Fiscal Responsibility and Budget Management (FRBM) Act, 2003

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was passed by Parliament in August 2003. Its goal was to enforce fiscal discipline, reduce the fiscal deficit, and improve the management of public funds, aiming for a balanced budget. The Comptroller and Auditor General of India (CAG) is responsible for reviewing compliance with the FRBM Act and reporting to Parliament under Section 7A of the Act.

Understanding the Fiscal Responsibility and Budget Management Act (FRBM)

The Fiscal Responsibility and Budget Management (FRBM) Act, introduced by the Atal Bihari Vajpayee-led BJP government in 2003, was created to ensure fiscal discipline in the government. It aims to reduce the fiscal deficit, which occurs when government spending exceeds its revenue. The Act sets targets for the fiscal deficit and aims for transparency in the government’s financial operations.

In addition to reducing the deficit, the FRBM Act focuses on managing the country’s debt and ensuring fairness across generations. It is presented alongside the Union Budget each year and includes key documents like the fiscal policy strategy and macroeconomic framework. The Act also promotes long-term economic stability.

Objectives of the FRBM Act:

Below are the objectives of the FEBM Act:

• Ensure the government’s fiscal deficit remains within a certain limit.
• Promote intergenerational equity in fiscal management and long-term economic stability.
• Prevent the economy from becoming over-dependent on any single sector.
• Set a target to achieve a fiscal deficit of 3% by the 2007-2008 fiscal year.
• Allow flexibility in government spending for social welfare and rural development projects.
• In 2016, a review committee under N K Singh was formed to reassess the targets of the FRBM Act.
• The government faced challenges with FRBM targets and restrictions, such as limited borrowing from the Reserve Bank of India.
• In emergencies like war or natural calamities, the government could exceed the fiscal deficit limits set by the Act.

Important Features of the FRBM Act, 2003:

Fiscal Targets for the Union Government:

• Limit the fiscal deficit to 3% of GDP by March 31, 2021.
• Ensure that total government debt (central + state) does not exceed 60% of GDP by 2024-25.
• Union government debt should remain under 40% of GDP by 2024-25.
• Additional loan guarantees against the Consolidated Fund of India should not exceed 0.5% of GDP annually.

Fiscal Deficit Reduction:

• The government must set annual targets for fiscal deficit reduction if it exceeds the limit.
• Exceptions (e.g., national security, calamities) are allowed but deviations cannot exceed 0.5% of GDP in a year.

Output Growth and Deficit:

• If real output growth rises significantly, the fiscal deficit must be reduced by at least 0.25% of GDP.

Pandemic Impact:

• Due to the COVID-19 crisis, the government has deviated from the fiscal targets but has not amended the FRBM Act, citing the need for flexibility in dealing with uncertainties.

Future Goal:

• The government aims to reduce the fiscal deficit to below 4.5% of GDP by FY 2025-26.

Advantages of the FRBM Act:

Below are the advantages of the FRBM Act:

• Improved Fiscal Discipline: Limits government borrowing, ensuring sustainable fiscal policy and reducing the risk of overspending.
• Increased Transparency: Mandatory disclosures provide better information, helping policymakers make informed decisions.
• Macroeconomic Stability: Controls fiscal deficits, reducing inflation pressure and promoting economic growth.
• Boosted Investor Confidence: Enhanced fiscal management attracts both domestic and international investments.

Challenges of the FRBM Act:

The Fiscal Responsibility and Budget Management (FRBM) Act was designed to reduce the fiscal deficit, ensure economic stability, and promote fair fiscal management. While it set rules for managing government debt, its enforcement was weak.

The Act aimed to prevent the government from exceeding fiscal deficit limits but allowed for exceptions in special cases, letting the government bypass these limits when needed. There were no strong mechanisms to ensure compliance, and the finance ministry only reviewed finances quarterly. Though Parliament had to approve any breach, its oversight was often ineffective due to political alignment with the ruling government. The Act focused on key targets like fiscal deficit and tax revenue but lacked strong enforcement.

• Rigidity in Targets: Fixed fiscal targets may not adjust well during economic slowdowns or crises, when higher public spending is needed.
• Escape Clause: Frequent use of the escape clause could reduce the Act’s credibility and weaken fiscal discipline.
• Impact on Public Spending: Adhering to fiscal targets may limit spending on vital sectors like health, education, and infrastructure, affecting long-term growth.
• Implementation Issues: Inconsistent political will and institutional mechanisms could affect the Act’s efficiency.
• State-Level Coordination: The focus on the central government may result in imbalanced fiscal management across states.

Financial Stability and Development Council (FSDC)

Establishment: The FSDC was created in December 2010 by the Union Government in response to the 2007-08 global financial crisis to address risks to India’s financial stability. It was first proposed by the Raghuram Rajan Committee (2008) on financial sector reforms.

Composition:

• The Finance Minister is the Chairman.
• Key members include heads of financial sector regulators:
  1. Reserve Bank of India (RBI)
  2. Insurance Regulatory and Development Authority (IRDA)
  3. Securities and Exchange Board of India (SEBI)
  4. Pension Fund Regulatory and Development Authority (PFRDA)
• Other members include the Finance Secretary, Chief Economic Advisor, and Secretary of the Department of Financial Services.

Membership Reforms (2018):

• Additional members were added, including:
  1. Minister of State for the Department of Economic Affairs (DEA)
  2. Secretary of the Department of Electronics and IT
  3. Revenue Secretary
  4. Chairman of the Insolvency and Bankruptcy Board of India (IBBI)
• These changes aimed to make the FSDC more broad-based and aligned with economic reforms.

The FSDC sub-committee is led by the RBI Governor, and experts can be invited as needed.

Conclusion:

The FRBM Act, introduced by the Atal Bihari Vajpayee-led BJP government, aimed to enforce fiscal discipline and provide legal backing for it. The bill was passed in 2000 and 2003, setting guidelines to reduce the fiscal deficit. The target was to bring the fiscal deficit to 3% by the 2007-2008 fiscal year.

While the Act aimed to prevent the government from exceeding the fiscal deficit limit, it also allowed the government to amend or ignore it in special situations.

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