FRBM ACT

The Fiscal Responsibility and Budget Management (FRBM) Act was enacted by the Indian government in 2003 to ensure fiscal discipline, improve the management of public funds, and reduce fiscal deficits. The act aims to instill a long-term strategy for fiscal sustainability by setting targets for the government to reduce its fiscal deficit and eliminate revenue deficit.

Objectives of the FRBM Act

1. Fiscal Discipline: To promote fiscal discipline by reducing the fiscal deficit and public debt.
2. Transparency: To enhance transparency in the government’s fiscal operations.
3. Long-term Sustainability: To ensure the long-term sustainability of government finances.
4. Macroeconomic Stability: To maintain macroeconomic stability by controlling inflation and interest rates through prudent fiscal management.

Key Provisions of the FRBM Act

1. Fiscal Deficit Targets: The act sets targets for the government to reduce the fiscal deficit. Initially, it aimed to reduce the fiscal deficit to 3% of GDP by March 2008.
2. Revenue Deficit Targets: The act also aims to eliminate the revenue deficit by a specified timeline.
3. Borrowing Limits: Limits on the government’s borrowing from the Reserve Bank of India (RBI) to finance the deficit.
4. Annual Reduction Targets: Specifies annual reduction targets for fiscal deficit and revenue deficit.
5. Medium-term Fiscal Policy Statement (MTFPS): Requires the government to present a three-year rolling target for key fiscal indicators.
6. Macroeconomic Framework Statement (MFS): The government must present a statement outlining the medium-term fiscal policy strategy and the fiscal policy’s macroeconomic impact.
7. Fiscal Policy Strategy Statement (FPSS): Details the policies for the current financial year, key fiscal measures, and an assessment of the strategic priorities for the fiscal policy.

Amendments and Flexibility

The FRBM Act has been amended several times to account for changing economic conditions:

1. 2004 Amendment: Adjusted targets and introduced the concept of “effective revenue deficit.”
2. 2012 Amendment: Introduced the concept of “effective revenue deficit,” which excludes grants for the creation of capital assets from the revenue deficit.
3. 2018 Amendment: The NK Singh Committee recommended a fiscal deficit target of 3% of GDP by 2020-21, and a reduction in the debt-to-GDP ratio to 40% for the central government and 20% for state governments by 2023.
4. COVID-19 Pandemic: Provided flexibility in fiscal targets to address the economic fallout of the pandemic, allowing higher deficits to support economic recovery.

Example: Implementation and Challenges

Union Budget 2020-21

The Union Budget for the fiscal year 2020-21 presented a significant deviation from the FRBM targets due to the unprecedented economic challenges posed by the COVID-19 pandemic.

1. Fiscal Deficit Target: The budget set a fiscal deficit target of 3.5% of GDP. However, due to the pandemic, the actual fiscal deficit was revised to 9.5% of GDP.
2. Revenue Deficit: The revenue deficit was also higher than the target due to decreased revenue collections and increased expenditures on health and social welfare.

Measures Taken

1. Increased Borrowing: The government increased borrowing to finance the higher fiscal deficit.
2. Economic Stimulus: The Atmanirbhar Bharat Abhiyan (Self-Reliant India Campaign) provided a comprehensive economic package to support the economy.
3. Flexibility in FRBM Targets: The government invoked the escape clause in the FRBM Act, allowing deviation from the fiscal deficit targets to address the economic crisis.

Impact of the FRBM Act

1. Improved Fiscal Discipline: The FRBM Act has instilled a sense of fiscal discipline and accountability in government finances.
2. Enhanced Transparency: Increased transparency in fiscal operations through regular reporting and monitoring of fiscal indicators.
3. Macroeconomic Stability: Contributed to macroeconomic stability by controlling fiscal deficits and public debt levels.
4. Challenges: The act has faced challenges in implementation, especially during economic crises when adherence to fiscal targets becomes difficult.

Conclusion

The FRBM Act is a crucial legislative framework in India’s fiscal policy aimed at ensuring fiscal discipline, transparency, and long-term sustainability of government finances. While the act has been instrumental in improving fiscal management, it also provides flexibility to address economic crises, as seen during the COVID-19 pandemic. The ongoing commitment to fiscal targets, combined with the necessary flexibility to adapt to changing economic conditions, is essential for maintaining fiscal stability and promoting sustainable economic growth.