The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an
Act of the
Parliament of India
The Parliament of India ( IAST: ) is the supreme legislative body of the Republic of India. It is a bicameral legislature composed of the president of India and two houses: the Rajya Sabha (Council of States) and the Lok Sabha (House of the ...
to institutionalize financial discipline, reduce India's fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a
balanced budget and strengthen fiscal
prudence. The main purpose was to eliminate revenue deficit
[''Revenue Deficit'' is defined in the ''act'' as the difference between the revenue expenditure and revenue receipts which indicates increase in liabilities of the Central Government without corresponding increase in assets] of the country (building revenue surplus thereafter) and bring down the
fiscal deficit
The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
to a manageable 3% of the GDP by March 2008. However, due to the
2007 international financial crisis, the deadlines for the implementation of the targets in the act was initially postponed and subsequently suspended in 2009. In 2011, given the process of ongoing recovery,
Economic Advisory Council
Economic Advisory Council to the Prime Minister of India (PMEAC) is a non-constitutional, non-permanent and independent body constituted to give economic advice to the Government of India, specifically the Prime Minister. The council serves t ...
publicly advised the
Government of India
The Government of India (ISO: ; often abbreviated as GoI), known as the Union Government or Central Government but often simply as the Centre, is the national government of the Republic of India, a federal democracy located in South Asia, ...
to reconsider reinstating the provisions of the FRBMA.
N. K. Singh
Nand Kishore Singh is an Indian politician, economist and former Indian Administrative Service officer. He is a senior member of the Bharatiya Janata Party (BJP) since March 2014 after having served as a Member of Parliament in the Rajya Sabha ...
is currently the Chairman of the review committee for Fiscal Responsibility and Budget Management Act, 2003, under the
Ministry of Finance (India)
The Ministry of Finance (IAST: ''Vitta Maṃtrālaya'') is a ministry within the Government of India concerned with the economy of India, serving as the Treasury of India. In particular, it concerns itself with taxation, financial legislation, ...
,
Government of India
The Government of India (ISO: ; often abbreviated as GoI), known as the Union Government or Central Government but often simply as the Centre, is the national government of the Republic of India, a federal democracy located in South Asia, ...
.
Enactment
The Fiscal Responsibility and Budget Management ''Bill'' (FRBM Bill) was introduced in India by the then
Finance Minister
A finance minister is an executive or cabinet position in charge of one or more of government finances, economic policy and financial regulation.
A finance minister's portfolio has a large variety of names around the world, such as "treasury", ...
of India, Mr.
Yashwant Sinha
Yashwant Sinha (, born 6 November 1937) is an Indian administrator and politician. He served as the Minister of Finance from 1990 until 1991 under Prime Minister Chandra Shekhar and again from March 1998 to July 2002 under Prime Minister Atal B ...
in December 2000. Firstly, the bill highlighted the terrible state of government finances in India both at the Union and the state levels under the statement of objects and reasons.
Secondly, it sought to introduce the fundamentals of fiscal discipline at the various levels of the government. The FRBM bill was introduced with the broad objectives of eliminating revenue deficit by 31 March 2006, prohibiting government borrowings from the
Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible f ...
three years after enactment of the bill, and reducing the fiscal deficit to 2% of GDP (also by 31 March 2006).
Further, the bill proposed for the government to reduce liabilities to 50% of the estimated GDP by year 2011. There were mixed reviews among economists about the provisions of the bill, with some criticising it as ''too drastic''. Political debate ensued in the country. Several revisions later, it resulted in a much relaxed and watered-down version of the bill
(including postponing the date for elimination of revenue deficit to 31 March 2008) with some experts, like Dr Saumitra Chaudhuri of ICRA Ltd.
[Formerly Investment Information and Credit Rating Agency of India Limited](and now a member of
Prime Ministers' Economic Advisory Council) commenting, "all teeth of the Fiscal Responsibility Bill have been pulled out and in the current form it will not be able to deliver the anticipated results."
This bill was approved by the Cabinet of Ministers of the Union Government of India in February, 2003 and following the due
enactment process of Parliament, it received the assent of the
President of India
The president of India ( IAST: ) is the head of state of the Republic of India. The president is the nominal head of the executive, the first citizen of the country, as well as the commander-in-chief of the Indian Armed Forces. Droupadi Mur ...
on 26 August 2003.
Subsequently, it became effective on 5 July 2004.
This would serve as the ''day of commencement of this Act''.
Objectives
The main objectives of the act were:
# to introduce transparent fiscal management systems in the country
# to introduce a more equitable and manageable distribution of the country's debts over the years
# to aim for fiscal stability for India in the long run
Additionally, the act was expected to give necessary flexibility to
Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible f ...
for managing inflation in India.
[
]
Content
Since the act was primarily for the management of the governments' behaviour, it provided for certain documents to be tabled in the parliament
In modern politics, and history, a parliament is a legislative body of government. Generally, a modern parliament has three functions: representing the electorate, making laws, and overseeing the government via hearings and inquiries. Th ...
annually with regards to the country's fiscal policy. This included the following along with the Annual Financial Statement and ''demands for grants'':
# a document titled ''Medium-term Fiscal Policy Statement'' – This report was to present a three-year rolling target for the ''fiscal indicators'' [The ''fiscal indicators'' was defined in this law as numerical ceilings and proportions to Gross Domestic Product, as may be prescribed for evaluation of the fiscal position of the Central Government.] with any assumptions, if applicable. This statement was to further include an assessment of sustainability with regards to ''revenue deficit'' and the use of capital receipts of the Government (including market borrowings) for generating productive assets.
# a document titled ''Fiscal Policy Strategy Statement'' – This was a tactical report enumerating strategies and policies for the upcoming Financial Year
A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ...
including strategic fiscal priorities, taxation policies, key fiscal measures and an evaluation of how the proposed policies of the Central Government conform to the 'Fiscal Management Principles' of this act.
# a document titled ''Macro-economic Framework Statement'' – This report was to contain forecasts enumerating the growth prospects of the country. GDP growth, revenue balance, gross fiscal balance and external account balance of the balance of payments were some of the key indicators to be included in this report.
#a document titled ''Medium-term Expenditure Framework Statement'' - This is to set forth a three-year rolling target for prescribed expenditure indicators with specification of underlying assumptions and risk involved (vide Section 6 A of the Act amended in 2012).
The Act further required the government to develop measures to promote ''fiscal transparency and reduce secrecy'' in the preparation of the Government financial documents including the Union Budget.
Fiscal management principles
The Central Government, by rules made by it, was to specify the following:
#a plan to eliminate revenue deficit by 31 March 2008 by setting annual targets for reduction starting from day of commencement of the act.
#reduction of annual fiscal deficit of the country
#annual targets for assuming contingent liabilities in the form of guarantees and the total liabilities as a percentage of the GDP
Borrowings from Reserve Bank of India
The Act provided that the Central Government shall not borrow from the Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible f ...
except under exceptional circumstances where there is temporary shortage of cash in particular financial year. It also laid down rules to prevent RBI from trading in the primary market for Government securities. It restricted them to the trading of Government securities in the secondary market after an April, 2005, barring situations highlighted in ''exceptions'' paragraph.
Exceptions
National security, natural calamity or other ''exceptional grounds that the Central Government may specify'' were cited as reasons for not implementing the targets for ''fiscal management principles, prohibition on borrowings from RBI and fiscal indicators'' highlighted above, provided they were approved by both the Houses of the Parliament as soon as possible, once these targets had been exceeded.
Measures to enforce compliance
This was a particularly weak area of the act. It required the Finance Minister of India to only conduct quarterly reviews of the receipts and expenditures of the Government and place these reports before the Parliament. Deviations to targets set by the Central government for fiscal policy had to be approved by the Parliament. No other measures for failure of compliance have been specified.
Implementation
Targets and fiscal indicators
Subsequent to the enactment of the FRBMA, the following targets and fiscal indicators were agreed by the central government:
*Revenue deficit
** Date of elimination – 31 March 2009 (postponed from 31 March 2008)
** Minimum annual reduction – 0.5% of GDP
*Fiscal Deficit
** Ceiling – 3% of the GDP by 31 March 2008
** Minimum annual reduction – 0.3% of GDP
*Additional Liabilities (including external debt at current exchange rate) – 9% of the GDP (a target increased from the original 6% requirement in 2004–05)
** Annual reduction – 1% of GDP
*RBI purchase of government bonds – to cease from 1 April 2006
Four fiscal indicators to be projected in the medium term fiscal policy statement were proposed. These are, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP.
Jurisdiction
The residuary powers to make rules with respect to this act were with the Central Government with subsequent presentation before the Parliament for ratification. Civil courts of the country had no jurisdiction for enforcement of this act or decisions made therein. The power to remove difficulties was also entrusted to the Central Government.
Criticism
Some quarters, including the subsequent Finance Minister Mr. P. Chidambaram, criticised the act and its rules as ''adverse'' since it might require the government to cut back on social expenditure necessary to create ''productive assets'' and general upliftment of rural poor of India. The vagaries of monsoon
A monsoon () is traditionally a seasonal reversing wind accompanied by corresponding changes in precipitation but is now used to describe seasonal changes in atmospheric circulation and precipitation associated with annual latitudinal osci ...
in India, the social dependence on agriculture and over-optimistic projections of the task force in-charge of developing the ''targets'' were highlighted as some of the potential failure points of the Act. However, other viewpoints insisted that the act would benefit the country by maintaining stable inflation rates which in turn would promote social progress.
Some others have drawn parallel to this act's international counterparts like the Gramm-Rudman-Hollings Act (US) and the Stability and Growth Pact
The Stability and Growth Pact (SGP) is an agreement, among all of the 27 member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU). Based primarily on Articles 121 and 126 of the Tre ...
(EU) to point out the futility of enacting laws whose relevance and implementation over time are bound to decrease. They described the law as ''wishful thinking'' and a ''triumph of hope over experience''. Parallels were drawn to the US experience of enacting ''debt-ceilings'' and how lawmakers have traditionally been able to amend such laws to their own political advantage. Similar fate was predicted for the Indian version which indeed was suspended in 2009 when the economy hit rough patches.
Suspension and reinstatement
Implementing the act, the government had managed to cut the fiscal deficit to 2.7% of GDP and revenue deficit to 1.1% of GDP in 2007–08. However, given the international financial crisis of 2007, the deadlines for the implementation of the targets in the act were suspended.[ The fiscal deficit rose to 6.2%] of GDP in 2008–09 against the target of 3% set by the Act for 2008–09. However, IMF estimated fiscal deficit to be 8% after accounting for oil bonds and other off budget expenses.
In August 2009, IMF had opined that India should implement fiscal reform at the soonest possible, enacting a successor to the current act.[ This IMF paper was authored by two senior IMF economists Alejandro Sergio Simone and Petia Topalova and highlighted the shortcomings of the current law along with proposed improvements for a new version.
It was reported that the Thirteenth ]Finance Commission of India
The Finance Commissions (IAST: ''Vitta Āyoga'') are commissions periodically constituted by the President of India under ''Article 280'' of the Indian Constitution to define the financial relations between the central government of India an ...
was working on a new plan for reinstating fiscal management in India. The initial expectation for revival of ''fiscal prudence'' was in 2010–11 but was further delayed. Finally, the government did announce a path of fiscal consolidation starting from fiscal deficit of 6.6% of GDP in 2009–10 to a target of 3.0% by 2014–15 However, eminent economist and ex-RBI Deputy Governor, S.S. Tarapore is quick to highlight the use of creative accounting to misrepresent numbers in the past. Furthermore, he added that fiscal consolidation is indeed vital for India, as long as the needs of the poor citizens are not marginalised. This need for financial inclusion of the poor while maintaining the fiscal discipline was highlighted by him as the most critical requirement for the 2011–12 Budget of India.
More recently, in February 2011, the PMEAC
Economic Advisory Council to the Prime Minister of India (PMEAC) is a non-constitutional, non-permanent and independent body constituted to give economic advice to the Government of India, specifically the Prime Minister. The council serves to ...
recommended the need for reinstatement of fiscal discipline of the Government of India
The Government of India (ISO: ; often abbreviated as GoI), known as the Union Government or Central Government but often simply as the Centre, is the national government of the Republic of India, a federal democracy located in South Asia, ...
, starting 2011–12 financial year. In FY 2011–12, it was almost certain that government would cross the budgetary fiscal deficit target of 4.6% and it would be around 5%.
State-level fiscal responsibility legislations in India
The tenth plan of the Planning Commission of India highlighted the need for fiscal discipline at the level of the states. This was to reduce the debt-to-GDP ratio of India. Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible f ...
, in its role as the ultimate financial authority in India, was also a keen supporter of the concept and publicly highlighted the need for state level fiscal responsibility legislation in India. By 2007, the states of Karnataka
Karnataka (; ISO: , , also known as Karunāḍu) is a state in the southwestern region of India. It was formed on 1 November 1956, with the passage of the States Reorganisation Act. Originally known as Mysore State , it was renamed ''Karnat ...
, Kerala
Kerala ( ; ) is a state on the Malabar Coast of India. It was formed on 1 November 1956, following the passage of the States Reorganisation Act, by combining Malayalam-speaking regions of the erstwhile regions of Cochin, Malabar, South ...
, Punjab
Punjab (; Punjabi: پنجاب ; ਪੰਜਾਬ ; ; also romanised as ''Panjāb'' or ''Panj-Āb'') is a geopolitical, cultural, and historical region in South Asia, specifically in the northern part of the Indian subcontinent, comprising a ...
, Tamil Nadu, Maharashtra and Uttar Pradesh
Uttar Pradesh (; , 'Northern Province') is a state in northern India. With over 200 million inhabitants, it is the most populated state in India as well as the most populous country subdivision in the world. It was established in 1950 ...
are among those which have already legislated the required fiscal discipline laws at the state level.
FRBM Review Committee of 2016
Finance Minister Arun Jaitley
Arun Jaitley (28 December 1952 – 24 August 2019) was an Indian politician and attorney. A member of the Bharatiya Janata Party, Jaitley served as the Minister of Finance and Corporate Affairs of the Government of India from 2014 to 2019. Jai ...
announced the FRBM Review Committee to be set up in the budget speech of February 2016–17. The Government of India
The Government of India (ISO: ; often abbreviated as GoI), known as the Union Government or Central Government but often simply as the Centre, is the national government of the Republic of India, a federal democracy located in South Asia, ...
had set up a review committee to evaluate the FRBM Act, 2003 in order to assess its functionality in the last 12 years. The five-member panel announced by the finance minister
A finance minister is an executive or cabinet position in charge of one or more of government finances, economic policy and financial regulation.
A finance minister's portfolio has a large variety of names around the world, such as "treasury", ...
includes Former Revenue Secretary and Secretary to the Prime Minister of India N. K. Singh
Nand Kishore Singh is an Indian politician, economist and former Indian Administrative Service officer. He is a senior member of the Bharatiya Janata Party (BJP) since March 2014 after having served as a Member of Parliament in the Rajya Sabha ...
as its chairman, former Finance Secretary Sumit Bose, Chief Economic Adviser Arvind Subramanian, Reserve Bank of India
The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible f ...
Governor Urjit Patel
Urjit Patel (born 28 October 1963) is an Indian economist, who formerly served as the 24th Governor of the Reserve Bank of India and also Deputy Governor of Reserve Bank of India, looking after monetary policy, economic research, financial m ...
and National Institute of Public Finance and Policy Director Dr Rathin Roy. The committee had wide-ranging terms of reference (ToR) to comprehensively review the existing FRBM Act in the light of contemporary changes, past outcomes, global economic developments, best international practices and to recommend the future fiscal framework and roadmap for the country. Subsequently, the Terms of Reference were enlarged to seek the committee's views on certain recommendations of the Fourteenth Finance Commission and the Expenditure Management Commission. These primarily related to strengthening the institutional framework on fiscal matters as well as certain issues connected with new capital expenditures in the budget.
The FRBM Review Committee of 2016 has been the largest review of the FRBM Act to date. The committee consisted of a large team of domain experts, consultants, experts from the private sector as well as representatives from the state governments. The committee submitted its report to the finance minister on 23 January 2017. The report was submitted three months after its government-recommended deadline of 31 October 2016. The report of the review committee is presently being reviewed by the government of India. The report of the 2017 FRBM Review Committee has positively received by the government and private sector with several articles and opinion pieces appearing in the media subsequently after the report was released in the public domain on 14 April 2017. In the Budget Speech of 2017, Finance Minister Arun Jaitley deviated from his earlier fiscal consolidation road map by pegging fiscal deficit at 3.2% of gross domestic product (GDP) for 2017–18, deferring the 3% of GDP target by a year. He mentioned the recommendations of the FRBM Review Committee Report being taken into consideration while keeping the targets for both Fiscal Deficit and Revenue Deficit. The government has also reduced revenue deficit to 2.1% of GDP in 2016–17 from the budget estimate of 2.3% of GDP and has pegged it at 1.9% of GDP for 2017–18 from 2% of GDP as mandated by the Fiscal Responsibility and Budget Management Act. Chief Economic Advisor Arvind Subramanian, who was also a member of the FRBM Review Committee, has published his own dissent note in Annexure 5 of the report submitted to the Government of India.
The report submitted is accessible on the website of the Department of Economic Affairs under the Ministry of Finance.
It consists of 10 chapters, 4 volumes and 6 annexures:
Chapters
Chapter 1 - ''Introduction''
Chapter 2 - ''Historical Perspective''
Chapter 3 - ''International Experience''
Chapter 4 - ''A 21st Century Debt & Fiscal Paradigm''
Chapter 5 - ''Partnering The States''
Chapter 6 - ''Anatomy of Credit''
Chapter 7 - ''Fiscal Council''
Chapter 8 - ''Escape Clauses''
Chapter 9 - ''Other Issues''
Chapter 10 - ''Summary of Recommendations''
Annexures
Annexure 1 - ''Debate of the Constituent Assembly''
Annexure 2 - ''Draft Statement of Objects & Reasons for the Debt Management and Fiscal Responsibility Bill, 2017 ''
Annexure 3 - ''Draft Debt Management & Fiscal Responsibility Bill, 2017''
Annexure 4 - ''Draft Debt Management & Fiscal Responsibility Rules, 2017''
Annexure 5 - ''Note of Dissent by Dr. Arvind Subramanian''
Annexure 6 - ''Rejoinder of the Committee to the Note of Dissent''
Composition of the committee
Members
Mr N. K. Singh
Nand Kishore Singh is an Indian politician, economist and former Indian Administrative Service officer. He is a senior member of the Bharatiya Janata Party (BJP) since March 2014 after having served as a Member of Parliament in the Rajya Sabha ...
- Chairman
Dr Urjit Patel
Urjit Patel (born 28 October 1963) is an Indian economist, who formerly served as the 24th Governor of the Reserve Bank of India and also Deputy Governor of Reserve Bank of India, looking after monetary policy, economic research, financial m ...
Dr Rathin Roy
Mr Sumit Bose
Dr Arvind Subramanian
Government officers
Mr Srinivasan Ramanathan Raja, Undersecretary
Undersecretary (or under secretary) is a title for a person who works for and has a lower rank than a secretary (person in charge). It is used in the executive branch of government, with different meanings in different political systems, and is al ...
Mr Prashant Goyal, Joint Secretary
Joint Secretary to Government of India (often abbreviated as JS, GoI or Union Joint Secretary or Joint Secretary to Union of India) is a post under the Central Staffing Scheme and the third highest non-political executive rank in Government of I ...
(Budget)
Mr Naresh Mohan Jha, Director (Budget)
Mr L. Sidharth Singh, Director - Comptroller and Auditor General of India
The Comptroller and Auditor General of India is the supreme audit institution of India, established under Article 148 of the Constitution of India. They are empowered to audit all receipts and expenditure of the Government of India and the ...
Mr Rangeet Ghosh, Officer on Special Duty to the Chief Economic Advisor
Mr Kapil Patidar, Deputy Director
Mr Syed Zubair Husain Noqvi, Deputy Director
Mr Sunil Chaudhary, Deputy Director
Specialist Advisors
Dr Prachi Mishra, Reserve Bank of India
Dr Subhash Chandra Pandey, IAAS
The first major provider of infrastructure as a service (IaaS) was Amazon in 2008. IaaS is a cloud computing service model by means of which computing resources are supplied by a cloud services provider. The IaaS vendor provides the storage, net ...
Domain Experts
Mr Sajjid Z Chinoy, Chief Economist JP Morgan
JPMorgan Chase & Co. is an American Multinational corporation, multinational Investment banking, investment bank and financial services holding company headquartered in City of New York, New York City and Delaware General Corporation Law, inco ...
Mr Neelkanth Mishra, India Equity Strategist Credit Suisse
Mr S Gurumurthy
Mr Chetan Ahya
Mr Ashish Gupta
Mr Kush Shah
Mr Martin Wolf
Martin Harry Wolf (born 16 August 1946 in London) is a British journalist of Austrian-Dutch descent who focuses on economics. He is the associate editor and chief economics commentator at the ''Financial Times''.
Early life
Wolf was born in ...
Mr Francesco Giavazzi
Francesco Giavazzi (born 11 August 1949 in Bergamo) is an Italian economist who is Professor of Economics at Bocconi University, and a regular visiting professor at MIT.
Biography
Giavazzi graduated in electrical engineering from the Politecnico ...
Mr Michael Boskin
Mr Ananya Kotia
Consultants
Mr Joshua Felman
Mr S. Gopalakrishnan
Mr Vijayraj Singh
Mr Raj Kumar Hirani
Institutions
The NITI Aayog
Observer Research Foundation
Observer Research Foundation (ORF) is an independent global think tank based in Delhi, India. The foundation has three centres in Mumbai, Chennai and Kolkata. ORF provides potentially viable inputs for policy and decision-makers in the Indian ...
The National Institute of Public Finance & Policy
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
VIDHI
Notes
References
External links
{{Portal, India, Economics
Fiscal Responsibility and Budget Management Act,2003 Act No : 39 of 2003 Online version
Union budgets of India
Vajpayee administration initiatives
Indian business law
Acts of the Parliament of India 2003
Economic history of India (1947–present)
2003 in Indian economy