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Review FRBM Act, Centre, states told

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The Reserve Bank of India (RBI), in its third quarter monetary policy review, has highlighted the need for the central and the state governments to revise fiscal responsibility and budgetary management (FRBM) mandate, given the acuteness of the economic slowdown and its impact on the financial health of the country.

The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline and the government had notified the FRBM Rules in July 2004.

The rules impose limits on fiscal and revenue deficit which the central government is required to stick to. In case of a breach, the government is held accountable under the law and is required to explain to Parliament the reasons for the breach, corrective steps, as well as the proposals for funding the additional deficit.

According to the target, revenue deficit has to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5 per cent of the gross domestic product (GDP). Similarly, the fiscal deficit is required to be reduced to 3 per cent of the GDP by 2008-09 or a reduction of 0.3 per cent of GDP every year.

Revenue deficit occurs when a government spends more than the revenue it receives in the current financial year. When a government’s total expenditure exceed the revenue that it generates (excluding money from borrowings), it results in fiscal deficit.

Revenue deficit for the period April-November 2008-09 registered a growth of 102 per cent (surplus of 17.2 per cent for the same period in 2007-08) thanks to a string of financial stimulus provided by the government to the counteract the impact of the global slowdown on the Indian economy, outgo towards the Sixth Pay Commission and waiver of dues towards farm loans. The fiscal deficit too increased by 85.7 per cent (surplus of 12.2 per cent for the same period in 2007-08).

In order to address the economy’s liquidity concerns, RBI had injected funds worth Rs 4,28,000 crore into the system. Of this, about Rs 1,65,000 crore was injected through refinance facilities, for which additional borrowings have to be made.

As against the budgeted net market borrowings of Rs 99,000 crore, the government till date has mobilised Rs 1,51,697 crore from the market.

In addition to this, special bonds worth 1.1 per cent of GDP, or Rs 58,000 crore, have been issued to oil marketing and fertiliser companies.

In its statement, RBI has explained that the additional borrowing is on account of the shortfall in revenue generation by the government due to lower direct and indirect tax collections, following the cuts in excise and customs duties. In its latest review of the economy (January 2006-09), the economic advisory council to the prime minister has placed the consolidated fiscal deficit of the central government at 8 per cent of the GDP for 2008-09.

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