FRBM Act – what is it?

Financial responsibility and Budget Management Act

The act is aimed at bringing transparency and accountability in the fiscal and monetary actions of the government. The set of rules and targets are to be followed which will allow country to create realistic projections and medium term projections. The annual actions to be guided by the medium term plan.

The important documents that are available to public/Parliament are

1. Medium Term Fiscal Policy Statement

2. Macroeconomic Framework Statement

3. Fiscal Policy Strategy Statement

These documents give projections of the revenue, increase in expenditure in each sector etc.

Why the FRBM act is relevant?

India is a developing country and the investments (especially rate of interest of lending) will be based on the financial health of country. If the country has less debt and has relatively accurate projections, the investors would be willing to lend at low rates for longer time. If the credit rating + their own assessment is negative, then the investors won’t focus on the long term and will be ready to exit making profits. They will charge higher interest to cover the risk.

The targets set by the FRBM act can be exempted during the natural calamities, disasters etc.

What is this 3% fiscal deficit limit which you hear often about FRBM ?

The gap between the revenue and expenditure of a country to its GDP should be within 3 percentage. The 3-5 percentage is considered better for a country.

Concerns raised in various news:

1.       The deficits as a result of off-budget borrowings not being included in calculating the fiscal deficit has been criticised. The off-budget borrowings are also debt and to get a complete picture has to be included for getting full picture of the repayment schedule the country will have to bear.

2.       CAG report estimation of GDP 2019 has been higher than budget estimate.

3.       Doubts has been raised by certain economists on the revenue estimates.

Related Article : GDP India

National Infrastructure Investment fund

National Infrastructure Investment fund is an Alternative Investment fund and India’s first sovereign investment fund. The large investment funds/fund managers are facilitated to drive the growth of India’s economy through this fund.

You can read a brief intro into the SWF (sovereign wealth fund) here: Sovereign wealth fund.  

It may be noted that SWF in India is not to park excess fund from natural resources as done by countries like Kuwait, Saudi Arabia, Botwana etc. It is for fund receipt into India. The fund is anchored by Government of India, who is a minority share holder. The NIIF has three types of funds (portfolios)

A.      Master fund – To invest in core assets like ports , roads etc.

B.      Fund of funds – The fund managers with proven track records in association with NIIF invest in areas like Green energy, Affordable housing etc.

C.      Strategic fund – to invest/fund in infrastructure projects  eg: Equity shareholding of 59% in IDFC-IFL.

Advantages for the investors

1.                   Attractive long-term risk-adjusted returns for our investors on a       sustainable basis.

2.                   Anchored by Government of India

3.                   There is 100% tax exemption to their interest, dividend         and capital gains income in respect of investment made in           infrastructure and other notified sectors before 31st March,             2024  and with a minimum lock-in period of 3 years .

4.                   providing local access and expertise

Risks

There is risk of project delays with respect to speed of execution, local conditions, legal issues etc.

The inflow of funds to a particular sector may lead to creation of bubble, stock price manipulations.

Note:  

At the time of writing this article, The world famous firms like DP world, Roadis, ADIA etc are investing in India through the NIIF. 

What is Sovereign Wealth Fund?

What is Sovereign Wealth Fund?

Let me quote what Wikipedia says

“A sovereign wealth fund (SWF) is a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.”

The SWF came into picture after the 2008 crash.

Importance of SWF

It holds significance as nations pension fund could be part of it. It could be investing in real estate.

(Above are few ones among the numerous ones which can be sensed easily by common man)

Why create Sovereign Wealth Fund?

Take a country with plenty of oil with projection that oil will dry up in 20 years from now. The country chooses to pool the profit/trade-surplus from the resource for the benefit of its citizens.  

Eg: Norway’s SWF is among the most famous sovereign fund which has grown now to be a massive fund.

India doesn't have trade surplus hence few economists feel the idea may not suit India. 

Risks and Criticism

The SWF could be used to get political or economic advantage. The way the SWF’s are used by many countries are unclear. Eg: If the SWF uses the pension fund in a ridiculous manner, then citizens would suffer badly.

 The above is a very ultrasimplified version on SWF, just to introduce the concept.


Update 2019:

India has become a favourite destination for SWFs. The SWFs (eg Canadian Pension Plan, QIP etc) from other countries are putting money in Indian firms.