The FRBM Act: FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT, 2003

The Fiscal Responsibility and Budget Management Act, of 2003, was enacted by the Indian government to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of public funds by moving towards a balanced budget, and strengthen fiscal prudence. The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.

Main features of the FRBM Act:

• In every annual Union Budget, the Government must place the following along with the Budget documents in Parliament.

• Medium-Term Fiscal Policy Statement

• Macroeconomic Framework Statement

• Fiscal Policy Strategy Statement

• The revenue deficit, fiscal deficit, tax revenue, and total outstanding liabilities shall be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.

Exemption:

 On grounds of national security, calamity, etc., the set targets of fiscal deficits and revenue could be exceeded.

N.K.Singh Committee:

In 2016, a committee under N K Singh was set up to suggest changes to the Act as the Government felt that the targets set under the FRBM Act previously were too rigid.

The above committee recommended the following;

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 specified.

Borrowings: According to the suggestions of the committee, the government must not borrow from the RBI, except when…

• The center 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 Updates on the Fiscal Responsibility and Budget Management FRBM Act:

The government aims to reduce the fiscal deficit to below 4.5% of GDP by 2025-26, as announced by the Finance Minister, Nirmala Sitharaman. The projected fiscal deficit for 2023-24 is 5.9% of GDP. Further, the Government is required to limit the debt of the central government to 40% of the GDP by the year 2024-25.

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