ECNANIF CILBUP

FISCAL
RESPONSIBILITY AND
BUDGET MANAGEMENT
ACT, 2003
Submitted To :- Mr. Santosh Kumar
Submitted By :- Jagriti (068)
Kratika Gupta (030) (Sec-A)
 WHAT IS FRBM ACT?
The FRBM ACT, 2003 is an act to:-

institutionalize financial discipline

reduce India's fiscal deficit and eliminate

revenue deficit

improve the overall management of the

public funds by moving towards a balanced 2003

budget.

The Act intends to bring transparency and

accountability in the conduct of the fiscal and

monetary act of the govt and to ensure long

run macroeconomic stability.

 BACKGROUND
LATE 1980s AND EARLY 1990s ECONOMIC CRISIS OF 1991
Indian economy faced the problem of Due to its large borrowings, the

large fiscal deficit and its government was unable to pay even

monetization spilled over to external for even two weeks of imports

sector in the late 1980s and early 1990s. resulting in economic crisis of 1991.

ECONOMIC REFORMS ECONOMY POST INTRODUCTION OF

OF 1991 ECONOMIC REFORMS
To tackle the crisis, reforms
were introduced in 1991 &
fiscal consolidation emerged
as one of the key areas of
reforms.
After a good start in the early
90s, the fiscal consolidation
faltered after 1997-98 and fiscal
deficit started rising. So, it was
necessary to prevent India from
falling into a debt-trap.
FRBM ACT,2003
The Govt introduced
FRBM Act,2003 to check
the deteriorating fiscal
situation and bring
financial discipline.
 ENACTMENT OF THE FRBM ACT

The Bill was After much This bill was approved It became

introduced by the discussions, a by the Ministers of the effective on 5

Union Govt. of India in
then Finance watered-down July 2004. This
Feb, 2003 and following
Minister of India, version of the Bill would serve as
the enactment process
Mr. Yashwant was passed in the day of
of Parliament, it
Sinha in December, 2003 to become commencement
received the assent of
2000 the FRBM Act. of this Act.
the President of India on

26 August 2003.
 OBJECTIVES OF FRBM ACT
1 2 3

To introduce To introduce a
To aim for
transparent more equitable
and manageable fiscal stability
fiscal
management distribution of of India in the
the country's long run.
systems in the
debts over the
country. years.

Additionally, the act was expected to give necessary flexibility to the Reserve

Bank of India for managing inflation in India.

 KEY FEATURES
The FRBM Act made it mandatory for the Government to place the following
along with the Union Budget Documents in the Parliament annually :-

A document titled Medium- A document titled Fiscal

term Fiscal Policy Statement. Policy Strategy Statement

A document titled Macro- A document titled Medium-term

economic Framework Statement Expenditure Framework Statement
OF THE FRBM
PROVISIONS The FRBM rules mandate four fiscal

ACT,2003
indicators to be projected :-

1. Revenue deficit as a percentage of GDP

2. Fiscal deficit as a percentage of GDP.

3. Tax revenue as a percentage of GDP.

4. Total outstanding liabilities as a

percentage of GDP.
 INITIAL
TARGETS

REVENUE DEFICIT TARGET FISCAL DEFICIT TARGET

Revenue Deficit should be completely Fiscal Deficit should be reduced to

eliminated by March 31, 2009 3% of GDP by March 31, 2009.

The minimum annual reduction target The minimum annual reduction target

was 0.5% of the GDP. was 0.3% of the GDP.

 CONTINGENT LIABILITIES
The Central Govt. shall not give incremental guarantees of an amount

exceeding 0.5% of GDP in any financial year beginning 2004-05.

ADDITIONAL LIABILITIES
Additional liabilities (including external debt) should be reduced to 9% of

the GDP by 2004-05.

The min annual reduction target in each subsequent year to be 1% of GDP.

RBI PURCHASE OF GOVERNMENT BONDS

RBI purchase of govt. bonds to cease from 1 April 2006. This indicates

the govt. not to borrow directly from the RBI.

 Did the govt. meet the FRBM targets by March 2009?

Implementing the act, the govt. managed to

cut the fiscal deficit to 2.7% of GDP and

revenue deficit to 1.1% of the GDP in 2007-08

However, the targets were not met.

The global financial crisis (2007-08) led

the govt. to infuse resources in the

economy as the fiscal stimulus in 2008.

Therefore, fiscal targets had to be

postponed temporarily in view of the

global crisis.
AMMENDMENTS IN FRBM ACT

2003-04 2007-08 2012

Act came into Initial targets postponed To be achieved

existance due to non fulfillment by 2015

2015 2016 2021

To be achieved Review committee set Latest ammend-

by 2018 up under N.K. Singh ments and targets

 2012 AMMENDMENT
A new term " EFFECTIVE Effective Revenue Deficit

REVENUE DEFICIT" was should be completely

coined. eliminated by March 31,

2015.

In addition to the existing Fiscal deficit should be

three documents, the reduced to 3% of GDP by

Medium Term Expenditure March 31, 2015. The

Framework Statement minimum annual reduction

(MTEF) will also be laid. target was 0.3% of GDP.

Effective revenue deficit = Revenue Deficit - Grants for capital assets

EDR signifies that amount of capital receipts that are being used for actual

consumption expenditure of the govt.

It helps in reducing consumptive component of revenue deficit and create space for

increased capital spending.

The objective of the MTEF is to provide a closer

integration between budget and the FRBM MEDIUM

Statements. It contains :-

a) The expenditure commitment of the govt. on TERM

major policy changes involving new services, new

instrument of service, new schemes and EXPENDITURE

programmes.

FRAMEWORK
b) The explicit contingent liabilities, which are in

the form of stipulated annuity payments over a STATEMENT

multi-year time-frame.

(MTEF)
c) The detailed break-up of grants for creation of

capital assets.
2018-19
 2015 AMMENDMENT
The target dates for achieving the prescribed rates

of EDR and fiscal deficit were further extended to

the end of 2017-18.

Further, the Govt. of India launched the scheme

Ujwal DISCOM Assurance Yojana (UDAY) for the

financial and operational turnaround of state-

owned Power Distribution Companies (DISCOMs) in

2015. The scheme aims to reduce interest burden,

reduce the cost of power, reduce power losses in

Distribution sector, and improve operational

efficiency of DISCOMs.
 FRBM REVIEW COMMITTEE

Govt. constituted the Committee in May, 2016

under the Chairmanship of Shri N.K.Singh,

Former Revenue & Expenditure Secretary. It

consisted of Dr. Urjit R. Patel, Governor, (RBI),

Shri Sumit Bose, former Finance Secretary, Dr.

Arvind Subramanian, Chief Economic Adviser

and Dr. Rathin Roy, Director, NIPFP as member.

The Committee was constituted to review the

implementation of the FRBM Act, 2003 and

give its recommendations on the way forward.

 COMMITTEE RECOMMENDATIONS
It was suggested that instead of fixed numbers, it may be better to have a fiscal deficit range as
the target, which would give necessary policy space to the Govt. to deal with dynamic situations.

A debt to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for
the states and should be achieved by 2023.

During the times of economic

instability/ calamity, the

committee recommends fiscal

flexibilities to go above or below

the fiscal deficit targets in the

form of ‘escape clauses’. The

Committee set 0.5% as escape

clause for fiscal deficit target.

 Finance minister Nirmala Sitharaman said that the government will not

worry about missing its budgetary deficit targets as it seeks to spend more

to revive the economy.

 LATEST TARGETS OF FRBM ACT
The latest provisions of

the FRBM act requires the

government to limit the

fiscal deficit to 3% of the

GDP by March 31, 2021,

and the debt of the

central government to

40% of the GDP by

2024-25.
 CONCLUSION
The FRBM Act seeks to achieve long-term macroeconomic

stability, while generating budget surpluses, limiting borrowings

to cut down deficits and debt and providing a medium-term

framework for budgetary implementation.

As seen in the above analysis, different governments have failed

to achieve the FRBM targets set to be achieved in 2008 even by

2020 but the efforts continue.

 THANK
YOU !!
PRESENTED BY- JAGRITI (068) (SEC-A)
KRATIKA GUPTA (030)