Daily Current Affairs – 19th October, 2016

Daily Current Affairs – 19th October, 2016

FRBM Act and Committee to review FRBM targets

Background:

  • In 1980s, India saw a sharp deterioration of the fiscal situation, which ultimately culminated in the balance of payments crisis of 1991.
  • Within a decade of economic liberalisation, the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000. At that time, a need was felt to institutionalize a new fiscal discipline framework.
  • The FRBM Bill 2000 was introduced by previous NDA government in the parliament to institutionalize the fiscal discipline at both the centre and state level. However, the bill took three years to become an act.
  • The act was passed to make the central government and finance minister accountable to parliament for fiscal discipline.

However, due to lack of an autonomous Fiscal Management Review Committee (as proposed originally) the act more or less became like a Directive Principle of State policy which is not enforceable via courts. Its mandate was diluted and even today we find both revenue deficit and fiscal deficits in budget documents.

Govt sets up FRBM committee on fiscal deficit range

  • The government on May 17, 2016 formed a five-member committee under former revenue secretary N K Singh to review the working of the 12-year old FRBM Act and examine the feasibility of a fiscal deficit range instead of a fixed target.
  • The Fiscal Responsibility and Budget Management (FRBM) committee will shortly submit its report to the government (within this month).

 

So, let us know about –

What is Fiscal Responsibility and Budget Management (FRBM) Act? What are the amendments to it?

  • The FRBM Act is a fiscal sector legislation enacted by the government of India in 2003, aiming to ensure fiscal discipline for the centre by setting targets including reduction of fiscal deficits and elimination of revenue deficit. It is a legal step to ensure fiscal discipline and fiscal consolidation in India.
  • The targets set under the Act was postponed several times in later years though some other goals of the Act including phasing out of government borrowing from the RBI were implemented.

 

What the FRBM says?

The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be realized with an annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by 2008-09. Later, the target dates were reset and Budget 2016-17 aims to realise the 3% fiscal deficit target by March 2018.

The Act gives slight flexibility to the government regarding the realisation of the target as well. It gives the responsibility to the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach.

 

Following are the provisions of the Act in detail.

  • The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 2008-09 and thereafter, sizable revenue surplus has to be created.
  • Setting annual targets for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities.
  • The government shall end its borrowing from the RBI except for temporary advances.
  • The RBI not to subscribe to the primary issues of the central government securities after 2006.
  • The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security, calamity etc.

Though the Act aims to achieve deficit reductions prima facie, an important objective is to achieve inter-generational equity in fiscal management. This is because when there are high borrowings today, it should be repaid by the future generation. But the benefit from high expenditure and debt today goes to the present generation. Achieving FRBM targets thus ensures inter-generation equity by reducing the debt burden of the future generation.

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