The Fiscal Responsibility and Budget Management (FRBM) Act is an important law in India. This guide will help you understand what it is, why it was created, and how it works. Read all about FRBM Act, Introduction, Objective, Need & Features.
What is FRBM Act?
The FRBM Act, or the Fiscal Responsibility and Budget Management Act, is a legislative measure instituted by the Indian Parliament. Its primary objectives include enhancing fiscal stability, curbing the fiscal deficit, attaining macroeconomic stability, and effectively managing public finances.
Through the pursuit of a balanced budget and the reinstatement of fiscal discipline, the FRBM Act aims to regulate government expenditure and revenue. Additionally, it promotes transparency in budgetary decision-making and ensures fairness across generations concerning fiscal policies and obligations.
FRBM Act Introduction
The introduction of the Fiscal Responsibility and Budget Management Act, commonly referred to as the FRBM Act, was a pivotal move by the Indian Parliament. Its aim was to reinstate fiscal discipline, achieve budgetary equilibrium, curb India’s fiscal deficit, bolster macroeconomic stability, and effectively manage public finances.
The primary goal of the FRBM Act was to address the nation’s revenue shortfall and reduce the fiscal imbalance to a sustainable level of 3% of GDP by March 2008.
However, due to the onset of the global financial crisis in 2007, the implementation timeline for the FRBM Act’s objectives was initially postponed and later halted in 2009.
Recognizing India’s ongoing recovery efforts, the Economic Advisory Council publicly advocated for the reinstatement of the FRBM Act’s provisions in 2011.
Administered by the Ministry of Finance (India), the Fiscal Responsibility and Budget Management Act, 2003, is chaired by N.K. Singh, overseeing its governance and implementation.
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FRBM Act Enactment
The Fiscal Responsibility and Budget Management Bill was initially introduced by India’s former finance minister, Yashwant Sinha, in 2000.
Subsequently, the Indian Parliament passed the FRBM law, aiming to instill fiscal discipline, manage public finances efficiently, and foster long-term economic stability. The proposal was prompted by significant fiscal and revenue deficits, along with a high debt-to-GDP ratio.
The FRBM bill outlined ambitious objectives, including the elimination of the revenue deficit by March 31, 2006, a moratorium on government borrowing from the Reserve Bank of India for three years following its enactment, and a reduction of the fiscal deficit to 2% of GDP by the specified deadline. Moreover, the legislation sought to educate government officials at all levels on the principles of fiscal prudence.
The bill’s preamble underscored the dire state of India’s national and state government finances. Since its inception, the FRBM Act has undergone several amendments, providing the government with increased flexibility to pursue its fiscal objectives during periods of economic turmoil.
Why FRBM act was introduced?
The necessity of the FRBM Act arises from the potential consequences of extensive deficit spending by the government, chiefly the inflationary pressures stemming from increased money supply.
To mitigate this risk, the Act seeks to enhance fiscal transparency and government accountability by publicly disclosing fiscal policy objectives, strategies, and targets.
Furthermore, the Act aims to address concerns regarding the crowding out effect, wherein high levels of public debt impede private investment by competing for available funds.
This competition for funding between the government and the private sector underscores the importance of public scrutiny and awareness of the government’s economic policies. By promoting public discourse and scrutiny, the Act fosters a greater understanding of economic policies and encourages constructive criticism.
Moreover, the FRBM Act endeavors to ensure the sustainability of government policies over the long term, thereby promoting economic stability and fiscal prudence.
By establishing measures to maintain fiscal discipline and sustainability, the Act aims to safeguard against potential economic instability and ensure the responsible management of public finances.
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FRBM Act Objective
The objective of the FRBM Act was to attain macroeconomic and financial stability within India. This was pursued through the implementation of a structured fiscal policy aimed at achieving economic equilibrium. Key objectives included:
- Establishing Fiscal Discipline: Implementing measures to ensure prudent fiscal management and discipline across all levels of government.
- Enhancing Fiscal Transparency: Creating transparent fiscal management systems throughout the country to promote accountability and public trust.
- Ensuring Intergenerational Equity: Allocating the nation’s financial obligations in a fair and sustainable manner over time, ensuring that future generations are not unduly burdened by current fiscal policies.
- Promoting Long-Term Financial Stability: Working towards maintaining India’s financial stability over an extended period, safeguarding against economic volatility and crises.
- Empowering the Reserve Bank of India: Granting the Reserve Bank of India the necessary autonomy and tools to effectively control inflation and maintain price stability within the country.
Overall, the FRBM Act aimed to establish a framework for responsible fiscal management that would contribute to India’s overall economic stability and growth trajectory.
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FRBM Act Feature
One prominent feature of the FRBM Act is its requirement for the annual presentation of certain documents alongside the Union Budget to the Parliament. These documents serve to enhance fiscal transparency and accountability. Key documents include:
- Medium-Term Fiscal Policy Statement: This statement outlines the government’s fiscal policy objectives and strategies over the medium term. It typically includes key fiscal indicators such as revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as a percentage of GDP, and total outstanding liabilities as a percentage of GDP.
- Macroeconomic Framework Statement: This statement provides an overview of the macroeconomic factors influencing the government’s fiscal policy decisions. It includes projections for economic growth, inflation, and other relevant macroeconomic indicators.
- Fiscal Policy Strategy Statement: This statement outlines the government’s fiscal policy stance and strategy for the upcoming fiscal year. It includes details on revenue mobilization, expenditure priorities, and measures to achieve fiscal targets.
These documents play a crucial role in informing policymakers, stakeholders, and the public about the government’s fiscal policies, objectives, and strategies. By requiring the regular publication of these documents, the FRBM Act promotes transparency, accountability, and informed decision-making in fiscal matters.
FRBM Act: N K Singh Committee
The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2003, aimed to set targets for the government to reduce fiscal deficits. However, over time, there were adjustments made to these targets.
In May 2016, recognizing the need for a review, the government constituted a committee chaired by N.K. Singh to evaluate the effectiveness of the FRBM Act. The committee observed that the existing targets were overly stringent and recommended revisions to achieve greater fiscal flexibility.
Specifically, the committee proposed that the government target a fiscal deficit of 3% of GDP leading up to March 31, 2020, followed by further reductions to 2.8% in 2020–2021 and 2.5% by 2023. These recommendations aimed to strike a balance between fiscal discipline and the need for flexibility in achieving macroeconomic stability.
FRBM Act: Last Change in 2023
The most recent amendment to the FRBM Act’s Medium Term Fiscal Policy Statement, covering 2021–2022 and 2022–2023, notably eliminated the rolling targets for budget deficits. In the Budget for 2022, the government established an ambitious target of reducing the fiscal deficit to less than 4.5% of GDP by the fiscal year 2025–2026.
For the fiscal year 2022–2023, a target of 6.4% of GDP has been set for the budget deficit, reflecting the amount of borrowing the government needs to cover its expenses. Additionally, the anticipated revenue shortfall for 2022–2023 is projected to be 3.8% of GDP, highlighting the necessity for borrowing to cover expenditures that may not yield immediate returns.
Revised estimates indicate that while the revenue gap is expected to decrease to 4.7%, the fiscal deficit is projected to exceed the budget’s forecast of 6.9%. The primary deficit goal for 2022–2023 is estimated to be 2.8% of GDP.
Furthermore, interest payments have risen significantly over the years, from 36% in 2011–2012 to 42% in 2020–2021. According to budget projections, this percentage is anticipated to further increase to 43% by the fiscal year 2022–2023.
FRBM Act Escape Clause
The NK Singh committee recommended incorporating an escape clause into the FRBM Act, providing the central government with flexibility in meeting fiscal deficit targets during exceptional circumstances. Subsequently, in 2018, amendments to the FRBM Act were made, allowing the government to adjust its fiscal stance by up to 0.5 percent or 50 basis points.
This provision enables the Reserve Bank of India (RBI) to directly participate in primary government bond auctions to fund deficits. However, the activation of the escape clause mandates formal deliberations and guidance from the Fiscal Council. During periods of war or major national disasters, the government is exempted from strictly adhering to the FRBM rules.
Finance Minister Nirmala Sitharaman utilized this escape clause in 2020 to revise the fiscal deficit target for FY20 to 3.8 percent and set the target for FY21 at 3.5 percent. This demonstrates how the escape clause provides necessary flexibility in fiscal management during challenging circumstances.
FRBM Act & Latest Changes with Union Budget 2022-23
In the Union Budget 2022-23, the Indian government outlined its goal to reduce the fiscal deficit to below 4.5% of GDP by the fiscal year 2025-26. The finance minister highlighted this target in the Budget Speech.
Fiscal and Revenue Deficits for 2022-23
- Fiscal Deficit: Estimated at 6.4% of GDP.
- Revenue Deficit: Estimated at 3.8% of GDP.
Comparison with Previous Year (2021-22)
- Fiscal Deficit: Allocated 6.8% of GDP.
- Revenue Deficit: Allocated 5.1% of GDP.
Updated Estimates for 2022-23
- Fiscal Deficit: Predicted to be slightly higher than the budget estimate, at 6.9%.
- Revenue Shortfall: Predicted to be lower, at 4.7%.
- Primary Deficit: Projected to be 2.8% of GDP.
Interest Payments and Liabilities
- Interest Payments: Increased from 36% of revenue receipts in 2011-12 to 42% in 2020-21, and expected to rise to 43% in 2022-23.
- Outstanding Liabilities: Expected to slightly decline to 60% of GDP in 2022-23, representing the accumulation of borrowings over time.
FRBM Act challenges
Despite the enactment of the FRBM Act and various amendments over the years, the Indian government has faced challenges in achieving the set targets. In 2016, a committee led by N.K. Singh was formed to assess the Act and suggest necessary changes to support fiscal expansion and credit creation within the economy.
FRBM Act in a Nutshell
| Aspect | Details |
|---|---|
| FRBM Act | |
| Introduction | A legislative measure aimed at enhancing fiscal stability and managing public finances. |
| Enactment | Introduced in 2000, enacted in 2003 by the Indian Parliament. |
| Objective | To achieve macroeconomic stability, fiscal discipline, and transparency in budgetary decisions. |
| Features | Annual presentation of documents like Medium-Term Fiscal Policy Statement, Macroeconomic Framework Statement, Fiscal Policy Strategy Statement. |
| N.K. Singh Committee | Constituted in May 2016 to evaluate FRBM Act, recommended revisions for fiscal flexibility. |
| Last Change (2023) | Eliminated rolling targets for budget deficits, set ambitious deficit reduction targets. |
| Escape Clause | Introduced in 2018, provides flexibility in meeting fiscal deficit targets during exceptional circumstances. |
| Latest Changes with Union Budget 2022-23 | Target to reduce fiscal deficit to below 4.5% of GDP by FY 2025-26. Estimated fiscal and revenue deficits for 2022-23. |
| Challenges | Despite amendments, challenges remain in achieving set targets. |
Conclusion
The FRBM Act is a key law in India that helps ensure the government manages its money wisely. By setting targets for the budget deficit and government debt, and by increasing transparency, the Act helps keep the economy stable and strong. Understanding the FRBM Act is important for anyone interested in how governments manage their finances.
Remember, managing money responsibly is not just important for governments, but for everyone!
Frequently Asked Questions about the FRBM Act
The full form of FRBM is Fiscal Responsibility and Budget Management.
The FRBM Act was recommended by the N.K. Singh Committee.
The FRBM Act was introduced to:
Reduce the Budget Deficit: Ensure the government does not spend much more than it earns.
Control Government Debt: Keep the total amount of money the government owes under control.
Increase Transparency: Ensure the government is open about how it spends money and how much it owes.
The FRBM Act was enacted in the year 2003
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