irst Published: December 2, 2015 | Last Updated:December 3, 2015

In 1980s, India saw a sharp deterioration of the fiscal situation, which ultimately culminated in the balance of payments crisis of 1991. Within a decade of
economic liberalisation, the fiscal deficit and debt situation again seemed to head towards unsustainable levels around 2000. At that time, a need
to institutionalize a new fiscal discipline framework. The FRBM Bill 2000 was introduced by previous NDA government in the parliament to
institutionalize the fiscal discipline at both the centre and state level. However, the bill took three years to become an act and during this process, it lost
most of its teeth.
Under the Fiscal Responsibility and Budget Management Act (FRBMA) 2003, both the Centre and States were supposed to wipe out revenue deficit and
cut fiscal deficit to 3% of GDP by 2008-09, thus bringing much needed fiscal discipline. Originally, the FRBM bill had given annual numerical targets as
well. But in the process of making it a law, the annual targets were dissolved and the act simply said that the Centre will take appropriate measures to
eliminate revenue deficit by March 31, 2008. The act left the annual numerical targets to be formulated by the Central Government   in the form of FRBM
rules under the FRBM Act 2000.
However, the NDA government (which passed this act) was replaced by UPA in 2004. The UPA-I Government notified the FRBM Rules in July 2004. As
Parliament is the supreme legislative body, the Act and the Rules legally bind the Finance Ministers and Governments. The key provisions of the Act as
well as FRBM rules are as follows:
 Every year the government will bring down revenue deficit by 0.5% and eliminate it by 2007-08.

 Every year, the government will bring down fiscal deficit by 0.3% and bring it down to 3% by 2007-08.

 Total liabilities of the Union Government should not rise by more than 9% a year.

 Union Government would not give guarantee to loans raised by PSUs and State governments for more than 0.5% of the GDP in aggregate.

 Union Government would place three more documents along with the budget documents viz. Macroeconomic Framework Statement, Medium Term
Fiscal Policy Statement and the Fiscal Policy Strategy Statement.

 At the end of second quarter, the Finance Minister would make a statement on the trend of fiscal indicators and corrective measures taken thereof.
However, due to the 2007 international financial crisis, the deadlines for the implementation of the targets in the act was initially postponed and
subsequently suspended in 2009. In last few years, the act has been largely neglected.
Central Government is required to lay before both Houses of Parliament the following documents: (1) Medium Term Fiscal Policy Statement
(2) Fiscal Policy Strategy Statement and (3) Macro Economic Framework Statement along with Annual Financial Statement and Demand for
Grants.
Contents [hide]
 Critical Analysis of the FRBM Act
o Why Government deviated from path of fiscal correction?
o Where is the problem?

Critical Analysis of the FRBM Act

The act was passed to make the central government and finance minister accountable to parliament for fiscal discipline. However, due to lack of an
autonomous Fiscal Management Review Committee (as proposed originally) the act more or less became like a Directive Principle of State policy which is
not enforceable via courts. Its mandate was diluted and even today we find both revenue deficit and fiscal deficits in budget documents.

Why Government deviated from path of fiscal correction?

The government deviated from the path of fiscal correction in the wake of the global financial crisis and unanticipated changes in the prices of oil and
fertilizers in 2008-09. In those days, the subsidy bill shot up and government needed to issue fertilizer and oil bonds to raise money from market. Further,
in 2008-09, the government also included a fiscal stimulus package to revive the economy and this led India’s fiscal deficit to go up to 6.5%.
A huge fiscal deficit forced the government to relax the FRBM targets and subsequently ask the 13th finance commission to rewrite the whole plan for
fiscal consolidation.
In 2010-11, Government gave further blow to this act by including the concept of  Effective Revenue Deficit in the budget documents. In Budget 2012-13,
the finance act changed the FRBM act and dumped the centre’s commitment to eliminate the revenue deficit. Instead, it brought in a new commitment of
eliminating the effective revenue deficit rather. The amended rules extended the time for elimination of Effective revenue deficit by March 2015 and
bringing down fiscal deficit to 3% by March 2017. Currently we have 2.9% revenue deficit and 4.1% fiscal deficit.
From the above discussion, it appears that the FRBM act and the rules framed for fiscal discipline was an exercise in futility. The government wants fiscal
consolidation but is not ready to pay the short term costs. Increasing taxes to raise revenue is painful, while cutting subsidy has political costs to the ruling
parties. In summary, the experience with FRBM has been of shifting goalposts and bypassing the spirit to achieve fiscal consolidation.

Where is the problem?

The problem lies in the act itself. The FRBM rules can be simply amended by gazette notification. They lack transparency and adequate monitoring and
compliance by the government. The Economic Survey 2013-14 had recommended for a new FRBM act with teeth. Further, there are some other
approaches which can help:
 Move the annual numerical targets from FRBM rules (which are framed and amended by central Government at whim by gazette notification) to the
FRBM act itself (so that at least a parliamentary approval is needed to make changes)

 Do away with the ambiguous concept of the Effective Revenue Deficit which is nothing but a jugglery to rewrite revenue expenditure as capital
expenditure.
The FRBM Committee Report of 2000 had recommended an autonomous Fiscal Management Review Committee (FMRC) which would conduct an annual
independent and public review of FRBM compliance. The current act lacks that, and there is a need to institute an independent review and monitoring of
implementation of the FRBM law.
Tags:Budget , Fiscal Policy in India , Government budgeting
 What is Fiscal Responsibility and Budget
Management (FRBM) Act? What are the amendments
to it?
The FRBM Act is a fiscal sector legislation enacted by the government of India in 2003, aiming to ensure fiscal discipline for the centre by
setting targets including reduction of fiscal deficits and elimination of revenue deficit.  It is a legal step to ensure fiscal discipline and fiscal
consolidation in India.

           The targets set under the Act was postponed several times in later years though some other goals of the Act including phasing out of
government borrowing from the RBI were implemented.

Why FRBM became necessary?

           The FRBM Act was enacted in 2003 as rising government borrowing and the resultant government debts have seriously eroded the
financial health of the government. High revenue deficit due to higher expenditure on subsidies, salaries, defence etc. compelled the
government to make big borrowing from early 1990s onwards. With inadequate revenues, government resorted to high level of borrowing.

The borrowing again produced high interest payments. In this way, interest payments became the largest expenditure item of the
government. To arrest this financial weakness in its budget, the government has taken some serious deficit cut targets by introducing a law in
the form of the FRBM.
What the FRBM says?
The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be realized with an annual reduction target of
0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete
elimination by 2008-09. Later, the target dates were reset and budget 2016-17 aims to realise the 3% fiscal deficit target by March 2018. 

The Act gives slight flexibility to the government regarding the realisation of the target as well. It gives the responsibility to the government to
adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach.
Following are the provisions of the Act in detail.

 The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 2008-
09 and thereafter, sizable revenue surplus has to be created.
 Setting annual targets for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities.
 The government shall end its borrowing from the RBI except for temporary advances.
 The RBI not to subscribe to the primary issues of the central government securities after 2006.
 The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security, calamity etc.
           Though the Act aims to achieve deficit reductions prima facie, an important objective is to achieve inter-generational equity in fiscal
management. This is because when there are high borrowings today, it should be repaid by the future generation. But the benefit from high
expenditure and debt today goes to the present generation. Achieving FRBM targets thus ensures inter-generation equity by reducing the
debt burden of the future generation.

Other objectives include: long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal
operation of the Government.

Amendments to the FRBM Act

           Amendments to the Act were made after its initial version in 2003. This include revision of the target realisation year and introduction
of the concept of effective revenue deficit. In 2012 and 2015, notable amendments were made. As per one provision of the amendment, a
“Medium-term Expenditure Framework” statement should be prepared which will set a three-year rolling target for expenditure indicators.

           As per the amendments in 2012, the Central Government has to take appropriate measures to reduce the fiscal deficit, revenue deficit
and effective revenue deficit to eliminate the effective revenue deficit by the 31st March, 2015 and thereafter build up adequate effective
revenue surplus and thereafter as may be prescribed by rules made by the Central Government.

           As per Finance Act 2015, the target dates for achieving the prescribed rates of effective deficit and fiscal deficit (3% fiscal deficit) were
further extended by 3 years to March 2018.

Committee to review FRBM targets

           As per the Union Budget 2016-17, the government constituted a Committee to review the implementation of the FRBM Act. This was
after a widely held view among experts that instead of fixed fiscal deficit targets, it may be better to have a fiscal deficit range as the target.
 This will help the government to meet specific situations like recessions which demand high government expenditure. There is also a
suggestion that fiscal expansion or contraction should be aligned with credit contraction or expansion respectively, in the economy. While
remaining committed to fiscal prudence and consolidation, Budget stated that a review of the FRBM Act is necessary in the context of the
uncertainty and volatility in the global economy.

CHAPTER-1
GOVERNMENT AUDITING
Introduction
1. Mandate

1.1 The Comptroller and Auditor General of India (CAG), who is the head of the Supreme

Audit Institution of India (SAI) derives his duties and powers mainly from Articles 149 to

151 of the Constitution of India and the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971.
Under the provisions of the Constitution of India and the Act, the CAG is the sole auditor of the accounts of the Central (Union)
Government and the State Governments. CAG is also responsible for the audit of local bodies (i.e. Panchayati Raj institutions and
urban local bodies) under the provisions of some of the State Acts and provides technical and administrative guidance for
accounting and audit functions in all States as per orders issued by Ministry of Finance, Government of India. The reports of the
CAG relating to the accounts of the Union and the States are submitted to the President/Governor of the State for being laid before
the Parliament/State Legislature. The CAG is also responsible for ensuring a uniform policy of accounting and audit in the
Government sector as a whole. The Act authorises the CAG to lay down for the guidance of the Government departments, the
general principles of Government accounting and the broad principles in regard to audit of receipts and expenditure.

1.2 The mandate of CAG includes audit of:

Receipts and expenditure from the Consolidated Fund of India and of the State and Union Territories.

Transactions relating to the Contingency Funds and Public Accounts. Trading, manufacturing, profit and loss accounts and balance
sheets, and other subsidiary accounts kept in any Government department. Accounts of stores and stock kept in Government
offices or departments. Government companies as per the provisions of the Companies Act, 1956. Corporations established by or
under laws made by Parliament in accordance with the provisions of the respective legislation. Authorities and bodies substantially
financed from the Consolidated Funds.

Any Body or Authority even though not substantially financed from the Consolidated Fund, the audit of which may be entrusted to
SAI. Grants and loans given by Government to Bodies and Authorities for specific purposes.

Panchayati Raj Institutions and Urban Local Bodies

1.3 The audit mandate also provides for the periodic inspection of records and accounts of the Government departments to
supplement the audit of vouchers and sanctions that are with the accounts compiling offices.

2. Auditing Standards

2.1 Auditing Standards prescribe the norms of principles and practices, which the Auditors are expected to follow in the conduct of
Audit. They provide minimum guidance to the Auditor that helps determine the extent of auditing steps and procedures that should
be applied in the audit and constitute the criteria or yardstick against which the quality of audit results are evaluated.

2.2 The auditing standards of the International Organization of Supreme Audit Institutions (INTOSAI) have been suitably adapted
with due consideration of the Constitution of India, relevant Statutes and rules for the auditing standards for the Supreme Audit
Institution of India (SAI).

2.3 The auditing standards consist of four parts:

1. Basic postulates
2. General Standards
3. Field Standards
4. Reporting Standards
3. Basic Postulates

3.1 The basic postulates for auditing standards are basic assumptions, consistent premises, logical principles and requirements
which help in developing auditing standards and serve the auditors in forming their opinions and reports, particularly in cases where
no specific standards apply.

3.2 The basic postulates are:

1. The SAI should comply with the INTOSAI auditing standards in all matters that are deemed material.
2. The SAI should apply its own judgment to the diverse situations that arise in the course of Government auditing.
3. With increased public consciousness, the demand for public accountability of persons or entities managing public resources has
become increasingly evident so that there is a need for the accountability process to be in place and operating effectively.
4. Development of adequate information, control, evaluation and reporting systems within the Government will facilitate the
accountability process;
Management is responsible for correctness and sufficiency of the form and content of the financial reports and other information.

5. Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure
relevant to the needs of the Government, and audited entities should develop specific and measurable objectives and performance
targets.
6. Consistent application of acceptable accounting standards should result in the fair presentation of the financial position and the
results of operations.
7. The existence of an adequate system of internal control minimizes the risk of errors and irregularities.
8. Legislative enactment's would facilitate the co-operation of audited entities in maintaining and providing access to all relevant data
necessary for a comprehensive assessment of the activities under audit.
9. All audit activities should be within the SAI's audit mandate.
10. SAIs should work towards improving techniques for auditing the validity of performance measures.
11. SAIs should avoid conflict of interest between the auditor and the entity under audit.
4. The following paragraphs elaborate on the above basic postulates for auditing standards.

4.1 The SAI should comply with the INTOSAI Auditing Standards in all matters that are deemed material.

The SAI should establish a policy by which the standards are followed for the various types of work carried out by the SAI to ensure
that the work and products are of high quality. In general terms, a matter may be judged material if knowledge of it would be likely to
influence the user of the audit report. Materiality is often considered in terms of value but the inherent nature of an item or a group of
items may also render a matter material as for example mandatory disclosure requirements of statutes regardless of the amounts
involved.

In addition to materiality by value and by nature, a matter may be material because of the context in which it occurs, for example,
considering an item relating to:

1. The overall view given to the financial information;

2. The total of which it forms a part;
3. Associated terms;
4. The corresponding amount in previous years.
4.2 The SAI applies its own judgment to the diverse situations that arise in the course of Government auditing.

It would be impracticable to establish a code of rules, sufficiently elaborate, to cater to all situations and circumstances which an
Auditor might encounter. In the observance of Auditing Standards, therefore, the Auditor must exercise his Judgment in determining
the auditing procedures necessary in the circumstances, to afford a reasonable basis for his opinion and the content of his report. In
regard to audit of financial statements of public sector enterprises, the SAIs audit objectives may be akin to the objectives of audit in
private sector. Correspondingly, for the audit of financial statements of the corporate sector, the government auditor may apply
standard audit practices issued by the Institute of Chartered Accountants.

4.3 With increased public consciousness the demand for public accountability of persons or entities managing public resources has
become increasingly evident so that there is a need for the accountability process to be in place and operating efficiently.

The broad aim of SAI is to safeguard the financial interests of the State and to uphold and promote public accountability and sound
and economical financial management practices.

Audit assists the legislatures in the exercise of financial control over the executive Government.

The executive Government and not Audit is responsible for enforcing economy and efficiency in the expenditure of public money. It
is, however, the duty of Audit to bring to light wastefulness, failures, system weaknesses, deficiencies and the circumstances
leading to in fructuous expenditure.

The entities managing public resources include commercial undertaking, e.g., entities established by statute or public sector
undertakings established under the

Companies Act in which the Government has a controlling interest.

Irrespective of the manner in which they are constituted, their functions, degree of autonomy or funding arrangements, such entities
are ultimately accountable to the Supreme law making body.

4.4 Development of adequate information control, evaluation and reporting systems within the Government will facilitate the
accountability process.
 Management of the audited entity is responsible for correctness and sufficiency of the form and content of the financial reports and
other information.

As a special arrangement dictated by mandate, the Accounts and Entitlement offices

Working under the SAI compile the financial reports of the State Governments based on the initial accounts rendered to them by the
respective State Government agencies. Such offices also, in some states, maintain the accounts of long term loans given to
Government servants the Provident Fund accounts and the Entitlement accounts of Government personnel. Also, the SAI advises
the President of India on the form of Government accounts.

4.5 Appropriate authorities should ensure the promulgation of acceptable accounting standards for financial reporting and disclosure
relevant to the needs of the Government and audited entities should develop specific and measurable objectives and performance
targets.

SAI shall advise the Government for the promulgation of acceptable accounting standards for financial reporting and disclosure
relevant to the needs of Government. The audited entities should develop specific and measurable objectives and performance
targets.

4.6 Consistent application of acceptable accounting standards should result in the fair presentation of the financial position and the
results of operations.

The Auditor often expresses an opinion on the performance of an audited and based on comparison of the information given in the
financial statements over a period of time. Consistency in following the accounting standards will facilitate expression of a fair
opinion.

4.7 The existence of an adequate system of internal control minimizes the risk of errors and irregularities.

It is the responsibility of audited entity to develop adequate internal control systems to protect its resources. It is also its obligation to
ensure that controls are in place and functioning to help ensure that applicable statutes and regulations are complied with and that
probity and propriety are observed in decision making. However, this does not relieve the auditor from submitting proposals and
recommendations to the audited entity where controls are found to be inadequate or missing.

Auditors should make use of the INTOSAI guidelines on evaluation of Internal Controls and reporting there on.

4.8 Legislative enactment exists to facilitate the co-operation of audited entities in maintaining and providing access to all relevant
date necessary for a comprehensive assessment of the activities under audit.

An Auditor has a right to inspect any office of accounts of the Union or of a State, to require that any books, papers and other
documents which are relevant to the transactions to be sent to him and to put such questions to the persons in charge of the office
or make such observations and call for such information as he may require for the preparation of any account or report which it is his
duty to prepare. Information about an audited entity acquired in the course of fie Auditor's work must not be used for purposes
outside the scope of audit. and formation of an opinion or in reporting not in accordance with the 'Auditor's responsibility. It is
essential that Audit maintain confidentiality regarding audit matters and the information obtained while carrying out audit
engagements.

4.9 All audit activities shall be within the mandate of SAL

The term 'Audit' includes Financial Audit, Regularity Audit and Performance Audit. In pursuance of the Constitutional responsibility,
the SAI is empowered to decide the nature, scope, extent and quantum of audit including the form and content of the audit reports in
respect of audit to be conducted by him or on his behalf.

4.10 SAI should work towards improving techniques for auditing the validity of performance measures.

The expanding audit role of the auditors will require them to improve and develop new techniques and methodologies to assess
whether reasonable and valid performance measures are used by the audited entity. Wherever practicable the auditors should
acquaint themselves with techniques and methodologies of other relevant disciplines.

4.11 SAI should avoid conflict of interest between the auditor and the entity under audit.

The SAI performs its role by carrying out audits of the various public sector entities and by reporting the results in conformity with
Reporting Standards. To fulfill this role, the SAI needs to maintain its independence and objectivity. The application of appropriate
general auditing standards assists the SAI in satisfying these requirements.

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