Fiscal Consolidation & FRBM Act: Notes & Free eBook PDF

To enable you to have a better understanding of the complicated Economics and Finance related concepts that keep doing rounds in the news as well as in important yearly Government Documents such as Economic Survey & Union Budget, we have come up with this blog that explains you in the most lucid manner the basic concept of Fiscal Consolidation and also the policies, acts and other provisions by the Union Government in this respect. Go through the blog post of Fiscal Consolidation & FRBM Act to understand it better. This will surely help you better know the concept as well you will able to comprehend it henceforth in the news and elsewhere. It will no doubt be very useful for the RBI Grade B Exam as well. 

Fiscal Consolidation & FRBM Act

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What is Fiscal Consolidation?

Fiscal Consolidation is referred to as to the policies effected/undertaken by both Governments (Union & State) to lessen/reduce their respective deficits (primarily Fiscal Deficit) and accumulation of debt stock. Fiscal consolidation has been designed with a judicious mix of rationalisation in the total expenditure of the Government as a percent of GDP and also improvement in gross tax revenues as a percentage of GDP.

The Government has been keen on and has also taken several measures to improve the fiscal situation in the Government Finances. Several measures have been suggested to realize the objective of Fiscal Consolidation such as better and improved Tax Revenue Collections, Prudent Government Spending, Mindful Government Borrowings, etc

Fiscal Responsibility & Budget Management Act (FRBM)

1. In India, Fiscal Consolidation or Fiscal roadmap is expressed and measured in terms of Deficit Targets (Fiscal & Revenue Deficits). The Fiscal Responsibility and Budget Management (FRBM) Act sets the targets for fiscal consolidation in India.

2. The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 that sets targets for the government to reduce fiscal deficits. FRBM Act provides a legal institutional framework for fiscal consolidation.

3. It is now mandatory for the Central government to take measures to (a) reduce/lessen fiscal deficit, (b) to eliminate revenue deficit, and (c) to generate revenue surplus in the subsequent years.

4. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation.

5. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security, and other exceptional grounds which Central Government may specify.

6. Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.

7. The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit.

8. The Act also requires the government to lay before the parliament three policy statements in each financial year namely Medium-Term Fiscal Policy Statement; Fiscal Policy Strategy Statement and Macroeconomic Framework Policy Statement.

9. Also to impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to states through conditional debt restructuring and interest rate relief for introducing Fiscal Responsibility Legislations (FRLs). All the states have implemented their own FRLs.

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Fiscal Consolidation & FRBM Act – Measures Required for Realizing the Fiscal Consolidation Targets 

  1. Improved Tax Revenue realization (Direct & Indirect Tax) – For this, increasing efficiency of tax administration by reducing tax avoidance, eliminating tax evasion, enhancing tax compliance, etc. need to be made.
  2. Enhancing Tax-GDP Ratio –  by widening the tax base & minimizing tax concessions.
  3. Better Targeting of Government Subsidies and extending the Direct Benefit Transfer scheme for more subsidies.

Recommendations of N K Singh Committee on Fiscal Consolidation 

In May 2016, the Central Government had set up a committee under the chairmanship of N.K. Singh to review the FRBM Act. The Government believed the targets were too rigid. The committee recommended that the Government should target a fiscal deficit of 3 percent of the GDP in years up to March 31, 2020, cut it to 2.8 percent in 2020-21, and to 2.5 percent by 2023. 

Fiscal Consolidation & FRBM Act – Targets set by the Government for achieving Fiscal Consolidation

  • The Economic Survey 2018-19 says the General Government (Centre plus states) has been on the path of fiscal consolidation and fiscal discipline. It says revenue augmentation and expenditure reprioritization and rationalization continue to be integral to fiscal reforms.
  • The revised fiscal glide path envisages achieving a fiscal deficit of 3% of GDP by end of FY 2020-21 and Central Government debt to 40% of GDP by FY 2024-25. Targeted Improving Quality of Expenditure is a key priority.
  • Broadening and Deepening the Direct Tax base and Stabilization of Goods and Services Tax are the Other Priorities. Improving the quality of expenditure remains the key priority.
  • Central Government finances over the last several years have seen an improvement in the tax to GDP ratio, consolidation of revenue expenditure, gradual tilt towards capital spending, and consistent decline in total liabilities of the Central Government. All these have resulted in a progressive reduction in primary and fiscal deficits over the years.
  • The Survey notes the Medium-Term Fiscal Policy Statement presented along with the Union Budget 2018-19 aimed to reach the fiscal deficit target of 3.3 percent of GDP in 2018-19 BE. The FY 2018-19 has ended with a fiscal deficit of 3.4 percent of GDP and a debt to GDP ratio of 44.5 percent (Provisional). As a percent of GDP, total Central Government expenditure fell by 0.3 percentage points in 2018-19 PA over 2017-18, with a 0.4 percentage point reduction in revenue expenditure and a 0.1 percentage point increase in capital expenditure. With respect to State’s finances, their own tax and non-tax revenue display robust growth in 2017-18 RE which is envisaged to be maintained in 2018-19 BE says the document.

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Fiscal Consolidation & FRBM Act – Some Important Definitions

1. Fiscal Deficit

  • A fiscal deficit occurs when a Government’s total expenditures exceed its revenue, excluding money coming from borrowings.
  • The fiscal deficit is the difference between revenue receipts plus non-debt capital receipts on the one side and total expenditure including loans, net of repayments, on the other.
  • It measures the gap between the government consumption expenditure including loan repayments and the anticipated income from tax and non-tax revenues.
  • It also indicates the borrowing requirements of the government from all sources. The bigger the gap the more the government will have to borrow or resort to printing money to make both ends meet.
  • Deficit differs from debt, which is an accumulation of yearly deficits.

2. Revenue Deficits

  • A revenue deficit occurs when realized net income is less than the projected net income. This happens when the actual amount of revenue and/or the actual amount of expenditures do not correspond with budgeted revenue and expenditures. 
  • Revenue deficit is the gap between the consumption expenditure (revenue expenditure) of the Government (Union or the State) and its current revenues (revenue receipts). It also indicates the extent to which the government has borrowed to finance the current expenditure.
  • Revenue receipts consist of tax revenues and non-tax revenues. Tax revenues comprise proceeds of taxes and other duties levied. The expenditure incurred for the normal running of government functionaries, which otherwise does not result in the creation of assets is called revenue expenditure.
  • Examples of revenue expenditure are Interest Payments and Servicing of Debt, Pensions, and expenditure on Grants-in-Aid and contributions to States and Union Territories. Even though some of these grants may be used for the creation of assets, all grants are given by the Union Government to State Governments/Union Territories and other entities are also treated as revenue expenditure. 

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3. Fiscal Prudence

Fiscal Prudence means being conservative when estimating your revenues but accounting for the unforeseen when estimating your expenditure. It means presenting the most unflattering view of your assets and liabilities.

4. Fiscal Federalism 

  • Fiscal federalism is concerned with “understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government”.
  • It is the study of how competencies and fiscal instruments are allocated across different layers of the administration. An important part of its subject matter is the system of transfer payments or grants by which a central government shares its revenues with lower levels of government.

This was all from us in the article “Fiscal Consolidation & FRBM Act”. We sincerely hope that you would like our effort that has been put up in comprising this blog. Keep visiting Oliveboard for more such articles on topics of Economics & Finance.

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