FRBM Act - Management of Public Finances in India

Why do we need this?• Wants are plenty ….means are limited..

• Competing demands

• Issue of sustainability• Debt burden on next generation

• If no option but to resort to borrowings• Is it for asset creation or to meet current expenditure

Why do we need this…..

Year Revenue Deficit ( as % of GDP)

Fiscal Deficit (as % of GDP)

Interest payment over TRR

2003-04 3.6 4.5 47.0

2002-03 4.4 5.9 51.0

2001-02 4.4 6.2 53.4

2000-01 4.1 5.7 51.6

1999-2000 3.5 5.4 49.7

OBJECTIVES• To ensure inter-generational equity in fiscal management and

long-term macro-economic stability;

• To generate sufficient revenue surplus;

• To remove fiscal impediments in the effective conduct of monetary policy;

OBJECTIVES• Prudential debt management

• Limits on borrowings, debt and deficits

• Transparency in fiscal operations

• Conducting fiscal policy in a medium-term framework

Fiscal management principles

Fiscal management principles

• Guarantees – 0.5 per cent of GDP

• Additional liabilities• 9 per cent of GDP in 2004-05• Gradual reduction by at least 1 per cent of

GDP in subsequent years

Fiscal management principles…• Provisos in case of deficits exceeding such

targets….

• Grounds of national security or national calamity or such other exceptional grounds as may be specified

• Grounds to be placed before the Parliament

FRBM – Approach

• Legislative framework• Indian Constitution enables Parliament to set limits for

debt by law• Medium term targets for deficits

• Revenue Deficit• Fiscal Deficit

• Statements to be laid before Parliament• To outline the strategy and projections• For better transparency and disclosure

Enforcing compliance

• Quarterly review of trends in receipts and expenditure by FM

• Outcome of reviews to be placed before the Parliament

• Shortfall in revenues or excess of expenditure from pre specified levels• Trigger for mid-course correction

• appropriate measures for increasing revenue• reducing expenditure….overriding power

Enforcing compliance…..

• Deviation in meeting obligation

• FM to make statement in Parliament

• Explaining deviation• Whether substantial • Remedial measures proposed

Enforcing compliance…..• Q2 review…

• Non debt receipts < 40 per cent of B.E.• Fiscal Deficit > 45 per cent of B.E.• Revenue Deficit > 45 per cent of B.E.

• Shall take corrective measures• Proposed financing of supplementary demands for grants

Borrowings from RBI• Shall not borrow from RBI

• (earlier provisions… adhoc T bills…monetisation..)• Can take advances from RBI for temporary mismatches

• To repay in 3 months• Sunset clause 2005-06.

Fiscal policy statements• Medium Term Fiscal Policy Statement

– Three year rolling targets for fiscal indicators– Assessment of sustainability

• Fiscal Policy Strategy Statement– Policies related to taxation, expenditure, borrowings, guarantees,

subsidies…– Key fiscal measures and rational for deviation if any

• Macro-economic Framework Statement– Growth prospects– Fiscal balance and external sector balance

Performance during FRBM Act Regime

Components : Expenditure

16

Trends in Interest Payments during

consolidation period

17

TRR: Total Revenue Receipts

Trends in non-plan expenditure during consolidation period

18

Trends in Plan expenditure during consolidation period

19

Major Components of Tax Revenue (BE 2013-14)

• Direct Taxes (5.9% of GDP)• Corporate Tax

33.9%• Income Tax 20.0%

• Indirect Taxes (5.0% of GDP)• Excise Duty 16.0%• Customs

15.2%• Service Tax 14.6%

Trends in Deficit and Debt

Outcomes of fiscal responsibilityMedium term perspective

Expenditure reform

Tax reform

Debt management

Value for money

Outlays to outcomes

Recent Changes – 2012

• Re-alignment of targets in light of recent economic slowdown• Continuation of fiscal consolidation after a brief pause

caused by fiscal stimulus• Redefining the revenue deficit that indicates

consumption expenditure of Government• Transfers to sub-national Governments and

implementing agencies for capital expenditure • Effective Revenue Deficit to be the focus instead of

Revenue Deficit

Recent Changes – 2012

• Medium Term Expenditure Framework • Detailed breakup of expenditure projections• Better integration of Medium Term Fiscal Plan

with the budget• Medium term perspective for expenditure

allocations• Review by Comptroller and Auditor General of

India• To be placed in the Parliament

FRBM at State levels

• All States have their own FRBM Acts• Mainly guided by the recommendations of Twelfth and

Thirteenth Finance Commission• Macro Targets – all-State

• Revenue Deficit to be eliminated• Fiscal Deficit to be brought down to 3% of GSDP• Debt to reduce to 30% of GSDP

• Disclosure Norms• Fiscal incentives for enactment and adherence

Budget schedule for TPL/TRU Divisions in the Department of Revenue:

SI No.

Activity Time Schedule

     

1. Finalization of Statement of Revenue Foregone 25th January, 2013 (Friday)

2. All Budget Discussions to be completed and approvals of FM (including consultation with PM, if any) obtained and preparation of files to start. 

1st February (Friday) to 9th February (Saturday), 2013

3. Detailed Estimates of Tax receipts to be sent to Budget Division 10th February, 2013 (Sunday)

4. All Files to reach Law Ministry 

5th (Tuesday) to 13th February (Wednesday), 2013 Total 9 days

5. Drafting, Collation etc. To be completed by 21st February, 2013 (Thursday) 

6. Law Ministry brings the Finance Bill to Lock-in 21st February, 2013 (Friday-Night) 

7. Print Orders for Finance Bill 23rd February, 2013 (Saturday) 

8. Print order for Explanatory Memorandum 24th February, 2013 (Sunday)

9. Budget Presentation 28th February, 2013 (Thursday) 

Further discussions if desired……