FRBM Amendment Bill likely by year-end

Amid the debate on whether the government will be able to rein in the fiscal deficit to 4.6 per cent of gross domestic product (GDP) this financial year, a Bill to amend a legislation on fiscal consolidation is likely to be tabled in the winter session of Parliament. The amendments will provide a road map for various deficit targets and also provide for deviation from them in the event of an economic downturn.

The amendments are required because the earlier road map given by the Fiscal Responsibility and Budget Management (FRBM) Act expired in 2008-09. The new road map given by the 13th Finance Commission is available, but the government will come out with its own targets. “We are working on the FRBM amendment Bill. It may be tabled in the winter session of Parliament,” a finance ministry official told Business Standard. The amendments will provide a road map for the next five years. “In the course of the year, the central government would introduce an amendment to the FRBM Act, laying down the fiscal road map for the next five years,” Finance Minister Pranab Mukherjee said in his Budget speech for 2011-12.

The FRBM Act of 2003 and its rules provided for 0.3 percentage points reduction in fiscal deficit from 2004-05 to cut it to three per cent of GDP by 2008-09. However, fiscal deficit doubled to six per cent of GDP during 2008-09. This happened because the government had to provide stimulus to industry in the wake of global financial crisis. As such, it cut excise duty by three percentage points in phases and the service tax by two per cent, besides stepping up public expenditure.

This time, the Bill may provide for sidestepping the road map during the period of economic crisis. “One of the challenges is how to address the issue of deviation in the event of a crisis,” the ministry official said.

He, however, made it clear no specific estimation would be given for this type of deviation.

After deviating sharply from fiscal consolidation during 2008-09, the government came back strongly to fiscal consolidation during 2010-11 even though stimulus was only partly withdrawn, by increasing excise duty by two per cent. The original estimate of fiscal deficit was 5.5 per cent of GDP during the financial year, but it was brought down to 5.1 per cent in the revised estimates. However, in actual, it turned out to be close to 4.7 per cent of GDP.

However, for this financial year, it seems only the finance ministry is confident of reining fiscal deficit to 4.6 per cent of GDP, while analysts believe it would be very difficult given elevated global fuel prices and prospects of low economic growth than nine per cent projected in the economic survey.