Transcript FRBM, Fiscal and Revenue Deficit

FRBM, Fiscal and Revenue Deficit
Ashita Allamraju
Associate Professor
Administrative Staff College of india
Basic Concepts
 What is the difference between revenue and capital?
 Capital: relates to creation/liquidation of an asset
 irregular
 Revenue: routine requirements
 Fairly regular
Some Definitions
Revenue Deficit= Revenue Expenditure – Revenue
Receipts
Fiscal deficit = Total expenditure - (Revenue Receipts
+recoveries of loans +
Other capital Receipts )
Effective Revenue Deficit = Revenue Deficit- Grants for
Creation of Capital
assets
Trends in Deficit
 Fiscal deficit till September,
2015 was Rs3,78,563 crore
which amounts to 68.1 per
cent of the BE 2015-16.
 Revenue deficit for AprilSeptember, 2015 was
Rs.2,69,008 crore as
against the budget estimates
of 2015-16 of Rs.3,94,472
crore.
 Revenue deficit was 68.2
per cent of BE
Assessing Quality: Capex and Social
Sectors
Deficit Indicators of State Governments
Issue 1: Why do fiscal imbalances
occur: need for FRBM?
Two Reasons
1) Someone else’s money spent on someone else!
4 Ways to spend money - Milton Friedman
Fiscal Imbalances are a common pool problem
– When you go to a restaurant with nine friends and decide to share the bill, you will only
have to pay for 10 % of the excesses you incur, but you will be partially liable for the
excesses of your friends.
– Suppose there are two options: a cheaper meal, say for Rs. 1, and an expensive meal for
Rs5. Assume that if you went on your own, you would choose the cheaper meal. Notice,
however, what happens if you go in a group and share the bill. If the nine friends choose the
cheaper meal, you could choose the cheaper meal for 1 or the expensive meal and pay only
1.40 [(9x1+5)/10].
– Alternatively, if your friends all choose the expensive meal, you could choose the cheaper
meal and pay Rs4.6 or the expensive meal and pay Rs5.
Fr
ie
n
d
s
Cheap Meal
Expensive Meal
Cheap Meal
1,1
1.4 , 1.4
Expensive Meal
4.6, 4.6
5,5
Fiscal policy involves expenditures that are paid out of a
common pool of public revenues and hence suffer a similar
problem, only that it involves much more than ten people,
not all of them friends, making problems so much harder.
Institutional Reforms
 Numerical Rules (like FRBM)
 Procedural Rules (like GFR)
 Transparency Rules (like RTI)
Fiscal Responsibility and Budget
Management Act
FRBM
 The FRBM Bill / Act provides rules for fiscal responsibility of
the Central Government. The FRBM Act 2003 (as amended)
became effective from July 5, 2004
 Objectives of FRBM Act 2003



To reduce fiscal deficit
To adopt prudent debt management.
To generate revenue surplus.
Three Planks of Strategy
 Limits on government borrowing under a time bound
programme to altogether eliminate revenue deficit and bring
down fiscal deficit
 Bringing a medium term perspective in Budget planning
through the introduction of certain statements to accompany
the budget the introduction of certain statements to
accompany the budget document.
 Improving transparency in the fiscal operations of the
government in order to avoid any window dressing in
meeting the deficit targets as well as improving fiscal
discipline.
Features of the FRBM Act/Rules
 Rules specify annual targets for Revenue and Fiscal deficit
 As per the amendments in 2012, the Central Government has to take
appropriate measures to reduce the fiscal deficit, revenue deficit and
effective revenue deficit to eliminate the effective revenue deficit by the
31st March, 2015 and thereafter build up adequate effective revenue
surplus and also to reach revenue deficit of not more than 2 % of Gross
Domestic Product by the 31st March, 2015 and thereafter as may be
prescribed by rules made by the Central Government.
 Vide the Finance Act 2015, the target dates for achieving the prescribed
rates of effective deficit and fiscal deficit were further extended. The
effective revenue deficit which had to be eliminated by March 2015 will
now need to be eliminated only after 3 years i.e., by March 2018. The
3% target of fiscal deficit to be achieved by 2016-17 has now been
shifted by one more year to the end of 2017-18.

Public Debt
The central government should ensure that the total liabilities
(including external debt at current exchange rate) should
not exceed 9% of GDP for the financial year 2004-2005.
There should be progressive reduction of this limit by
atleast one percentage point of GDP in each subsequent
year
FRBM: Discipline
 In the mid-year review at end of 2nd quarter every year, if :
 Total non-debt receipts are < 40 % of BE of that year
 or Revenue Deficit is > 45 % of BE of that year
 Or Fiscal Deficit is > 45 % of BE of that year
then action is triggered as stipulated under Section 7(2) and
Section 7(3) of the Act, namely :
 u/s 7(2) Govt. shall take appropriate measures to increase
revenue or curtail expenditure and
 u/s 7(3) Finance Minister is required to make a statement in
the Parliament on the ‘State of Central Govt. Finances’
State Wise Analysis of Impact of FRBM
 Marginal reductions in revenue
expenditures.
Are Fiscal Rules Helpful?
 Charles Wyplosz, reviewing global experience with fiscal
rules (NBERWorking Paper No. 1788), concludes they are
neither necessary nor sufficient to ensure good behaviour, but
they can be potentially helpful.
 The FRBM Act succeeded in disciplining the states, because
the states cannot borrow without the permission of the
centre, but it was spectacularly ineffective in disciplining the
centre.
 Sovereign governments are not easily disciplined by fiscal
rules unless Parliament is an effective watchdog.
Reasonable Fiscal Deficit
 The Fourteenth Finance Commission has explicitly
recommended a 3% fiscal deficit for the centre and another
3% for the states, yielding a combined limit of 6% per year
for the period 2015-16 to 2019-20.
 Is a combined deficit of 6% reasonable?
 Crowding out of private Investment?
 In 2007-08, the net financial saving of households was about
11.6% of GDP and the combined fiscal deficit of the centre
and states together was only 4.1%.
 This meant that 7.5% of GDP was left for the corporate
sector. We know that private investment boomed at that
time.
 Net financial saving of the household sector has declined to
about 7.3% of GDP. This probably reflects higher levels of
inflation, prompting households to shift from financial assets
to real estate and gold. If the combined fiscal deficit is fixed
at 6% of GDP, it would leave only 1.3% of the GDP for the
corporate sector!
Thank you!