1. Topic
- Fiscal Responsibility Bill
Prepared By:
Pravinkumar P. Sukre
2. 1. Introduction
Fiscal responsibility is the act of creating, optimizing and maintaining a balanced
budget.
"Fiscal" refers to money and can include personal finances, though it most often is
used in reference to public money or government spending. This can involve income from
taxes, revenue, investments or treasuries. In a governmental context, a pledge of fiscal
responsibility is a government’s assurance that it will judiciously spend, earn and generate
funds without placing undue hardship on its citizens.
Fiscal responsibility often starts with a balanced budget, which is one with no deficits
and no surpluses. The expectations of what might be spent and what is actually spent are
equal.
In recent years the lack of fiscal discipline has been costly for the Indian economy, as
excessive demand arising from large deficits translated into stubbornly high inflation and was
partly responsible for large current account deficits. Fiscal discipline should be a priority. An
emerging market requires a strong commitment to keeping fiscal deficits in check. New
budget legislation, along the lines of the Fiscal Responsibility Bill, but with more teeth,
should be instituted.
The Fiscal Responsibility Bill is an financial discipline, reduce fiscal deficit, improve
macroeconomic management and the overall management of the public funds by moving
towards a balanced budget. The main purpose was to eliminate revenue deficit of the country
(building revenue surplus thereafter) and bring down the fiscal deficit.
A Bill to provide for the responsibility of the State Government to ensure prudence in
fiscal management and fiscal stability by progressive elimination of revenue deficit, reduction
in fiscal deficit, prudent debt management consistent with fiscal sustainability, greater
transparency in fiscal operations of the Government and conduct of fiscal policy in a medium
term framework and for matters connected therewith or incidental thereto.
2. Objectives
The main objectives of the act were:
1. To introduce transparent fiscal management systems in the country
2. To introduce a more equitable and manageable distribution of the country's debts over
the years
3. To aim for fiscal stability in the long run
3. 3. Fiscal Responsibility Bill
The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the
duty of the Union government to stick to the deficit targets. It also empowers RBI for taking
measures to control Inflation. The Act also provides exception to government in case of
natural calamity and national security.
The Bill is based on the presumption that the fiscal deficit is the key parameter
adversely affecting all other macroeconomic variables. It is argued that lower fiscal
deficits lead to higher as well as sustainable growth and higher fiscal deficits
apparently lead to inflation. It is also argued that large fiscal deficits may lead to huge
accumulation of public debt.
However, many development economists argue that if the fiscal deficit is
dominantly in the form of capital expenditure, it contributes to future growth through
demand and supply linkages, and in fact can create so much demand in the economy
that private investment may crowd-in to supplement autonomous investment. As far as
inflation is concerned, it results from an excess of aggregate demand over aggregate
supply and there can be higher inflation with low, zero or even positive fiscal
accounts.
There is nothing wrong in maintaining large fiscal deficits if resorting to public
debt is made only to meet investment requirements as long as their social rate of
return is higher than the rate of interest. Deficit per se is not bad as the Countries
economy is a demand-constrained economy. Due to existence of underemployment of
resources and production at much less than its optimal level, the economy can actually
sustain a high level of fiscal deficit up to around 7-8 percent of GDP. Even in case of
revenue deficit, if it is properly managed will help pumping in purchasing power to
the economy and boost demand keeping in mind the persistently low level of inflation
during recent years.
In India, it is not the problem of growing deficits, which deserves concern but
the composition for these deficits and the way these are being financed. There are
many other countries like USA, Canada in the developed world and Argentina, Peru,
Brazil among the emerging market economies have such fiscal responsibility
legislations.
However, they often try to reduce their deficit through front loaded Centre for
Budget and Governance Accountability (CBGA) 5 mechanisms. Still, many countries
sustain their huge fiscal deficit without compromising on the development expenditure
front.
4. 4. Gross Fiscal Deficit (GFD)
Gross fiscal deficit (GFD) represents the gap between the government’s expenditures
(Like Interest, Defence, Subsidies, Plan Expenditure, and Other Capital Expenditure) and its
revenues (Like Net Tax Revenues, Non-tax Revenues, Recovery of Loans and PSU
Disinvestment other than net borrowings). This gap is met by net borrowing.
GFD is the difference between
(i) Aggregate disbursements net of debt repayments
(ii) Revenue receipts, recovery of loans, and non-debt capital receipts.
It also indicates the total net borrowing of the government, and the increment to its
outstanding debt.
The State Government finances its gross fiscal deficit by
(i) Loans from the Centre,
(ii) Market borrowings,
(iii) Loans from financial institutions/banks,
(iv) Provident funds,
(v) Reserve funds,
(vi) Deposits and advances,
(vii) Special securities issued to the NSSF, etc.
Fiscal deficit = Total expenditure (Revenue expenditure + Capital expenditure) – Revenue
receipts – Recovery of loans – Other receipt (mainly PSU disinvestment)
5. Revenue Deficit
Revenue deficit refers to the excess of revenue expenditure over revenue receipts.
Revenue expenditure, unlike capital expenditure, does not yield financial return. Therefore,
one of the golden rules of fiscal policy is to eliminate revenue deficit, if any. On the other
hand, surplus in the revenue account can be used to fund capital expenditure and reduce the
government’s dependence on borrowed funds.
Revenue deficit = Revenue expenditure (Interest payments + Total Subsidies + Defence
expenditure) – Revenue receipts (Tax revenue + Non-tax revenue)
6. Primary deficit
Primary deficit is the gross deficit which is obtained by subtracting interest payments
from budget deficit of any country of a particular year.
Primary deficit corresponds to the net borrowing, which is required to meet the expenditure
excluding the interest payment.
Primary Deficit = Fiscal Deficit – Interest Payment
5. 7. Principles of Fiscal Legislation at the State level
Keeping in view the poor financial position of the State governments, it is argued that
there is an urgent need for putting in place fiscal policy rules at the subnational level. While
designing any fiscal rule, it is important to keep in mind the internationally accepted
principles of fiscal legislation. In view of the above, the Group felt that the model fiscal
responsibility bill for the State Governments should be consistent with the following
internationally accepted fiscal management principles meant primarily for national
governments, but which could also be applied to sub-national governments with appropriate
modifications.
1. Transparency is an important aspect in the setting of fiscal policy objectives,
implementation of fiscal policy and publication of the public accounts.
2. Stability in the fiscal policy-making process and in the way fiscal policy impacts on
the economy is a very crucial element of fiscal management. Accordingly, the
Government should operate fiscal policy in a manner that is predictable and consistent
with the objective of high and stable levels of growth and employment.
3. Responsibility in the management of the public finances requires the Government to
operate fiscal policy in a prudent way, and manage public assets, liabilities and fiscal
risks with a view to ensuring that the fiscal position is sustainable over the long term.
4. Fairness requires that fiscal policy should be operated in a way that takes into
account the financial effects on future generations, as well as its distributional impact
on the current population.
5. Efficiency should be the key objective in the design and implementation of fiscal
policy and in managing the assets and liabilities of the public sector balance sheet.
The Government should ensure that available resources are deployed optimally and
public assets are put to the best possible use.
6. 8. Deficit Rule
The choice of the deficit indicator for laying down the deficit rule is not an easy one.
The Group assessed the pros and cons of adopting one or more among the three major deficit
indicators,
1. Gross fiscal deficit (GFD),
2. Revenue deficit (RD)
3. Primary deficit (PD).
Major Deficit Indicators of State Governments ((Amount in billions)
Item 1990-98 1998-
2004
2004-08 2008-10 2010-11 2011-12 2012-13
(BE)
2012-13
(RE)
2013-14
(BE)
Averages
1 2 3 4 5 6 7 8 9 10
Gross
(2.7) (4.1) (2.3) 1,617.0
1,614.6
1,683.5
2,152.7
2,334.1
Fiscal
(2.7)
(2.1)
(1.9)
(2.1)
(2.3)
Deficit
2,450.5
(2.2)
Revenue
Deficit
(0.8) (2.5) (0.0) 91.7
(0.1)
-30.5
(-0.0)
-239.6
(-0.3)
-425.7
(-0.4)
-196.3
(-0.2)
-477.3
(-0.4)
Primary
Deficit
(0.9) (1.7) (0.0) 538.2
(0.9)
366.4
(0.5)
315.4
(0.4)
598.3
(0.6)
790.8
(0.8)
716.7
(0.6)
BE: Budget Estimates. RE: Revised Estimates.
Note: 1. Negative (-) sign indicates surplus.
2. Figures in parentheses are percentages to GDP.
3. The ratios to GDP at current market prices are based on CSO's National Accounts 2004-05 series.
Source: Budget documents of the state governments.
3
2
1
0
-1
Major Deficit Indicators
2011-12 2012-13 (BE) 2012-13 (RE) 2013-14 (BE)
GFD/GDP RD/GDP PD/GDP
7. 6.48
6.43
6.61
5.75
5.99
5.73
5.48
9. Fiscal Deficit of Centre and States in India
5.36
4.63
4.83
5.14
4.8
4.62
4.81
4.74
4.8
4.72
(1990-1991 to 2014-2015)
4.12
4.14
4.34
3.96
3.88
4.17
4.11
4.23
6
States Centre
3.32
1.91
2.16
1.88
2.3
2.1
2.26
2.54
2.94
3.11
2.85
3.19
2.33
2.66
2.7
2.63
2.67
2.82
2.28
3.76
3.8
3.8
1.49
1.82
2014-2015 (BE)
2013-2014 (RE)
2012-2013
2011-2012
2010-2011
2009-2010
2008-2009
2007-2008
2006-2007
2005-2006
2004-2005
2003-2004
2002-2003
2001-2002
2000-2001
1999-2000
1998-1999
1997-1998
1996-1997
1995-1996
1994-1995
1993-1994
1992-1993
1991-1992
1990-1991
As per above Bar Chart we take Fiscal Deficit of Centre and States in India from
1990-1991 to 2014-2015 and from this we see after Implementing the Fiscal Responsibility
and Budget Management Act, 2003 (FRBMA), the government had managed to cut the fiscal
deficit of center to 2.54% of GDP and fiscal deficit of states to 1.49% 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 5.99% of
GDP in 2008–09 against the target of 3% set by the Act for 2008–09.
8. 10. Fiscal Policy Statements to be laid before the Legislature
The State Government shall in each financial year lay before the House/Houses of the
Legislature, the following statements5 of fiscal policy along with the budget, namely:-
(a) Macroeconomic Framework Statement;
(b) Medium Term Fiscal Policy Statement; and
(c) Fiscal Policy Strategy Statement.
Since the act was primarily for the management of the governments' behaviour, it
provided for certain documents to be tabled in the Parliament annually with regards to the
country's fiscal policy.
Medium-term Fiscal Policy Statement –
This report was to present a three-year rolling target for the fiscal indicators 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.
Fiscal Policy Strategy Statement –
This was a tactical report enumerating strategies and policies for the upcoming
Financial Year 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.
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.
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.
9. 11. Effects of Fiscal deficit on credit cycle & farmers suicide
On one hand, the hard credit policy and shortage of funds is strangling all economic
activity. On the other hand, because of the negligible use of the banking system in rural India,
farmers have almost no credit history.
As a result, most of them are simply not in the reckoning for disbursal of loans
through the formal banking system. So what options does a farmer have? The local
moneylender, of course. At exorbitant and unfair interest rates - but at least it is available.
Unfortunately, such borrowing is usually impossible to repay, and usually ends in tragedy,
Farmer’s suicide. Is it so difficult to understand now, why more than one hundred and sixty
rural districts are in the grip of the Naxal movement today?
So the role of Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is
very important and having priorities for nation for all over growth and development in
Agriculture and Rural sector specially.
10. 12. Current Scenario on Fiscal Responsibility and Budget Management
Act, 2003 (FRBMA)
Success attracts its own supporters. New government epitomizes the success of merit
and dedication. It is not surprising therefore, that supporters, including erstwhile critics, both
national and international, are thronging his doorstep for a darshan.
There are visible signs that the public adulation has not gone to his head. He has shot
down an attempt to curry favor with him by BJP governments, by revising the textbooks with
a chapter devoted to him as a role model. This is very welcome and good news.
“But a big governance test will confront him over the next two months”.
Can he deliver a “realistic” budget which does not fudge either revenue receipt or
expenditure- two favourite tricks of budget managers to fool the public, adopted by the UPA2
in its last budget? Second, can he reduce the fiscal deficit below the level of 4.9% in 2012-13;
the last “normal year” data available. The Fiscal Responsibility and Budget Management Act
2003 targeted a maximum fiscal deficit level of 2% by 2006. We never achieved that level.
The best was 2.7% in 2007. A plan to reach close to this over the next 3 years, by
reducing it by 0.5% point every year is sorely needed.
The fiscal deficit in 2013-14 stood at 4.5% of GDP, lower than 4.6% projected in the
revised estimate, mainly on account of curbs on government expenditure.
The fiscal deficit, the gap between government's expenditure and revenue, in actual terms
was Rs 5.08 lakh crore as against 5.24 lakh crore projected in the revised estimate.
"The fiscal deficit is 4.5% of GDP. Revenue deficit is 3.2% of GDP. Effective revenue deficit
is 2% of GDP," the Controller General of Accounts (CGA) said in the provisional accounts
for2013-2014.
Achieving the fiscal deficit target for 2014-15 of 0.5% point below the 4.9% actual
deficit in 2013-14 by reducing the current expenditure of the central government, is the PMs
Test in Governance.
But in other part of India, to overcome the financial crisis emerging out of the
bifurcation of Andhra Pradesh, the state government has urged the Centre to grant a two-year
exemption from implementing the Fiscal Responsibility and Budget Management Act, 2003
(FRBMA) in both Telangana and Andhra Pradesh.
The government needs to find more money, and quickly, to make a variety of
investments. If it reduces subsidies significantly(The FY15 budgeted major subsidies are Rs
67,970 crore for fertilizers, Rs 1.15 lakh crore for food (including Rs 88,500 crore for
implementation of the food security act), and Rs 63,427 crore for petroleum. ), there is a
realistic chance that this can happen. If it doesn't, there is virtually no chance at all. From a
strategic perspective, the positive experience with the Fiscal Responsibility and Budget
Management (FRBM) Act of 2003 suggests that explicit fiscal rules can help.
In fact, the proposal made in the 2012-13 Budget to embed an explicit fiscal deficit
ceiling of two per cent of gross domestic product (GDP) in a new FRBM Act (the first one
terminated in 2010) has merit and should be seriously considered by the government, even
before it takes a decision on whether to move forward on new legislation. The upcoming
Budget provides an opportunity to act aggressively on this front, while still basking in the
goodwill generated by its electoral performance.
