Revenue reforms which include tax reforms on both direct and indirect tax front; reduction/elimination of tax exemptions and treating the revenue forgone as tax expenditure, improving efficiency of tax collection, including the arrears and stable medium-term tax rates avoiding annual changes.
Expenditure reforms which include cutting out non-essential and unproductive activities, schemes and projects; allocation of resources to priority areas; reducing cost of services; rationalizing subsidies; reduction of time and cost overruns on projects and getting proper ‘outcome’ from output.
Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)
In a multi-party parliamentary system, electoral concerns play an important role in determining expenditure policies. A legislative provision that is applicable to all governments – present and future – is likely to be effective in keeping deficits under control.
The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms, binding the government through an institutional framework to pursue a prudent fiscal policy.
The central government must ensure inter-generational equity, long-term macro-economic stability by achieving sufficient revenue surplus, removing fiscal obstacles to monetary policy and effective debt management by limiting deficits and borrowing.
Main Features of FRBMA
The Act mandates the central government to take appropriate measures to reduce fiscal deficit and revenue deficits so as to eliminate the revenue deficit by March 31, 2009 and thereafter build up adequate revenue surplus.
It requires the reduction in fiscal deficit by 0.3% of GDP each year and the revenue deficit by 0.5%. If this is not achieved through tax revenues, the necessary adjustment has to come from a reduction in expenditure.
The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.
The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.
The Reserve Bank of India must not subscribe to the primary issues of central government securities from the year 2006-07.
Measures to be taken to ensure greater transparency in fiscal operations
The central government to lay before both Houses of Parliament three statements
Medium-term Fiscal Policy Statement
The Fiscal Policy Strategy Statement
The Macroeconomic Framework Statement along with the Annual Financial Statement
Quarterly review of the trends in receipts and expenditure in relation to the budget be placed before both Houses of Parliament.
The Act applies only to the central government. Though few states like Karnataka, Kerala, Punjab, Tamil Nadu and Uttar Pradesh have enacted fiscal responsibility legislations, the objective of fiscal consolidation, growth and macroeconomic stability will not be achieved if all the states do not participate.
However, though there has been an effort by the government to widen the tax net and ensure better compliance, there have been fears that welfare expenditure may get reduced to meet the targets mandated by the Act.
