Concerned over the worsening of financial situation, inward 2000, the Government of Bharat had prepare a commission to recommend draft legislation for financial responsibility. Based on the recommendations of the Committee, Government of Bharat introduced the Fiscal Responsibility in addition to Budget Management (FRBM) Bill inward Dec 2000. In this Bill numerical targets for diverse financial indicators were specified. The Bill was referred to the Parliamentary Standing Committee on Finance. The Standing Committee recommended that the numerical targets proposed inward the Bill should hold upwardly incorporated inward the rules to hold upwardly framed nether the Act. Taking into line of piece of work concern human relationship the recommendations of the Standing Committee, a revised Bill was introduced inward Apr 2003. The Bill was passed inward Lok Sabha inward May 2003 in addition to inward Rajya Sabha inward August 2003. After receiving the assent of the President, it became an Act inward August 2003. The FRBM Act 2003 was farther amended.
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The FRBM Bill / Act provides rules for financial responsibleness of the Central Government. The FRBM Act 2003 (as amended) became effective from July 5, 2004. Under this Act, Rules are framed relating to financial responsibleness of the Central Government, which came into forcefulness on 5th July 2004.
Objectives of FRBM Act 2003 ↓
The principal objectives of FRBM Bill / Act are :-
- To cut financial deficit
- To adopt prudent debt management.
- To generate revenue surplus.
Features of FRBM Act 2003 ↓
1. Revenue Deficit
The maiden of all of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that the key regime should cause got surely specific measures related amongst reduction of revenue deficit.
Measures relating to reduction of revenue deficits are:-
- The regime should cut revenue deficit past times an amount equivalent to 0.5 percent or to a greater extent than of the gross domestic product at the halt of each financial year, get-go amongst 2004-2005.
- The revenue deficit should hold upwardly reduced to naught inside a flow of 5 years ending on March 31, 2009.
- Once revenue deficit becomes naught the key regime should construct upwardly surplus amount of revenue which it may utilised for discharging liabilities inward excess of assets.
2. Fiscal Deficit
The minute of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that the key regime should cause got surely specific measures related amongst reduction of financial deficit.
Measures relating to reduction of financial deficits are:-
- The regime should cut Gross financial deficit past times an amount equivalent to 3.3% or to a greater extent than of the gross domestic product at the halt of each financial year, get-go amongst 2004-2005.
- The key regime should cut Gross Fiscal deficit to an amount equivalent to 2% of gross domestic product upto March 31 2006.
3. Exceptional Grounds
The tertiary of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that it clearly stated that the revenue deficit in addition to financial deficit of the regime may overstep the targets specified inward the rules exclusively on the grounds of national safety or national calamity faced past times the country.
4. Public Debt
The 4th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that the key regime should ensure that the full liabilities (including external debt at electrical flow central rate) should non overstep 9% of gross domestic product for the financial twelvemonth 2004-2005. There should hold upwardly progressive reduction of this bound past times atleast 1 per centum signal of gross domestic product inward each subsequent year.
5. Borrowing from the RBI
The 5th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is related amongst borrowings done past times key regime from R.B.I. The Amended FRBM mouth 2000 or FRBM Act 2003 clearly states that the key regime shall non usually borrow from the R.B.I. However the key regime may borrow from R.B.I. past times way of advances to run across temporary excess of cash payments over the cash receipts during whatever financial twelvemonth inward accordance amongst the agreements which may entered into past times the regime amongst the R.B.I.
6. Fiscal Transparency
The 6th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is related amongst financial transparency. The Amended FRBM mouth 2000 or FRBM Act 2003 clearly stated 2 of import measures to ensure greater transparency inward financial operations of the government.
These 2 of import features are every bit follows :-
- The key regime should minimize every bit far every bit possible secrecy inward grooming of annual budget.
- The key regime at the fourth dimension of presentation of the annual budget shall expose the meaning changes inward accounting standards, policies in addition to practices probable to touching on the computation of financial indicators.
7. Limit On Guarantees
The 7th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is that it restricts the guarantees given past times the key regime to 0.5% of gross domestic product inward whatever financial twelvemonth get-go amongst 2004-2005.
8. Medium term financial policy statement
The 8th of import characteristic of amended FRBM mouth 2000 or FRBM Act 2003 is that the key regime should nowadays medium term financial policy declaration inward both houses of parliament along amongst annual financial statement. The medium term financial policy declaration should projection specifically for of import financial indicators.
These financial indicators are every bit follows :-
- Revenue deficit every bit per centum of GDP.
- Fiscal deficit every bit per centum of GDP.
- Tax revenue every bit per centum of GDP.
- Total outstanding liabilities every bit per centum of GDP.
9. Compliance of rules
Finally the 9th of import characteristic of Amended FRBM mouth 2000 or FRBM Act 2003 is related amongst measures to enforce compliance of rules.
These measures are every bit follows :-
- The FRBM mouth clearly states that the Finance Minister shall review every quarter, the trends inward receipts in addition to expenditure inward relation amongst the budget in addition to house it earlier both houses of parliament the resultant of such reviews.
- The finance government minister shall besides brand declaration inward both houses of parliament if at that topographic point is whatever deviations inward coming together the obligations of the key government.
- If deviations are substantial in addition to so the Finance Minister volition declare the remedial measures which the key regime proposes to cause got inward hereafter flow of time.
- The rules mandate the key regime to cause got appropriate corrective activeness inward illustration of revenue & financial deficit exceeding 45% of the budget estimates or full non-debt receipts falling curt of 40% of the budget estimates at the halt of maiden of all one-half of the financial year.
10. Task forcefulness on implementation of FRBM Act
Following the enactment of FRBM Act, Government constituted a Task Force headed past times Dr. Vijay Kelkar for drawing upwardly the medium term framework for financial policies to attain the FRBM targets.
The work forcefulness proposed the next measures :-
- Widening the revenue enhancement base of operations through removal of exemptions.
- An All-India goods in addition to service-tax (GST) on the footing of a "grand bargain" amongst States, whereby U.S. of A. volition cause got the concurrent powers to revenue enhancement service, dependent to surely principles that volition assist foster a national mutual market.
- Income revenue enhancement exemption bound to hold upwardly increased to Rs.1,00,000.
- A two-tire charge per unit of measurement construction of xx percent revenue enhancement for income of Rs. 1,00,000 to Rs. 4,00,000 in addition to 30% for income inward a higher house Rs. 4,00,000 for individuals in addition to elimination of measure deduction available to the salaried taxpayer.
- A reduction inward the corporate income revenue enhancement to 30% for domestic companies in addition to the reduction inward depreciation rates from 25 to 15%.
- A 3-tier custom duty rates of 5, 8 in addition to 10% to convey downwardly tariffs to Association of Southeast Asian Nations levels.
- Allocation of greater part of expenditure to legitimate populace goods past times revisiting the classification of expenditure.
- Empowering panchayats / local bodies through reserve transfer.
The work forcefulness stated that nether the reforms measures recommended past times it, revenue enhancement gross domestic product ratio of the key regime should hold upwardly raised from 9.2% inward 2003 to 13.2% of gross domestic product inward 2008-09. H5N1 revenue surplus of 0.2% of gross domestic product is estimated to emerge inward 2008-09. Fiscal deficit estimated to autumn from 4.8% of gross domestic product inward 2003-04 to 2.8% of gross domestic product inward 2008-09.
The inward a higher house features of Amended FRBM mouth 2000 or Fiscal Responsibility in addition to Budget Management Act 2003 clearly points out that the regime intends to do a rigid institutional machinery to restore financial champaign of report at the grade of the key government. Similarly the regime wants to innovate greater transparency inward financial operations of the key government.
Criticism / Limitations of FRBM Act 2003 ↓
Though the Fiscal Responsibility in addition to Budget Management Act 2003 or Amended FRBM mouth 2000 is a credible endeavour past times the regime to ready responsibleness on the regime to cut financial deficit in addition to convey transparency inward financial operations of the regime it has surely limitations.
These limitations of Amended FRBM Bill 2000 or FRBM Act pointed out past times diverse economists are every bit follows :-
1. Target regarding GFD rattling stringent
The Bill stipulates that past times March 31, 2006, the Gross Fiscal Deficit (GFD) every bit a proportion of gross domestic product must hold upwardly 2%. This, of course, agency that the regime tin borrow from the economic scheme exclusively to the extent of 2% of GDP, whatever hold upwardly the grade of savings. Given the nowadays demand of regime borrowings, 2% bound is rattling low.
The increment inward populace investment helps to increment the grade of effective demand in addition to increases private investment inward the economy. According to Dr. Raja Chelliah the ratio of Gross Fiscal Deficit (GFD) to gross domestic product should hold upwardly 4% to 5% of gross domestic product every bit populace investment on infrastructure sector is essential to boost economical growth.
2. Neglect of equity in addition to growth
According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded against investment inward both human evolution in addition to infrastructure sector. One of the major ommission of amended FRBM Bill 2000 or FRBM Act 2003 was consummate absence of whatever target for fourth dimension leap minimum improvement inward areas of might generation, transport, etc. which is rattling of import both from the signal of equity in addition to higher economical growth.
3. Non-Coverage of State Governments
The provisions of the mouth impose restrictions on exclusively the key regime only province governments are out of its scope. But, deficits of province governments are every bit much or fifty-fifty a greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs. 1 lakh crore every bit on Dec 2004 (the minute State afterwards Up to cross deficit of Rs. 1 lakh crore). Therefore, at that topographic point is a demand for financial responsibleness legislation for the State Governments every bit well.
4. Neglect of Development Needs
Today, the levels of uppercase expenditures past times the regime are miserably depression inward India. These uppercase expenditures increment the efficiency in addition to productivity of private investment in addition to thence contribute to the evolution procedure inward the country. If Revenue Deficit is to hold upwardly reduced to naught in addition to GFD to hold upwardly 2% of gross domestic product every bit per the requirement of FRBM Bill, it is the uppercase expenditure which volition hold upwardly sacrificed in addition to thence volition hinder farther evolution of the country.
5. Need to Increase Revenue
Revenue deficits are determined past times the interplay of expenditure in addition to revenues, both revenue enhancement in addition to non-tax. Too often, attending gets focused exclusively on the expenditure side of the identity to the fail of the revenue side. Increasing non-tax revenue requires that populace sector services hold upwardly appropriately priced, which may hold upwardly hard every bit the nowadays lodge has got used to the subsidised education, health, nutrient items, etc.
6. Neglect of Social Sector
The FRBM mouth does non bring upwardly anything relating to social sector development. However, investment inward social sector such every bit health, education, etc is rattling vital for the economical evolution of the nation.
7. Problem of Subsidies
The regime may hold upwardly able to cut revenue deficit past times reducing subsidies. However, it is quite probable that the regime volition hold upwardly nether severe clitoris per unit of measurement area to maintain the subsidies. It agency the expenditure on the productive areas may hold upwardly reduced due to subsidies.
8. Stable Growth Deficit
Chelliah points out that given the menage financial savings inward India, the overall financial deficit termed every bit stable growth deficit of the regime sector every bit a whole should hold upwardly pegged at 6% of gross domestic product amongst revenue deficit beingness gradually phased out. Thus, the target of 2% of financial deficit gross domestic product ratio stated inward FRBM mouth is non desirable from the signal of sentiment of productive investment according to Chelliah.
9. False Assumptions
The FRBM Bill is based on the next assumptions :-
- Lower financial deficit atomic number 82 to higher growth.
- Larger financial deficit atomic number 82 to higher inflation
- Larger financial deficit increment external vulnerability of the economy.
These assumptions cause got been rejected past times C.P. Chandrashekhar in addition to Jayanti Ghosh who cause got given the next arguments :-
- If the deficit is inward the shape of uppercase expenditure it would contribute to hereafter growth.
- Fiscal deficit is non exclusively the sweat for higher inflation. During the belatedly 1990s the charge per unit of measurement of inflation has fallen fifty-fifty when the financial deficit was every bit high every bit 5.5% of GDP.
- Higher financial deficit demand non necessarily sweat external crisis. The external vulnerability depends to a greater extent than on uppercase in addition to merchandise line of piece of work concern human relationship convertibility. In Bharat nosotros cause got managed to construct large unusual central reserves, though financial deficit has non come upwardly down.
Conclusion on FRBM Act 2003 ↓
The Amended FRBM Bill 2000 or FRBM Act 2003 despite inward a higher house criticism tin play a rattling of import part inward controlling financial deficit in addition to inward bringing transparency inward financial functioning of the regime if it is implemented effectively inward missive of the alphabet in addition to spirit past times the concerned government.
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