Article 112 of Constitution requires the Government to present Annual Financial Statement (AFS) before the Parliament every financial year. The AFS should distinguish the expenditure on the revenue account from other expenditures.
Revenue Budget include Current Receipts and expenditure that can be met from these receipts. On the other hand, Capital Budget includes Assets and Liabilities.
| CRITERIA | REVENUE BUDGET | CAPITAL BUDGET |
| Receipts | Non-redeemable receipts | Receipts which create liability or reduce financial assets. |
| Examples of Receipts | Tax Revenue (Direct and Indirect Taxes): GST, Income Tax, Corporate Tax, Excise Duty, Customs duty (In Declining Order)Non-Tax Revenue: Interest Receipts, Dividends and Profits of PSUs, User Charges, External Grants etc. | Debt Receipts: Market Borrowings.Non-Debt Receipts: Disinvestment, Recovery of Loans |
| Expenditure | Recurring: Incurred for purposes other than creation of Assets | Non-Recurring: Incurred for Asset creation |
| Examples of Expenditure | Interest Payments, Subsidies, Salaries and Pensions, Defence, Grants to the States for creation of Assets etc. | Creation of Roads, railways etc. and loans to States. |
MAJOR REFORMS IN BUDGET
Shifting the date of the Budget: The date of the Budget was advanced to 1 February from the Budget FY18. The advancement of Budget presentation by a month has paved the way for early completion of the Budget cycle. It has also enabled the Ministries to ensure better planning and execution of schemes from the beginning of the financial year.
Merger of railway Budget with the Main Budget: The railway budget was merged with the Union Budget from FY18. The reform gave a holistic picture of the government's financial position. The initiative envisaged facilitating multimodal transport planning between highways, railways and inland waterways, which has been strengthened in the subsequent years through Gatishakti.
Discontinuation of Plan-Non plan classification: The Budget FY18 discontinued having Plan and Non-Plan classifications of Government expenditure. The reform gave a greater emphasis to the Revenue and Capital classification of Government expenditure. Over the years, a broad understanding had been that Plan expenditures were good and Non-Plan expenditures were bad, resulting in skewed allocations in the Budget. The reform enabled effective planning and allocation of resources in the Budget.
IMPROVED FISCAL TRANSPARENCY AND REALISTIC REVENUE ASSUMPTIONS IN THE BUDGET
- The Government has been presenting statement highlighting the extent of off budget financing along with the Budget documents.
- Budget 2022 based its revenue projections on realistic assumptions, thus providing a buffer to the government in an uncertain global environment. These measures credibly demonstrate the government's commitment to sound fiscal management and provide an adequate buffer to deal with global challenges.
ROLE OF FRBM ACT IN ENSURING FISCAL DISCIPLINE
The FRBM Act, 2003 has been formulated in accordance with Article 292 to improve the Public Financial management. The FRBM Act seeks to limit Fiscal Deficit to 3% of GDP by end of 2022 and Combined debt of Centre and States to 60% of GDP by end of 2024-25. similar fiscal responsibility laws were adopted in most states, with the states being given various incentives to adhere to these laws.
According to Economic Survey 2016-17, introduction of FRBM rules helped a great deal in consolidating the finances of both central government and the states. The combined debt of the centre and states declined from 83% of GDP in FY2004 to 66% in FY2016. Similarly, fiscal deficit declined from 8.3% of GDP in FY2004 to 7% in FY2016.
BENEFITS
Ensure Fiscal discipline:
- Limit on Expenditure through targets on Fiscal Deficit and Public Debt
- Restricts Direct Monetisation of Government's deficit through RBI's borrowing
- Higher Revenue mobilisation through rolling targets in form of Tax-to-GDP ratio
Ensure Transparency and accountability
- Submission of Reports by the Government to Parliament
- Audit of compliance of FRBM Provisions by CAG
Ensure Intergenerational equity by preventing short-sighted expansionary fiscal policies and overaccumulation of debt
Greater coordination between Monetary Policy (Inflation Targeting) and Fiscal Policy (FRBM Act)
Ensure Macro-economic stability and promote GDP growth
CHALLENGES
Problems with the Targets:
- Focusses only on Quantity and Quality of Fiscal Deficit
- Does not target to eliminate Effective Revenue Deficit
- Does not target to keep Capital Expenditure at a certain level
Lack of Flexibility: Fiscal rules need to be cyclically adjusted rather than being fixed. For example, during high growth phase, the Fiscal deficit should reduce by much higher margin in comparison to normal times. Similarly, adherence to fixed Fiscal deficit target during recession would prevent the Government from following counter-cyclical fiscal policy.
Lack of Well-Defined Escape Clause: The FRBM Act has also been criticized because of incorporating imprecisely defined fiscal deficit escape clauses such as collapse of agriculture, structural reforms etc.
Circumvention of Fiscal Deficit target through Off budget financing
Poor enforcement as the FRBM laws: No legal sanctions or penalties for breach of targets by the Centre. For example, In the case of the states, Article 293 clause (3) of the Constitution requires them to seek central government permission to raise loans so long as they have outstanding liabilities to the central government
Limited accountability in the event of missed targets: Lack of independent fiscal institutions to monitor compliance
WAY FORWARD
The FRBM Review committee headed by N.K Singh recommended the creation of independent Fiscal council in order to ensure effective implementation of FRBM Act.