Fiscal firepower necessary to handle exogenous shocks

Fiscal firepower necessary to handle exogenous shocks

Subject :Economy

Section: Monetary Policy

In News: Finance ministry expressed inability to release the Medium-Term Expenditure Framework (MTEF)

Concept

Delayed Release of MTEF:

• Global uncertainties prompt Finance Ministry to hold back Medium-Term Expenditure Framework (MTEF) release.
• MTEF necessitates growth and revenue assumptions for meaningful expenditure projections.
• Maintaining “fiscal firepower” is crucial for managing external shocks.

Understanding FRBM and MTEF:

• Fiscal Responsibility and Budget Management (FRBM) Act guides fiscal planning.
• MTEF provides a roadmap for expenditure planning over a specified period.
• Flexible expenditure management and adherence to FRBM law enable effective responses to uncertainties.

FRBM Act, 2003

The act is officially titled the “Fiscal Responsibility and Budget Management Act, 2003.”

Objective:

• The primary objective is to ensure inter-generational equity in fiscal management and long-term macroeconomic stability.
• This includes reducing fiscal imbalances and preventing excessive government borrowing.

Fiscal Indicators:

• The act focuses on fiscal indicators such as fiscal deficit, revenue deficit, and effective revenue deficit to assess fiscal health.
• Fiscal deficit represents the excess of total expenditure over total receipts (excluding borrowings).
• Revenue deficit signifies the excess of revenue expenditure over revenue receipts (excluding borrowings).
• Effective revenue deficit denotes revenue deficit minus grants for the creation of capital assets.

Fiscal Responsibility and Budget Management Rules:

• The central government has the authority to prescribe rules for better fiscal management.
• These rules provide detailed guidelines for calculating fiscal indicators and ensuring consistency in computation.

Medium-Term Fiscal Policy Statement:

• The central government is required to present a Medium-Term Fiscal Policy Statement along with the annual budget.
• The statement outlines the government’s fiscal policy strategy for the next three years, ensuring alignment with fiscal consolidation objectives.

Fiscal Policy Strategy Statement:

• Presented along with the annual budget, this statement outlines fiscal policies and strategies for the upcoming year.
• It establishes how the government intends to adhere to fiscal targets and achieve its fiscal policy objectives.

Macroeconomic Framework Statement:

• The Macroeconomic Framework Statement is an integral part of the fiscal framework under the act.
• It outlines the assumptions and projections for key macroeconomic indicators such as GDP growth, inflation, and fiscal indicators.
• This statement provides a macroeconomic context for the fiscal policy strategy presented in the annual budget.

Medium-Term Expenditure Framework (MTEF):

• MTEF is a government planning tool that aligns policy priorities with budget allocations over 3-5 years, improving resource utilization and fiscal management.

In India, the MTEF was introduced to enhance transparency, accountability, and efficiency in government expenditure.

• MTEF comprises three components:
  • Rolling Multi-Year Perspective: Outlines government’s expenditure priorities over 3 years, allocating resources to sectors.
  • Linkage with Policy Priorities: Matches budget to government’s key policies, supporting economic and social goals.
  • Performance Measurement: Uses indicators to evaluate program impact, aiding monitoring and effectiveness assessment.

Fiscal Management Principles:

• The act lays down fiscal management principles including stability, equity, efficiency, and transparency.
• These principles guide the government’s fiscal decisions and actions.

Targets for Fiscal Indicators:

• The act sets targets for fiscal indicators to guide fiscal consolidation efforts.
• These targets include gradually reducing fiscal deficit and ultimately eliminating revenue deficit to achieve a balanced budget.
• Budget-2021: FRBM amended to provide a fiscal deficit of 6.8% (2021-22) and 4.5% (2025-26)-because a 4.5% target is recommended by 15th FC.

Escape Clauses:

• The act includes provisions allowing deviations from fiscal targets in exceptional circumstances.
• These escape clauses provide flexibility during times of natural disasters, national security concerns, and other exigencies.
• FRBM Act Section 4(2):
  • National Security / Act of War
  • National Calamity
  • If agriculture output and farm incomes collapse
  • Fall in real output/ GDP growth rate beyond x%
  • Structural reforms in the economy with unanticipated fiscal implications
• Govt may over cross/deviate from the fiscal deficit target by up to 0.5% of GDP, as recommended by NK Singh’s FRBM Review Committee.

Reporting and Transparency:

• The act emphasizes transparency by requiring the regular release of fiscal data and information.
• The government must report fiscal performance, adherence to targets, and reasons for deviations to the Parliament and the public.

Review and Amendments:

• The act permits periodic reviews and potential amendments to ensure its relevance in changing economic conditions.

Exemption for Special Category States:

• Special Category States may be exempted from certain provisions based on their unique circumstances.

Consequences of Non-Compliance:

• If the central government deviates from the targets, it must present reasons and corrective measures in the Budget.

The following documents to be released along with the budget annually – 

• Macroeconomic Framework Statement
• Medium-Term Fiscal Policy Statement
• Fiscal Policy Strategy Statement
• Medium-Term Expenditure Framework