Welcome to this session on

Principles of Budgeting

Mandatory Training for AAOs to be empanelled for promotion

as SAOs – Day 6 Session 1(Commercial Module for all Streams)
Session Overview

 Revenue, Expenditure and Control in Government

 An overview of FRBM Act, 2003
 Public Debt and its Redemption – Its effects on Production, Distribution,
Consumption, Income and Employment
 Public Liabilities and General Government Debt (Central and State combined)
Learning Objective

 Given access to the background material on

 Revenue, Expenditure and Control in Government

 FRBM Act, 2003

 Public Debt and its Redemption – Its effects on Production, Distribution,

Consumption, Income and Employment

 Public Liabilities and General Government Debt (Central and State combined)

Participants would gain knowledge of these concepts and better explain them
References

 General Financial Rules 2017

 Fiscal Responsibility Budget Management Act, 2003
Provisions of GFR 2017

Presentation of Budget to Parliament.

 In accordance with the provisions of Article 112 (1) of the Constitution, the Finance

Minister shall arrange to lay before both the Houses of Parliament, an Annual
Financial Statement also known as the ‘Budget’ showing the estimated receipts and
expenditure of the Central Government in respect of a financial year, before the
commencement of that year (GFR 43(1))
 Railway Budget is now merged with the General Budget with effect from 2017-18

(GFR 43(2))
Provisions of GFR 2017 Contd…

Components of Budget
(i) Estimates of all revenues expected to be raised during the financial year to which
the budget relates ;
(ii) Estimates of all expenditure for each programme, scheme and project in that
financial year;
(iii) Estimates of all interest and debt servicing charges and any repayments on loans in
that financial year;
(iv) Any other information as may be prescribed.
(GFR 44)
Control of Expenditure against Budget
Responsibility for control of Expenditure.
 The Departments of the Central Government responsible for the control of

expenditure against the sanctioned grants and appropriations through HODs, HOOs
& DDOs (GFR 57(1))
 A Grant or Appropriation to be utilized only to cover the charges (including

liabilities, if any, of the past year) which are to be paid during the financial year of
the Grant or Appropriation and adjusted in the account of the year. (GFR 57(2))
 No expenditure to be incurred in excess of total grant or appropriation authorized

by Parliament by law for a financial year, except after obtaining a supplementary

grant or appropriation or an advance from the Contingency Fund (GFR 57(3))
Control of Expenditure against Budget Contd…
Responsibility for control of Expenditure.
 Separate bills for voted and charged expenditure with complete accounts

classification with accurate distribution over object heads and having progressive
upto date expenditure under each primary unit of appropriation (GFR 57(4))
 DDOs and Controlling officers to maintain appropriate registers and records and

render returns to HODs for monitoring purposes (GFR 57(4))

 Head of the Department and the Accounts Officer jointly responsible for the

monthly reconciliation of the figures given in the accounts maintained by the

Head of the Department with those appearing in the Accounts Officer’s books.
Procedure as outlined in GFR to be followed by DDO and PAO in this regard (GFR
57(5))
Control of Expenditure against Budget Contd…

Responsibility for control of Expenditure.

 Departmental figures to be received centrally from all HODs by 15th of the month

following the month to which these details pertain showing separately capital and
revenue expenditure and to be posted in the registers maintained for watching the
flow of expenditure
 Broadsheets in GFR 9 to be maintained by Departments/HODs to watch the

prompt receipt of returns

(GFR 57(6 to 8))

Control of Expenditure against Budget Contd…

 Maintenance of Liability Register for effecting proper control over expenditure

by controlling officer - (GFR 58)
 Personal attention of the Head of Department /Controlling Officer required to
estimate savings or excesses – GFR 59
 Control of expenditure against grant/appropriation the ultimate responsibility of
the authority administering it – GFR 60
 No payment by AO against sanctions in excess of the Budget provisions unless
there is specific approval of the Chief Accounting Authority – GFR 61
Control of Expenditure against Budget Contd…

 All anticipated savings to be surrendered before the prescribed date

 No savings to be held in reserve for possible future excesses

 Rush of expenditure, particularly in the closing months of the Financial year,

shall be regarded as a breach of financial propriety and shall be avoided

 Financial Advisers of the Departments to ensure adherence to the stipulated

Quarterly Expenditure Plan and the guidelines issued in this regard by Ministry
of Finance from time to time.
GFR - 62
Control of Expenditure against Budget Contd…

 No expenditure shall be incurred during a financial year on a “New Service” not

contemplated in the Annual Budget for the year except after obtaining a supplementary
grant or appropriation or an advance from the Contingency Fund during that year - GFR
63 & 66
 subordinate authority incurring the expenditure shall be responsible for seeing that the
allotment placed at its disposal is not exceeded. Where any excess over the allotment is
apprehended, the subordinate authority shall obtain additional allotment before
incurring the excess expenditure. Liability register in form GFR 3 to be maintained for
this purpose – GFR 64
Control of Expenditure against Budget Contd…

 Re-appropriation of Funds from one primary unit of appropriation to another to

be done by competent authority subject to the provisions of Rule 10 of the
Delegation of Financial Powers Rules, and also subject to such other general or
specific restrictions as may be imposed by the Finance Ministry in this behalf
 Principles and procedure laid down for Re-appropriation to be scrupulously
followed

- GFR 65
Control of Expenditure against Budget Contd…

 Unforeseen expenditure to be met from advance from Contingency Fund set up

under Article 267 (1) of Constitution
 An advance from the Contingency Fund shall also be obtained to meet
expenditure in excess of the provisions for the service included in an
Appropriation (Vote on Account) Act
 Procedure laid down in Contingency fund of India Rules 1952

- GFR 67
Fiscal Responsibility and Budget Management Act, 2003
(Act 39 of 2003) (FRBM Act 2003)
 Enacted on August 26, 2003
 Came into effect from July 5, 2004
 Was enacted
 to provide for the responsibility of the Central Government to ensure inter-

generational equity in fiscal management and to long-term macro-economic

stability by removing fiscal impediments in the effective conduct of monetary policy
 for prudential debt management consistent with fiscal sustainability through limits

on the Central Government borrowings, debt and deficits

 for greater transparency in fiscal operations of the Central Government and

conducting fiscal policy in a medium-term framework and for matters connected

therewith or incidental thereto.
FRBM Act, 2003 Contd…

 Sets targets for the Government of India

 to achieve fiscal stability

 to provide RBI with the flexibility to deal with inflation

 to improve the management of public funds

 to strengthen fiscal prudence and to reduce fiscal deficits.

FRBM Act, 2003 Contd…
 Definitions
 “fiscal deficit” means the excess of total disbursements, from the Consolidated

Fund of India, excluding repayment of debt, over total receipts into the Fund
(excluding the debt receipts), during a financial year (Section 2(a))
 “fiscal indicators” means the measures such as numerical ceilings and proportions

to gross domestic product, as may be prescribed, for evaluation of the fiscal

position of the Central Government (Section 2(b))
 “general Government debt” means the sum total of the debt of the Central

Government and the State Governments, excluding inter-Governmental liabilities

(Section 2(bb))
FRBM Act, 2003 Contd…
 Definitions
 “gross domestic product” means the sum of the gross value added by all resident

production units plus that part of taxes, less subsidies, on products, which is not
included in the valuation of output, during a financial year, reckoned at current
market prices, as published by the Central Statistics Office from time to time
(Section 2(bc))
 “real gross domestic product” means gross domestic product, reckoned at

constant prices, as published by the Central Statistics Office from time to time
(Section 2(ca))
 “real output growth” means growth in real gross domestic product
(Section 2(cb))
FRBM Act, 2003 Contd…

After the FRBM Bill was passed by the Union Cabinet, the following points were
mandatory to be presented along with the Union Budget in the Parliament annually:
1- Medium Term Fiscal Policy Statement
2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy Statement
4. Medium-term Expenditure Framework Statement
FRBM Act, 2003 Contd…

 The Medium-term Fiscal Policy Statement shall set forth a three-year rolling target
for prescribed fiscal indicators with specification of underlying assumptions (Section
3(2))
 The Medium-term Fiscal Policy Statement shall include an assessment of
sustainability relating to the use of capital receipts including market borrowings for
generating productive assets (Section 3(3))
 The FRBM also proposed four fiscal indicators- revenue deficit, fiscal deficit, tax
revenue and the total outstanding liabilities to be projected as a percentage of GDP
in the medium-term fiscal policy statement.
FRBM Act, 2003 Contd…

 Fiscal Policy Strategy Statement to contain, for the ensuing financial year,
 the policies of the Central Government relating to taxation, expenditure, market
borrowings and other liabilities, lending and investments, pricing of administered
goods and services, securities and description of other activities such as
underwriting and guarantees which have potential budgetary implications
 the strategic priorities of the Central Government in the fiscal area
 the key fiscal measures and rationale for any major deviation in fiscal measures
pertaining to taxation, subsidy, expenditure, administered pricing and borrowings
 Evaluation of how current policies conform to the fiscal management principles
and the objectives set out in the Medium-term Fiscal Policy Statement
FRBM Act, 2003 Contd…

 The Macro-economic Framework Statement shall contain an assessment of the

growth prospects of the economy with specification of underlying assumptions
 It shall contain an assessment relating to
 the growth in the gross domestic product

 the fiscal balance of the Union Government as reflected in the gross fiscal

balance
 the external sector balance of the economy as reflected in the current account

balance of the balance of payments

Section 3(5) &3(6)

FRBM Act, 2003 Contd…

 The Medium-term Expenditure Framework Statement shall set forth a three-

year rolling target for prescribed expenditure indicators with specification of
underlying assumptions and risk involved.
 It shall, inter alia, contain
 the expenditure commitment of major policy changes involving new service,

new instruments of service, new schemes and programmes

 the explicit contingent liabilities, which are in the form of stipulated annuity

payments over a multi-year time-frame

 FRBM Act, 2003 Contd…
Fiscal management principles
(1) The Central Government shall,—
a. take appropriate measures to limit the fiscal deficit upto three per cent of gross domestic
product by the 31st March, 2021;
b. endeavour to ensure that—
i. the general Government debt does not exceed sixty per cent.;
ii. the Central Government debt does not exceed forty per cent.,
of gross domestic product by the end of financial year 2024-2025;
c. not give additional guarantees with respect to any loan on security of the Consolidated
Fund of India in excess of one-half per cent. of gross domestic product, in any financial
year;
d. endeavour to ensure that the fiscal targets specified in clauses (a) and (b) are not
exceeded after stipulated target dates. (Section 4)
FRBM Act, 2003 Contd…

Fiscal management principles

(2) The Central Government shall prescribe the annual targets for reduction of fiscal
deficit for the period beginning from the date of commencement of Part XV of
Chapter VIII of the Finance Act, 2018 and ending on the 31st March, 2021
Provided that exceeding annual fiscal deficit target due unforeseen circumstances,
structural reforms in the economy with unanticipated fiscal implications, decline in
real output growth of a quarter by at least three per cent points below its average
of the previous four quarters, may be allowed for the purposes of this section.
FRBM Act, 2003 Contd…

Fiscal management principles

(3) Any deviation from fiscal deficit target shall not exceed one-half per cent. of the
gross domestic product in a year.
(4) The Central Government shall, in case of increase in real output growth of a
quarter by at least three per cent. points above its average of the previous four
quarters, reduce the fiscal deficit by at least one-quarter per cent. of the gross
domestic product in a year.
(5) Where the fiscal deficit is allowed to vary from the target prescribed or
deviation is initiated, 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
FRBM Act, 2003 Contd…

Borrowing from Reserve Bank

 The Central Government shall not borrow from the Reserve Bank.

 the Central Government may borrow from the Reserve Bank by way of advances

to meet temporary excess of cash disbursement over cash receipts during any
financial year in accordance with the agreements and the same is repayable in
accordance with the relevant provisions of the RBI Act, 1934
 Reserve Bank may subscribe to the primary issues of Central Government

Securities
 Reserve Bank may buy and sell the Central Government securities in the

secondary market or convert Central Government Securities held by it with

other Securities of the Central Government as mutually agreed between the
Reserve Bank and the Central Government
FRBM Act, 2003 Contd…

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) 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.
FRBM Act, 2003 Contd…
Measures to enforce compliance
 Half-yearly review by Minister-in-charge of the Ministry of Finance shall review

the trends in receipts and expenditure in relation to the budget and placing
before both Houses of Parliament the outcome of such reviews.
 Preparation of a monthly statement of its accounts by the Central Government

 Appropriate measures by the Central Government to address either shortfall in

revenue or excess of expenditure over the during any period in a financial year
(Section 7)
FRBM Act, 2003 Contd…
Measures to enforce compliance
 No deviation in meeting the obligations cast on the Central Government under

this Act, shall be permissible without approval of Parliament

 In case of any deviation in exceptional circumstances, the Minister-in-charge of

the Ministry of Finance shall make a statement in both Houses of Parliament

explaining—
(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)
FRBM Act, 2003 Contd…

Laying of review reports

The Central Government may entrust the Comptroller and Auditor-General of India to
review periodically as required, the compliance of the provisions of this Act and such
reviews shall be laid on the table of both Houses of Parliament
(Section 7A)
Public Debt
 State Government, in order to carry out its day today activities, raises money
from Public, Public Sector Undertakings through loans, by obtaining Ways and
Means Advance from Reserve Bank of India and also through loans and
advances from the Government of India
 Public Debt comprises Internal Debt and External Debt in respect of Union
Government whereas Loans and Advances from the Central Government instead
of External Loans constitute Public Debt of the State Government
 The Government also encourages Small Savings from the Public, which are used
for funding its activities
Public Debt Contd…
 Public Debt consists of market loans, loans from banks/financial institutions, and
loans and advances from the GoI.
 The Constitution of India provides that a State may borrow, within the territory
of India, upon the security of its Consolidated Fund, within such limits as may
from time to time, be fixed by the Act of its Legislature and give guarantees
within such limits as may be fixed
Debt Redemption

 Utilisation of surplus revenue

 Re-purchase of Government Bonds
 Annuities
 Conversion of high-interest rate bonds to low-interest rate bonds
 Sinking fund
 Auction of Cash Management Bills (CMBs)
Effects of Public Debt

 Effects on Production: Public debts enhance production activities as these are raised
to finance infrastructure activities in various sectors, e.g., steel works, cement,
multipurpose projects, construction of ships, railway lines and highways, heavy
electrical and engineering works, mining, oil refining, etc.
 Effects on Consumption: While, it may lead to curtailment of consumption, when
people subscribe to government loans, since investment of funds raised by
borrowing raises the level of employment it results in increase in the level of
consumption.
Effects of Public Debt Contd…

 Effects on Distribution: As surplus money in the hands of the rich is channelized

through public debt, the fiscal operations of the government paves way for
increased employment or it benefits to masses through the enlargement of social
services.
 Effects on the Level of Income and Employment: Public debt if used to finance
agriculture, industry, mining, transportation, communication, etc. can result in
increased employment opportunities, the level of income and standard of living.
Source: CAG’s CFRA Report 2016-17
Source: CAG’s CFRA Report 2016-17
 Performance of States

 Debt-GSDP ratio is an important indicator which signifies sustainability of the fiscal

liability.
 Punjab had the highest debt to GSDP ratio followed by Nagaland and Jammu &
Kashmir where debt to GSDP ratio is more than thirty
per cent.
 NCT of Delhi, Chhattisgarh, Assam, Odisha, Arunachal Pradesh, Karnataka,
Maharashtra, Gujarat, Tripura, Uttarakhand, Sikkim, Meghalaya, Telangana, Madhya
Pradesh, Mizoram, Kerala, Tamil Nadu and Goa had the lowest debt to GSDP ratio
less than twenty per cent.
Thank You