FRBM ACT

The Fiscal Responsibility and budget Management Act.

FLOW OF PRESENTATION

What is Fiscal POLICY? Fiscal policy, refers to government policy that attempts to influence the direction of the economy . Fiscal policy can be contrasted with the other main types of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money.

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT

Proposed in 2000

Passed in 2003

Effective from July 5, 2004

Imposes limits on Fiscal and Revenue Deficit

Why FRBM ?

FRBM was introduced by Mr.Yashwant Sinha It was enacted by the Parliament of India FRBM was enacted to institutionalise financial discipline, reduce India's 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 and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008. And due to the 2007 international financial crisis, the deadlines for the implementation of the targets in the Frbm act was initially postponed and subsequently suspended in 2009.

Objectives of FRBM
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 Reduce the possible progressive reduction of Capital A/C liabilities Improve in the areas of fiscal transparency and to make it available to any public domain Improve Fiscal Planning and Budget Management Disaggregated analysis of administrative expenditure

Principles of FRBM act

The principles enacted Central Government are a plan to eliminate revenue deficit by 31 Mar 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

Limits of FRBM act

The Act provided that the Central Government shall not borrow from the Reserve Bank of India(RBI) 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.

Targets and fiscal indicator

The following are the targets and fiscal indicators 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 Mar 2008 Minimum Annual reduction 0.3% of GDP Total Debt 9% of the GDP (a target increased from the original 6% requirement in 200405) Annual Reduction 1% of GDP RBI purchase of Government bonds to cease from 1 April 2006

States level fiscal responsibility in India

The tenth plan of the Planning Commission of India highlighted the need for fiscal discipline at even the level of the states This was to reduce the debt-to-GDP ratio of India By 2007, the states like Karnataka, Kerala, Punjab, Tamil Nadu, Maharashtra and Uttar Pradesh are among those which have already legislated the required fiscal discipline laws at the state level

Criticism

No Target for Fiscal Deficit - Change through notification Fiscal Expansion and not contraction is important for growth No consideration for business cycles Unrealistic Assumptions - Tax revenue growth: 22% - GDP growth rate: 8%