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An outline of post 2009 FRBM fiscal architecture of the Union Government in the medium term

By: Contributor(s): Material type: TextTextSeries: Development Research Group (DRG) studies; 31Publication details: Mumbai Reserve Bank of India 2009Description: 71 p.: col. illSubject(s): DDC classification:
  • FP 336.54 D4O8
Online resources: Summary: The study emphasizes that in designing a meaningful framework on fiscal consolidation during the post-Fiscal Responsibility and Budget Management (FRBM) period in India there is a need for reconciling the discrepancies between the fiscal deficit and movement in debt. It finds that discrepancy between the two arise mainly due to: i) exclusion of off-budget liabilities and Market Stabilization Scheme (MSS) in fiscal deficit while being part of outstanding liabilities; ii) part of National Small Savings Fund (NSSF) being utilized by the States to finance their deficits being shown as liabilities of the Central Government, and iii) financing of fiscal deficit by draw-down or build-up in cash balances. Thus, the paper makes an attempt to reconcile the discrepancy by including the off-budget liabilities and MSS explicitly as above the line items, excluding the NSSF utilized by the States from the outstanding liabilities of the Central Government and adjusting the cash balances from Gross Fiscal Deficit (GFD). For the fiscal consolidation framework, the burden of interest payments on revenue receipts is considered the target variable. The choice of this target variable is based on the argument that the Government would be in a much better position to decide on how much of the current revenues it can afford for paying interest on its borrowing in the coming years while defining a sustainable debt/GDP ratio in terms of a precise number is neither straight forward nor always meaningful under the high growth environment. Given the targeted level of this chosen variable, the paper provides a framework based on budgetary identity to derive the tolerable level of deficit and debt under alternative assumptions of growth and interest rate. With the tolerable level of deficit so derived, the components of expenditure are calibrated by making adjustments in the discretionary component. Moreover, the paper reclassifies the expenditure components into current and investment components as against the current budgetary practice of defining them into revenue and capital component. The reclassification is based on the procedure adopted by Economic and Functional Classification of budget, which recognizes that a significant proportion of the presently defined revenue expenditures in the budget are an investment in nature, while defense capital outlay is primarily consumed in nature as recognized in the national income accounting. The paper also proposes for zero current deficits by 2013-14 so that the entire net borrowing goes to meet the investment expenditure, the so-called Golden Rule. https://www.rbi.org.in/scripts/PublicationsView.aspx?Id=11402#EXE
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Books Vikram Sarabhai Library Reference / Slot 1436 (2nd Floor West Wing) Non-fiction Faculty Publication R FP 336.54 D4O8-1 (Browse shelf(Opens below)) 1 Not for Issue 168529
Books Vikram Sarabhai Library Reference / Slot 1436 (2nd Floor West Wing) Non-fiction Faculty Publication FP 336.54 D4O8-2 (Browse shelf(Opens below)) 2 Available 168530

Table of contents

ACKNOWLEDGEMENTS
Executive Summary
I. Introduction
II. Fiscal Consolidation at Centre during the FRBM Period: An Assessment
III. An Exercise at Reconciliation of Budget Figures
IV. Post FRBM Fiscal Architecture
V. Concluding Remarks
References
List of Appendices
The Alternative Scenario (1-54)
List of Tables
1. Major Fiscal Indicators of the Central Government (percent of GDP)
2. Achievements of FRBM Rules for the Central Government
3. Fiscal Sustainability of the Central Government: Indicator Analysis
4. Adjusted and Unadjusted Debt and Deficit Series
5. Re-classified Expenditure Series
6(a). Alternative Fiscal Correction Path Under Three Different Assumptions of Growth and Interest Rate – High Revenue Buoyancy Scenario
6(b). Alternative Fiscal Correction Path Under Three Different Assumptions of Growth and Interest Rate – Low Revenue Buoyancy Scenario
7. Required Additional Correction in Deficit Indicators under Lower Growth and Lower Revenue Buoyancy

The study emphasizes that in designing a meaningful framework on fiscal consolidation during the post-Fiscal Responsibility and Budget Management (FRBM) period in India there is a need for reconciling the discrepancies between the fiscal deficit and movement in debt. It finds that discrepancy between the two arise mainly due to: i) exclusion of off-budget liabilities and Market Stabilization Scheme (MSS) in fiscal deficit while being part of outstanding liabilities; ii) part of National Small Savings Fund (NSSF) being utilized by the States to finance their deficits being shown as liabilities of the Central Government, and iii) financing of fiscal deficit by draw-down or build-up in cash balances. Thus, the paper makes an attempt to reconcile the discrepancy by including the off-budget liabilities and MSS explicitly as above the line items, excluding the NSSF utilized by the States from the outstanding liabilities of the Central Government and adjusting the cash balances from Gross Fiscal Deficit (GFD). For the fiscal consolidation framework, the burden of interest payments on revenue receipts is considered the target variable. The choice of this target variable is based on the argument that the Government would be in a much better position to decide on how much of the current revenues it can afford for paying interest on its borrowing in the coming years while defining a sustainable debt/GDP ratio in terms of a precise number is neither straight forward nor always meaningful under the high growth environment. Given the targeted level of this chosen variable, the paper provides a framework based on budgetary identity to derive the tolerable level of deficit and debt under alternative assumptions of growth and interest rate. With the tolerable level of deficit so derived, the components of expenditure are calibrated by making adjustments in the discretionary component. Moreover, the paper reclassifies the expenditure components into current and investment components as against the current budgetary practice of defining them into revenue and capital component. The reclassification is based on the procedure adopted by Economic and Functional Classification of budget, which recognizes that a significant proportion of the presently defined revenue expenditures in the budget are an investment in nature, while defense capital outlay is primarily consumed in nature as recognized in the national income accounting. The paper also proposes for zero current deficits by 2013-14 so that the entire net borrowing goes to meet the investment expenditure, the so-called Golden Rule.

https://www.rbi.org.in/scripts/PublicationsView.aspx?Id=11402#EXE

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