The Fiscal Responsibility and Budget Management Act (FRBM Act), enacted in 2003, establishes financial discipline with the aim of reducing fiscal deficit.
Enactment of the FRBM Act: Who and When?
The FRBM Bill was introduced in 2000 by the then finance minister, Yashwant Sinha. Approved by the Union Cabinet in 2003, it became effective on July 5, 2004.
Objectives of the FRBM Act
The FRBM Act aims to introduce transparency in India’s fiscal management, fostering fiscal stability and providing the Reserve Bank of India (RBI) flexibility to address inflation. The equitable distribution of India’s debt over the years is another long-term goal.
A pause in fiscal targets
The fiscal targets set by the FRBM Act were temporarily suspended due to the Covid-19 pandemic. The pandemic led to a revenue shortfall and increased expenditure commitments, leading to the exceeding of the fiscal targets outlined in the FRBM Act. In the 2021–22 budget, a new fiscal consolidation plan was introduced, aiming to reduce the fiscal deficit to below 4.5% of GDP by 2025–26.
Key Features
The FRBM Act mandates the government to annually present the following documents in Parliament alongside the Union Budget:
- Medium-Term Fiscal Policy Statement
- Macroeconomic Framework Statement
- Fiscal Policy Strategy Statement
- The Act also requires projections of revenue deficit, fiscal deficit, tax revenue, and total outstanding liabilities as a percentage of GDP in the medium-term fiscal policy statement.
FRBM Act Exemptions
Exemptions under the FRBM Act allow for deviations from fiscal deficit and revenue targets on grounds of national security, calamity, etc.Effectiveness of the FRBM Act
Despite several years since its enactment, the Government of India has struggled to meet the FRBM Act targets. The Act has undergone multiple amendments. In 2013, the concept of effective revenue deficit was introduced, and in 2016, the N K Singh Committee recommended significant changes to the Act, citing the previous targets as too rigid.
N K Singh Committee Recommendations:
The N K Singh Committee suggested the following:
Targets: The primary fiscal policy target should be debt, with a goal to be achieved by 2023.
Fiscal Council: Establish an autonomous Fiscal Council with a chairperson and two members appointed by the Centre.
Deviations: Clearly specify grounds for government deviations from FRBM Act targets.
Borrowings: Define conditions under which the government can borrow from the RBI, limiting it to specific circumstances such as temporary shortfalls or financing deviations through government securities.
