FRBM Act - Management of Public Finances in India

Why do we need this?

Wants are plenty .means are limited.. Competing demands Issue of sustainability
Debt burden on next generation

If no option but to resort to borrowings

Is it for asset creation or to meet current expenditure

Why do we need this..

Year Revenue Deficit ( as % of GDP) Fiscal Deficit (as % of GDP) Interest payment over TRR 47.0 51.0 53.4 51.6 49.7

2003-04 2002-03 2001-02 2000-01 1999-2000

3.6 4.4 4.4 4.1 3.5

4.5 5.9 6.2 5.7 5.4

OBJECTIVES
To ensure inter-generational equity in fiscal management and long-term macro-economic stability; To generate sufficient revenue surplus;

To remove fiscal impediments in the effective conduct of monetary policy;

OBJECTIVES
Prudential debt management
Limits on borrowings, debt and deficits

Transparency in fiscal operations

Conducting fiscal policy in a medium-term framework

Fiscal management principles

Appropriate measures to reduce fiscal and revenue deficit.Sec. 4(1)
Eliminate revenue deficit by 31st March 20089 and thereafter build up adequate revenue surplus

Annual targets for reduction in FD and RD starting from 200405

0.5 per cent or more of GDP for RD 0.3 per cent or more for FD FD to be brought down to not more than 3 per cent of GDP by 31st March ,20089.

Fiscal management principles

Guarantees 0.5 per cent of GDP Additional liabilities 9 per cent of GDP in 2004-05 Gradual reduction by at least 1 per cent of GDP in subsequent years

Fiscal management principles

Provisos in case of deficits exceeding such targets. Grounds of national security or national calamity or such other exceptional grounds as may be specified

Grounds to be placed before the Parliament

FRBM Approach
Legislative framework Indian Constitution enables Parliament to set limits for debt by law Medium term targets for deficits Revenue Deficit Fiscal Deficit Statements to be laid before Parliament To outline the strategy and projections For better transparency and disclosure

Enforcing compliance
Quarterly review of trends in receipts and expenditure by FM Outcome of reviews to be placed before the Parliament Shortfall in revenues or excess of expenditure from pre specified levels Trigger for mid-course correction appropriate measures for increasing revenue reducing expenditure.overriding power

Enforcing compliance..
Deviation in meeting obligation
FM to make statement in Parliament Explaining deviation Whether substantial Remedial measures proposed

Enforcing compliance..
Q2 review

Non debt receipts < 40 per cent of B.E. Fiscal Deficit > 45 per cent of B.E. Revenue Deficit > 45 per cent of B.E.
Shall take corrective measures Proposed financing of supplementary demands for grants

Borrowings from RBI

Shall not borrow from RBI
(earlier provisions adhoc T billsmonetisation..)

Can take advances from RBI for temporary mismatches

To repay in 3 months

Sunset clause 2005-06.

Fiscal policy statements

Medium Term Fiscal Policy Statement
Three year rolling targets for fiscal indicators Assessment of sustainability

Fiscal Policy Strategy Statement

Policies related to taxation, expenditure, borrowings, guarantees, subsidies Key fiscal measures and rational for deviation if any

Macro-economic Framework Statement

Growth prospects Fiscal balance and external sector balance

Performance during FRBM Act Regime

Total Liabilities
Year Revenue Deficit Fiscal Deficit Gross Tax Revenu e
Actuals

As percentage of GDP (at current market prices)

Target (Original) Actuals Target Actuals Actuals

2004-05

2.5

2.4

4.4

3.9

9.4

53.4

2005-06
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

2.7
2.1 1.5 1.0 -

2.5
1.9 1.1 4.5 5.2 3.2 4.4 3.9 (Prov.)

4.3
3.8 3.3 2.5 Under 3 -do-do-do

4.0
3.3 2.5 6.0 6.5 4.8 5.7 4.9 (Prov.)

9.9
11.0 11.9 10.8 9.6 10.2 9.9 10.4

51.9
49.1 45.9 48.9 48.7 45.3 46.1 46.5

Components : Expenditure
Interest payment Defence Services Subsidies Pensions Grants to States & UTs Others

Non-Plan Expenditure

The first 5 items correspond to about 80 % of non-plan expenditure

16

Trends in Interest Payments during consolidation period

2004-05

2005-06

2006-07

2007-08

Interest Payments
% yoy increase

126934 2 4.0

132630 4 3.7

150272 13 3.6

171030 14 3.6

% of GDP

% of TRR

41

38

35

32
17

TRR: Total Revenue Receipts

Trends in non-plan expenditure during consolidation period

2004-05

2005-06

2006-07

2007-08

Total Non-Plan Expenditure

365960

365100

413527

507589

Non-Plan Exp. as % of GDP

11.6 4.9

10.2 -0.2

10.0 13.3

10.7 22.7

% yoy increase

% of TRR

120

106

95

94

18

Trends in Plan expenditure during consolidation period

2004-05

2005-06

2006-07

2007-08

Plan Expenditure

132292

140638

169860

205082

Plan Exp. as % of GDP

4.2 8.2 105

3.9 6.3 95

4.1 20.8 119

4.3 20.7 162 19

% yoy increase

% of Fiscal Deficit

Major Components of Tax Revenue (BE 2013-14)

Direct Taxes (5.9% of GDP)
Corporate Tax Income Tax 33.9% 20.0%

Indirect Taxes (5.0% of GDP)

Excise Duty Customs Service Tax 16.0% 15.2% 14.6%

Trends in Deficit and Debt

Outcomes of fiscal responsibility

Medium term perspective Expenditure reform Tax reform Debt management

Value for money

Outlays to outcomes

Recent Changes 2012

Re-alignment of targets in light of recent economic slowdown Continuation of fiscal consolidation after a brief pause caused by fiscal stimulus Redefining the revenue deficit that indicates consumption expenditure of Government Transfers to sub-national Governments and implementing agencies for capital expenditure Effective Revenue Deficit to be the focus instead of Revenue Deficit

Recent Changes 2012

Medium Term Expenditure Framework Detailed breakup of expenditure projections Better integration of Medium Term Fiscal Plan with the budget Medium term perspective for expenditure allocations Review by Comptroller and Auditor General of India To be placed in the Parliament

FRBM at State levels

All States have their own FRBM Acts Mainly guided by the recommendations of Twelfth and Thirteenth Finance Commission Macro Targets all-State Revenue Deficit to be eliminated Fiscal Deficit to be brought down to 3% of GSDP Debt to reduce to 30% of GSDP Disclosure Norms Fiscal incentives for enactment and adherence

Budget schedule for TPL/TRU Divisions in the Department of Revenue:

SI No.

Activity

Time Schedule

1. 2.

Finalization of Statement of Revenue Foregone All Budget Discussions to be completed and approvals of FM (including consultation with PM, if any) obtained and preparation of files to start.

25th January, 2013 (Friday) 1st February (Friday) to 9th February (Saturday), 2013

3. 4.

Detailed Estimates of Tax receipts to be sent to Budget Division All Files to reach Law Ministry

10th February, 2013 (Sunday) 5th (Tuesday) to 13th February (Wednesday), 2013 Total 9 days To be completed by 21st February, 2013 (Thursday)

5.

Drafting, Collation etc.

6.

Law Ministry brings the Finance Bill to Lock-in

21st February, 2013 (Friday-Night)

23rd February, 2013 (Saturday) 24th February, 2013 (Sunday) 28th February, 2013 (Thursday)

7. 8. 9.

Print Orders for Finance Bill Print order for Explanatory Memorandum Budget Presentation

Further discussions if desired