Understanding the FRBM Act

Dec 06 2004, 00:28 IST
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The Centre has breached the 45% limit of revenue deficit for the first half of the financial year prescribed by the Fiscal Responsibility and Budget Management (FRBM) Rules. As per the Rules, Union finance minister P Chidambaram will have to make a statement in Parliament during the ongoing winter session, explaining the reasons for the breach and the corrective steps proposed. FE takes a closer look at what is the FRBM Act and why it is important.

What is the FRBM Act?
The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the Presidents assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004.

As Parliament is the supreme legislative body, these will bind the present finance minister P Chidambaram, and also future finance ministers and governments.

How will it help in redeeming the fiscal situation?
The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets.

As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP.

The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.It would mean reduction of fiscal deficit by 0.3 % of GDP every year.

How are these targets monitored?
The Rules have mid-year targets for fiscal and revenue deficits. The Rules required the government to restrict fiscal and revenue deficit to 45% of budget estimates at the end of September (first half of the financial year).

In case of a breach of either of the two limits, the FM will be required to explain to Parliament the reasons for the breach, the corrective steps, as well as the proposals for funding the additional deficit.

What is fiscal deficit?
Every government raises resources for funding its expenditure. The major sources for funds are taxes and borrowings. Borrowings could be from the Reserve Bank of India (RBI), from the public by floating bonds, financial institutions, banks and even foreign institutions. These borrowings constitute public debt and fiscal deficit is a measure of borrowings by the government in a financial year.

In budgetary arithmetic, it is total expenditure minus the sum of revenue receipts, recoveries of loans and other receipts such as proceeds

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