Fiscal Stability: The FRBM Act of 2003 in India’s Dynamic Political Landscape

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM) is a critical legislative measure aimed at ensuring prudent fiscal policy and financial discipline in India, especially within a multi-party parliamentary system where electoral considerations significantly influence expenditure policies.

What are the Key Objectives of FRBM?

• Fiscal Discipline: Enacted in August 2003, FRBM obliges the central government to maintain fiscal discipline, ensure long-term macroeconomic stability, and achieve intergenerational equity through sufficient revenue surplus.
• Debt management: The Act emphasizes effective debt management by minimizing deficits and borrowings.
• Transparency and Accountability: This legislative measure enhances the fiscal transparency and accountability of the government, thus reinforcing an institutional framework for fiscal prudence.

What are the main features of FRBM, 2003? 

Fiscal Deficit Targets

• The Act necessitates the reduction of the
  • Fiscal deficit to a maximum of 3% of GDP and
  • The elimination of the revenue deficit by March 31, 2009, followed by the buildup of an adequate revenue surplus.
• Annual Targets and Fiscal Discipline under the FRBM Act:
  • The fiscal deficit should be reduced by 0.3% of GDP and
  • The revenue deficit by 0.5%. 
  • If tax revenues fall short, the deficit must be adjusted through expenditure reduction.

Borrowing Limitations and RBI Restrictions

• The central government is prohibited from borrowing from the Reserve Bank of India (RBI), except for temporary advances to bridge the gap between cash disbursements and receipts.
• From 2006-07 onwards, RBI was restricted from subscribing to the primary issues of central government securities.

Exceptional Circumstances and Deficit Tolerance:

• Actual deficits may surpass the specified targets only under exceptional circumstances like national security threats or natural calamities, as defined by the central government.

Improving Fiscal Transparency Measures:

• The Act mandates greater transparency in fiscal operations.
• The central government is required to present three statements before both Houses of Parliament: 
  • The Medium-term Fiscal Policy Statement,
  • The Fiscal Policy Strategy Statement, and
  • The Macroeconomic Framework Statement, along with the Annual Financial Statement.
• A quarterly review of receipts and expenditure trends in relation to the budget must also be placed before both Houses of Parliament.

Beyond the Centre: State-Level Fiscal Responsibility Legislation in India

• While the Act primarily applies to the central government, all states have enacted similar fiscal responsibility legislation, broadening the rule-based fiscal reform programme across the nation.

FRBM Review Committee

• Over the thirteen years post-enactment, 
  • India has evolved into a middle-income country, and though the global trend shifted towards fiscal discretion.
  • India retained its commitment to the fiscal rules outlined in the Fiscal Responsibility and Budget Management Act.
• There’s support for retaining the basic operational framework of Fiscal Responsibility and Budget Management while revamping it to align with India’s changing economic landscape and future growth trajectory, a task assigned to the FRBM Review Committee.

Concerns about FRBM:

• Despite the government’s assertion that FRBM is a pivotal institutional mechanism for fiscal prudence, concerns loom that welfare expenditure might be curtailed to meet the Act’s mandated targets, potentially impacting various critical sectors like agriculture, education, health, and poverty alleviation.

GST and FRBM in India: Creating a Unified and Efficient Tax Structure

• The Goods and Services Tax, operational from 1 July 2017, is a comprehensive single indirect tax imposed on the supply of goods and services from the manufacturer or service provider to the consumer, applicable throughout India. 
  • It’s a destination-based consumption tax promoting Input Tax Credit (ITC) utilization in the supply chain, with one rate applied to one type of goods/service, thus ensuring tax parity across the nation. The Fiscal Responsibility and Budget Management Act, contributing to fiscal discipline and sustainability, complements the objectives of Goods and Services Tax in creating a unified and efficient tax structure.

Tax Framework Pre and Post GST: Aligning with FRBM principles

• Pre-GST: Taxes were levied not on the value added at each stage but on the total value of the commodity/service, leading to a cascading tax effect.
• Post-GST: Tax is levied at every stage of supply, with credit for tax paid at the previous stage available at the next stage, making it a tax on value addition at each stage. 
• The FRBM Act adds a layer of financial discipline to this transformed tax framework.

Tax Simplification: Integrating Subsumption with FRBM

• Amalgamated numerous Central and State taxes and cesses, replacing them with a single tax to simplify the tax structure.
• Major taxes subsumed include Central Excise Duty, Service Tax, VAT/Sales Tax, Entry Tax, Luxury Tax, and various cesses.
• The FRBM Act plays a crucial role in maintaining fiscal discipline within this reformed tax framework.

Understanding GST Rates and Special Provisions in India with FRBM

• Five standard Goods and Services Tax rates are applied: 0%, 5%, 12%, 18%, and 28% on all goods and/or services.
• Special provisions under the FRBM framework exist for five petroleum products, alcoholic liquor for human consumption, and tobacco products, which are not subsumed in Goods and Services Tax.

GST Implementation and Legislative Backing with FRBM

• Launched on the midnight of 30 June/1 July 2017 during a special midnight session of Parliament.
• The GST is backed by the 101st Constitution Amendment Act. Article 246A in the Constitution empowers both Parliament and State Legislatures to enact laws concerning Goods and Services Tax, aligning with the principles of Fiscal Responsibility and Budget Management framework.

Impact & Advantages: Common Market & Cost Saving Aligned with FRBM

• Common Market: Created a common market, facilitating the free movement of goods and services across the country.
• Cost Saving: Reduced the cost of business operations and the cascading effect of various taxes on consumers.
• Economic Growth: It is expected to boost GDP and enhance the competitiveness of Indian products/services both domestically and internationally.
• Simplified Tax Compliance: Through an online portal www.gst.gov.in, expanding the tax base, introducing higher transparency, reducing the human interface between Taxpayer and Government, and furthering ease of doing business.
• FRBM principles align with the positive impact of GST, ensuring fiscal responsibility and sustainable economic growth

Conclusion

• The government’s fiscal operations, showcased through its budget, play an important role in a mixed economy, influencing economic stability and growth. 
• The balance between revenue collection and spending results in either a balanced, surplus, or deficit budget, each having distinct economic repercussions.
• Deficit management, through measures like taxation and expenditure cuts, is vital to controlling debt accumulation, thereby ensuring a financially sustainable trajectory for the economy.