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Fiscal Responsibility and Budget Management (FRBM) Act, 2003

 

FRBM Act: Relevance

  • GS 3: Government Budgeting.

 

What is FRBM Act?

  • The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is an act to provide for the responsibility of the Central Government to ensure intergenerational equity in fiscal management and long-term macro-economic stability by removing fiscal impediments in the effective conduct of monetary policy.
  • The Act sets a target for the government to establish financial discipline in the economy, improve public funds management and reduce fiscal deficit.

 

Why FRBM Act was needed?

  • During 1990s and the early 2000s, the borrowing level were very high. It had led to high fiscal deficit, high revenue deficit, and high debt-to-GDP ratio.
  • The high government borrowing and the resultant debt had severely impacted the health of the Indian economy.
  • Moreover, the borrowings were more to pay interest than for any capital formation, which means we were on the verge of falling into a debt trap.
  • All these reasons led to passing of Fiscal Responsibility and Budget Management Act in 2003.

 

Fiscal Responsibility and Budget Management (FRBM) Act, 2003_40.1

 

FRBM Act objectives

  • The FRBM Act aimed to introduce transparency in India’s fiscal management systems.
  • It also aimed to bring fiscal discipline, efficient debt management, and macroeconomic stability.
  • The Act also aimed at maintaining better coordination between fiscal and monetary policy.
  • The long-term vision was to introduce more equitable distribution of India’s debt over the years.

 

Fiscal policy statements to be laid before Parliament

  • Along with the annual financial statement (Budget) and demands for grants, the Central Government shall lay in each financial year before both Houses of Parliament the following statements of fiscal policy namely:
    • the Medium-term Fiscal Policy Statement;
    • the Fiscal Policy Strategy Statement;
    • the Macro-economic Framework Statement;
    • the Medium-term Expenditure Framework Statement.

 

Fiscal Responsibility and Budget Management (FRBM) Act, 2003_50.1

 

Fiscal indicators

  • fiscal deficit as a percentage of GDP;
  • revenue deficit as a percentage of GDP;
  • primary deficit as a percentage of GDP;
  • tax revenue as a percentage of GDP;
  • non-tax revenue as a percentage of GDP; and
  • Central Government debt as a percentage of GDP.

 

Initial FRBM Targets

These targets were scheduled to be met by 2008-09.

  • Revenue Deficit (RD): – RD should be completely eliminated by 2009. The minimum annual reduction target was 0.5% of GDP.
  • Fiscal Deficit (FD): FD should be reduced to 3% of GDP by 2009. The minimum annual reduction target was 0.3% of GDP.
  • Contingent Liabilities – The Central Government shall not give incremental guarantees aggregating an amount exceeding 0.5% of GDP in any financial year beginning 2004-05.
  • Additional Liabilities – Additional liabilities should be reduced to 9% of the GDP by 2004-05. The minimum annual reduction target in each subsequent year to be 1% of GDP.
  • RBI purchase of government bonds – to cease from 1 April 2006. This indicates the government not to borrow directly from the RBI.

The targets were not achieved. So, the Act was amended first in 2012 and then in 2015 to relax the realisation of fiscal targets.

 

N.K.Singh committee recommendations

  • Central government believed that the targets are too rigid. So, it set up a committee under N.K.Singh to review the FRBM Act.
  • Targets: The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.
  • Fiscal Council: The committee proposed to create an autonomous Fiscal Council with a chairperson and two members appointed by the Centre (not employees of the government at the time of appointment)
  • Deviations: The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified
  • Borrowings: According to the suggestions of the committee, the government must not borrow from the RBI, except when…
    • the Centre has to meet a temporary shortfall in receipts
    • RBI subscribes to government securities to finance any deviations
    • RBI purchases government securities from the secondary market.

 

Latest FRBM targets

  • Fiscal Deficit: The Central Government shall take appropriate measures to limit the fiscal deficit upto 3% of GDP by the 2021.
  • The Central Government shall also ensure that the general Government debt does not exceed 60%.
  • The Central Government debt does not exceed 40%. of GDP by the end of financial year 2024-2025.
  • The Central Government does not give additional guarantees with respect to any loan on security of the Consolidated Fund of India in excess of 0.5% of GDP, in any financial year.

 

FRBM escape clause

  • The FRBM Act also allows invoking of an escape clause in situations of calamity and national security. In such situations, the government can deviate from its annual fiscal deficit target.

 

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