FRBM Act

Deficit
When the government expenditure exceed revenue, the government is having a budget deficit. The government finances its deficit mainly by borrowing from public through selling bonds, which give rise to public debt. Deficit may also be financed by borrowing from Central Bank.

Revenue Deficit
When the net amount received (revenues less expenditures) falls short of the projected net amount to be received. This occurs when the actual amount of revenue received and/or the actual amount of expenditures do not correspond with predicted revenue and expenditure figures .

Budget Deficit
The budget is said to be a deficit, when it spends more than what it collects by way of taxes. A deficit may occur in revenue budget or capital budget or both. India adopts a zero deficit budget since 1997-98.

Fiscal Deficit
When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings).

FRBM Bill
In order to bring fiscal discipline and to implement a prudent fiscal policy the government introduced the Fiscal Responsibility and Budget Management Bill 2000. The bill became an Act in August, 2003. The FRBM Act 2003 was further amended. The FRBM Act 2003 (as amended) became effective from 5th July 2004.

The main objectives of this Bill /Act are

1) To reduce fiscal deficit By introducing transparent fiscal management system in the country. 2) To generate revenue surplus (when the actual amount exceeds the projected amount). 3) To adopt prudent debt management.

FEATURES OF FRBM BILL / ACT

1. Revenue Deficit The revenue deficit should be reduced to an amount equivalent to 0.5% or more of GDP every year, beginning with in the financial year according to FRBM Rules 2004. Further FRBM Act, 2003 states that appropriate measures should be taken to eliminate revenue deficit by March, 2009, and thereafter build a adequate revenue surplus.

2. Fiscal Deficit The fiscal deficit should be reduced to 0.3% or more of the GDP every year, beginning with the financial year 2004-05. The fiscal deficit should be brought down to 3% of GDP by March 2009.

3. Government Guarantees The Central Government should not provide guarantees in excess of 0.5% of GDP in any financial year, beginning with 2004-05. (For Eg. Guarantees for loans borrowed by State Governments, Public Corporations etc.)

4. Additional Liabilities :The FRBM Rules 2004 states that the Central Government should not assume additional liabilities in excess of 9% of GDP for financial year 2004-05 and progressive reduction of this limit by at least one percentage point of GDP in each subsequent year.

5. Relaxation In Deficit Reduction Targets :The FRBM Act states that the revenue and fiscal deficit may exceed the targets specified in Rules only on grounds of national security or national calamity or such other exceptional grounds as the Central Government may specify.

 6. RBI's Subscription To Government Securities :The RBI should not subscribe to primary issues of Central Government securities from the year 2006-07.

7. Transparency In Budgetary Process : The FRBM Act and Rules States that the Central Government should take suitable measures to ensure greater transparency in fiscal operations. The Government is also required to submit statements of receivables and guarantees and a statement of assets, at the time of presenting the annual financial statement latest by Budget 200607.

8. Quarterly Reviews :The FRBM Act states that the Finance Minister to make a quarterly review of trends in receipts and expenditure in relation to budget and place the outcome of such reviews before both the Houses of Parliament.

9. Projection Of Fiscal Indicators :The FRBM Rules 2004 states that the Central Government should specify four fiscal indicators. These are a) Fiscal deficit as a percentage of GDP. b) Revenue deficit as a percentage of GDP. c) Tax revenue as a percentage of GDP. d) Total outstanding liabilities as percentage of GDP.

10. Financial Statements The Central Government should place in each financial year before houses of Parliament three statements: a) Medium Term Fiscal Policy Statement. b) Fiscal policy strategy statement. c) Macro-economic Framework statement along with Annual Financial Statement and Demands for grants.

11. RBI Borrowings The FRBM Act States that the Central Government shall not borrow from RBI except by way of advances to meet temporary excess of cash disbursements over cash receipts.