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FiscalResponsibilityandBudgetManagementFRBMAct2003

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FiscalResponsibilityandBudget
ManagementFRBMAct2003
Post:GauravAkrani.
Date:3/21/201110:08:00AMIST.
Comment(1)
Label:Economics.

Concernedovertheworseningoffiscalsituation,in2000,theGovernmentof
India had set up a committee to recommend draft legislation for fiscal
responsibility.BasedontherecommendationsoftheCommittee,Government
ofIndiaintroducedtheFiscalResponsibilityandBudgetManagement(FRBM)
BillinDecember2000.InthisBillnumericaltargetsforvariousfiscalindicators
werespecified.TheBillwasreferredtotheParliamentaryStandingCommittee
on Finance. The Standing Committee recommended that the numerical
targetsproposedintheBillshouldbeincorporatedintherulestobeframed
under the Act. Taking into account the recommendations of the Standing
Committee,arevisedBillwasintroducedinApril2003.TheBillwaspassedin
LokSabhainMay2003andinRajyaSabhainAugust2003.Afterreceiving
theassentofthePresident,itbecameanActinAugust2003.TheFRBMAct
2003wasfurtheramended.

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The FRBM Bill / Act provides rules for fiscal responsibility of the Central

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FiscalResponsibilityandBudgetManagementFRBMAct2003

Government.TheFRBMAct2003(asamended)becameeffectivefromJuly5,
2004.UnderthisAct,Rulesareframedrelatingtofiscalresponsibilityofthe
CentralGovernment,whichcameintoforceon5thJuly2004.

ObjectivesofFRBMAct2003
ThemainobjectivesofFRBMBill/Actare:

WhatisFinance?Meaning
DefinitionFeaturesofFinance

WhatisCreditCard?Meaning
DefinitionSizeAnatomyGlossary

WhatisFinancialPlanning?
MeaningTypesofFinancialPlans

DifferenceBetweenPrimaryand
SecondaryData

WhatisFinancialManagement?
MeaningDefinitionScopeArticles

TopInventionsandDiscoveries
ScrollToTop
byScientistsAtoZListScience

WhatisCorporateFinance?
MeaningWhatitIncludes?

HowtoImproveHuman
Relations?

1.Toreducefiscaldeficit

HowToPrepareForSuccessful
JobInterviews?BestInterviewTips

2.Toadoptprudentdebtmanagement.
3.Togeneraterevenuesurplus.

FeaturesofFRBMAct2003

1.RevenueDeficit
ThefirstimportantfeatureofAmendedFRBMbill2000orFRBMAct2003is
thatthecentralgovernmentshouldtakecertainspecificmeasuresrelatedwith
reductionofrevenuedeficit.
Measuresrelatingtoreductionofrevenuedeficitsare:
1.Thegovernmentshouldreducerevenuedeficitbyanamountequivalent

BANKING
WhatisaBank?Introduction,
DefinitionandFeaturesofBank
DifferentTypesofBanksWhat
areVariousKindsofBanks?
CommercialBanksDefinitions,
PrimarySecondaryFunctions

HowToSummarizePassage?
SummarizationSkillsTechniques
BasicPrinciplesofInsurance
ExamplesofInsurancePrinciples
IndianMoneyMarketFeatures,
DrawbacksandRecentReforms
ConceptofMarketingResearch
(MR)MarketingResearchProcess

BalanceSheetofCommercial
BankLiabilitiesandAssets
HowtoOpenBankAccount?7
StepsToOpenBankAccount

MANAGEMENT

WhataretheAdvantagesof
OpeningBankAccount?

ManagementFunctionsAnd
Process,ManagementThought

SavingAccountBankMeaning,
FeaturesandAdvantagesofIt

PlanningFirstPrimaryImportant
FunctionOfManagement

FixedDepositAccountofBank
Meaning,Features,Advantages

ManagementByObjectives
(MBO)PeterDruckerMBO

WhatisCurrentBankAccount?
ItsFeaturesandAdvantages

DecisionMakingProcessIn
ManagementProblemSolving

RecurringDepositAccountIn
BankMeaningandFeatures

Authority,Responsibilityand
AccountabilityInManagement

2.FiscalDeficit

WhatisaCheque?Definition
KindsandTypesofCheques

PrincipleofDelegationof
AuthorityImportanceofDelegation

ThesecondimportantfeatureofAmendedFRBMbill2000orFRBMAct2003

WhatareFeaturesofCheques?
MainCharacteristicsofChecks

OrganisationOrganizational
StructureOrganisationalChart

WhatisCrossingofCheque?
DifferentTypesofCheckCrossing

DecentralisationAdvantages
andLimitationsofDecentralization

AutomatedTellerMachine(ATM)
TheAdvantagesofATMMachine

ManagerialLeadershipLeader
QualitiesLeadershipTheories

EBankingOnlineBanking
MainAdvantagesofEBanking

HumanResourceManagement
HumanResourceDevelopment

PrinciplesofGoodLending
EveryBankerFollowsLoans

MotivationMotivationalFactors
IncentivesTheoriesofMotivation

DifferentFormsofAdvancesby
CommercialBanksLoanTypes

Maslow'sHierarchyofNeeds
TheTheoryofHumanMotivation

DutiesandResponsibilitiesof
ComputerOperatorinBank

FrederickHerzberg'sTwoFactor
TheoryMotivationHygiene
Factors

to0.5percentormoreoftheGDPattheendofeachfinancialyear,
beginningwith20042005.
2.Therevenuedeficitshouldbereducedtozerowithinaperiodoffive
yearsendingonMarch31,2009.
3.Oncerevenuedeficitbecomeszerothecentralgovernmentshouldbuild
upsurplusamountofrevenuewhichitmayutilisedfordischarging
liabilitiesinexcessofassets.

isthatthecentralgovernmentshouldtakecertainspecificmeasuresrelated
withreductionoffiscaldeficit.
Measuresrelatingtoreductionoffiscaldeficitsare:
1.ThegovernmentshouldreduceGrossfiscaldeficitbyanamount
equivalentto3.3%ormoreoftheGDPattheendofeachfinancialyear,
beginningwith20042005.
2.ThecentralgovernmentshouldreduceGrossFiscaldeficittoanamount
equivalentto2%ofGDPuptoMarch312006.

3.ExceptionalGrounds
ThethirdimportantfeatureofAmendedFRBMbill2000orFRBMAct2003is
thatitclearlystatedthattherevenuedeficitandfiscaldeficitofthegovernment
mayexceedthetargetsspecifiedintherulesonlyonthegroundsofnational
securityornationalcalamityfacedbythecountry.

4.PublicDebt
ThefourthimportantfeatureofAmendedFRBMbill2000orFRBMAct2003is
that the central government should ensure that the total liabilities (including
externaldebtatcurrentexchangerate)shouldnotexceed9%ofGDPforthe

http://kalyancity.blogspot.in/2011/03/fiscalresponsibilityandbudget.html

NationalisationofBanksinIndia
IntroductionObjectivesDemerits
NarasimhamCommitteeReportI
1991II1998Recommendations
NewEconomicReformsofthe
BankingSectorInIndiaBrief
FunctionsofReserveBankof
India(RBI)CreditPolicyofRBI

DouglasMcGregor'sTheoryX
andTheoryYEmployee
Motivation
DavidMcClelland'sAchievement
Motivation,ManifestNeedTheory
MarketingMixand4P'sofThe
MarketingManagementArticle
WhatisMarketSegmentation?
ImportanceInModernMarketing

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FiscalResponsibilityandBudgetManagementFRBMAct2003

financialyear20042005.Thereshouldbeprogressivereductionofthislimit
byatleastonepercentagepointofGDPineachsubsequentyear.

5.BorrowingfromtheRBI
ThefifthimportantfeatureofAmendedFRBMbill2000orFRBMAct2003is

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AdministrativeLaw

Banking

FRBMbill2000orFRBMAct2003clearlystatesthatthecentralgovernment

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borrow from R.B.I. by way of advances to meet temporary excess of cash

paymentsoverthecashreceiptsduringanyfinancialyearinaccordancewith
theagreementswhichmayenteredintobythegovernmentwiththeR.B.I.

QualityControlTotalQuality
ManagementTQMQualityCircles

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relatedwithborrowingsdonebycentralgovernmentfromR.B.I.TheAmended
shallnotnormallyborrowfromtheR.B.I.Howeverthecentralgovernmentmay

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CommunicationSkills
DistinguishBetween
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Education

6.FiscalTransparency

Finance

ThesixthimportantfeatureofAmendedFRBMbill2000orFRBMAct2003is

IndustrialPsychology

relatedwithfiscaltransparency.TheAmendedFRBMbill2000orFRBMAct

KalyanCity

2003clearlystatedtwoimportantmeasurestoensuregreatertransparencyin
fiscaloperationsofthegovernment.

Management
MarketingResearch

Thesetwoimportantfeaturesareasfollows:
1.Thecentralgovernmentshouldminimizeasfaraspossiblesecrecyin
preparationofannualbudget.

Photos
ProductionPlanning
Snakes

2.Thecentralgovernmentatthetimeofpresentationoftheannualbudget
shalldisclosethesignificantchangesinaccountingstandards,policiesand
practiceslikelytoaffectthecomputationoffiscalindicators.

7.LimitOnGuarantees
TheseventhimportantfeatureofAmendedFRBMbill2000orFRBMAct2003
isthatitrestrictstheguaranteesgivenbythecentralgovernmentto0.5%of
GDPinanyfinancialyearbeginningwith20042005.

8.Mediumtermfiscalpolicystatement
TheeighthimportantfeatureofamendedFRBMbill2000orFRBMAct2003is
that the central government should present medium term fiscal policy
statementinbothhousesofparliamentalongwithannualfinancialstatement.
The medium term fiscal policy statement should project specifically for
importantfiscalindicators.
Thesefiscalindicatorsareasfollows:
1.RevenuedeficitaspercentageofGDP.
2.FiscaldeficitaspercentageofGDP.
3.TaxrevenueaspercentageofGDP.
4.TotaloutstandingliabilitiesaspercentageofGDP.

9.Complianceofrules
FinallytheninthimportantfeatureofAmendedFRBMbill2000orFRBMAct
2003isrelatedwithmeasurestoenforcecomplianceofrules.
Thesemeasuresareasfollows:
1.TheFRBMbillclearlystatesthattheFinanceMinistershallreviewevery
quarter,thetrendsinreceiptsandexpenditureinrelationwiththebudget
andplaceitbeforebothhousesofparliamenttheoutcomeofsuchreviews.
2.Thefinanceministershallalsomakestatementinbothhousesof

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parliamentifthereisanydeviationsinmeetingtheobligationsofthecentral
government.
3.IfdeviationsaresubstantialthentheFinanceMinisterwilldeclarethe
remedialmeasureswhichthecentralgovernmentproposestotakeinfuture
periodoftime.
4.Therulesmandatethecentralgovernmenttotakeappropriatecorrective
actionincaseofrevenue&fiscaldeficitexceeding45%ofthebudget
estimatesortotalnondebtreceiptsfallingshortof40%ofthebudget
estimatesattheendoffirsthalfofthefinancialyear.

10.TaskforceonimplementationofFRBMAct
FollowingtheenactmentofFRBMAct,GovernmentconstitutedaTaskForce
headed by Dr. Vijay Kelkar for drawing up the medium term framework for
fiscalpoliciestoachievetheFRBMtargets.
Thetaskforceproposedthefollowingmeasures:
1.Wideningthetaxbasethroughremovalofexemptions.
2.AnAllIndiagoodsandservicetax(GST)onthebasisofa"grand
bargain"withStates,wherebyStateswillhavetheconcurrentpowerstotax
service,subjecttocertainprinciplesthatwillhelpfosteranationalcommon
market.
3.IncometaxexemptionlimittobeincreasedtoRs.1,00,000.
4.Atwotireratestructureof20percenttaxforincomeofRs.1,00,000to
Rs.4,00,000and30%forincomeaboveRs.4,00,000forindividualsand
eliminationofstandarddeductionavailabletothesalariedtaxpayer.
5.Areductioninthecorporateincometaxto30%fordomesticcompanies
andthereductionindepreciationratesfrom25to15%.
6.A3tiercustomdutyratesof5,8and10%tobringdowntariffstoASEAN
levels.
7.Allocationofgreaterportionofexpendituretolegitimatepublicgoodsby
revisitingtheclassificationofexpenditure.
8.Empoweringpanchayats/localbodiesthroughreservetransfer.

Thetaskforcestatedthatunderthereformsmeasuresrecommendedbyit,tax
GDP ratio of the central government should be raised from 9.2% in 2003 to
13.2%ofGDPin200809.Arevenuesurplusof0.2%ofGDPisestimatedto
emergein200809.Fiscaldeficitestimatedtofallfrom4.8%ofGDPin2003
04to2.8%ofGDPin200809.
TheabovefeaturesofAmendedFRBMbill2000orFiscalResponsibilityand
BudgetManagementAct2003clearlypointsoutthatthegovernmentintends
to create a strong institutional mechanism to restore fiscal discipline at the
levelofthecentralgovernment.Similarlythegovernmentwantstointroduce
greatertransparencyinfiscaloperationsofthecentralgovernment.

Criticism/LimitationsofFRBMAct2003
Though the Fiscal Responsibility and Budget Management Act 2003 or
Amended FRBM bill 2000 is a credible effort by the government to fix
responsibility on the government to reduce fiscal deficit and bring
transparencyinfiscaloperationsofthegovernmentithascertainlimitations.
These limitations ofAmended FRBM Bill 2000 or FRBMAct pointed out by
variouseconomistsareasfollows:

1.TargetregardingGFDverystringent
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TheBillstipulatesthatbyMarch31,2006,theGrossFiscalDeficit(GFD)asa
proportion of GDP must be 2%.This, of course, means that the government
canborrowfromtheeconomyonlytotheextentof2%ofGDP,whateverbe
the level of savings. Given the present need of government borrowings, 2%
limitisverylow.
The increase in public investment helps to increase the level of effective
demand and increases private investment in the economy.According to Dr.
RajaChelliahtheratioofGrossFiscalDeficit(GFD)toGDPshouldbe4%to
5%ofGDPaspublicinvestmentoninfrastructuresectorisessentialtoboost
economicgrowth.

2.Neglectofequityandgrowth
AccordingtocriticstheAmendedFRBMBill2000orFRBMAct2003isheavily
loaded against investment in both human development and infrastructure
sector.OneofthemajorommissionofamendedFRBMBill2000orFRBMAct
2003 was complete absence of any target for time bound minimum
improvement in areas of power generation, transport, etc. which is very
importantbothfromthepointofequityandhighereconomicgrowth.

3.NonCoverageofStateGovernments
Theprovisionsofthebillimposerestrictionsononlythecentralgovernment
butstategovernmentsareoutofitsscope.But,deficitsofstategovernments
areasmuchorevenagreaterproblem.Forinstance,theStateofMaharashtra
hasalreadycrossedthedeficitofRs.1lakhcroreasonDecember2004(the
secondStateafterUptocrossdeficitofRs.1lakhcrore).Therefore,thereisa
needforfiscalresponsibilitylegislationfortheStateGovernmentsaswell.

4.NeglectofDevelopmentNeeds
Today,thelevelsofcapitalexpendituresbythegovernmentaremiserablylow
inIndia.Thesecapitalexpendituresincreasetheefficiencyandproductivityof
private investment and thus contribute to the development process in the
country.IfRevenueDeficitistobereducedtozeroandGFDtobe2%ofGDP
aspertherequirementofFRBMBill,itisthecapitalexpenditurewhichwillbe
sacrificedandthuswillhinderfurtherdevelopmentofthecountry.

5.NeedtoIncreaseRevenue
Revenue deficits are determined by the interplay of expenditure and
revenues,bothtaxandnontax.Toooften,attentiongetsfocusedonlyonthe
expendituresideoftheidentitytotheneglectoftherevenueside.Increasing
nontaxrevenuerequiresthatpublicsectorservicesbeappropriatelypriced,
whichmaybedifficultasthepresentsocietyhasgotusedtothesubsidised
education,health,fooditems,etc.

6.NeglectofSocialSector
The FRBM bill does not mention anything relating to social sector
development.However,investmentinsocialsectorsuchashealth,education,
etcisveryvitalfortheeconomicdevelopmentofthenation.

7.ProblemofSubsidies
Thegovernmentmaybeabletoreducerevenuedeficitbyreducingsubsidies.
However,itisquitelikelythatthegovernmentwillbeunderseverepressureto
continuethesubsidies.Itmeanstheexpenditureontheproductiveareasmay
bereducedduetosubsidies.

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FiscalResponsibilityandBudgetManagementFRBMAct2003

8.StableGrowthDeficit
Chelliah points out that given the household financial savings in India, the
overallfiscaldeficittermedasstablegrowthdeficitofthegovernmentsector
as a whole should be pegged at 6% of GDP with revenue deficit being
graduallyphasedout.Thus,thetargetof2%offiscaldeficitGDPratiostatedin
FRBM bill is not desirable from the point of view of productive investment
accordingtoChelliah.

9.FalseAssumptions
TheFRBMBillisbasedonthefollowingassumptions:
1.Lowerfiscaldeficitleadtohighergrowth.
2.Largerfiscaldeficitleadtohigherinflation
3.Largerfiscaldeficitincreaseexternalvulnerabilityoftheeconomy.

TheseassumptionshavebeenrejectedbyC.P.ChandrashekharandJayanti
Ghoshwhohavegiventhefollowingarguments:
1.Ifthedeficitisintheformofcapitalexpenditureitwouldcontributeto
futuregrowth.
2.Fiscaldeficitisnotonlythecauseforhigherinflation.Duringthelate
1990stherateofinflationhasfallenevenwhenthefiscaldeficitwasas
highas5.5%ofGDP.
3.Higherfiscaldeficitneednotnecessarilycauseexternalcrisis.The
externalvulnerabilitydependsmoreoncapitalandtradeaccount
convertibility.InIndiawehavemanagedtobuildlargeforeignexchange
reserves,thoughfiscaldeficithasnotcomedown.

ConclusiononFRBMAct2003
TheAmendedFRBMBill2000orFRBMAct2003despiteabovecriticismcan
play a very important role in controlling fiscal deficit and in bringing
transparency in fiscal operation of the government if it is implemented
effectivelyinletterandspiritbytheconcernedgovernment.

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1Comment:
surajbadaiksaid...
October5,2012at11:07AM

thankuverymuchforthisinfoaboutFRBMAct............

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