{"id":54367,"date":"2020-01-31T16:54:00","date_gmt":"2020-01-31T11:24:00","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=54367"},"modified":"2020-02-26T16:56:52","modified_gmt":"2020-02-26T11:26:52","slug":"7-pm-the-ugly-truth-about-indias-adherence-to-the-frbm-act31st-january-2020","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-the-ugly-truth-about-indias-adherence-to-the-frbm-act31st-january-2020\/","title":{"rendered":"7 PM |The ugly truth about India\u2019s adherence to the FRBM Act|31st January 2020"},"content":{"rendered":"\n<p><strong>Context:\n<\/strong>FRBM\nAct. <\/p>\n\n\n\n<p><strong>More\nin news:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Fiscal deficit has become a key factor\nto watch out for in every Budget presentation.&nbsp;It is considered the most\nimportant marker of a government\u2019s financial health.<\/li><\/ul>\n\n\n\n<p><strong>Budget:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The word \u2018budget\u2019 has not been used in\nthe Constitution of India. Rather Article 112 of the Constitution of India\nmentions the term \u201cAnnual Financial statement\u201d. <\/li><li>The budget is a statement of the\nestimated receipts and expenditure of the Government of India among other\nthings. Overall the budget contains the following:<\/li><li>Estimates\nof revenue and capital receipts;<\/li><li>Ways\nand means to raise revenue<\/li><li>Estimates\nof Expenditure<\/li><li>Details\nof the actual receipts and expenditure of the closing financial year and the\nreasons for any deficit or surplus in that year&nbsp;<\/li><li>Economic&nbsp;and\nfinancial policy of the coming year, that is, taxation proposals, prospects of\nrevenue, spending programme and&nbsp;introduction&nbsp;of new schemes<\/li><\/ul>\n\n\n\n<p><strong>Different\nTypes of Budget Deficits:<\/strong><\/p>\n\n\n\n<p>There can be\ndifferent types of the deficit in a budget depending upon the types of receipts\nand expenditure we take into consideration. Accordingly, there are three\nconcepts of the deficit:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Revenue deficit<\/li><li>Fiscal deficit and<\/li><li>Primary deficit.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" width=\"343\" height=\"271\" src=\"https:\/\/i0.wp.com\/blogadmin.forumias.com\/wp-content\/uploads\/2020\/02\/333-2.jpg?resize=343%2C271&#038;ssl=1\" alt=\"Related image\" class=\"wp-image-54371\"\/><\/figure>\n\n\n\n<figure class=\"wp-block-image size-large\"><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" width=\"332\" height=\"271\" src=\"https:\/\/i0.wp.com\/blogadmin.forumias.com\/wp-content\/uploads\/2020\/02\/444.jpg?resize=332%2C271&#038;ssl=1\" alt=\"Related image\" class=\"wp-image-54372\"\/><\/figure>\n\n\n\n<p><strong>Revenue\nDeficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Revenue deficit is\nexcess of total revenue expenditure of the government over its total revenue\nreceipts. <\/li><li>It is related to only\nrevenue expenditure and revenue receipts of the government. <\/li><li>Alternatively, the\nshortfall of total revenue receipts compared to total revenue expenditure is\ndefined as revenue deficit.<\/li><li>Revenue deficit results\nin borrowing. Simply put, when government spends more than what it collects by\nway of revenue, it incurs revenue deficit. <\/li><li>Revenue deficit\nincludes only such transactions which affect current income and expenditure of\nthe government.&nbsp;<strong><\/strong><\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"\"><tbody><tr><td><\/td><\/tr><tr><td><\/td><td>\n \n \n \n \n Revenue deficit = Total revenue expenditure \u2013 Total revenue\n receipts.\n &nbsp;\n \n \n \n \n &nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>&nbsp;<\/strong><br><\/p>\n\n\n\n<p><strong>Fiscal\nDeficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The difference between total revenue and\ntotal expenditure of the government is termed as fiscal deficit. It is an\nindication of the total borrowings needed by the government.&nbsp;<\/li><li>Generally fiscal deficit takes place\neither due to revenue deficit or a major hike in capital expenditure. Capital\nexpenditure is incurred to create long-term assets such as factories, buildings\nand other development.<\/li><li>A deficit is usually financed through\nborrowing from either the central bank of the country or raising money from\ncapital markets by issuing different instruments like treasury bills and bonds.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"\"><tbody><tr><td><\/td><\/tr><tr><td><\/td><td>\n \n \n \n \n Fiscal deficit\n = Total expenditure \u2013 Total receipts excluding borrowings.\n &nbsp;\n \n \n \n \n &nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>&nbsp;<\/strong><br><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Importance\nof fiscal deficit:<\/strong> Fiscal deficit indicates the borrowing\nrequirements of the government during the budget year. By implication, greater\nfiscal deficit signifies greater borrowing by the government. The extent of\nfiscal deficit is an indicator of the amount of expenditure for which the\ngovernment has to borrow money.<\/li><li>Some economists like&nbsp;J.M.\nKeynes&nbsp;say that a fiscal deficit situation is beneficial as it assists\ncountries in coming out of recession. However, other experts opine that\ngovernments should avoid deficits in favour of balanced budget policy.<\/li><\/ul>\n\n\n\n<p><strong>Primary Deficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Primary deficit is defined as fiscal\ndeficit of current year minus interest payments on previous borrowings. <\/li><li>In other words whereas fiscal deficit\nindicates borrowing requirement inclusive of interest payment, primary deficit\nindicates borrowing requirement exclusive of interest payment.<\/li><\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"\"><tbody><tr><td><\/td><\/tr><tr><td><\/td><td>\n \n \n \n \n Primary\n deficit = Fiscal deficit \u2013 Interest payments\n &nbsp;\n \n \n \n \n &nbsp;<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p><strong>&nbsp;<\/strong><br><\/p>\n\n\n\n<p><strong>Fiscal Responsibility and Budget Management (FRBM) Act 2003:<\/strong><strong><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>The Fiscal\nResponsibility and Budget Management (FRBM) Act was enacted in 2003\nwhich set targets for the government to reduce fiscal deficits. <\/li><li>The primary objective was the\nelimination of revenue deficit and bringing down the fiscal deficit.<\/li><li>The other objectives included:<\/li><li>To\nensure that the government did not borrow beyond rational limits.<\/li><li>Borowing\nfor consumption has to be brought to zero over a period.<\/li><li>Only\nborrowing for asset creation was to be allowed.<\/li><li>Total\ninternal debt of the government of India should be limited.<\/li><li>RBI\nshould not be the primary lender.<\/li><li><strong>Features\nof the FRBM Act:<\/strong><\/li><li>It\nwas mandated by the act that the following&nbsp;must be placed along with the\nBudget documents annually in the Parliament:<\/li><li>Macroeconomic\nFramework Statement<\/li><li>Medium\nTerm Fiscal Policy Statement and<\/li><li>Fiscal\nPolicy Strategy Statement<\/li><li>It\nwas proposed that the four fiscal indicators i.e, revenue deficit as a\npercentage of&nbsp;GDP, fiscal deficit as a percentage of GDP, tax revenue as a\npercentage of GDP and total outstanding liabilities as a percentage of GDP be\nprojected in the medium-term fiscal policy statement.<\/li><li><strong>Targets\nand fiscal indicators as per the FRBM Act: <\/strong>The central\ngovernment agreed to the following fiscal indicators and targets, subsequent to\nthe enactment of the FRBMA<\/li><li>Revenue\ndeficit to be eliminated by the 31st of March 2009. A minimum annual reduction\nof 0.5% of GDP.<\/li><li>Fiscal\nDeficit to be brought down to at least 3% of GDP by 31st of March 2008. A\nminimum annual reduction \u2013 0.3% of GDP.<\/li><li>Total\nDebt to be reduced to 9% of the GDP (a target increased from the original 6%\nrequirement in 2004\u201305). An annual reduction of \u2013 1% of GDP.<\/li><li>The\npurchase of government bonds by RBI must cease from 1 April 2006.<\/li><\/ul>\n\n\n\n<p><strong>Adherence\nto FRBM Act:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Between 2004 and 2008, the Indian\ngovernment had made giant strides on reducing both revenue deficit and fiscal\ndeficit. But this process was reversed thereafter thanks largely to the Global\nFinancial Crisis and a domestic slowdown. Since then, there have been several\namendments to the Act essentially postponing the targets.<\/li><li>In Budget 2016-17, a panel under the\nchairmanship of N.K Singh was constituted to review the Fiscal Responsibility\nand Budget Management Act. The main recommendations of NK Singh committee:<\/li><li>Committee\nrecommended that the&nbsp;combined debt-to-GDP ratio&nbsp;of Centre and States\nshould be brought down to 60% by 2023(40% Centre and 20 % States) as against\nexisting 49.4% of centre and 21% of states.<\/li><li>For\nfiscal consolidation, the centre should reduce its&nbsp;fiscal\ndeficit&nbsp;from the current 3.5% (2017) to 2.5% by 2023.<\/li><li>The\ncentral government should reduce its&nbsp;revenue deficit&nbsp;steadily by 0.25\npercentage (of GDP) points each year, to reach 0.8% by 2023.<\/li><li>The\ncommittee has recommended an&nbsp;Escape Clause&nbsp;to accommodate counter\ncyclical fluctuations such as Boom or Recession or in case of any natural\ncalamities.<\/li><li>The\nCommittee proposed to create an autonomous&nbsp;Fiscal Council&nbsp;with a role\nof preparing multi-year fiscal forecasts, recommending changes to the fiscal\nstrategy, improving quality of fiscal data, advising the government if\nconditions exist to deviate from the fiscal target, and advising the government\nto take corrective action for non-compliance with the Bill<\/li><li><strong>Changes\nmade in 2018 amendment:<\/strong><\/li><li>The\ncentral government shall reduce the fiscal deficit by an amount equivalent to\n0.1 percent or more of the gross domestic product at the end of each financial\nyear beginning with the financial year 2018-19, so that fiscal deficit is\nbrought down to not more than 3 percent of the GDP by 2020-2021.<\/li><li>Union\ngovernment stopped targeting revenue deficit and instead focussed only on\nfiscal deficit.<\/li><\/ul>\n\n\n\n<p><strong>Significance\nof Revenue deficit:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Revenue Deficit is shown as a reference\nindicator in the Medium-term Fiscal Policy Statement (MTFP). The Revenue\nDeficit of the government has several implications, such as, it has to be met\nfrom the capital receipts, because of which a government either borrows or\nsells its existing assets. This brings in a reduction in assets.<\/li><li>Also, to meet its consumption\nexpenditure, since the government uses capital receipts, it leads to an\ninflationary situation in the economy.<\/li><li>With more and more such borrowings,\nalong with interest, the burden to repay the liability also increases which, in\nthe future, results in huge revenue deficits.<\/li><\/ul>\n\n\n\n<p><strong>Conclusion:<\/strong><\/p>\n\n\n\n<p>Since there is\nno compulsion to reduce revenue deficit, the government has, over the past\ncouple of years, been containing the fiscal deficit by reducing its capital\nexpenditure. As a result, India has now reached a point where adhering to the\nFRBM Act is actually sending a contractionary pulse. In other words, adherence\nto FRBM Act is achieving the exact opposite of what it was supposed to do.<\/p>\n\n\n\n<p>There is a need\nto revert back to the original FRBM Act if 2003 by recognising and prioritising\nthe reduction in revenue deficit. Doing this will help the government boost the\nkind of expenditure that actually increases the GDP.<\/p>\n\n\n\n<p><br>\n<strong>Source: <\/strong><a href=\"https:\/\/indianexpress.com\/article\/explained\/explained-union-budget-2020-the-ugly-truth-about-indias-adherence-to-the-frbm-act-6243108\/\">https:\/\/indianexpress.com\/article\/explained\/explained-union-budget-2020-the-ugly-truth-about-indias-adherence-to-the-frbm-act-6243108\/<\/a><strong><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: FRBM Act. More in news: Fiscal deficit has become a key factor to watch out for in every Budget presentation.&nbsp;It is considered the most important marker of a government\u2019s financial health. Budget: The word \u2018budget\u2019 has not been used in the Constitution of India. Rather Article 112 of the Constitution of India mentions the&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-the-ugly-truth-about-indias-adherence-to-the-frbm-act31st-january-2020\/\">Continue reading <span class=\"screen-reader-text\">7 PM |The ugly truth about India\u2019s adherence to the FRBM Act|31st January 2020<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,955],"tags":[],"class_list":["post-54367","post","type-post","status-publish","format-standard","hentry","category-7-pm","category-7-pm-brief-infograph","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704867432},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/54367","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=54367"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/54367\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=54367"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=54367"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=54367"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}