Fiscal Responsibility and Budget Management Act (FRBM Act), 2003

 

·       The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit, improve microeconomic management and strengthen fiscal prudence.

·       The FRBM Bill was introduced by the finance minister, in 2000 for providing legal backing to the fiscal discipline to be institutionalized in the country.

·       The Bill, approved by the Union Cabinet in 2003, became effective from July 5, 2004.

Objectives of the FRBM Act

·       The FRBM Act aims to introduce transparency in India's fiscal management systems.

·       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.

·       The FRBM Act was enacted to introduce more equitable distribution of India's debt over the years.

Key features of the FRBM Act

·       The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

Ø  Medium Term Fiscal Policy Statement

Ø  Macroeconomic Framework Statement

Ø  Fiscal Policy Strategy Statement

·       The FRBM Act of 2003 had mandated that, apart from limiting the fiscal deficit to 3% of the nominal GDP, the revenue deficit should be brought down to 0%.

Significance of an FRBM Act

·       The popular understanding of the FRBM Act is that it is meant to “compress” or restrict government expenditure. But that is a flawed understanding.

·       The truth is that FRBM Act is not an expenditure compressing mechanism, rather an expenditure switching one.

·       In other words, the FRBM Act – by limiting the total fiscal deficit (to 3% of nominal GDP) and asking for revenue deficit to be eliminated altogether – is helping the governments to switch their expenditure from revenue to capital.

·       This also means that – again, contrary to popular understanding – adhering to the FRBM Act should not reduce India’s GDP, rather increase it.

How effective has the FRBM Act been?

·       Between 2004 and 2008, the Indian government had made giant strides on reducing both revenue deficit and fiscal deficit.

·       But this process was reversed thereafter because of the Global Financial Crisis and a domestic slowdown.

·       Several years have passed since the FRBM Act was enacted, but the Government of India has not been able to achieve targets set under it. The Act has been amended several times. 

·       In 2013, the government introduced a change and introduced the concept of effective revenue deficit. This implies that effective revenue deficit would be equal to revenue deficit minus grants to states for the creation of capital assets.

N.K. Singh Committee

·       In 2016, a committee under N K Singh was set up to suggest changes to the Act. According to the government, the targets set under FRBM Act previously were too rigid.

·       N K Singh Committee's recommendations were as follows:

Ø  The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.

Ø  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).

Ø  The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified

Ø  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 and RBI purchases government securities from the secondary market.