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Objectives of the FRBM Act
• The first objective of the Act is to make the Government responsible to "ensure inter generational equity in fiscal management" implying that borrowings are nothing but deferred taxation and the governments living beyond their means leave a burden of debt on future generations.
• The second objective is to make the Government responsible for ensuring long term Macro Economic stability because reckless borrowings by government crowds out private investment or fuels inflation or leads to balance of payment crises eventually leading to macro-economic instability.
• The third objective is to make the Government responsible for removing fiscal impediments to the effective conduct of monetary policy because unsustainable increase in deficit makes the task of the RBI to control money supply difficult as the RBI also happens to be the debt manager of the government.
Main Features
a) The Act mandates the central government to take appropriate measures to reduce fiscal deficit and revenue deficits so as to eliminate the revenue deficit by March 31, 2009 and thereafter build up adequate revenue surplus.
Main Features
a) The Act mandates the central government to take appropriate measures to reduce fiscal deficit and revenue deficits so as to eliminate the revenue deficit by March 31, 2009 and thereafter build up adequate revenue surplus.
b) It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per cent. If this is not achieved through tax revenues, the necessary adjustment has to come from a reduction in expenditure.
c) The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.
d) The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.
e) The Reserve Bank of India must not subscribe to the primary issues of central government securities from the year 2006-07.
f) Measures to be taken to ensure greater transparency in fiscal operations.
g) The central government to lay before both Houses of Parliament three statements – Medium-term Fiscal Policy Statement, The Fiscal Policy Strategy Statement, The Macroeconomic Framework Statement along with the Annual Financial Statement.
h) Quarterly review of the trends in receipts and expenditure in relation to the budget be placed before both Houses of Parliament.
The Act applies only to the central government. Though few states like Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh have enacted fiscal responsibility legislations, the objective of fiscal consolidation, growth and macroeconomic stability will not be achieved if all the states do not participate. However, though there has been an effort by the government to widen the tax net and ensure better compliance, there have been fears that welfare expenditure may get reduced to meet the targets mandated by the Act.
The Act applies only to the central government. Though few states like Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh have enacted fiscal responsibility legislations, the objective of fiscal consolidation, growth and macroeconomic stability will not be achieved if all the states do not participate. However, though there has been an effort by the government to widen the tax net and ensure better compliance, there have been fears that welfare expenditure may get reduced to meet the targets mandated by the Act.
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