The Fiscal Responsibility and Budget Management Act, 2003 is an Act of the
Parliament of India to institutionalise financial discipline, reduce India's
fiscal deficit, improve macroeconomic management and the overall management of
the public funds by moving towards a balanced budget. The main purpose was to
eliminate revenue deficit of the country and bring down the fiscal deficit to a
manageable 3% of the GDP by March 2008. 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 2011, given the
process of ongoing recovery, Economic Advisory Council publicly advised the
Government of India to reconsider reinstating the provisions of the FRBMA.
Enactment The Fiscal Responsibility and Budget
Management Bill was introduced in India by the then Finance Minister of India,
Mr.Yashwant Sinha in December, 2000. Firstly, the bill highlighted the
terrible state of government finances in India both at the Union and the state
levels under the statement of objects and reasons. Secondly, it sought to
introduce the fundamentals of fiscal discipline at the various levels of the
government.The FRBM bill was introduced with the broad objectives of eliminating
revenue deficit by 31 Mar 2006, prohibiting government borrowings from
the Reserve Bank of India three years after enactment of the bill, and
reducing the fiscal deficit to 2% of GDP. Further, the bill proposed for the
government to reduce liabilities to 50% of the estimated GDP by year 2011. There
were mixed reviews among economists about the provisions of the bill, with
some criticising it as too drastic. Political debate ensued in the country.
Several revisions later, it resulted in a much relaxed and watered-down version
of the bill with some experts, like Dr Saumitra Chaudhuri of ICRA Ltd.(and now
a member of Prime Ministers' Economic Advisory Council) commenting, ‘‘all
teeth of the Fiscal Responsibility Bill have been pulled out and in the current
form it will not be able to deliver the anticipated results.’’ This bill was
approved by the Cabinet of Ministers of the Union Government of India in
February, 2003 and following the due enactment process of Parliament, it
received the assent of the President of India on 26 August 2003. Subsequently,
it became effective on 5 July 2004. This would serve as the day of commencement
of this Act. Objectives
The main objectives of the act were: to introduce transparent fiscal
management systems in the country to introduce a more equitable and
manageable distribution of the country's debts over the years
to aim for fiscal stability for India in the long run
Additionally, the act was expected to give necessary flexibility to Reserve
Bank of India(RBI) for managing inflation in India.
Content of the Act Since the act was primarily for the
management of the governments' behaviour, it provided for certain
documents to be tabled in the Parliament annually with regards to the country's
fiscal policy. This included the following along with the Annual
Financial Statement and demands for grants:
a document titled Medium-term Fiscal Policy Statement – This report was to
present a three-year rolling target for the fiscal indicators with any
assumptions, if applicable. This statement was to further include an
assessment of sustainability with regards to revenue deficit and the use
of capital receipts of the Government for generating productive assets.
a document titled Fiscal Policy Strategy Statement – This was a tactical report
enumerating strategies and policies for the upcoming Financial Year including
strategic fiscal priorities, taxation policies, key fiscal measures and an
evaluation of how the proposed policies of the Central Government conform to the
'Fiscal Management Principles' of this act.
a document titled Macro-economic Framework Statement – This report was to
contain forecasts enumerating the growth prospects of the country. GDP growth,
revenue balance, gross fiscal balance and external account balance of the
balance of payments were some of the key indicators to be included in this
report. The Act further required the government
to develop measures to promote fiscal transparency and reduce secrecy in the
preparation of the Government financial documents including the Union Budget.
= Fiscal management principles = The Central Government, by rules made by
it, was to specify the following: a plan to eliminate revenue deficit by
31 Mar 2008 by setting annual targets for reduction starting from day of
commencement of the act. reduction of annual fiscal deficit of
the country annual targets for assuming contingent
liabilities in the form of guarantees and the total liabilities as a
percentage of the GDP = Borrowings from Reserve Bank of India
The Act provided that the Central Government shall not borrow from the
Reserve Bank of India(RBI) except under exceptional circumstances where there is
temporary shortage of cash in particular financial year. It also laid down rules
to prevent RBI from trading in the primary market for Government
securities. It restricted them to the trading of Government securities in the
secondary market after an April, 2005, barring situations highlighted in
exceptions paragraph. Exceptions
National security, natural calamity or other exceptional grounds that the
Central Government may specify were cited as reasons for not implementing
the targets for fiscal management principles, prohibition on borrowings
from RBI and fiscal indicators highlighted above, provided they were
approved by both the Houses of the Parliament as soon as possible, once
these targets had been exceeded. Measures to enforce compliance
This was a particularly weak area of the act. It required the Finance Minister of
India to only conduct quarterly reviews of the receipts and expenditures of the
Government and place these reports before the Parliament. Deviations to
targets set by the Central government for fiscal policy had to be approved by
the Parliament. No other measures for failure of compliance have been
specified. Implementation
= Targets and fiscal indicators = Subsequent to the enactment of the
FRBMA, the following targets and fiscal indicators were agreed by the Central
government: Revenue deficit
Date of elimination – 31 March 2009 Minimum Annual reduction – 0.5% of GDP
Fiscal Deficit Ceiling – 3% of the GDP by 31 Mar 2008
Minimum Annual reduction – 0.3% of GDP Total Debt – 9% of the GDP
Annual Reduction – 1% of GDP RBI purchase of Government bonds – to
cease from 1 April 2006 Four fiscal indicators to be projected
in the medium term fiscal policy statement were proposed. These are,
revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP,
tax revenue as percentage of GDP and total outstanding liabilities as
percentage of GDP. = Jurisdiction =
The residuary powers to make rules with respect to this act were with the
Central Government with subsequent presentation before the Parliament for
ratification. Civil courts of the country had no jurisdiction for
enforcement of this act or decisions made therein. The power to remove
difficulties was also entrusted to the Central Government.
Criticism Some quarters, including the subsequent
Finance Minister Mr. P. Chidambaram, criticised the act and its rules as
adverse since it might require the government to cut back on social
expenditure necessary to create productive assets and general upliftment
of rural poor of India. The vagaries of monsoon in India, the social dependence
on agriculture and over-optimistic projections of the task force in-charge
of developing the targets were highlighted as some of the potential
failure points of the Act. However, other viewpoints insisted that the act
would benefit the country by maintaining stable inflation rates which in turn
would promote social progress. Some others have drawn parallel to this
act's international counterparts like the Gramm-Rudman-Hollings Act and the
Growth and Stability Pact to point out the futility of enacting laws whose
relevance and implementation over time is bound to decrease. They described the
law as wishful thinking and a triumph of hope over experience. Parallels were
drawn to the US experience of enacting debt-ceilings and how lawmakers have
traditionally been able to amend such laws to their own political advantage.
Similar fate was predicted for the Indian version which indeed was
suspended in 2009 when the economy hit rough patches.
Suspension and reinstatement Implementing the Act, the government had
managed to cut the fiscal deficit to 2.7% of GDP and revenue deficit to 1.1%
of GDP in 2007–08. However, given the international financial crisis of 2007,
the deadlines for the implementation of the targets in the act were suspended.
The fiscal deficit rose to 6.2% of GDP in 2008–09 against the target of 3% set
by the Act for 2008–09. However, IMF estimated fiscal deficit to be 8% after
accounting for oil bonds and other off budget expenses.
In August 2009, IMF had opined that India should implement fiscal reform at
the soonest possible, enacting a successor to the current act. This IMF
paper was authored by two senior IMF economists Alejandro Sergio Simone and
Petia Topalova and highlighted the shortcomings of the current law along
with proposed improvements for a new version.
It was reported that the Thirteenth Finance Commission of India was working
on a new plan for reinstating fiscal management in India. The initial
expectation for revival of fiscal prudence was in 2010–11 but was further
delayed. Finally, the government did announce a path of fiscal consolidation
starting from fiscal deficit of 6.6% of GDP in 2009–10 to a target of 3.0% by
2014–15 However, eminent economist and ex-RBI Deputy Governor, S.S. Tarapore is
quick to highlight the use of creative accounting to misrepresent numbers in
the past. Furthermore, he added that fiscal consolidation is indeed vital for
India, as long as the needs of the poor citizens are not marginalised. This need
for financial inclusion of the poor while maintaining the fiscal discipline
was highlighted by him as the most critical requirement for the 2011–12
Budget of India. More recently, in February 2011, the
PMEAC recommended the need for reinstatement of fiscal discipline of
the Government of India, starting 2011–12 financial year. In FY 2011–12,
it is almost certain that government will cross budgetary fiscal deficit
target of 4.6% and it will be around 5%. States level fiscal responsibility
legislations in India The tenth plan of the Planning
Commission of India highlighted the need for fiscal discipline at even the level
of the states. This was to reduce the debt-to-GDP ratio of India. Reserve Bank
of India(RBI),in its role as the ultimate financial authority in India,
was also a keen supporter of the concept and publicly highlighted the need for
state level fiscal responsibility legislations in India. By 2007, the
states of Karnataka, Kerala, Punjab, Tamil Nadu, Maharashtra and Uttar
Pradesh are among those which have already legislated the required fiscal
discipline laws at the state level. Notes
^ Revenue Deficit is defined in the act as the difference between the revenue
expenditure and revenue receipts which indicates increase in liabilities of the
Central Government without corresponding increase in assets
^ Formerly Investment Information and Credit Rating Agency of India Limited
^ The fiscal indicators was defined in this law as numerical ceilings and
proportions to Gross Domestic Product, as may be prescribed for evaluation of
the fiscal position of the Central Government.
References External links
Fiscal Responsibility and Budget Management Act,2003 Act No : 39 of 2003
Online version