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Medium-term Fiscal Policy Statement

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Fiscal Framework: Review medium-term fiscal stance

Economic Survey 2016 which was tabled in Parliament  in New Delhi on Friday during the Budget session

Arvind Subramanian

Ashok Lahiri

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	The Medium-term Fiscal Policy Statement, presented to Parliament under Section 3(2) of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, sets out three-year rolling targets for four specific fiscal indicators in relation to gross domestic product (GDP) at market prices &mdash; (i) Revenue Deficit, (ii) Fiscal Deficit, (iii) Tax to GDP ratio and (iv) Total outstanding Debt at the end of the year. The statement includes the underlying assumptions, an assessment of sustainability relating to balance between revenue receipts and revenue expenditure and the use of capital receipts, including market borrowings for generation of productive assets.</div>
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	In Budget 2018, then finance minister Arun Jaitley did away with revenue deficit as a part of the fiscal consolidation road map. Instead, the central government debt and general government debt substituted revenue deficit as a more accurate indicator of fiscal trajectory.&nbsp;</div>
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	The Interim Budget 2019-20 pegged the fiscal deficit for the year 2019-20 at 3.4 per cent of GDP. According to the Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement, non-debt capital receipts on the capital side are expected to be Rs 102,508 crore in Budgeted Estimates (BE) 2019-20, indicating an increase of Rs 9,353 crore over Revised Estimates (RE) 2018-19.</div>
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	Increase in non-debt capital receipts is mostly on account of disinvestment, which is budgeted at Rs 90,000 crore. Total net borrowings in 2019-20 are projected at Rs 703,999 crore, compared with Rs 634,398 crore in RE 2018-19. This reflects an increase of 11 per cent over the RE.<br />
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	<strong>Read full Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement</strong><br />
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	<a href="https://bsmedia.business-standard.com/_media/bs/data/general-file-upload/2020-02/frbm2.pdf" target="_blank">Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement&nbsp; 2020-21</a></div>

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What is Medium-term Fiscal Policy Statement, Medium-term Fiscal Policy Statement Meaning, and Definition

What is Medium-term Fiscal Policy Statement

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	There can be different forms of deficit in a Budget depending on the type of receipt and expenditure taken into account. Revenue deficit is that which occurs when the government&#39;s total revenue expenditure exceeds its total revenue receipts. This includes those transactions that have a direct impact on the government&#39;s current income and expenditure and happens when the actual amount of revenue and/or the actual amount of spending do not correspond with the budgeted revenue and expenditure.</div>
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	<strong>What is the difference between revenue deficit and fiscal deficit?</strong></div>
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	A revenue deficit should not be confused with the fiscal deficit. If the government has a revenue deficit, it means that its income cannot cover its expenditure. A country&rsquo;s fiscal deficit, on the other hand, is the total money spent by the government in excess of its income, with the income figure including only taxes and other revenues and excluding money borrowed to make up the shortfall.</div>
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	<strong>How is revenue deficit calculated?</strong></div>
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	Revenue deficit can be calculated by subtracting total revenue expenditure from total revenue receipts. It is important to note that revenue receipts neither create liability nor lead to a reduction in assets. The opposite of revenue deficit is revenue surplus, which arises when the actual amount of net income exceeds the projected amount of expenditure. Supposing the level of fiscal deficit remains the same, a higher revenue deficit would be considered worse because that would imply a higher repayment burden in the future not matched by benefits from investment.</div>
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	Revenue deficit can be divided into two categories &mdash; receipt from tax (direct tax, indirect tax), and receipt from non-tax revenue.</div>
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	<strong>How is revenue deficit met?</strong></div>
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	To remedy a revenue deficit, the government can choose to increase taxes or cut expenses. If not remedied, a revenue deficit can adversely affect the government&rsquo;s credit rating. Running a revenue deficit may place the government&rsquo;s planned expenditures in jeopardy, as there aren&#39;t enough funds to cover the cost. The government should try to reduce its expenditure and avoid unnecessary expenditure. By identifying and employing cost-cutting measures, the government can avoid revenue deficit.</div>
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	Revenue deficit indicates dissaving on the government account because the government has to make up the uncovered gap by drawing upon capital receipts, either through borrowing or through the sale of its assets.</div>

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What is Revenue deficit, Budget News, Revenue deficit Definition

Revenue Deficit

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	The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit.</div>
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	<strong>When was the FRBM Act enacted? Who introduced it in India?</strong></div>
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	The FRBM Bill was introduced by the then finance minister, Yashwant Sinha, in 2000. The Bill, approved by the Union Cabinet in 2003, became effective from July 5, 2004.</div>
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	<strong>What are the objectives of the FRBM Act?</strong></div>
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	The FRBM Act aims to introduce transparency in India&#39;s fiscal management systems. The Act&rsquo;s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India. The FRBM Act was enacted to introduce more equitable distribution of India&#39;s debt over the years.</div>
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	<strong>Key features of the FRBM Act</strong></div>
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	The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:</div>
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	<strong>1. </strong>Medium Term Fiscal Policy Statement</div>
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	<strong>2. </strong>Macroeconomic Framework Statement</div>
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	<strong>3. </strong>Fiscal Policy Strategy Statement</div>
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	The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.</div>
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	<strong>FRBM Act exemptions</strong></div>
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	On grounds of national security, calamity, etc, the set targets of fiscal deficits and revenue could be exceeded.</div>
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	<strong>How effective has the FRBM Act been?</strong></div>
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	Several years have passed since the FRBM Act was enacted, but the Government of India has not been able to achieve targets set under it. The Act has been amended several times.</div>
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	In 2013, the government introduced a change and introduced the concept of effective revenue deficit. This implies that effective revenue deficit would be equal to revenue deficit minus grants to states for the creation of capital assets. In 2016, a committee under N K Singh was set up to suggest changes to the Act. According to the government, the targets set under FRBM Act previously were too rigid.</div>
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	<strong>N K Singh Committee&#39;s recommendations were as follows:</strong></div>
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	<strong>Targets:</strong> The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.</div>
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	<strong>Fiscal Council:</strong> The committee proposed to create an autonomous Fiscal Council with a chairperson and two members appointed by the Centre (not employees of the government at the time of appointment)</div>
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	<strong>Deviations:</strong> The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified</div>
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	<strong>Borrowings:</strong> According to the suggestions of the committee, the government must not borrow from the RBI, except when...</div>
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	<strong>a.</strong> the Centre has to meet a temporary shortfall in receipts</div>
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	<strong>b.</strong> RBI subscribes to government securities to finance any deviations</div>
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	<strong>c. </strong>RBI purchases government securities from the secondary market<br />
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	<strong>Read full FRBM documents</strong></div>
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		<a href="https://bsmedia.business-standard.com/_media/bs/data/general-file-upload/2020-02/frbm1.pdf" target="_blank">Macro-Economic Framework Statement 2020-21</a></div>
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	<div>
		<a href="https://bsmedia.business-standard.com/_media/bs/data/general-file-upload/2020-02/frbm2.pdf" target="_blank">Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement&nbsp; 2020-21</a></div>
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What is FRBM Act, FRBM Act Definition, FRBM Act News

FRBM Act

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	Gross Domestic Product (GDP) is the final monetary value of the goods and services produced within the country during a specified period of time, normally a year. In simple terms, GDP is the measure of the country&#39;s economic output in a year. In India, contributions to GDP are mainly divided into three broad sectors &mdash; agriculture, industry, and services. GDP is measured over market prices and there is a base year for the computation. The GDP growth rate measures how fast the economy is growing. It does this by comparing the country&#39;s gross domestic product in one quarter with that in the previous one, and with the same quarter of the previous year.</div>
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	The GDP growth rate is driven by GDP&rsquo;s four components. The main driver is personal consumption, which includes the critical sector of retail sales. The second component is business investment, including construction and inventory levels. The third is government spending whose largest categories are social security benefits, defence spending, and medicare benefits. The government often increases spending to jump-start the economy during a recession. The fourth is net trade.</div>
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	When the economy is expanding, the GDP growth rate is positive. If the economy grows, so do businesses, jobs and personal income. If it contracts, then businesses hold off investing in new purchases. They delay hiring new employees until they are confident that the economy will improve. Those delays further depress the economy. Without jobs, consumers have less money to spend. If the GDP growth rate turns negative, the country&#39;s economy is said to be in a state of recession.</div>
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	The GDP growth rate is the most important indicator of economic health. It changes during the four phases of the business cycle &mdash; peak, contraction, trough, and expansion.</div>
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	Nominal GDP is the value of all final goods and services that an economy produces during a given year; it is not adjusted for inflation. It is calculated by using the prices that are current in the year in which the output is produced. Nominal GDP takes into account all of the changes that occurred for all goods and services produced during the year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant.</div>
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	Real GDP, on the other hand, is the total value of all final goods and services that the economy produces during a given year, accounting for inflation. It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much of GDP has been changed by inflation since the base year, and divide out the inflation each year. Real GDP, therefore, accounts for the fact that if prices change but output doesn&rsquo;t, nominal GDP would change.</div>
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	In January 2015, the government moved to the new base year of 2011-12 from the earlier base year of 2004-05 for national accounts. The base year of national accounts had previously been revised in January 2010. In the new series, the Central Statistics Office (CSO) did away with GDP at factor cost and adopted the international practice of valuing industry-wise estimates in gross value added (GVA) at basic prices.</div>
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Medium-term Fiscal Policy Statement

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