FRBM Act and Rules effective from July 5, 2004
GOVERNMENT ISSUES NOTIFICATION
In a landmark development, Government has notified on 2nd July 2004 the Fiscal Responsibility and Budget Management (FRBM) Act, and the Rules framed thereunder. Both shall become effective from 5th July 2004.
The Act stipulates elimination of revenue deficit by 31st March 2008 and the Rules relate to annual targets of reduction in deficits, Government borrowing and debt. This important legislation embodies an institutional framework within which the Government stands committed to pursuing a prudent fiscal policy aimed at achieving sustained growth and inter-generational equity.
The trajectory of fiscal correction is important and the FRBM Rules stipulate that, beginning with financial year 2004-05, annual reduction in revenue deficit must be at least 0.5% of GDP and that in fiscal deficit must be at least 0.3% of GDP. Similarly, the Rules have capped the level of guarantees and total liabilities that the Government can assume every year. On borrowing, the FRBM Act prohibits Government to borrow from RBI after 1st April 2006.
Periodic reporting to Parliament is an essential feature. On a quarterly basis, Government is required to place before both the Houses of Parliament an assessment of trends in receipts and expenditure. On an annual basis, three Statements have to be presented along with the Budget. These are the Macro-economic Framework Statement, Medium Term Fiscal Policy Statement and Fiscal Policy Strategy Statement. Essentially, these three statements are supposed to embody the macro-economic background and assessment of the budgetary proposals, in so far as they relate to the achievement of FRBM goals. The Medium Term Fiscal Policy Statement will contain a 3-year rolling targets for key fiscal parameters that underpin the Government’s fiscal correction trajectory. It is proposed to present these Statements along with Budget 2004-05.
Through the FRBM discipline, Government is also committed to undertake an intra-year assessment of the achievement of its budgetary targets. At the end of the second quarterly assessment, if the non-debt receipts are less than 40% of BE or the revenue or fiscal deficit is more than 45% of the BE, Government shall not only take corrective measures, but the Finance Minister shall also make a Statement in both the Houses of Parliament.
By undertaking to accept this discipline upon itself, the Government has put India among the select group of countries that are serious about managing their public finances well and have similar legislation.
(Release ID :2246)