The Hindu Business Line : Rules on FRBM Act bind Govt to bring down fiscal deficit

THE Ministry of Finance had notified the rules under the Fiscal Responsibility and Budget Management (FRBM) Act under which the Government would be mandated to annually reduce the revenue deficit by at least 0.5 per cent and the fiscal deficit by 0.3 per cent beginning fiscal 2004-05.

During 2003-04, the Centre's gross fiscal deficit stood at Rs 1,25,960 crore which amounted to 4.54 per cent of the country's GDP of Rs 27,72,194 crore at current market prices. The revenue deficit during the year stood at Rs 98,308 crore amounting to 3.55 per cent of GDP.

According to an official release, the rules have provided a cap on the level of guarantees and total liabilities of the Government.

The notification has made both the rules and the parent FRBM Act effective from July 5, 2004. While the Act stipulates elimination of revenue deficit by March 31, 2008, the rules relate to annual targets of reduction in deficits, government borrowing and debt.

The FRBM Act prohibits Government to borrow from the RBI after April 1, 2006.

The act requires that on a quarterly basis, that Government would have to place before both the Houses of Parliament an assessment of trends in receipts and expenditure.

The Government also has to annually present the macro-economic framework statement, medium term fiscal policy statement and fiscal policy strategy statement. The three statements would provide the macro-economic background and assessment relating to the achievement of FRBM goals.

The medium term fiscal policy statement will contain a three-year rolling targets for key fiscal parameters that underpin the Government's fiscal correction trajectory. A statement on this is proposed to be present along with forthcoming Union Budget for 2004-05.

Through the FRBM discipline, the Government is also committed to undertake an intra-year assessment of the achievement of its budgetary targets. At the end of the second quarterly assessment, if the non-debt receipts are less than 40 per cent of the Budget Estimates or the revenue or fiscal deficit is more than 45 per cent of the Budget

Estimates, the Government would not only be required to take corrective measures, but the Finance Minister shall also make a statement in both the Houses of Parliament.