FRBM Act: FM In Tight Spot

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New Delhi, Aug 1: Finance minister P Chidambaram faces trial by fire in the first year of the implementation of the Fiscal Responsibility and Budget Management (FRBM) Act. He will have to come up with a fresh dose of taxes and ruthlessly prune expenditure to honour FRBM Act commitments in letter and spirit.

If the fiscal data for the first quarter and economic condition emanating from a bad monsoon are any indication, the stiff targets prescribed in the FRBM Rules will not be met. And Mr Chidambaram, who had displayed exemplary alacrity in notifying the FRBM Act and the Rules, will now have to do a lot of explaining to Parliament and announce unpopular remedial measures to rectify the fiscal situation.

The Act prescribes various trigger points which shall automatically activate the FRBM machinery at the end of second quarter (April-September 2004). The FRBM Rules enjoin the government to monitor the trends in receipt and expenditure every quarter and take action if at the end of second quarter, “the total non-debt receipts are less than 40 per cent of budget estimates or fiscal deficit is higher than 45 per cent of the budget estimates or the revenue deficit is higher than 45 per cent of the budget estimates.”

As per the FRBM rules government is required to meet all the three parameters at the end of second quarter. The fiscal data for the first quarter (April-June 2004) released by the Controller General of Accounts (CGA) indicates that non-debt capital receipts at Rs 17,379 crore amounted to 55.9 per cent of the target. There is no problem on that account.

Fiscal deficit at the end of June 30, 2004 stood at Rs 41,681 crore. It worked out to be 30.3 per cent of the Budget target. The government is required to remain below 45 per cent of the target at the end of September 30, 2004. It means that Union government’s fiscal deficit at the end of September 2004 can go up to Rs 61,833 crore. Effectively, in the second quarter the Union government has to restrict its incremental fiscal deficit to about Rs 20,000 crore, half of what it incurred in the first quarter. There is some problem on the second count.