To ensure that the government keeps its expenses in check, the National Democratic Alliance (NDA) government, under the prime ministership of Atal Bihari Vajpayee, had proposed the Fiscal Responsibility and Budget Management (FRBM) Bill in Parliament in 2001. In July 2003, this bill was approved by Parliament and became an Act. However, the Act came into force in July 2004, when the the United Progressive Alliance (UPA) government, under the prime ministership of Manmohan Singh, presented the budget.
It had said that the fiscal deficit should be brought down to 3% of the gross domestic product (GDP) and revenue deficit should drop down to nil, both by March 2009. Fiscal deficit is the excess of government’s total expenditure over its total income. The government incurs revenue and capital expenses and receives income on the revenue and capital account. Further, the excess of revenue expenses over revenue income leads to a revenue deficit. The FRBM Act wants the revenue deficit to be nil as the revenue expenditure is day-to-day expenses and does not create a capital asset. Usually, the liabilities should not be carried forward, else the government ends up borrowing to repay its current liabilities.
However, these targets were not achieved because the global credit crisis hit the markets in 2008. The government had to roll out a fiscal stimulus to revive the economy and this increased the deficits.
In the 2011 budget, the finance minister said that the FRBM Act would be modified and new targets would be fixed and flexibility will be built in to have a cushion for unforeseen circumstances. According to the 13th Finance Commission, fiscal deficit will be brought down to 3.5% in 2013-14. Likewise, revenue deficit is expected to be cut to 2.1% in 2013-14.
In the 2012 Budget speech, the finance minister announced an amendment to the FRBM Act. He also announced that instead of the FRBM targeting the revenue deficit, the government will now target the effective revenue deficit. His budget speech defines effective revenue deficit as the difference between revenue deficit and grants for creation of capital assets. In other words, capital expenditure will now be removed from the revenue deficit and whatever remains (effective revenue deficit) will now be the new goalpost of the fiscal consolidation. Here’s what effective revenue deficit means.
Every year the government incurs expenditure and simultaneously earns income. Some expenses are planned (that it includes in its five-year plans) and other are non-planned. However, both planned and non-planned expenditure consists of capital and revenue expenditure. For instance, if the government sets up a power plant as part of its non-planned expenditure, then costs incurred towards maintaining it will now not be called revenue deficit because it is towards maintaining a “capital asset”. Experts say that revenue deficit could become a little distorted because by reclassifying revenue deficit, it is simplifying its target.