Context: The Finance Ministry has conveyed its inability to release the Medium Term Expenditure Framework (MTEF), mandated by the Fiscal Responsibility and Budget Management (FRBM) Act.
The MTEF requires assumptions to be made about the growth rate of the economy and revenue receipts to enable meaningful expenditure projections and rolling targets for the next two years. However, due to unprecedented global uncertainties that may adversely affect medium-term projections, the government is not placing fiscal projections for 2024-25 and 2025-26 in Parliament.
Background of FRBM Act
- The Indian economy faced the problem of large fiscal deficit and its monetization spilled over to the external sector in the late 1980s and early 1990s. The large borrowings of the government led to such a precarious situation that the government was unable to pay even for two weeks of imports resulting in the economic crisis of 1991.
- Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. After a good start in the early nineties, the fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98.
- The Government introduced FRBM Act,2003 to check the deteriorating fiscal situation.
Fiscal Responsibility and Budget Management (FRBM) Act, 2003
- Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings during a fiscal year. Let us understand this with the help of an example, the government earns Rs. 100 in a particular year. However, it has to spend Rs. 120 in that fiscal year. Hence, the government needs to borrow Rs. 20 from somewhere. So in simpler terms, Rs. 20 is the government’s fiscal deficit.
- FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years.
- The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which the Central Government may specify.
- Hence, this act provides a legislative framework for reduction of deficit, and thereby debt, of the Government to sustainable levels over a medium term so as to ensure inter-generational equity in fiscal management and long term macro-economic stability.
Fiscal management principles
- The Central Government shall take appropriate measures to limit the fiscal deficit upto 3% of gross domestic product (GDP) by the 31st March, 2021.
- Endeavour to ensure that:
- The general Government debt does not exceed 60% of GDP.
- The Central Government debt does not exceed 40% of GDP by the end of financial year 2024-2025.
- Not give additional guarantees with respect to any loan on security of the Consolidated Fund of India in excess of 0.5% of GDP, in any financial year.
- The government may exceed annual fiscal deficit target on grounds of national security, act of war, national calamity, collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, decline in real output growth of a quarter by at least 3% below its average of the previous four quarters. Any deviation from the fiscal deficit target shall not exceed 0.5% of the GDP in a year.
Statements to be Submitted under FRBM Act
- FRBM Act required the government to lay before the parliament three policy statements in each financial year namely:
- Medium Term Fiscal Policy Statement.
- Fiscal Policy Strategy Statement.
- Macroeconomic Framework Policy Statement.
- Through Finance Act 2012, amendments were made to the Fiscal Responsibility and Budget Management Act, 2003 through which it was decided that in addition to the existing three documents, Central Government shall lay another document – the Medium Term Expenditure Framework Statement (MTEF) – before both Houses of Parliament in the Session immediately following the Session of Parliament in which first three documents are laid.
- While the Medium Term Fiscal Policy (MTFP) lays down the fiscal constraints of the Government in the medium term, Medium Term Expenditure Framework (MTEF) lays down the expenditure commitments for various sectors over a 3 years rolling framework.
Medium-term Expenditure Framework (MTEF) Statement
- The Medium-term Expenditure Framework Statement is a statement presented to the Parliament under Section 3 of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.
- The objective of the MTEF is to provide a closer integration between budget and the FRBM Statements. This Statement is presented separately in the session next to the session in which the Union Budget is presented, i.e. normally in the Monsoon Session.
- The MTEF is essentially a vertical expansion of the aggregates of the expenditure projections in the fiscal framework presented along with the Annual Financial Statement and the Demands for Grants.
- It sets forth a three-year rolling target for the expenditure indicators with specification of underlying assumptions and risks involved.
- MTEF contains:
- The expenditure commitment of the government on major policy changes involving new services, new instruments of service, new schemes and programmes.
- The explicit contingent liabilities, which are in the form of stipulated annuity payments over a multi-year time-frame.
- The detailed break-up of grants for creation of capital assets.
- Hence, this statement provides an estimate of expenditure commitments for various items viz. Education, Health, Rural Development, Energy, Subsidies and Pension etc.
- While formulating the MTEF Statement, information on expenditure commitments spread across the various central ministries on salaries (including grants-in-aid for salaries) and pensions, grants-in-aid for creation of capital assets, major programme, interest payment, defence expenditure and major subsidies etc. and other commitments of Government, will be considered. ” Grants-in-aid for creation of capital assets” and its projection are also depicted as a part of Revenue expenditure.
- To take an example, in MTEF, the salary component which now appears scattered amongst the various Demand for Grants of central Ministries would be aggregated and projected into the future. Expenditure commitments are shown separately for Revenue and Capital expenditure.