Fiscal Responsibility and Budget Management ACT, 2003

ECNANIF CILBUP
FISCAL
RESPONSIBILITY AND
BUDGET MANAGEMENT
ACT, 2003
Submitted To :- Mr. Santosh Kumar
Submitted By :- Jagriti (068)
Kratika Gupta (030) (Sec-A)
WHAT IS FRBM ACT?
The FRBM ACT, 2003 is an act to:-
institutionalize financial discipline
reduce India's fiscal deficit and eliminate
revenue deficit
improve the overall management of the
public funds by moving towards a balanced 2003

budget.
The Act intends to bring transparency and
accountability in the conduct of the fiscal and
monetary act of the govt and to ensure long
run macroeconomic stability.

BACKGROUND
LATE 1980s AND EARLY 1990s ECONOMIC CRISIS OF 1991
Indian economy faced the problem of Due to its large borrowings, the
large fiscal deficit and its government was unable to pay even
monetization spilled over to external for even two weeks of imports
sector in the late 1980s and early 1990s. resulting in economic crisis of 1991.
ECONOMIC REFORMS ECONOMY POST INTRODUCTION OF

OF 1991 ECONOMIC REFORMS FRBM ACT,2003
To tackle the crisis, reforms After a good start in the early The Govt introduced
90s, the fiscal consolidation
were introduced in 1991 & FRBM Act,2003 to check
faltered after 1997-98 and fiscal
fiscal consolidation emerged the deteriorating fiscal
deficit started rising. So, it was
as one of the key areas of situation and bring
necessary to prevent India from
reforms.
falling into a debt-trap. financial discipline.
ENACTMENT OF THE FRBM ACT
The Bill was After much This bill was approved It became
introduced by the discussions, a by the Ministers of the effective on 5

Union Govt. of India in
then Finance watered-down July 2004. This
Feb, 2003 and following
Minister of India, version of the Bill would serve as
the enactment process
Mr. Yashwant was passed in the day of
of Parliament, it
Sinha in December, 2003 to become commencement
received the assent of
2000 the FRBM Act. of this Act.
the President of India on
26 August 2003.
OBJECTIVES OF FRBM ACT
1 2 3
To introduce To introduce a
To aim for
transparent more equitable
and manageable fiscal stability
fiscal
management distribution of of India in the
the country's long run.
systems in the
debts over the
country. years.
Additionally, the act was expected to give necessary flexibility to the Reserve
Bank of India for managing inflation in India.

KEY FEATURES
The FRBM Act made it mandatory for the Government to place the following
along with the Union Budget Documents in the Parliament annually :-
A document titled Medium- A document titled Fiscal

term Fiscal Policy Statement. Policy Strategy Statement
A document titled Macro- A document titled Medium-term

economic Framework Statement Expenditure Framework Statement
OF THE FRBM
PROVISIONS The FRBM rules mandate four fiscal
ACT,2003
indicators to be projected :-
1. Revenue deficit as a percentage of GDP
2. Fiscal deficit as a percentage of GDP.
3. Tax revenue as a percentage of GDP.
4. Total outstanding liabilities as a
percentage of GDP.
INITIAL
TARGETS
REVENUE DEFICIT TARGET FISCAL DEFICIT TARGET

Revenue Deficit should be completely Fiscal Deficit should be reduced to
eliminated by March 31, 2009 3% of GDP by March 31, 2009.
The minimum annual reduction target The minimum annual reduction target
was 0.5% of the GDP. was 0.3% of the GDP.

CONTINGENT LIABILITIES
The Central Govt. shall not give incremental guarantees of an amount
exceeding 0.5% of GDP in any financial year beginning 2004-05.
ADDITIONAL LIABILITIES
Additional liabilities (including external debt) should be reduced to 9% of
the GDP by 2004-05.
The min annual reduction target in each subsequent year to be 1% of GDP.
RBI PURCHASE OF GOVERNMENT BONDS

RBI purchase of govt. bonds to cease from 1 April 2006. This indicates
the govt. not to borrow directly from the RBI.

Did the govt. meet the FRBM targets by March 2009?
Implementing the act, the govt. managed to
cut the fiscal deficit to 2.7% of GDP and
revenue deficit to 1.1% of the GDP in 2007-08
However, the targets were not met.
The global financial crisis (2007-08) led
the govt. to infuse resources in the
economy as the fiscal stimulus in 2008.
Therefore, fiscal targets had to be
postponed temporarily in view of the
global crisis.
AMMENDMENTS IN FRBM ACT
2003-04 2007-08 2012

Act came into Initial targets postponed To be achieved
existance due to non fulfillment by 2015
2015 2016 2021

To be achieved Review committee set Latest ammend-
by 2018 up under N.K. Singh ments and targets

2012 AMMENDMENT
A new term " EFFECTIVE Effective Revenue Deficit
REVENUE DEFICIT" was should be completely
coined. eliminated by March 31,
2015.
In addition to the existing Fiscal deficit should be
three documents, the reduced to 3% of GDP by
Medium Term Expenditure March 31, 2015. The
Framework Statement minimum annual reduction
(MTEF) will also be laid. target was 0.3% of GDP.

Effective revenue deficit = Revenue Deficit - Grants for capital assets
EDR signifies that amount of capital receipts that are being used for actual
consumption expenditure of the govt.
It helps in reducing consumptive component of revenue deficit and create space for
increased capital spending.

The objective of the MTEF is to provide a closer
integration between budget and the FRBM MEDIUM

Statements. It contains :-
a) The expenditure commitment of the govt. on TERM

major policy changes involving new services, new
instrument of service, new schemes and EXPENDITURE

programmes.
FRAMEWORK
b) The explicit contingent liabilities, which are in
the form of stipulated annuity payments over a STATEMENT

multi-year time-frame.
(MTEF)
c) The detailed break-up of grants for creation of
capital assets.
2018-19
2015 AMMENDMENT
The target dates for achieving the prescribed rates
of EDR and fiscal deficit were further extended to
the end of 2017-18.
Further, the Govt. of India launched the scheme
Ujwal DISCOM Assurance Yojana (UDAY) for the
financial and operational turnaround of state-
owned Power Distribution Companies (DISCOMs) in
2015. The scheme aims to reduce interest burden,
reduce the cost of power, reduce power losses in
Distribution sector, and improve operational
efficiency of DISCOMs.
FRBM REVIEW COMMITTEE
Govt. constituted the Committee in May, 2016
under the Chairmanship of Shri N.K.Singh,
Former Revenue & Expenditure Secretary. It
consisted of Dr. Urjit R. Patel, Governor, (RBI),
Shri Sumit Bose, former Finance Secretary, Dr.
Arvind Subramanian, Chief Economic Adviser
and Dr. Rathin Roy, Director, NIPFP as member.
The Committee was constituted to review the
implementation of the FRBM Act, 2003 and
give its recommendations on the way forward.

COMMITTEE RECOMMENDATIONS
It was suggested that instead of fixed numbers, it may be better to have a fiscal deficit range as
the target, which would give necessary policy space to the Govt. to deal with dynamic situations.
A debt to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for
the states and should be achieved by 2023.
During the times of economic
instability/ calamity, the
committee recommends fiscal
flexibilities to go above or below
the fiscal deficit targets in the
form of ‘escape clauses’. The
Committee set 0.5% as escape
clause for fiscal deficit target.

Finance minister Nirmala Sitharaman said that the government will not
worry about missing its budgetary deficit targets as it seeks to spend more
to revive the economy.

LATEST TARGETS OF FRBM ACT
The latest provisions of
the FRBM act requires the
government to limit the
fiscal deficit to 3% of the
GDP by March 31, 2021,
and the debt of the
central government to
40% of the GDP by
2024-25.
CONCLUSION
The FRBM Act seeks to achieve long-term macroeconomic
stability, while generating budget surpluses, limiting borrowings
to cut down deficits and debt and providing a medium-term
framework for budgetary implementation.
As seen in the above analysis, different governments have failed
to achieve the FRBM targets set to be achieved in 2008 even by
2020 but the efforts continue.

THANK
YOU !!
PRESENTED BY- JAGRITI (068) (SEC-A)
KRATIKA GUPTA (030)

Fiscal Responsibility and Budget Management ACT, 2003

Uploaded by

Copyright:

Available Formats

Fiscal Responsibility and Budget Management ACT, 2003

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fiscal Responsibility and Budget Management ACT, 2003

Uploaded by

Copyright:

Available Formats

ECNANIF CILBUP

institutionalize financial discipline

reduce India's fiscal deficit and eliminate

improve the overall management of the

public funds by moving towards a balanced 2003

The Act intends to bring transparency and

accountability in the conduct of the fiscal and

monetary act of the govt and to ensure long

run macroeconomic stability.

monetization spilled over to external for even two weeks of imports

ECONOMIC REFORMS ECONOMY POST INTRODUCTION OF

introduced by the discussions, a by the Ministers of the effective on 5

Bank of India for managing inflation in India.

A document titled Medium- A document titled Fiscal

A document titled Macro- A document titled Medium-term

1. Revenue deficit as a percentage of GDP

2. Fiscal deficit as a percentage of GDP.

3. Tax revenue as a percentage of GDP.

4. Total outstanding liabilities as a

REVENUE DEFICIT TARGET FISCAL DEFICIT TARGET

eliminated by March 31, 2009 3% of GDP by March 31, 2009.

was 0.5% of the GDP. was 0.3% of the GDP.

exceeding 0.5% of GDP in any financial year beginning 2004-05.

the GDP by 2004-05.

The min annual reduction target in each subsequent year to be 1% of GDP.

RBI PURCHASE OF GOVERNMENT BONDS

the govt. not to borrow directly from the RBI.

Implementing the act, the govt. managed to

cut the fiscal deficit to 2.7% of GDP and

revenue deficit to 1.1% of the GDP in 2007-08

However, the targets were not met.

The global financial crisis (2007-08) led

the govt. to infuse resources in the

economy as the fiscal stimulus in 2008.

Therefore, fiscal targets had to be

postponed temporarily in view of the

2003-04 2007-08 2012

existance due to non fulfillment by 2015

2015 2016 2021

by 2018 up under N.K. Singh ments and targets

REVENUE DEFICIT" was should be completely

coined. eliminated by March 31,

In addition to the existing Fiscal deficit should be

three documents, the reduced to 3% of GDP by

Medium Term Expenditure March 31, 2015. The

Framework Statement minimum annual reduction

(MTEF) will also be laid. target was 0.3% of GDP.

consumption expenditure of the govt.

increased capital spending.

integration between budget and the FRBM MEDIUM

a) The expenditure commitment of the govt. on TERM

instrument of service, new schemes and EXPENDITURE

the form of stipulated annuity payments over a STATEMENT

of EDR and fiscal deficit were further extended to

the end of 2017-18.

Further, the Govt. of India launched the scheme

Ujwal DISCOM Assurance Yojana (UDAY) for the

financial and operational turnaround of state-

owned Power Distribution Companies (DISCOMs) in