of Expenditure Management Commission’ (GOI) <https://doe.gov.in/sites/default/files/EMC_recomendation_PPD.pdf> accessed 19 February 2023
[22] ‘Subsidy on food at Parliament canteen removed, prices to be hiked’ (Business Today, 19 January 2021) <https://www.businesstoday.in/latest/economy-politics/story/subsidy-on-food-at-parliament-canteen-removed-prices-to-be-hiked-284801-2021-01-19> accessed 19 February 2023
[23]‘India’s fiscal deficit for FY23 estimated at Rs 17.5 lakh crore, FY24 Rs 17.95 lakh crore: SBI’ (The Economic Times, 17 January 2017) <https://economictimes.indiatimes.com/news/economy/indicators/indias-fiscal-deficit-for-fy23-estimated-at-rs-17-5-l-crore-fy24-rs-17-95-l-crore-sbi/articleshow/97055225.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst> accessed 19 February 2023
