Fiscal Responsibleness As Well As Budget Administration Frbm Human Action 2003

Concerned over the worsening of financial situation, inwards 2000, the Government of Republic of Republic of India had prepare 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 as well as 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 last incorporated inwards the rules to last framed nether the Act. Taking into line of piece of work concern 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 as well as 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 principal objectives of FRBM Bill / Act are :-

1. To bring down 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 nib 2000 or FRBM Act 2003 is that the key authorities should accept surely specific measures related alongside reduction of revenue deficit.

Measures relating to reduction of revenue deficits are:-

1. The authorities should bring down revenue deficit past times an amount equivalent to 0.5 percent or to a greater extent than of the gross domestic product at the terminate of each financial year, kickoff alongside 2004-2005.
2. The revenue deficit should last reduced to zippo inside a menstruum of v years ending on March 31, 2009.
3. Once revenue deficit becomes zippo the key authorities should produce upwardly surplus amount of revenue which it may utilised for discharging liabilities inwards excess of assets.

2. Fiscal Deficit

The minute of import characteristic of Amended FRBM nib 2000 or FRBM Act 2003 is that the key authorities should accept surely specific measures related alongside reduction of financial deficit.

Measures relating to reduction of financial deficits are:-

1. The authorities should bring down Gross financial deficit past times an amount equivalent to 3.3% or to a greater extent than of the gross domestic product at the terminate of each financial year, kickoff alongside 2004-2005.
2. The key authorities should bring down Gross Fiscal deficit to an amount equivalent to 2% of gross domestic product upto March 31 2006.

3. Exceptional Grounds

The 3rd of import characteristic of Amended FRBM nib 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit as well as financial deficit of the authorities may transcend 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 nib 2000 or FRBM Act 2003 is that the key authorities should ensure that the full liabilities (including external debt at electrical flow central rate) should non transcend 9% of gross domestic product for the financial twelvemonth 2004-2005. There should last progressive reduction of this boundary past times atleast 1 per centum betoken of gross domestic product inwards each subsequent year.

5. Borrowing from the RBI

The 5th of import characteristic of Amended FRBM nib 2000 or FRBM Act 2003 is related alongside borrowings done past times key authorities from R.B.I. The Amended FRBM nib 2000 or FRBM Act 2003 clearly states that the key authorities shall non commonly borrow from the R.B.I. However the key authorities may borrow from R.B.I. past times way of advances to encounter 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 authorities alongside the R.B.I.

6. Fiscal Transparency

The 6th of import characteristic of Amended FRBM nib 2000 or FRBM Act 2003 is related alongside financial transparency. The Amended FRBM nib 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 every bit follows :-

1. The key authorities should minimize every bit far every bit possible secrecy inwards grooming of annual budget.
2. The key authorities at the fourth dimension of presentation of the annual budget shall let out the pregnant changes inwards accounting standards, policies as well as practices probable to touching on the computation of financial indicators.

7. Limit On Guarantees

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

8. Medium term financial policy statement

The 8th of import characteristic of amended FRBM nib 2000 or FRBM Act 2003 is that the key authorities 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 every bit follows :-

1. Revenue deficit every bit per centum of GDP.
2. Fiscal deficit every bit per centum of GDP.
3. Tax revenue every bit per centum of GDP.
4. Total outstanding liabilities every bit per centum of GDP.

9. Compliance of rules

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

These measures are every bit follows :-

1. The FRBM nib clearly states that the Finance Minister shall review every quarter, the trends inwards receipts as well as expenditure inwards relation alongside the budget as well as identify it earlier both houses of parliament the final result of such reviews.
2. The finance government minister shall likewise brand declaration inwards both houses of parliament if at that spot is whatever deviations inwards coming together the obligations of the key government.
3. If deviations are substantial so the Finance Minister volition declare the remedial measures which the key authorities proposes to accept inwards futurity menstruum of time.
4. The rules mandate the key authorities to accept appropriate corrective activeness inwards illustration of revenue & financial deficit exceeding 45% of the budget estimates or full non-debt receipts falling brusk of 40% of the budget estimates at the terminate 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 upwardly the medium term framework for financial policies to arrive at the FRBM targets.

The occupation forcefulness proposed the next measures :-

1. Widening the taxation base of operations through removal of exemptions.
2. An All-India goods as well as service-tax (GST) on the footing of a "grand bargain" alongside States, whereby US volition direct hold the concurrent powers to taxation service, dependent to surely principles that volition assistance foster a national mutual market.
3. Income taxation exemption boundary to last increased to Rs.1,00,000.
4. A two-tire charge per unit of measurement construction of xx percent taxation for income of Rs. 1,00,000 to Rs. 4,00,000 as well as 30% for income higher upwardly Rs. 4,00,000 for individuals as well as elimination of measure deduction available to the salaried taxpayer.
5. A reduction inwards the corporate income taxation to 30% for domestic companies as well as the reduction inwards depreciation rates from 25 to 15%.
6. A 3-tier custom duty rates of 5, 8 as well as 10% to convey downwardly tariffs to Association of Southeast Asian Nations levels.
7. Allocation of greater component subdivision of expenditure to legitimate populace goods past times revisiting the classification of expenditure.
8. Empowering panchayats / local bodies through reserve transfer.

The occupation forcefulness stated that nether the reforms measures recommended past times it, taxation gross domestic product ratio of the key authorities should last raised from 9.2% inwards 2003 to 13.2% of gross domestic product inwards 2008-09. Influenza A virus subtype 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 higher upwardly features of Amended FRBM nib 2000 or Fiscal Responsibility as well as Budget Management Act 2003 clearly points out that the authorities intends to produce a rigid institutional machinery to restore financial dependent at the grade of the key government. Similarly the authorities wants to innovate greater transparency inwards financial operations of the key government.

Criticism / Limitations of FRBM Act 2003 ↓

Though the Fiscal Responsibility as well as Budget Management Act 2003 or Amended FRBM nib 2000 is a credible endeavor past times the authorities to cook responsibleness on the authorities to bring down financial deficit as well as convey transparency inwards financial operations of the authorities it has surely limitations.

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

1. Target regarding GFD real stringent

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

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

2. Neglect of equity as well as growth

According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded against investment inwards both human evolution as well as 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 real of import both from the betoken of equity as well as higher economical growth.

3. Non-Coverage of State Governments

The provisions of the nib impose restrictions on solely the key authorities merely province governments are out of its scope. But, deficits of province governments are every bit much or fifty-fifty a greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs. 1 lakh crore every bit on Dec 2004 (the minute State later on Up to cross deficit of Rs. 1 lakh crore). Therefore, at that spot is a demand for financial responsibleness legislation for the State Governments every bit well.

4. Neglect of Development Needs

Today, the levels of working capital alphabetic quality expenditures past times the authorities are miserably depression inwards India. These working capital alphabetic quality expenditures increment the efficiency as well as productivity of private investment as well as so contribute to the evolution procedure inwards the country. If Revenue Deficit is to last reduced to zippo as well as GFD to last 2% of gross domestic product every bit per the requirement of FRBM Bill, it is the working capital alphabetic quality expenditure which volition last sacrificed as well as so volition hinder farther evolution of the country.

5. Need to Increase Revenue

Revenue deficits are determined past times the interplay of expenditure as well as revenues, both taxation as well as 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 last appropriately priced, which may last hard every bit the nowadays social club has got used to the subsidised education, health, nutrient items, etc.

6. Neglect of Social Sector

The FRBM nib does non cite anything relating to social sector development. However, investment inwards social sector such every bit health, education, etc is real vital for the economical evolution of the nation.

7. Problem of Subsidies

The authorities may last able to bring down revenue deficit past times reducing subsidies. However, it is quite probable that the authorities volition last nether severe pressure level to maintain the subsidies. It agency the expenditure on the productive areas may last reduced due to subsidies.

8. Stable Growth Deficit

Chelliah points out that given the identify financial savings inwards India, the overall financial deficit termed every bit stable growth deficit of the authorities sector every bit a whole should last pegged at 6% of gross domestic product alongside revenue deficit beingness gradually phased out. Thus, the target of 2% of financial deficit gross domestic product ratio stated inwards FRBM nib is non desirable from the betoken of persuasion of productive investment according to Chelliah.

9. False Assumptions

The FRBM Bill is based on the next assumptions :-

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

These assumptions direct hold been rejected past times C.P. Chandrashekhar as well as Jayanti Ghosh who direct hold given the next arguments :-

1. If the deficit is inwards the cast of working capital alphabetic quality expenditure it would contribute to futurity growth.
2. Fiscal deficit is non solely the displace for higher inflation. During the belatedly 1990s the charge per unit of measurement of inflation has fallen fifty-fifty when the financial deficit was every bit high every bit 5.5% of GDP.
3. Higher financial deficit demand non necessarily displace external crisis. The external vulnerability depends to a greater extent than on working capital alphabetic quality as well as merchandise line of piece of work concern human relationship convertibility. In Republic of Republic of India nosotros direct hold managed to produce large unusual central reserves, though financial deficit has non come upwardly down.

Conclusion on FRBM Act 2003 ↓

The Amended FRBM Bill 2000 or FRBM Act 2003 despite higher upwardly criticism tin post away play a real of import business office inwards controlling financial deficit as well as inwards bringing transparency inwards financial functioning of the authorities if it is implemented effectively inwards alphabetic quality as well as spirit past times the concerned government.