Module 2: Deviation in performance from the Act and Rules

The FRBM Act 2003 and FRBM Rules 2004 (as amended from time to time) prescribed targets
for fiscal indicators. This chapter discusses deviations from the provisions of the Act and the
Rules including shifting of targets in subsequent years.

2.1 Compliance with annual reduction targets specified under the

FRBM Act
Rule 3 of FRBM Rules (amended in June 2015) required that in order to achieve the deficit
targets as set out in Section 4 of the Act, the Central Government shall reduce the Effective
Revenue Deficit (ERD), Revenue Deficit (RD) and Fiscal Deficit (FD). The reduction in ERD, RD
and FD was to be done by an amount equivalent to 0.5, 0.4 and 0.4 per cent or more of GDP
respectively at the end of each financial year, beginning with financial year 2015-16.
Although Government was able to achieve annual reduction targets in respect of all the three
indicators in 2016-17, it was against the base that prevailed in 2015-16 in respect of ERD and
FD. In 2015-16, Government had already deviated from the annual reduction target by 0.2 per
cent against ERD target of 0.5 per cent and by 0.2 per cent against the FD target of 0.4 per cent.
As such, taking into consideration 2015-16 and 2016-17 together, if Government would have
met the annual reduction targets as required by 2015 amendment, the actual ERD at the end of
March 2017 would have been 0.9 per cent and not 1.0 per cent and the actual FD would have
been 3.3 per cent and not 3.5 per cent. As such, after the amendment in 2015, Government
was not able to achieve the cumulative reduction target for two years together.
Ministry stated (July 2018) that the FRBM Rules provided for reduction in the FD/RD/ERD
targets by an amount equivalent to 0.4 per cent/0.4 per cent/ 0.5 per cent beginning with FY
2015-16; the reference points for comparing the annual reduction target is 2015-16 and not
2014-15. The annual reduction targets are prospective, beginning with end of 2015-16.
The reply of the Ministry is not tenable as the FRBM Rules 2015 amended in June 2015 requires
that in order to achieve the FD/RD/ERD deficit target of three per cent, two per cent and Nil of
the GDP respectively by the end of FY 2017-18 (target year), Central Government shall reduce
such deficit by an amount equivalent to 0.4, 0.4 and 0.5 per cent or more of GDP respectively
at the end of each financial year beginning with financial years 2015-16.
Audit is also comparing the achievement in annual reduction targets at the end of March 2016-
17 with reference to those at the end of March 2015-16, as stated by the Ministry. However,
audit is pointing out non-achievement of targets in 2015-16. Though the amended annual
reduction targets (amendment in June 2015) of 0.5 per cent and 0.4 per cent for ERD and FD
respectively were applicable for FY 2015-16 also, Government could achieve annual reduction
of only 0.3 per cent and 0.2 per cent of ERD and FD respectively. Hence, in 2015-16, there was
less achievement by 0.2 per cent of annual reduction for ERD and FD both. Further, if the pre-
amended targets (before June 2015 amendment) are taken into account, the target of annual
reduction for ERD was 0.8 per cent and FD was 0.5 per cent. As such, comparing actual annual
reduction in 2015-16 of 0.3 per cent and 0.2 per cent of ERD and FD, there was less
achievement by 0.5 per cent and 0.3 per cent for ERD and FD respectively.
This implies that first annual reduction was to be effected from the end of financial year 2015-
16 as compared to actual figures at the end of financial year 2014-15. Hence, Ministry’s view
about 2015-16 as a reference year for effecting this amendment and reckoning of first annual
reduction at the end of 2016-17 rather than 2015-16 is not consistent with the provision of the
amended Rules.

2.2 Inconsistency in specifying liability targets between FRBM Act and

Rules
As per Section 4 (2) (b) of the FRBM Act, 2003, the Central Government shall, by rules made by
it, specify the annual targets of assuming contingent liabilities in the form of guarantees and the
total liabilities as a percentage of gross domestic product. Rule 3(4) of the FRBM Rules 2004
provides that the Central Government shall not assume additional liabilities (including external
debt at current
exchange rate) in excess of nine per cent of GDP for the financial year 2004-05 with one per
cent reduction in each subsequent year instead of total liability limit as specified in the Act.
While the Act required an annual target of assuming contingent liabilities and total liabilities,
the Rules specified a cap on additional liability of nine per cent of GDP for the year 2004-05 and
required one per cent annual reduction thereafter. As such, the Rules envisaged a sunset point
at the end of March 2014 after which no additional liability was to be assumed. However, in
2014-15, 2015-16 and 2016-17, additional liability was 4.1, 4.7 and 3.2 per cent respectively.
Ministry stated (July 2018) that Section 4 of FRBM Act has since been modified vide Finance Act
2018 and Rule 3(4) of the FRBM Rules, 2004 and assumption of additional liabilities has also
been omitted by amending the FRBM Rules, 2004 on 2 April 2018.
The reply of the Ministry recognises this anomaly in principle and states that concept of Central
government debt has been introduced in place of additional/total liabilities from financial year
2018-19. However, the audit observation pertains to FY 2016-17 on the provisions of Act that
were applicable at that time.

2.3 Continuous deferment of mid-year benchmarks for review

to enforce corrective measures
In order to take corrective measures timely to enforce compliance, Section 7 (1) of the Act
required quarterly review of the trends of receipts and expenditure in relation to budget
estimates and pre-specified levels mentioned in the Fiscal Policy Strategy Statement by the
Minister-in-charge of the Ministry of Finance. In order to have controlled achievement of
annual targets and have scope for timely corrective measures, the Government fixed mid-year
benchmarks (second quarter ending September) in respect of non-debt receipts, fiscal deficit
and revenue deficit. Government was required to maintain Fiscal Deficit and Revenue Deficit
up to 70 per cent of Budget Estimates for the year in 2016-17. In the event of breach of this
mid-year targets, the Government was required to take appropriate corrective measures and
appraise the Parliament of such corrective measures in the session immediately following the
end of second quarter.
Ministry stated (July 2018) that deviation vis-à-vis mid-year benchmarks in respect of fiscal
deficit and revenue deficit may be seen in the context of higher pace of expenditure on one
hand and comparatively slow progress in realisation of receipts in general and non-tax receipts
and disinvestment receipts in particular on the other side.
It was further stated in the Statement that the Government is continuously monitoring the
emerging economic scenario and is taking measures for reviving growth. To mobilize higher
amount of resources, administrative, legal and technological measures initiated by Government
are underway. Measures initiated by Government for expenditure management, fiscal
prudence, subsidy reforms, direct transfer of benefits (DBT) are also in progress and
incremental benefits may become visible in later part of the financial year. Government is
steadfast on the policy of fiscal rectitude and committed to achieve the fiscal targets as
estimated in budget 2016-17.
The reply of the Ministry neither provides specific reasons of continuous deferment of mid-year
benchmarks of FD and RD nor highlights specific reasons of breach of mid-year benchmarks in
2016-17. This defeats the purpose of having mid-year benchmarks and presenting strategy
statement before Parliament to correct the course in achieving the targets.

2.4 Analysis of Half Yearly Review of Receipts and Expenditure

Prior to 2018 Amendment, the FRBM Act, 2018 provided for the quarterly review of receipts
and expenditure to be done by the Central Government. After 2018 Amendment, Section 7 of
the FRBM Act, 2003 read with Rule 7 of the FRBM Rules, 2004 provides for a half yearly review
of receipts and expenditure.
This review is made in order to ensure that receipts and expenditure of Central Government is
in accordance with the estimates projected/reflected in the Union Budget.
• Section 7 of the Act makes it imperative for the Minister-incharge of the Ministry of Finance
to review, on half-yearly basis], the trends in receipts and expenditure in relation to the budget
which is required to be laid down before both Houses of Parliament along with the outcome of
review.
• Sub-Section (1A) of section 7 states that the Central Government shall prepare a monthly
statement of its accounts.
[Please remember that accounts of the Government of India (GoI) presented to Parliament,
consist of the Finance Accounts and the Appropriation Accounts. The Finance Accounts depict
the receipts and payments from the Consolidated Fund, Contingency Fund and Public Account.
The Appropriation Accounts compare the expenditure with the amounts authorised by
Parliament and provide the explanations of the Executive on the excesses or savings under each
grant/appropriation. Article 150 of the Indian Constitution provides for the Form of Accounts of
The Union and of The States. It states that the accounts of the Union and of the States shall be
kept in such form as the President may, on the advice of the Comptroller and Auditor-General
of India, prescribe.]
• Sub-Section 2 provides that in case if there is either shortfall in revenue or excess of
expenditure over the prescribed levels (this means those estimated at the time of passing of
Budget which are referred to as Budget Estimates) during any period in a financial year, the
Central Government shall take appropriate measures for-
1. Increasing revenue in case revenue/income generated is less than the one estimated in the
Budget; or
2. Reducing the expenditure, in case expenditure is more than the one estimated in the Budget,
including curtailing of the sums authorised to be paid and applied from and out of the
Consolidated Fund of India under any Act so as to provide for the appropriation of such sums
However, this curtailing of sums / reduction of expenditure is subject to the exception that this
reduction shall not apply to the expenditure charged on the Consolidated Fund of India under
clause (3) of article 112 of the Constitution or to any other expenditure which is required to be
incurred under any agreement or contract or such other expenditure which cannot be
postponed or curtailed.
• Sub-section 3 states that no deviation in meeting the obligations cast on the Central
Government under this Act, shall be permissible without approval of Parliament. [Please
remember that deviation of 0.5% of GDP in case of Fiscal Deficit Target is permissible under the
FRBM Act, 2003 as such it does not require permission of Parliament. In that case, a statement
explaining the reasons thereof and the path of return to annual prescribed targets under this
section shall be laid, as soon as may be, before both the Houses of Parliament.]
However where, owing to unforeseen circumstances, any deviation is made in meeting the
obligations cast on the Central Government under this Act, the Minister-in-charge of the
Ministry of Finance shall make a statement in both Houses of Parliament explaining the
following three things-
(i) any deviation in meeting the obligations cast on the Central Government under this Act;
(ii) whether such deviation is substantial and relates to the actual or the potential budgetary
outcomes; and
(iii) the remedial measures the Central Government proposes to take.
Section 7 of the Act is to be read with Rule 7 of the Rules.
Rule 7 of the FRBM Rules, 2004 provides that in case the outcome of half yearly review of
trends in receipts and expenditure, made under sub-section (1) of section 7, at the end of first
half of any financial year (after expiry of six months) beginning with the financial year reveals
that –
(i) the total non-debt receipts are less than 40 per cent of Budget Estimates for that year; or
(ii) the fiscal deficit is higher than 70 per cent of the Budget Estimates for that year; or
(iii) the revenue deficit is higher than 70 per cent of the Budget Estimates for that year,
Then in such a case,
as required under sub-section (2) of section 7, the Central Government shall take appropriate
corrective measures; and
as required under sub-section (3) of that section, the Minister-incharge of the Ministry of
Finance shall make a statement in both Houses of Parliament during the session immediately
following the end of first half detailing the following three things-
1. The corrective measures taken by the Central Government;
2. The manner in which any supplementary demands for grants are proposed to be financed;
[Please Remember that Article 115 of the Constitution provides for the Supplementary Demand
for Grants which are presented in Parliament for voting when grants, authorised by the
Parliament, fall short of the required expenditure, an estimate is presented before the
Parliament for Supplementary or Additional grants. These grants are presented and passed by
the Parliament before the end of the financial year. Simply when some extra expenditure is to
be made from consolidated fund of India, the permission/approval of Parliament is required as
no amount of money can be withdrawn from Consolidated Fund of India without the Approval
of Parliament as per Article 266 clause 3 of the Indian Constitution] and
3. The prospects for the fiscal deficit of that financial year.

MODULE 3- Progress in achievement of FRBM targets (3.1 and 3.2)

Concept of Revenue Deficit
Introduction:
Deficit is the amount by which the expends in a budget overreach the earnings.
The Government Deficit is the amount of money in the budget set by which the
government expend overreaches the government earning amount. This deficit
furnishes a manifestation of the financial health of the economy. To minimize the
deficit or the gap between the expends and income, the government may reduce
a few expenditures and also rise revenue initiating pursuits.
A developing country like India needs revenue surplus for the capital investment
at the same time to pursue the economic development through demand
expansion it needs expenditure especially in the social sectors such as health,
education etc. The recent global economic crisis also compels India to induce the
expenditure for sustainability of the growth that it has achieved recently. This also
needs enormous expenditure. On the other hand, current expenditure over
current revenue of an economy makes revenue deficit. Revenue deficit means
excess of revenue expenditure over the revenue receipts and revenue surplus
means excess of revenue receipts over revenue expenditure Revenue deficit
denotes the difference between revenue receipts and revenue expenditure.
India's Thirteenth Finance Commission's one of the recommendation is that
revenue deficit of the Centre needs to be progressively reduced and eliminated,
followed by emergence of a revenue surplus by 2014-15 and a long term and
permanent target for the Central Government should be to maintain at the
minimum a zero revenue deficit.
• Revenue Deficit:
Revenue deficit is excess of total revenue expenditure of the government over its
total revenue receipts. It is related to only revenue expenditure and revenue
receipts of the government. Alternatively, the shortfall of total revenue receipts
compared to total revenue expenditure is defined as revenue deficit.
Revenue deficit signifies that government’s own earning is insufficient to meet
normal functioning of government departments and provision of services.
Revenue deficit results in borrowing. Simply put, when government spends more
than what it collects by way of revenue, it incurs revenue deficit. Mind, revenue
deficit includes only such transactions which affect current income and
expenditure of the government.
Revenue deficit = Total Revenue expenditure – Total Revenue receipts
(Here, revenue expenditure > revenue receipts)
[Note: opposite of Revenue Deficit is Revenue Surplus. It represents a condition in
which Total Revenue Receipts > Total Revenue Expenditure]
It reflects government’s failure to meet its revenue expenditure fully from its
revenue receipts. In other words, we can say that Revenue deficit is the gap
between the consumption expenditure (revenue expenditure) of the Government
(Union or the State Governments) and its current revenues (revenue receipts). It
also indicates the
extent to which the government has borrowed to finance the current
expenditure. Revenue receipts consist of tax revenues and non-tax revenues. Tax
revenues comprise proceeds of taxes and other duties levied. The expenditure
incurred for normal running of government functionaries, which otherwise does
not result in creation of assets is called revenue expenditure.
Implications of Revenue Deficit: 1. It indicates the inability of the government to
meet its regular and recurring expenditure in the proposed budget.
2. It implies that government is dissaving, i.e. government is using up savings of
other sectors of the economy to finance its consumption expenditure.
3. It also implies that the government has to make up this deficit from capital
receipts, i.e. through borrowings or disinvestments. It means, revenue deficit
either leads to an increase in liability in the form of borrowings or reduces the
assets through disinvestment.
4. Use of capital receipts for meeting the extra consumption expenditure leads to
an inflationary situation in the economy Higher borrowings increase the future
burden in terms of loan amount and interest payments.
5. A high revenue deficit gives a warning signal to the government to either curtail
its expenditure or increase its revenue.
• Revenue Expenditure:
Revenue Expenditure is that part of government expenditure that does not result
in the creation of assets. Payment of salaries, wages, pensions, subsidies and
interest fall in this category as revenue expenditure examples. Also, note that
revenue expenses are incurred by the government for its operational needs. The
Union government’s revenue expenditure comprises money spent on revenue
account — the amount spent on running its elaborate machinery.
Government collect huge sums of money from different receipts. Expenditure of
these large amounts has become an extremely complex task. Apart from spending
on salaries and pensions, the government also spends on the construction of
schools, colleges, hospitals, roads, bridges, railways, airports and seaports. It also
incurs expenses on securing the country from internal and external enemies.
While some of these tasks are related to the operational needs of the
government, some others result in the creation of physical assets like dams and
school buildings. The expenditure incurred in creation of physical assets is a one
time expenditure. It is called the Capital Expenditure.
On the other hand there are those tasks which are operational in nature requiring
recurring/ regular expenditure to be incurred for example the payments of
salaries, wages, subsidies, pensions, etc. These are regular in nature meaning
thereby that these payments/ expenditure is to be made after regular intervals of
time, mostly monthly. These are included in the revenue expenditure as they are
recurring/regular in nature. Therefore, government expenditure is divided into
two broad categories – capital and revenue expenditure.
High revenue expenditure means that the government machinery is spending too
much money on sustaining itself, rather than creating assets required to achieve
high economic growth.
Simply put, an expenditure which neither creates assets nor reduces liability is
called Revenue Expenditure, e.g., salaries of employees, interest payment on past
debt, subsidies, pension, etc. These are financed out of revenue receipts. Broadly,
any expenditure which does not lead to any creation of assets or reduction in
liability is treated as revenue expenditure.
Generally, expenditure incurred on normal running of the government
departments and maintenance of services is treated as revenue expenditure.
Examples of revenue expenditure are salaries of government employees, interest
payment on loans taken by the government, pensions, subsidies, grants, rural
development, education and health services, etc.
It is a short period expenditure and recurring in nature which is incurred every
year (as against capital expenditure which is long period expenditure and
nonrecurring in nature). The purpose of such expenditure is not to build up any
capital asset, but to ensure normal functioning of government machinery.
Traditionally, all grants given to state governments are treated as revenue
expenditure even though some of the grants may before creation of assets.
What is included in Revenue Expenditure?
1. The Union government’s revenue expenditure comprises money spent on
revenue account — the amount spent on running its elaborate machinery. All
grants given to state governments and Union territories are also treated as
revenue expenditure, even if some of these grants may be used for the creation
of capital assets.
2. In India, the payment of subsidies is also included in revenue expenditure. The
central government pays subsidy under three major heads – food subsidy,
fertiliser subsidy and fuel subsidy.
3. Giving and taking loans also have become an integral part of the functions of a
modern government.
4. Borrowing of money and repayment of debt and interest are also divided into
two categories – revenue account and capital account.
Revenue Receipts:
Revenue receipts can be defined as those receipts which neither create any
liability nor cause any reduction in the assets of the government. They are regular
and recurring in nature and the government receives them in the normal course
of activities.
Revenue receipts include the proceeds from taxes and other duties levied by the
Centre; the interest and dividend it receives on its investments; and the fees and
charges the government receives for its services.
Simply put, revenue receipts must satisfy two basic conditions:
No liability: Revenue receipts do not create any liability for the government. For
example, taxes received by the government, unlike borrowings, do not create any
liabilities for it.
No asset reduction: Revenue receipts do not lead to any reduction in the
government’s assets. So, the government cannot show its earnings from sale of
stake in a public-sector undertaking as revenue receipts because the stake sale
resulted in reduction of its assets.
For the government, there are two types of revenue receipts — tax receipts and
non-tax receipts:
1.Tax Revenue Receipts:
Tax revenue refers to sum total of receipts from taxes and other duties imposed
by the government. Tax is a compulsory payment made by people and companies
to the government without reference to any direct benefit in return.
Tax revenue is the main source of regular receipts of the government.
Government collects various kinds of taxes from public to meet its day-to-day
expenditures and there is a strict action against anyone who fails to pay the taxes.
Tax Revenue Receipts arises out of
(i) Direct Taxes
(ii) Indirect Taxes
(i) Direct Taxes: Direct taxes refer to taxes that are imposed on property and
income of individuals and companies and are paid directly by them to the
government.
i. They are imposed on individuals and companies.
ii.The ‘liability to pay’ the tax (i.e. impact) and ‘actual burden’ of the tax (i.e.
incidence) lie on the same person, i.e. its burden cannot be shifted to others.
For example, in case of income tax, the liability to pay tax (i.e. impact) and ‘actual
burden’ is on the same person on whom it is levied.
iii. They directly affect the income level and purchasing power of people and help
to change the level of aggregate demand in the economy.
iv. Examples: Income tax, corporate tax, Interest tax, Wealth tax, Death duty,
Capital gains tax, etc.
(ii) Indirect Taxes: Indirect taxes refer to those taxes which affect the income and
property of individuals and companies through their consumption expenditure.
They are imposed on goods and services.
1. The ‘liability to pay’ the tax (i.e. impact) and ‘actual burden’ of the tax (i.e.
incidence) lie on different persons, i.e. its burden can be shifted to others.
2. For example, in case of sales tax, the liability to pay tax to the government (i.e.
impact) is on sellers. But, ‘actual burden’ (i.e. incidence) is on consumers because
sellers collect the sales tax from them. So, burden of indirect taxes can be shifted.
3. Examples: Sales tax, Service tax, VAT, Entertainment tax, Excise duty, Custom
duty, etc.
2. Non-Tax Revenue Receipts: Non-Tax revenue refers to receipts of the
government from all sources other than those of tax receipts.
The main sources of non-tax revenue receipts are: 1. Interest: Government
receives interest on loans given by it to state governments, union territories,
private enterprises and general public. Interest receipts from these loans are an
important source of non-tax revenue.
2. Profits and Dividends: Government earns profit through public sector
undertakings like Indian railways, LIC, BHEL, etc. It earns profit from the sale
proceeds of the products of such public enterprises. Government also gets
dividend from its investments in other companies.
3. Fees: Fees refer to charges imposed by the government to cover the cost of
recurring services provided by it. Such services are generally in public interest and
fees is paid
by those, who receive such services. It is also a compulsory contribution like tax.
Court fees, registration fees, import fees, etc. are some examples of fees.
4. License Fee: It is a payment charged by the government to grant permission for
something. For example, license fee paid for permission of keeping a gun or to
obtain National Permit for commercial vehicles.
5. Fines and Penalties: They refer to those payments which are imposed on law
breakers. For example, fine for jumping red light or penalty for non-payment of
tax. Fines are different from taxes as the former is levied to maintain law and
order, whereas, the latter is imposed to generate revenue. 6. Escheats: It refers to
claim of the government on the property of a person who dies without leaving
behind any legal heir or a will.
7. Gifts and Grants: Government receives gifts and grants from foreign
governments and international organisations. Sometimes, individuals and
companies also voluntarily gift money to the government. Such gifts are not a
fixed source of revenue and are generally received during national crisis such as
war, flood, etc.
8. Forfeitures: These are in the form of penalties which are imposed by the courts
for noncompliance of orders or non-fulfilment of contracts etc.
9. Special Assessment:
It refers to the payment made by owners of those properties whose value has
appreciated due to developmental activities of the government. For example, if
value of a property near a Metro Station has increased, then a part of
developmental expenditure is recovered from owners of such property in the
form of special assessment.
2. Revenue Deficit Target under Frbm Act, 2003
a. Pre 2018 Amendment:
Prior to the amendment in FRBM Act, 2003, carried out by Finance Act, 2018
Section 2(e) of FRBM Act, 2003 defined revenue deficit as the “difference
between revenue expenditure and revenue receipts”. This meant an increase in
the liabilities of the Central Government without corresponding increase in the
assets of the Government.
• Revenue Deficit Target at the time of enactment of FRBM Act, 2003:
When the FRBM Act, 2003 was enacted, it had set an original target/ broad target
of elimination of Revenue Deficit completely by 31st March, 2008 and aimed at
building up revenue surplus that means when the revenue income exceeds
revenue expenditure under section 4 of the Act.
Minimum Annual Reduction Target as per FRBM Rules, 2004 at that time was
0.5% of GDP.
• Revenue Deficit Target as per Finance Act, 2012:
As Revenue Deficit was not eliminated by 31st March, 2008, the Finance Act, 2012
provided for a broad target of limiting Revenue Deficit upto 2% of the GDP by 31st
March, 2015.
Minimum Annual Reduction Target as per FRBM (Amendment) Rules, 2013 was
0.6% of GDP.
• Revenue Deficit Target as per Finance Act, 2015:
The Finance Act, 2015 only extended the date of achieving a broad target of
Revenue Deficit of 2% of the GDP to 31st March, 2018 from the earlier target date
31st March, 2015.
Minimum Annual Reduction Target as per FRBM (Amendment) Rules, 2015 was
0.4% of GDP.
b. Post 2018 Amendment:
Finance Act, 2018 has deleted section 2(e) from the FRBM Act, 2003 and has
amended Section 4 of the FRBM Act, 2003 whereby now the FRBM Act, 2003 does
not provides for any broad target to be achieved by the Central Government in
relation to limiting/eliminating revenue deficit.
The Frbm (Amendment) Rules, 2018 amended Rule 3 of the FRBM Rules, 2004
and now Rule 3 does not provide for any minimum annual reduction target for
reducing revenue deficit.
Through the amended FRBM Act 2018 and the Rules made thereunder,
Government has removed revenue deficit targets which are applicable for the
year 2018-19 and onwards. It has been cited that in a country like India, there is
little or no evidence to say that capital expenditure should enjoy pre-eminence
over revenue expenditure. However, the Government added that this strategy
will not compromise on the capital expenditure since Government is meeting the
requirement through off-budget borrowings. Debt raised for the purpose would
be repaid through revenue generation from such projects. Thus, both revenue
and capital expenditure needs of the economy would be met. Though
Government’s strategy to meet capital expenditure through off-budget financing
provides flexibility in meeting requirement of capital intensive projects, such
financing would be outside budgetary control. Further, mainly backed by the trust
in the Government’s explicit or implicit guarantee, it would pose fiscal risk in the
long term in cases the entity that raises the funds fails to meet debt servicing.
Select cases of off-budget financing of Ministries of Government of India were
examined to understand methods and extent of such borrowings which remain
beyond Parliamentary control. It came to notice that the Government resorts to
offbudget methods of financing to meet revenue and capital requirements. The
quantum of such borrowings is huge and current policy framework lacks
transparent
disclosures and management strategy for comprehensively managing such
borrowings.
3. Revenue Deficit as a component of Fiscal Deficit
At present there is no target in relation to elimination or limiting Revenue Deficit
which the Central Government intends to achieve owing to amendments in
Section 4 of the FRBM Act, 2003 and Rule 3 of FRBM Rules, 2004 made by the
Finance Act, 2018 and FRBM (Amendment) Rules 2018 respectively.
However prior to 2018, FRBM Act/Rules envisaged fiscal deficit of not more than
three per cent of GDP and revenue deficit of not more than two per cent of GDP
by 31 March 2018, implying that the revenue deficit accounts for two-thirds (66.6
per cent) of fiscal deficit.
In the light of the amended FRBM Act 2018, doing away with Revenue Deficit
target carries the risk of not addressing the issue of revenue deficit. The fact
remains that revenue deficit continues to have significant bearing on targets of
fiscal deficit and there is need of addressing revenue deficit in containing fiscal
deficit as an indicator.
Please examine the following to understand as to how revenue deficit is a
component of fiscal deficit:
1.We know, Fiscal Deficit = Total Expenditure – Total Receipts other than
Borrowings
2.By expanding the term, Total Expenditure as Revenue Expenditure and Capital
Expenditure and Total Receipts as Revenue and Capital Receipts, as discussed
earlier, we can rewrite the above formula as:
Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts +
Capital Receipts other than borrowings)
3.Now by rearranging the terms:
Fiscal Deficit = (Revenue Expenditure - Revenue Receipts) + Capital Expenditure -
(Recoveries of loans + other Receipts)
4. This implies that
Fiscal Deficit = Revenue Deficit + Capital Expenditure – Recovery of Loans – other
receipts.
This signifies the fact that post 2018 amendment though the FRBM Act/rules do
not address the issue of limiting/ reducing/ eliminating the Revenue Deficit, the
increase in revenue deficit will directly affect the fiscal deficit as revenue deficit is
a component of fiscal deficit.
During 2015-16, Revenue deficit as a component of Fiscal deficit improved to 64.3
per cent from 71.6 per cent in 2014-15 and further to 59.1 per cent in 2016-17.
During 2014-15 to 2016-17, major portion of fiscal deficit was because of revenue
deficit, resulting in revenue deficit averaging 65 per cent of fiscal deficit.
It is clear that Revenue Deficit, although contained within limit, constitutes a large
part of Fiscal Deficit. In the light of the amended FRBM Act 2018, doing away with
Revenue Deficit target carries the risk of not addressing the issue of revenue
deficit.

OFF BUDGET FINANCING

The budget is one of the most important principal tools of financial administration
in addition to being the more powerful instrument of Legislative control and of
Executive management. Conceived thus, it is at the core of democratic
government. Admittedly, one of the aspects of financial administration, budgeting
involves the largest number of policy questions in the course of making fiscal
decisions. Etymologically speaking, the word "budget" is derived from the old
French word "bougette", means a sack or a pouch of leather from which the
Chancellor of the Exchequer used to take out his papers for laying before the
Parliament the government's financial scheme for the ensuing year. The term was
used in its present tense for the first time in the year 1733 in a satire titled 'Open
the budget' pointed against the British Finance Minister Sir Robert Walpole's
financial plan for that year. Since then, the term "budget" began to be used for a
financial statement. Now, the term budget refers to financial papers certainly not
to go sack.
The word Budget has not been defined in the Indian Constitution. Instead of this,
the expression used under Article 112 is "Annual Financial Statement.” The
budget system is the basis of efficient fiscal management. The budget is a
document through which the executive that is the Central Government presents
to the Legislature a full report regarding the manner in which it has administered
the financial affairs during the last financial year and the statement of the present
condition of the public treasury. On the basis of such information the executive
that is the Central Government sets forth its programme of work for the coming
financial year with proposals as to the financing of such work. It is therefore a
plan of action which
projects/reflects the intention and course of action of the Central Government for
the ensuing financial year consisting of an estimate of expenditure and
income/receipts for the ensuing financial year in respect of which the budget is
being presented.
In order execute/implement budget, it has to be passed to by the Parliament
because
of following two basic reasons:
1. The Government cannot withdraw even a single penny for its expenditure from
the Consolidated Fund of India as per Article 266 clause 3 of the Constitution.
Hence an Appropriation Bill, consisting of the estimates of expenditure, is
required to be passed by the Parliament. Only after that the Central Government
can withdraw money from the Consolidated Fund of India. 2. The Government
cannot impose taxes in order to generate revenue receipts/income without the
authority of law as per Article 265 of the Constitution. Hence, a Finance Bill,
consisting of taxes to be imposed in the ensuing financial year, is required to be
passed by the Parliament. Only after that the Central Government can impose
taxes in order to generate revenue/income.
Thus every estimate of expenditure which the Central Government wants to incur
in the Financial year for which the Budget is presented has to be passed by the
Parliament. The Central Government submits all the estimates before the
Parliament in an Appropriation Bill.
Off Budget Financing
Every expenditure which is not funded through the Budget is called Off Budget
Expenditure and the process of getting the expenditure funded outside the
Budget is called as Off Budget Financing. Simply put, the expenditure of Central
Government which is not reflected or shown in the Budget estimates of
expenditure for the ensuing financial year is the off budget expenditure. It is
called off budget expenditure because it will be funded from sources outside
budget. It is off record. The expenditure which is funded through sources not as
per Budget or through channels outside budget is called the Off budget
expenditure. Off budget expenditure is not shown/disclosed in the budget yet it
has direct impact on the budget which will be discussed under the head
‘Implications of Off Budget Financing’ hereinafter.
Therefore, the budget may be considered as the law or collection of laws
authorizing expenditures and/ or the incurrence of obligations to make
expenditures, to be financed from taxes or levies, as well as the specification of
the sources of revenue from which expenditures are to be financed. The
government transactions may thus be called budgeted if they follow specified
budgeting laws and become off-budget if they bypass these laws.
The Annual Budget is based on the following recognized principles:
1. Universality principle—it means all expenditures and all revenues collected
through taxes or non tax receipts should be disclosed in the budget.
2. Unity principle—it means all expenditures in the budget to be made during a
financial year and all revenues in the budget to be collected during that period
should be presented before the Parliament for the purpose of approval of the
Parliament. 3. Specificity principle—it means expenditures and revenues should
be specified separately under different heads in the budget along with
accompanying details wherever required.
Off Budget Financing violates all these aforestated principles of sound budgeting.
Off Budget Financing is beyond the Parliamentary Control since it is not shown in
the Budget.
Why Government uses Off Budget Financing?
The reason why government takes recourse of Off Budget Financing is to keep the
fiscal deficit within the target limit it has set for the ensuing financial year and to
comply with the FRBM Target of Fiscal Deficit.
Please examine the following example carefully to understand why Government
resort to Off Budget Financing:
As we know, Fiscal Deficit = Total Expenditure – Total income (excluding
borrowings)
Here, total expenditure = Capital Expenditure + Revenue Expenditure.
The expenditure as well as income are shown in the form estimates in the Budget.
Now, if the Government wants to incur some expenditure on some project which
is vital for the economic growth of the nation or for the government’s day to day
regular functioning, it will cost extra burden on the government as the same
amount is to be withdrawn from the Consolidated Fund of India in the manner
discussed hereinbefore. (Please study Appropriation Bill and Article 266 clause 3
of Constitution)
This amount which is intended to be spent is to be shown in the Budget estimates
of expenditure so that the amount of expenditure can be withdrawn from
Consolidated Fund of India. But with an increase in the Total Expenditure of the
Government, the Fiscal Deficit will also increase.
Please understand, if the Government wants to create a capital asset for example
a hospital which requires an expenditure of Rs. 1000/- and Rs. 500/- is the
expenditure required to fund the subsidies which the Government gives as per its
schemes. So total expenditure becomes Rs. 1500/-.
Let us say, the total income of Government is Rs.1000/-.
Then Fiscal Deficit = 1500 – 1000 = Rs. 500/-
To understand, Please hypothetically assume that GDP is Rs 10000/-
Therefore Fiscal Deficit of Rs. 500/- is 5% of GDP. [as 10000×5% = 500]
This fiscal deficit of Rs 500/- is more than more than 3% of GDP. This is more than
the Fiscal Deficit Target specified in Section 4 of the FRBM Act 2003 read with
Rule 3 of FRBM Rules, 2004.
So, in order to keep the fiscal deficit within the prescribed statutory limit i.e. upto
maximum 3% of GDP, the government will not show Rs.500/- (expenditure for
funding subsidies) in the Budget.
But then subsidies are important. Government has to grant subsidies as per its
scheme without making an increase in the fiscal deficit and for doing so, the
Government needs money. Since this expenditure of Rs. 500/- is not shown in the
budget, the same cannot be taken out of Consolidated Fund of India.
However this expenditure of Rs. 500/- is necessary to be incurred, the
Government will make use off budget channels / sources which are outside
budget in order to keep the fiscal deficit within the statutory limit i.e. 3% of GDP.
The simple reason is if this expenditure is not shown in the budget, it will not be
counted in the total expenditure and accordingly it will not reflect on the fiscal
deficit number as well. Therefore to keep the fiscal deficit within the statutory
limit without withholding or discontinuing the expenditure, the Government
takes help of the Off Budget Financing.
Off Budget Financing of Revenue Expenditure and its implications
Off budget Financing of Revenue Expenditure:
The CAG Review Report 20 of 2018 on the compliance of FRBM Act, 2003 under
Chapter 3 reveals that the Central Government has so far funded its revenue
expenditure through the following three Off Budget Channels:
• Case 1. Special Banking Arrangements by Ministry of Chemicals and Fertilizers:
The mandate of the Department of Fertilizers is to make available fertilizers to the
farmers at affordable prices. The affordable prices part of the mandate gets
translated into subsidised fertilisers. The subsidy portion of fertilizers which
ranges from 30% to 70% of the cost of the fertilizers is given to the companies, so
as to make available fertilizers for the farmers at subsidized MRPs.
When the budget allocation made to Ministry of Chemicals and Fertilizers in a
financial year were not sufficient to clear all the dues of fertilizer subsidies, the
dues of fertilizer subsidies were carried over to next financial year and as a result
thereof the accumulated carryover liabilities of the Ministry increased. To
overcome this, the Government made ‘Special Banking Arrangement’ (SBA) in
which loans from Public Sector Undertaking banks were arranged to make
payments against arrears of subsidies with some selected companies.
Government made payments of interest on these loans at Government Security
rate. Interest over and above Government Security rate was borne by the
fertilizer companies. Resorting to SBA is an offbudget arrangement for financing a
part of the subsidy payment, which is deferred.
• Case Study - 2 Off-budget financing for Food Corporation of India (FCI).
Food Corporation of India (FCI) is a statutory corporation created through Food
Corporations Act 1964 by Parliament to implement the objectives of the National
Food Policy. FCI procures food grains at minimum support price (MSP) notified by
Government of India and provides food grains for public distribution system
(PDS). The difference between the cost of procurement and cost of providing it to
fair price shops is worked out as subsidy bill and it is raised with Government for
payment.
When the budget allocation of a financial year to Ministry of Consumer Affairs,
Food and Public Distribution was not sufficient to clear all the dues of food
subsidies bill raised by FCI, the dues of such subsidies were carried over to next
financial year.
In order to cover financial requirements arising out of the subsidy arrears, FCI
resorts to a number of methods in different years such as Bonds (A bond is a debt
instrument in which an investor loans money to an entity (typically corporate or
government) which borrows the funds for a defined period of time at a variable or
fixed interest rate), unsecured short term loans (loan given without any security
taken for repayment), National Small Saving Funds (NSSF) Loans etc. Besides, Cash
Credit Facility guaranteed by Government of India with consortium of 68 banks
also remains available with FCI. Government regularly extends this guarantee.
• Case Study - 3 Off-budget funding under Accelerated Irrigation Benefits
Programme (AIBP)
The Accelerated Irrigation Benefit Programme (AIBP) was launched during 199697
to give assistance to States to help them complete some of the incomplete
major/medium irrigation projects which were at an advanced stage of completion
and to create additional irrigation potential in the country. Like other Central
Sector Schemes, several components of the scheme are eligible for grant of
assistance.
For this purpose, a dedicated Long Term Irrigation Fund (LTIF) in National Bank for
Agriculture and Rural Development (NABARD) was created in 201617 for funding
and fast tracking the implementation of incomplete major and medium irrigation
projects. This funding mechanism through NABARD was for both States and
Central share of financing irrigation projects.
Earlier, expenditure for AIBP schemes were provided through the budget
appropriations, but due to off-budget financing it does not appear in the budget
of 2016-17 onwards.
Off budget Financing of Capital Expenditure:
The CAG Review Report 20 of 2018 on the compliance of FRBM Act, 2003 under
Chapter 3 reveals that the Central Government has so far funded its capital
expenditure through the following two Off Budget Channels:
• Case Study – 4 Arrangement of financial resources by Indian Railway Finance
Corporation (IRFC)
IRFC was created in 1986 exclusively for arranging finances for projects of Indian
Railways. IRFC arranges finances for Ministry of Railway in International and
Domestic market using various financial instruments. IRFC issued bonds to raise
money and Ministry of Railways provided letters of undertaking (LoU) to foreign
lenders stating that in the event of IRFC falling short of funds to redeem the
bonds on maturity and/or to repay the term loans owing to inadequate cash flows
during the year, Ministry of Railways shall make good such shortfalls.
International rating agencies recognizes that IRFC's credit profile as inseparable
from the
Government's credit profile for the reason of likelihood of Government of India
extraordinary support to IRFC in events of financial distress.
• Case Study - 5 Power Finance Corporation (PFC ) Ltd
Power Finance Corporation (PFC) Ltd was incorporated in 1986 as a dedicated
Financial Institution in Power Sector. It was registered as Non-Banking Finance
Company (NBFC) in 1998 and was categorized by RBI as Infrastructure Finance
Company (IFC) in 2010. PFC is a nodal agency for various Government of India
schemes such as Ultra Mega Power Projects (UMPPs) and Integrated Power
Development Scheme (IPDS) for the development of the country’s power sector.
PFC is strategically important for achieving the Government’s objective of
augmenting power capacity across the country. PFC provides loans for a range of
power-sector activities, including generation, distribution, transmission, and plant
renovation and maintenance. While assigning rating to PFC, international rating
agency Fitch noted that PFC's ratings reflect its strong operational and strategic
ties with the Government of India as the company plays an important role in
developing and financing power sector utilities in India.
PFC's high strategic importance to Government of India is reflected in the role it
plays in implementing Government policies, and its importance in financing
India's power sector, particularly state power utilities (SPUs). Additionally,
majority ownership by GoI implies a strong moral obligation on the Government
to support the company in the event of an exigency.
Implications of Off Budget Financing:
Now, please understand in all the aforesaid five cases of off budget financing, the
Government of India stands as a guarantor for the repayment of loan. In case
study 4 and 5, the impression of the International Rating Agency is that in case of
financial distress of Indian Railway Finance Corporation or Power Finance
Corporation, the Government of India will support these companies. Therefore,
their ratings are taken at par with that of Central Government.
Being off-budget in nature, these borrowings do not find mention in the Finance
Accounts nor are included as part of guarantees given by the Government. This
not only reflects lack of disclosure; it also puts major sources of funding of
Government’s crucial infrastructure projects beyond the control of Parliament.
Such substantial borrowings for capital expenditure may require concrete policy
for sustainability of debt and adequate disclosure.
It is clear from the five cases discussed hereinbefore that Central Government has
resorted to off-budget financing for revenue as well as capital spending. In terms
of revenue spending, off-budget financing, for instance, was used for
covering/deferring fertilizer arrears/bills through special banking arrangements;
food subsidy bills/arrears of FCI through borrowings and for implementation of
irrigation scheme (AIBP) through borrowings by NABARD under the Long Term
Irrigation Fund (LTIF). In terms of capital expenditure, for instance, off-budget
financing of railway projects through borrowings of the IRFC and financing of
power projects through the PFC are outside the budgetary control.
Off-budget financing route being outside the parliamentary control, has
implication for fiscal indicators, as they understate Government’s expenditure in
the year by keeping them off the budget. Such off-budget financial arrangement,
defers committed liability (subsidy arrears/bills) or create future
Liability and increases cost of subsidy due to interest payment. As such,
appropriate disclosure framework may be required for off-budget financing.
Keeping in view the aforesaid, the CAG has made the following recommendations
which the Central Government may consider while putting in place a policy
framework for off-budget financing, which amongst others, should include
disclosure to Parliament:
(i) The rationale and objective of off-budget financing, quantum of off-budget
financing and budgetary support under the same project/scheme / programme,
instruments and sources of financing, means and strategy for debt servicing of off
budget financing, etc.
(ii) Details of off-budget financing undertaken during a financial year by/ through
all the bodies/companies substantially owned by Government; and
(iii) Government may consider disclosing the details of off-budget borrowings
through disclosure statements in Budget as well as in Accounts.

3.3 EFFECTIVE REVENUE DEFICIET

Effective Revenue Deficit (ERD) is the difference between revenue deficit and
grants for the creation of capital assets. In other words, the Effective Revenue
Deficit excludes those revenue expenditures which were done in the form of
grants for the creation of capital assets. Effective Revenue Deficit was introduced
in the Budget of 2011-12 for the first time. In 2012-13, Effective Revenue Deficit
was introduced as a fiscal parameter.
The concept of Effective revenue deficit came in the year 2012 pursuant to the
recommendations of C. Rangarajan committee which was set up to give
recommendations on efficient management of public expenditure.
At present there is Niti Aayog which has replaced the earlier Planning
Commission. Planning Commission used to give five year plans and these five year
plans suggested the strategy to be followed by the central government for the
maximum as also balance utilisation of the resources available. Accordingly there
used to be plan as well as non plan expenditure.
Plan expenditure was any expenditure that was to be incurred on
programmes/projects which were detailed under the five year plan of the central
government. So the expenditure made in the name of planning was called the
plan expenditure and it pertained to the productive purpose like construction of
roads, bridges, canals, etc.
Non plan expenditure was that expenditure which was incurred on salary,
subsidies, pension, interest payments, defence expenditure, grants to states
governments, It was considered to be an expenditure for non productive purpose.
This committee i.e. C. Rangarajan committee examined the distinction between
plan and non plan expenditure. The committee suggested that plan and non plan
expenditure does not adequately distinguish between development and non
development dimensions of expenditure.
Accordingly, this committee suggested that classification of public expenditure as
plan and non plan expenditure shall be abolished and instead the public
expenditure shall be classified under two heads that is capital expenditure and
revenue expenditure where capital expenditure would be the expenditure
incurred for creation of capital assets while the revenue expenditure will be the
expenditure incurred not for creating a Capital Asset.
This committee further observed another aspect of expenditure. It said that there
may be certain expenditure which may be classified as revenue expenditure for
example the grant given by the central government to the state government
which will be classified as revenue expenditure of the central government for the
reason that these grants and the expenditure incurred upon them does not create
any capital asset for the central government nor it reduces the liability of the
central government. Further, the grants are to be made on regular basis therefore
it is to be classified as revenue expenditure of the central government but what if,
this grant given by the central government to the state government is utilised by
the recipient State Government for some productive asset or for the creation of
some Capital Asset such as construction of roads, school, hospitals, health
centres, etc.
Keeping this in view, C. Rangarajan committee suggested that it is necessary to
exclude such grants given to the states by the central government ,which
ultimately result in creation of Capital Asset, from the Revenue Deficit in order to
correctly assess the effective revenue deficit.
Therefore, effective revenue deficit is simply the difference between revenue
deficit and the grant given by central government to the state government which
is used by the State Government for creation of Capital Asset.
Please understand that if some grant has been given by the central government
to the state government under some scheme for example Pradhanmantri Sadak
Yojana, accelerated irrigation benefit programme Jawaharlal Nehru National
urban renewal mission, etc and the state government utilizes that grant for
creation of some Capital Asset then we subtract that grant or the amount of grant
from the revenue deficit to get effective revenue deficit.
The Concept of effective revenue deficit pertains specifically to the Indian
economy and is not a globally recognised phenomena. It was inserted in the
FRBM Act,2003 by virtue of Finance Act, 2012.
The 14th Finance Commission headed by Dr Y V Reddy recommended that the
central government should delete the concept of effective revenue deficit from
the frbm act because under the constitution there are only two categories of
expenditure that is revenue expenditure and capital expenditure and the artificial
carving out of revenue deficit into effective revenue deficit, to bring out that
portion of grants which is intended to create Capital Asset and the recipient level,
leads to accounting problem. What it meant was that despite the grant is been
used for creation of Capital Asset by the state government yet it will continue to
remain the revenue expenditure of the central government as it is of recurring /
regular nature.
This concept has now been deleted from the frbm Act 2003 by the finance act
2018.
In between 2012 to 2018, ERD finds mention under section 2(aa) which defined
ERD as the difference between revenue deficit and the grants for creation of
capital assets.
Grants for creation of Capital Asset was defined under section 2(bb) as the grants
in aid given by the Central Government to the State Governments, constitutional
authorities or bodies, autonomous bodies, local bodies and other scheme
implementing agencies for creation of capital assets which are owned by the said
entities.
Effective Revenue Deficit Target (Pre and Post 2018 Amendment)
In the year 2012:
Frbm Act 2003 as amended by Finance Act, 2012 aimed at eliminating or wiping
out effective revenue deficit by 31st March 2015.
The minimum annual reduction prescribed by frbm (amendment) rules 2013 was
0.8% of GDP.
In the year 2015:
The Finance Act 2015 extended target date from 31st March 2015 to 31st March
2018.
The minimum annual reduction was prescribed by the frbm (amendment) rules
2015 as 0.5% of GDP.
In the year 2018:
Finance Act, 2018 deleted the concept of effective revenue deficit from the frbm
Act 2003.
At present, the frbm Act 2003 subsequent to the 2018 amendment made by
virtue of the Finance Act, 2018 in silent on the effective revenue deficit target so
as of now there is no effective revenue deficit target to be achieved by the central
government post 2018 amendment in the frbm act as well as in the frbm rules.
Inconsistency in estimation of Effective Revenue Deficit
The CAG review report 2016 on the compliance of frbm act 2003, wheels the
following inconsistencies for the irregularities in the computation of/ in the
estimation of the effective revenue deficit.
1. Incorrect estimation of ERD target:
The report reveals a mismatch in the detailed demand of grants prepared by
respective Ministries and the statements appended with the expenditure budget
prepared by the Finance ministry.
In order to estimate the effective revenue deficit target of the Government, every
Ministry prepares information containing budget provision under the object head
‘grants for creation of capital assets’ under various schemes and programmes as
contained in the Detailed Demands of Grants (DDG) of the respective Ministries
and furnish the same to the Ministry of Finance. On the basis of this information,
a statement containing the budget provision on the object head ‘grants for
creation of capital assets’ is appended in the Expenditure Budget.
At the time of preparation of budget, different ministries prepares a detailed
demands of grants that is the expenditure amount it requires for the ensuing
financial year in respect of the different scheme run by those ministries. This
detailed demands of grants is forwarded to the Finance ministry which
accordingly prepare a detailed statement of Expenditure which is appended along
with the budget in order to apprise the Parliament with respect to the total
expenditure of the central government in the ensuing financial year. The review
report reveals that in certain cases there were inaccurate statistical figures in the
Budget Expenditure Statement prepared by Finance Ministry which did not match
those figures mentioned in the detailed demands for grants.
As a result of mismatch of grants for creation of capital assets, effective revenue
deficit was underestimated by 1,226.82 crore and overestimated by 515.44 crore
for FY 2014-15.
Due to computation error, in the Budget 2015-16, the provision on grants for
creation of capital assets was understated by 413 crore, resulting in
overestimation of effective revenue deficit by an equivalent amount.
For FY 2016-17 the errors/omissions resulted in under/over estimation of grants
for creation of capital assets with overall impact of underestimation of 2,692.25
crore. The budgeted figures of grants for creation of capital assets would have
been 1,69,532 crore instead of 1,66,840 crore which has also impacted the
correct estimation of effective revenue deficit.
CAG accordingly recommended that the Ministry of Finance, being the focal point
for administration of the FRBM Act, should ensure that the information being
disclosed under the Act is complete and accurate.
2. Incorrect Classification of certain expenditure as grants for creation of Capital
Asset:
Section 2(bb) of FRBM Act defines grants for creation of capital assets as grants
given by the Central Government to the State Governments, constitutional
authorities or bodies, autonomous bodies, local bodies and other scheme
implementing agencies for creation of capital assets which are owned by the said
entities.
Indira Awas Yojana (IAY), was a flagship scheme of the Ministry of Rural
Development, providing assistance to Below Poverty Line (BPL) families, who are
either houseless or having inadequate housing facilities for constructing a safe
and durable shelter. During FY 2014-15, expenditure of 11,096.90 crore was
incurred by the Ministry on the IAY scheme and categorised as grants for creation
of capital assets.
Under this scheme, the grants are released by the Ministry to various State
Governments which in turn releases grants/assistance to the beneficiaries under
the scheme.
It was noticed that the funds under the scheme were utilised for providing
housing facilities to BPL beneficiaries and the houses were owned by the
beneficiaries and not by the grantee entities/organisations. Hence, categorising
expenditure on IAY as grant for creation of capital assets was incorrect. This had
resulted in understatement of effective revenue deficit by 11,096.90 crore.
Similarly, Rajiv Awas Yojana (RAY) was a pioneering scheme of the Ministry of
Housing & Urban Poverty Alleviation with the objectives of improving and
provisioning of housing, basic civic infrastructure and social amenities in urban
slums. During FY 2014-15, expenditure of 1,092.96 crore was incurred by the
Ministry on the RAY and categorised as grants for creation of capital assets. Under
this scheme, the grants are released by the Ministry to various State
Governments which in turn releases grants to the beneficiaries under the scheme.
Since the expenditure under the scheme was utilised for providing housing in
urban slums not owned by the grantee entities/organisations, categorising them
as grants for creation of capital assets was incorrect. This, resulted in
understatement of effective revenue deficit by 1,092.96 crore.
Expenditure on Grants for creation of Capital Assets
Revenue Deficit – Grants for creation of capital asset = Effective Revenue Deficit
If, ERD = 0
THEN Revenue Deficit = Grants for creation of capital asset.
This means that elimination of effective revenue deficit implies that expenditure
on grants for creation of capital assets must be equal to revenue deficit. In other
words, the Government’s revenue expenditure in excess of revenue receipts must
be used for creation of capital assets.

3.4 LIABILITY OF CENTRE GOVERNMENT

Meaning of Liability
Simply, liability means a present obligation of the government that is central
government which arises out of past events. Here, past events means an act of
borrowing or raising money by way of loans. This implies 'liability of the
government' is the liability to repay the loan of the borrowings it has resorted to
in the past. This liability is the existing liability to repay the loan or borrowings at
present.
Question arises why central government takes loan or why it resorts to
borrowings? Simple answer is when it is unable to meet the expenditure out of its
income it takes help of borrowings. Borrowing is a method by which the central
government finances it's deficit. It is a method of deficit financing.
One might think that instead of taking loans if the central government ask
Reserve Bank of India to print more currency won't it help in meeting out the
expenditure required? The simple answers is that in case such a method is
adopted then more printing of currency would increase more inflow of cash in the
market which will increase the purchasing power of people and because of this
there will be a steep increase in the demand as compared to the supply therefore
when the demand will be more and supply would be less the prices will increase
and as a result there will be inflation.
Therefore, printing more currency by the RBI on the request of Central
Government is not a suitable solution for meeting out the excess expenditure of
the central government.
Central Government Resorts to borrowings as the constitution itself under Article
292 authorises the central government to borrow upon the security of
consolidated fund of India.
Contingent Liability: There is another kind of liability in respect of repayment of
loan which we call contingent liability contingent mean dependent upon the
happening or non happening of an event which is to take place at some future
date.
Contingent liability means the liability of repayment not at present but which may
arise in future as it is dependent upon the happening on non happening of a
certain event. This event means default in repayment of loan by an entity on
whose behalf Central government is acting as a guarantor or surety. So there is a
likelihood that in future the central government might incur a liability in respect
of repayment of loan which an entity, on whose behalf Central Government is
acting as a guarantor, has taken and if such entity makes a default in repayment
of loan.
The Entity on whose behalf Central Government gives guarantee can be a
government company or a government corporation or a public sector undertaking
owned Bai central government the reason why Central Government gives
guarantee is primarily for the purpose of improving viability of projects and
activities undertaken by the government entities with significant social and
economic benefits.
Keep in mind that as per the Indian Contract Act the liability, in respect of
repayment of loan , of the principal debtor and a guarantor is coextensive and in
case of a default
being made by the principal debtor the creditor has all rights and remedies
available against the guarantor/surety as it has against the principal debtor and
creditor can directly enforce all rights and avail all remedies against the guarantor
before exhausting search rights and remedies against the principal debtor as the
liability is coextensive.
Liability Target
The liability target respect of the liability of Central Government towards the
leave repayment of loan is firstly with respect to the present liability section 4(1)
(b) of FRBM Act, 2003 states that the General government debt shall not exceed
60% of GDP and Central Government debt shall not exceed 40% of the GDP by
31st of March 2025.
Section 2 of FRBM Act, 2003 defines Central Government debt to include
firstly total outstanding liabilities of Central Government on the security of
consolidated fund of India including external debt;
secondly total outstanding liabilities in the public account of India; and
thirdly financial liabilities of body corporate or other entity which is owned and
controlled by central government.
Please remember that there are three kinds of Government Accounts as per
Indian constitution :
1. Consolidated Fund of India : Article 266(1) 2. Contingency Fund of India : Article
267
3. Public Accounts of India : Article 266(2)
Consolidated fund of India is subject to parliamentary control no amount of
money can be withdrawn from this fund by the central government without the
permission of Parliament.
It includes firstly, all revenue with the central government generates;
secondly all loans with the government raises
and thirdly all money received in repayment of loans.
Consolidated fund of India is divided into 5 parts
first is revenue account of receipts which include all revenue receipts tax as well
as non tax
second is revenue account of expenditure which includes the revenue
expenditure
third is the capital accounts of receipts which include all capital receipts debt
creating as well as non debt creating
fourth is capital account of disbursement or expenditure which includes capital
expenditure and
fifth is the expenditure charged on consolidated fund of India which include
salaries and pensions of Hon’ble President, Vice President, Speaker of Lok Sabha,
Hon’ble Judges of Supreme Court and High Courts, CAG and all constitutional
authorities.
Public Accounts of India
It includes money received by the central government from the state provident
funds or small saving schemes etc in respect of which there is a liability to repay
the amount upon the central government.
Everything apart from which that is included in the consolidated fund of India is
included in the public accounts of India.
The central government acts as a Trustee in respect of the money kept in the
public account of India
Contingency fund of India
The contingency fund of India include the money which is for some special
purpose that is imprest which is basically meant for meeting unforeseen
expenditure related to disaster or some natural calamity this fund is at the
disposal of Hon’ble President of India.
The general government debt as defined under section 2 of the frbm act includes
both Central Government debt as well as State Government debt.
As far as borrowings of state government are concerned, as per article 293 of the
Indian constitution the state government can borrow upon the consolidated fund
of the state only within the territory of India that means as per article 293 state
governments can only borrow from internal sources and not from the external
sources unlike the central government.
If some amount has to be borrowed from any external source in respect of a state
government then it can only be done by the central government and then the
central government will further lend that money to the state government.
Thus, the Liability target is –
General government debt shall not exceed 60% of GDP and Central Government
debt shall not exceed 40% of the GDP by 31st of March 2025.
These are the broad targets. There is no annual reduction target.
Liability Target in relation to Contingent Liability:
Section 4(1)(c) states that Central Government shall not in CA contingent liability
in terms of giving guarantees with respect to any loan on the security of
consolidated fund of India in excess of point five percent of GDP in any financial
year.
Inconsistency in Specifying Liability Targets between the FRBM Act and FRBM
Rules.
Prior to 2018 amendment, the frbm act provided for two things
firstly that the central government tell by way of rules that is frbm rules specify
the annual targets of assuming contingent liabilities and
secondly the central government cell specified by way of frbm rules the annual
target with respect to total liability that is liability upon consolidated fund of India
and liability upon public accounts of India
Therefore, what was required to be specified by the central government in the
frbm rules was the annual reduction target in relation to the contingent liabilities
of the central government and total liabilities of the central government.
However the FRBM Rules, 2004 as framed by the central government only
specified a limit on assuming additional liabilities on the part of Central
Government.
Additional liability is the difference between the liability at the end of financial
year and the liability at the beginning of the financial year what it signifies is that
the central government has incurred some extra liability during a financial year.
Please understand that the frbm rules in 2004 provided a limit of 9% of GDP for
the financial year 2004 2005 in respect of assuming additional liability on the part
of Central Government and for each subsequent financial year this limit of 9% of
GDP was to be reduced by 1% of GDP.
That means for financial year 2004-05 limit in respect of assuming additional
liability was 9%,
Reducing this limit each year by 1% of GDP would mean:
For 2005-06 it was 8%
For 2006-07 it was 7%
For 2007-08 it was 6%
For 2008-09 it was 5%
For 2009-10 it was 4%
For 2010-11 it was 3%
For 2011-12 it was 2%
For 2012-13 it was 1%
And finally For 2013-14 it was suppose to be 0% of GDP that means no additional
liability.
However, in 2014-15, 2015-16 and 2016-17, additional liability was 4.1, 4.7 and
3.2 per cent respectively.
Ministry of Finance stated (July 2018) that Section 4 of FRBM Act has since been
modified vide Finance Act 2018 and Rule 3(4) of the FRBM Rules, 2004 and
assumption of additional liabilities has also been omitted by amending the FRBM
Rules, 2004.
The reply of the Ministry recognises this anomaly in principle and states that
concept of Central government debt has been introduced in place of
additional/total liabilities from financial year 2018-19. However, the audit
observation pertained to FY 201617 on the provisions of Act that were applicable
at that time.
What it meant was that after the end of financial year 2013-14 that is 31st of
March 2014 the central government was not supposed to assume any additional
liability but the CAG review report upon the compliance of the frbm act 2018
revealed that even after 31st of March 2014 certain additional liabilities were
incurred by the central government. The CAG review report emphasised on the
fact that by not specifying annual reduction target in relation to the contingent
liability and total liability as required by the frbm act there was an anomaly in the
annual reduction target.

MODULE 4- DISCLOSURES UNDER FRBM ACT, 2003

Disclosure Statements:
Disclosure in simple words means revelation. In the context of fiscal responsibility
and budget management, it means to release information which affects the
computation of physical indicators such as the fiscal deficit, revenue deficit,
effective revenue deficit, liability targets, etc.
The FRBM Act, 2003 was enacted to provide for the responsibility of the central
government to ensure intergenerational equity in fiscal management thereby
facilitating or ensuring greater transparency in fiscal operations of the central
government.
Section 6 of the frbm act, 2003 read with rule 6 of the frbm rules, 2004 deals with
disclosures. The Act and Rules together provides for disclosure to be made by the
central government by way of which the FRBM Act aims at ensuring two things:
Firstly, it aims at ensuring greater transparency in fiscal operations in the public
interest and
Secondly, it aims at minimising secrecy in the preparation of annual financial
statement that is the annual budget and demand for grants.
(Note: intergenerational equity in general means fairness among the generations
that is the present generation and the generations to come in future. In
Economics, it means that the present generation should carry out its expenditure
in such a way that it does not passes on liabilities on the coming next generation.
It simply means that the present generation should not resort to heavy
borrowings which it cannot repay and the liability to repay the same passes on to
the next generation)
The two basic objectives enshrined in the Preamble of the frbm act pertaining to a
greater transparency in fiscal operations and minimization of secrecy in the
preparation of annual financial statement can only be achieved if the central
government makes complete and accurate disclosures along with the
presentation of annual financial statement and demands for grants in the
parliament.
If the central government reveals all information correctly which affects the
competition for calculation of Fiscal indicators, it promotes transparency.
Section 6 of the FRBM Act, 2003: Measures for fiscal transparency.—
(1) The Central Government shall take suitable measures to ensure greater
transparency in its fiscal operations in public interest and minimise as far as
practicable, secrecy in the preparation of the annual financial statement and
demands for grants.
(2) In particular, and without prejudice to the generality of the foregoing
provision, the Central Government shall, at the time of presentation of annual
financial statement and demands for grants, make such disclosures and in such
form as may be prescribed.
Thus, The FRBM Act requires that the Central Government shall take suitable
measures to ensure greater transparency in its fiscal operations and make such
disclosures in the prescribed forms.
Rule 6 of the FRBM Rules, 2004: Disclosures- (1) In order to ensure greater
transparency in its fiscal operation in the public interest, the Central Government
shall, at the time of presenting the annual financial statement and demands for
grants, make disclosures of the following:
(a) any significant change in accounting standards, policies and practices affecting
or likely to affect the computation of prescribed fiscal indicators.
(b) statements of receivables and guarantees in Forms D-1 to D-3 along with
explanatory notes, if any;
(c) a statement of assets in Form D-4 along with explanatory notes, if any.
(d) a statement of explicit contingent liabilities, which are in the form of
stipulated
annuity payments over a multi-year time-frame in Form D-5;
(2) The provisions of sub-rule (1) shall be complied with not later than with the
presentation of the annual financial statement and demands for grants for the
financial year 2006-2007.
Importance of Disclosures:
Whenever the central government takes recourse of off budget channels for
financing its expenditure, the same being off record are not revealed in the
budget statistics. However this does not absolves the central government from
the risk of incurring contingent liabilities which are attached when off budget
channels are used.
Being off-budget in nature, these borrowings do not find mention in the Finance
Accounts nor are included as part of guarantees given by the Government. This
not only reflects lack of disclosure; it also puts major sources of funding of
Government’s crucial infrastructure projects beyond the control of Parliament.
Offbudget financing route being outside the parliamentary control, has
implication for fiscal indicators, as they understate Government’s expenditure in
the year by keeping them off the budget. Such off-budget financial arrangement,
defers committed liability (subsidy arrears/bills) or create future liability and
increases cost of subsidy due to interest payment. As such, the CAG has
recommended that appropriate disclosure framework is required for off-budget
financing in respect of the following:
(i) The rationale and objective of off-budget financing, quantum of off-budget
financing and budgetary support under the same project/scheme / programme,
instruments and sources of financing, means and strategy for debt servicing of off
budget financing, etc.
(ii) Details of off-budget financing undertaken during a financial year by/ through
all the bodies/companies substantially owned by Government; and
(iii) Government may consider disclosing the details of off-budget borrowings
through disclosure statements in Budget as well as in Accounts.

4.4 Transparency in disclosure forms mandated under FRBM

Act
In compliance to Section 6 of FRBM Act, along with Budget, various disclosure
forms (D1 to D5) are placed before the Parliament. Examination of these forms by
CAG has revealed inadequacy in disclosure of arrears of Non Tax Revenue:-
1. Inconsistency in disclosure of arrears of Non-Tax Revenue
Rule 6 of the FRBM Rules requires laying of a form providing details of non-tax
revenue in arrear in Form D-2. Receipt Budget 2018-19 (Annex-6) provided details
of arrears of non-tax revenue as at the end of financial year 2016-17. As per this
disclosure, at the end of financial year 2016-17, the arrears of non-tax revenue
was 1,71,844 crore, which also includes 42,437 crore as arrears of interest
receipts from State/Union territory Government, Department Commercial
Undertakings and Public Sector Undertakings.
It was noticed that arrears of interest receipts from State/Union Territory
Governments and other loanee entities as disclosed through Union Government
Finance Accounts for financial year 2016-17 was at variance with disclosure made
through Form D-2.
2. Incorrect information of coal levy in arrears
The Hon’ble Supreme Court had cancelled (September 2014) allocation of 204
captive coal blocks and imposed additional levy on coal extracted.
This levy was to be collected by Ministry of Coal in two phases, in 1st phase, levy
becoming due on or before 31 December 2014 for coal produced since
commencement of coal production till 24 September 2014. In second phase, levy
becoming due on or before 30 June 2015 for coal produced between 25
September 2014 and 31 March 2015.
During examination of information in respect of Ministry of Coal, it came to
knowledge that Ministry of Coal had furnished the incorrect information relating
to Arrears of Non-Tax Revenue for financial year 2016-17 for inclusion in
consolidated statement of the same presented along with Budget 2018-19.
Owing to this mismatch in the statistical figures in the abovementioned two
instances, the CAG observed that Ministry of Finance should ensure that
information obtained from the line Ministries and included in the Budget
documents laid before the Parliament is complete, accurate and consistent, being
the nodal Ministry for the administration of the FRBM Act and preparation of
Central Budget and the CAG
Accordingly recommended that Government should ensure explicit disclosures of
all transactions having fiscal implications and avoid presenting mis-matched
figures.

4.5 Non-Submission of disclosure statements as required

under the FRBM Act.
As per Rule 6 of FRBM Rule 2004, in order to ensure greater transparency in its
fiscal operation in the public interest, the central Government shall, at the time of
presenting the Annual Financial Statement and Demand for Grants, make
disclosure about arrears of tax revenue and non-tax revenue, guarantees, asset,
liability on annuity projects and grants for creation of capital assets in Form D1 to
D5.. The consolidated statements of disclosures in Form D1 to D5, presented
along with Budget, are compiled on the basis of reports of
ministries/departments furnished to the Ministry of Finance.
During test check of disclosure statements furnished by the individual
ministry/department to Ministry of Finance, it was revealed by the CAG that some
ministries/ departments did not furnish the information to the Ministry of Finance
in respect of some disclosure statements on the assumption that information in
respect of concerned disclosure statement was ‘Nil’ or it does not pertains to
their department/ministry.
Since, the consolidated statements of disclosures in Form D1 to D5 are compiled
solely on the basis of reports of ministries/departments furnished to the Ministry
of Finance and thereafter presented in Parliament along with Budget and Ministry
of Finance having no mechanism to ensure authenticity of information furnished
by the
concerned Ministries/Departments, the possibility of incorrectness of information
in Form D1 to D5 presented along with Budget could not be ruled out.