'Revisiting original FRBM Act key to economic revival'

Professor N R Bhanumurthy explains the changes made to the FRBM Act in 2018-19 resulted in low capital expenditure which in turn causing the structural slowdown in the economy.

New Delhi: Union budget is round the corner and one of the most keenly awaited statistics is the fiscal deficit number which will be announced by the finance minister Nirmala Sitharaman on February 1.

In her maiden budget presented in July last year, she projected the fiscal deficit for FY 2019-2020 to be 3.3% of the country’s GDP or little over Rs 7 lakh crore.

In 2003, Prime Minister Atal Bihari Vajpayee’s government had enacted the Fiscal Responsibility and Budget Management Act (FRBM Act) to induce fiscal discipline in the functioning of both the Centre and states.

It required the Centre to bring down its revenue deficit to zero percent and fiscal deficit to 3% of the GDP.

However, economists believe that the provisions of FRBM Act have been diluted over the years, causing structural weakness in the economy, and Modi government must go back to the original FRBM Act for economic recovery.

“By philosophy, the FRBM Act is an expenditure switching mechanism, from revenue expenditure to capital expenditure and it is not an expenditure compression mechanism,” said NR Bhanumurthy, Professor at the National Institute of Public Finance and Policy (NIPFP).

“Original FRBM Act mandated bringing down fiscal deficit to 3% of the GDP and revenue deficit to zero percent. In this adjustment what happens is that the capital expenditure increases over a period of time and consumption expenditure declines,” he told ETV Bharat while explaining the direct relationship between high capital expenditure and high GDP growth.

Unlike revenue expenditure, which basically means operational expenses of a government such as wage and pension bill, subsidy and interest payments and other non-productive expenses, the capital expenditure goes into asset creation like building of roads, ports, schools and hospitals.

High capital expenditure means more money flowing into infrastructure development that has a multiplier effect for economic growth of a country.

“So when you’re shifting from consumption expenditure to capital expenditure then your GDP growth should go up,” said Professor Bhanumurthy adding that the Centre diluted the provisions of original FRBM Act in 2018.

Changes in 2018-19

“In 2018-19, finance bill, they (the Union government) removed the distinction of the revenue deficit. Now the government only has fiscal deficit and public debt saying that the fiscal deficit should come down and the public debt should also come down but it cannot happen if you remove the distinction of revenue deficit,” explained the economist who has closely tracked the macro-economic indicators and finances of the Union government.

He blames the dilution of original FRBM Act for causing the structural weakness in the country’s economy.

“Since 2018, what is happening is just the opposite of what the Original FRBM Act intended. Our revenue expenditure is going up while capital expenditure is coming down. In 2019, the capital expenditure has come down both in absolute terms and also as ratio the GDP,” he explained while blaming the low capital expenditure for causing the structural slowdown in the economy.

The GDP growth has come down to just 4.5% in July-September quarter in this fiscal, an all time low since January-March period of 2012-13 when it was 4.3%.

Most of the agencies, including the Reserve Bank of India and international agencies like the International Monetary Fund (IMF) have projected India’s GDP growth to be below 5% in this fiscal.

(Article by Senior Journalist Krishnanand Tripathi)