The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit.
When was the FRBM Act enacted? Who introduced it in India?
The FRBM Bill was introduced by the then finance minister, Yashwant Sinha, in 2000. The Bill, approved by the Union Cabinet in 2003, became effective from July 5, 2004.
What are the 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:
1. Medium Term Fiscal Policy Statement
2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy Statement
The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.
FRBM Act exemptions
On grounds of national security, calamity, etc, the set targets of fiscal deficits and revenue could be exceeded.
How effective has the FRBM Act been?
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. 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:
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...
a. the Centre has to meet a temporary shortfall in receipts
b. RBI subscribes to government securities to finance any deviations
c. RBI purchases government securities from the secondary market
Read full FRBM documents