.

INTRODUCTION
The Fiscal Responsibility and Budget Management (FRBM) Act was legislated by the
Parliament in the year 2003

India has gone through fourteen years of economic reforms that included a package of fiscal
and legislative measures to ensure fiscal rectitude. However, a fiscal deficit of over 4 per cent
of gdp has come to stay instead of being an aberration in Indian public finance. The revenue
deficit remains a significant proportion of fiscal deficit.1 A larger portion of revenue receipts
goes to pay interest. As a result neither revenue deficit nor fiscal deficit can be brought down
unless interest payments are reduced. It appears that the Government has failed to seize the
opportunity provided by the low interest rate regime that prevailed in the last few years in
balancing its own financial accounts, at least its revenue account.The united progressive
alliance government had notified the FRBM rules in July 2004. The FRBM Rules imposes
limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to
stick to deficit targets .The main purpose was to eliminate the revenue deficit of the
country(building revenue surplus thereafter)and bring down the fiscal deficit to the
manageable 3% of the GDP by March , 2008. However due to the 2007 international crisis ,
the deadlines for the implementation of the targets in the act was initially postponed . and
subsequently suspended in 2009. Basically FRBM Act was introduced because the debt
burden on country’s economy was increasing and interest payments were alone consuming
50% of government revenue.2

The FRBM Act was introduced in India by MR.. Yashwant Sinha in December, 2000. The
bill highlighted the poor state of the government finances at union and as well as state level.
The FRBM bill was introduced with the broad objectives of eliminating revenue deficits by
March2006, prohibiting government borrowings from the reserve bank of India three years
after enactment of the bill, and reducing the fiscal deficit to 2% of the gdp.Further the bill
proposed for the government to reduce the liabilities to 50% of the estimated gdp by year
2011. It is an act to provide for the responsibility of the central government to ensure inter-
generational equity in fiscal management This law also gives flexibility to the Reserve
Bank of India to undertake monetary policy to tackle inflation and take corrective measures
in order to give an impetus to the economic environment.

1
The Hindu Online Edition of 30th May 2004
http://www.thehindu.com/biz/2004/08/30/stories/2004083000651400.htm
2
Roshan Kumar ‘Fiscal responsibility and Budget management act,2003’www.slideshare.net last accessed on
2016-01-22 http://www.slideshare.net/Roshankumar2007/fiscal-responsibility-budget-management-act
BACKGROUND
Indian economy faced with the problem of large fiscal deficit and its monetization spilled
over to external sector in the late 1980s and early 1990s. The large borrowings of the
government led to such a precarious situation that government was unable to pay even for
two weeks of imports resulting in economic crisis of 1991. Consequently, Economic reforms
were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms.
After a good start in the early nineties, the fiscal consolidation faltered after 1997-98. The
fiscal deficit started rising after 1997-98. Concerned over the worsening of fiscal situation, in
2000, the Government of India had set up a committee to recommend draft legislation for
fiscal responsibility. Based on the recommendations of the Committee, Government of India
introduced the Fiscal Responsibility and Budget Management (FRBM) Bill in December
2000. In this Bill numerical targets for various fiscal indicators were specified. The Bill was
referred to the Parliamentary Standing Committee on Finance. The Standing Committee
recommended that the numerical targets proposed in the Bill should be incorporated in the
rules to be framed under the Act. Taking into account the recommendations of the Standing
Committee, a revised Bill was introduced in April 2003. The Bill was passed in Lok Sabha in
May 2003 and in Rajya Sabha in August 2003. After receiving the assent of the President, it
became an Act in August 2003. The FRBM Act 2003 was further amended.The Government
introduced FRBM Act,2003 to check the deteriorating fiscal situation.3

OBJECTIVES
 To institutionalise fiscal discipline;
 Reduce Fiscal Deficit;
 Improve Macroeconomic Management.
 The law aims at promoting Fiscal Stability for the country on a long-term basis.
 It emphasises a Transparent Fiscal Management System and a more equitable
distribution of debts over the years.
 To adopt prudent debt management
 To generate revenue surplus.

Section 2 of the act provides for the DEFINITIONS 4

a) “fiscal deficit” means the excess of total disbursements from the consolidated fund
of India , excluding repayment of debt,over total receipts into the fund
(excluding the debt receipts ) during a financial year.
b) “fiscal indicators” means the measures such as numerical ceilings and proptions to
grow domestic product may be prescribed for evaluation of fiscal position of the
central government.
c) “prescribed” means prescribed by rules made under this act.

3
Puja rustagi ‘Fiscal responsibility and Budget management act ‘www. arthapedia.in last accessed on 23 Jan
2016-01-23
http://www.arthapedia.in/index.php?title=Fiscal_Responsibility_and_Budget_Management_(FRBM)_Act
4
See Section 2 of Act 39 of 2003 www.finmin.nic.in last accessed on 23Jan 2016-01-23
http://www.finmin.nic.in/law/frbmAct2003.pdf
 d) “Reserve Bank” means the Reserve Bank of India constituted under sub –section 1 of
the reserve bank of India act,1934.
e) “revenue deficit”means the difference between revenue expenditure and revenue
receipts which indicate increase in liabilities of the central government without
corresponding increase in assets of that government.
f) “total liabilities” means the liabilities under the consolidated fund of India and the
public account of India.

IMPLEMENTATION
The implementation of FRBM Act/FRLs improved the fiscal performance of both centre and
states. The States have achieved the targets much ahead the prescribed timeline. Government
of India was on the path of achieving this objective right in time. However, due to the global
financial crisis, this was suspended and the fiscal consolidation as mandated in the FRBM
Act was put on hold in 2007-08.The crisis period called for increase in expenditure by the
government to boost demand in the economy. As a result of fiscal stimulus, the government
has moved away from the path of fiscal consolidation. However, it should be noted that strict
adherence to the path of fiscal consolidation during pre crisis period created enough fiscal
space for pursuing counter cyclical fiscal policy.5

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.6

5
Supra at 2
6
Ibid at 4
 Features of FRBM Act 2003
1. Revenue Deficit

The first important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the
central government should take certain specific measures related with reduction of revenue
deficit.7

Measures relating to reduction of revenue deficits are:-

1. The government should reduce revenue deficit by an amount equivalent to 0.5 percent or
more of the GDP at the end of each financial year, beginning with 2004-2005.
2. The revenue deficit should be reduced to zero within a period of five years ending on
March 31, 2009.
3. Once revenue deficit becomes zero the central government should build up surplus amount
of revenue which it may utilised for discharging liabilities in excess of assets.

2. Fiscal Deficit

The second important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the
central government should take certain specific measures related with reduction of fiscal
deficit.

Measures relating to reduction of fiscal deficits are:-

1. The government should reduce Gross fiscal deficit by an amount equivalent to 3.3% or
more of the GDP at the end of each financial year, beginning with 2004-2005.
2. The central government should reduce Gross Fiscal deficit to an amount equivalent to 2%
of GDP upto March 31 2006.

3. Exceptional Grounds

The third important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it clearly
stated that the revenue deficit and fiscal deficit of the government may exceed the targets
specified in the rules only on the grounds of national security or national calamity faced by
the country.

4. Public Debt

The fourth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that the
central government should ensure that the total liabilities (including external debt at current
exchange rate) should not exceed 9% of GDP for the financial year 2004-2005. 8There should

7
Gaurav Akrani ‘the frbm act, 2003’ www. kalyancity.blogspot.in last accessed on 24jan 2016-01-24
http://kalyan-city.blogspot.in/2011/03/fiscal-responsibility-and-budget.html
8
Ibid
 be progressive reduction of this limit by atleast one percentage point of GDP in each
subsequent year.

5. Borrowing from the RBI

The fifth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with
borrowings done by central government from R.B.I. The Amended FRBM bill 2000 or
FRBM Act 2003 clearly states that the central government shall not normally borrow from
the R.B.I. However the central government may borrow from R.B.I. by way of advances to
meet temporary excess of cash payments over the cash receipts during any financial year in
accordance with the agreements which may entered into by the government with the R.B.I.

6. Fiscal Transparency

The sixth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is related with
fiscal transparency. The Amended FRBM bill 2000 or FRBM Act 2003 clearly stated two
important measures to ensure greater transparency in fiscal operations of the government.

These two important features are as follows :-

1. The central government should minimize as far as possible secrecy in preparation of annual
budget.
2. The central government at the time of presentation of the annual budget shall disclose the
significant changes in accounting standards, policies and practices likely to affect the
computation of fiscal indicators.

7. Limit On Guarantees

The seventh important feature of Amended FRBM bill 2000 or FRBM Act 2003 is that it
restricts the guarantees given by the central government to 0.5% of GDP in any financial year
beginning with 2004-2005.

8. Medium term fiscal policy statement

The eighth important feature of amended FRBM bill 2000 or FRBM Act 2003 is that the
central government should present medium term fiscal policy statement in both houses of
parliament along with annual financial statement. The medium term fiscal policy statement
should project specifically for important fiscal indicators.

These fiscal indicators are as follows :-

1. Revenue deficit as percentage of GDP.

2. Fiscal deficit as percentage of GDP.
3. Tax revenue as percentage of GDP.
4. Total outstanding liabilities as percentage of GDP.
 9. Compliance of rules

Finally the ninth important feature of Amended FRBM bill 2000 or FRBM Act 2003 is
related with measures to enforce compliance of rules.9

These measures are as follows :-

1. The FRBM bill clearly states that the Finance Minister shall review every quarter, the
trends in receipts and expenditure in relation with the budget and place it before both
houses of parliament the outcome of such reviews.
2. The finance minister shall also make statement in both houses of parliament if there is any
deviations in meeting the obligations of the central government.
3. If deviations are substantial then the Finance Minister will declare the remedial measures
which the central government proposes to take in future period of time.
4. The rules mandate the central government to take appropriate corrective action in case of
revenue & fiscal deficit exceeding 45% of the budget estimates or total non-debt receipts
falling short of 40% of the budget estimates at the end of first half of the financial year.

10. Task force on implementation of FRBM Act

Following the enactment of FRBM Act, Government constituted a Task Force headed by Dr.
Vijay Kelkar for drawing up the medium term framework for fiscal policies to achieve the
FRBM targets.

The task force proposed the following measures :-

1. Widening the tax base through removal of exemptions.

2. An All-India goods and service-tax (GST) on the basis of a "grand bargain" with States,
whereby States will have the concurrent powers to tax service, subject to certain principles
that will help foster a national common market.
3. Income tax exemption limit to be increased to Rs.1,00,000.
4. A two-tire rate structure of 20 percent tax for income of Rs. 1,00,000 to Rs. 4,00,000 and
30% for income above Rs. 4,00,000 for individuals and elimination of standard deduction
available to the salaried taxpayer.
5. A reduction in the corporate income tax to 30% for domestic companies and the reduction
in depreciation rates from 25 to 15%.
6. A 3-tier custom duty rates of 5, 8 and 10% to bring down tariffs to ASEAN levels.
7. Allocation of greater portion of expenditure to legitimate public goods by revisiting the
classification of expenditure.
8. Empowering panchayats / local bodies through reserve transfer.

The task force stated that under the reforms measures recommended by it, tax GDP ratio of
the central government should be raised from 9.2% in 2003 to 13.2% of GDP in 2008-09. A
revenue surplus of 0.2% of GDP is estimated to emerge in 2008-09. Fiscal deficit estimated
to fall from 4.8% of GDP in 2003-04 to 2.8% of GDP in 2008-09.

9
Ibid at 8
The above features of Amended FRBM bill 2000 or Fiscal Responsibility and Budget
Management Act 2003 clearly points out that the government intends to create a strong
institutional mechanism to restore fiscal discipline at the level of the central government.
Similarly the government wants to introduce greater transparency in fiscal operations of the
central government.
CRITICISM / LIMITATIONS OF FRBM ACT 2003
Quitting smoking is difficult for a smoker, like avoiding loans for governments also. These
major drawbacks makes the law toothless .10

Though the Fiscal Responsibility and Budget Management Act 2003 or Amended FRBM bill
2000 is a credible effort by the government to fix responsibility on the government to reduce
fiscal deficit and bring transparency in fiscal operations of the government it has certain
limitations.

These limitations of Amended FRBM Bill 2000 or FRBM Act pointed out by various
economists are as follows :-

1. Target regarding GFD very stringent

The Bill stipulates that by March 31, 2006, the Gross Fiscal Deficit (GFD) as a proportion of
GDP must be 2%. This, of course, means that the government can borrow from the economy
only to the extent of 2% of GDP, whatever be the level of savings. Given the present need of
government borrowings, 2% limit is very low.

The increase in public investment helps to increase the level of effective demand and
increases private investment in the economy. According to Dr. Raja Chelliah the ratio of
Gross Fiscal Deficit (GFD) to GDP should be 4% to 5% of GDP as public investment on
infrastructure sector is essential to boost economic growth.

2. Neglect of equity and growth

According to critics the Amended FRBM Bill 2000 or FRBM Act 2003 is heavily loaded
against investment in both human development and infrastructure sector. One of the major
ommission of amended FRBM Bill 2000 or FRBM Act 2003 was complete absence of any
target for time bound minimum improvement in areas of power generation, transport, etc.
which is very important both from the point of equity and higher economic growth.

3. Non-Coverage of State Governments

The provisions of the bill impose restrictions on only the central government but state
governments are out of its scope. But, deficits of state governments are as much or even a
greater problem. For instance, the State of Maharashtra has already crossed the deficit of Rs.
1 lakh crore as on December 2004 (the second State after Up to cross deficit of Rs. 1 lakh
crore). Therefore, there is a need for fiscal responsibility legislation for the State
Governments as well.

10
Supra at 1
 4. Neglect of Development Needs

Today, the levels of capital expenditures by the government are miserably low in India. These
capital expenditures increase the efficiency and productivity of private investment and thus
contribute to the development process in the country. If Revenue Deficit is to be reduced to
zero and GFD to be 2% of GDP as per the requirement of FRBM Bill, it is the capital
expenditure which will be sacrificed and thus will hinder further development of the
country.11

5. Need to Increase Revenue

Revenue deficits are determined by the interplay of expenditure and revenues, both tax and
non-tax. Too often, attention gets focused only on the expenditure side of the identity to the
neglect of the revenue side. Increasing non-tax revenue requires that public sector services be
appropriately priced, which may be difficult as the present society has got used to the
subsidised education, health, food items, etc.

6. Neglect of Social Sector

The FRBM bill does not mention anything relating to social sector development. However,
investment in social sector such as health, education, etc is very vital for the economic
development of the nation.

7. Problem of Subsidies

The government may be able to reduce revenue deficit by reducing subsidies. However, it is
quite likely that the government will be under severe pressure to continue the subsidies. It
means the expenditure on the productive areas may be reduced due to subsidies.

8. Stable Growth Deficit

Chelliah points out that given the household financial savings in India, the overall fiscal
deficit termed as stable growth deficit of the government sector as a whole should be pegged
at 6% of GDP with revenue deficit being gradually phased out. Thus, the target of 2% of
fiscal deficit GDP ratio stated in FRBM bill is not desirable from the point of view of
productive investment according to Chelliah.

9. False Assumptions

The FRBM Bill is based on the following assumptions :-

1. Lower fiscal deficit lead to higher growth.

2. Larger fiscal deficit lead to higher inflation

11
Ibid
3. Larger fiscal deficit increase external vulnerability of the economy.

These assumptions have been rejected by C.P. Chandrashekhar and Jayanti Ghosh who have
given the following arguments :-

1. If the deficit is in the form of capital expenditure it would contribute to future growth.
2. Fiscal deficit is not only the cause for higher inflation. During the late 1990s the rate of
inflation has fallen even when the fiscal deficit was as high as 5.5% of GDP.

Higher fiscal deficit need not necessarily cause external crisis. The external vulnerability
depends more on capital and trade account convertibility. In India we have managed to build
large foreign exchange reserves, though fiscal deficit has not come down.
AMENDMENTS TO FRBM ACT
Through Finance Act 2012, amendments were made to the Fiscal Responsibility and Budget
Management Act, 2003 through which it was decided that in addition to the existing three
documents, Central Government shall lay another document - the Medium Term Expenditure
Framework Statement (MTEF) - before both Houses of Parliament in the Session
immediately following the Session of Parliament in which Medium-Term Fiscal Policy
Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement are
laid.

Amendments to the FRBM Act were introduced subsequent to the recommendations of 13th
Finance Commission.12

Concept of “Effective Revenue Deficit” and “Medium Term Expenditure Framework”

statement are the two important features of amendment to FRBM Act in the direction of
expenditure reforms. Effective Revenue Deficit is the difference between revenue deficit and
grants for creation of capital assets. This will help in reducing consumptive component of
revenue deficit and create space for increased capital spending. Effective revenue deficit has
now become a new fiscal parameter. “Medium-term Expenditure Framework” statement will
set forth a three-year rolling target for expenditure indicators.

As per the amendments in 2012, the Central Government has to take appropriate measures to
reduce the fiscal deficit, revenue deficit and effective revenue deficit to eliminate the
effective revenue deficit by the 31st March, 2015 and thereafter build up adequate effective
revenue surplus and also to reach revenue deficit of not more than 2 % of Gross Domestic
Product by the 31st March, 2015 and thereafter as may be prescribed by rules made by the
Central Government.

Further, the Central Government may entrust the Comptroller and Auditor-General of India
to review periodically as required, the compliance of the provisions of FRBM Act and such
reviews shall be laid on the table of both Houses of Parliament.

With the Finance Act 2015, the target dates for achieving the prescribed rates of effective
deficit and fiscal deficit were further extended. The effective revenue deficit which had to be
eliminated by March 2015 will now need to be eliminated only after 3 years i.e., by March
2018. The 3% target of fiscal deficit to be achieved by 2016-17 has now been shifted by one
more year to the end of 2017-18.

The FRBM Bill / Act provides rules for fiscal responsibility of the Central Government. The
FRBM Act 2003 (as amended) became effective from July 5, 2004. Under this Act, Rules are
framed relating to fiscal responsibility of the Central Government, which came into force on
5th July 2004.

12
www.wikipedia.org last accessed on 25jan2016-01-24
https://en.wikipedia.org/wiki/Fiscal_Responsibility_and_Budget_Management_Act,_2003
CONCLUSION
The 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 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. The
provisions of this act shall be in addition to the and not in degradation of , the provisions of
any other law for the time being in force.

Some others have drawn parallel to this act's international counterparts like the Gramm-
Rudman-Hollings Act (US) and the Growth and Stability Pact (EU) to point out the futility of
enacting laws whose relevance and implementation over time is 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.
13

Thus Amended FRBM Bill 2000 or FRBM Act 2003 despite above criticism can play a very
important role in controlling fiscal deficit and in bringing transparency in fiscal operation of
the government if it is implemented effectively in letter and spirit by the concerned
government

13
Ibid at 12