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Fiscal Responsibility and Budget Management Act (FRBM)

Introduction


The Fiscal Responsibility and Budget Management Act (FRBM) was passed in 2003. The Act's goal is to ensure intergenerational equity in fiscal management, long-run macroeconomic stability, better coordination of fiscal and monetary policy, and transparency in the government's fiscal operations.


It establishes a legal and institutional foundation for fiscal consolidation. The Central Government is now required to take steps to reduce the fiscal deficit, eliminate the revenue deficit, and generate revenue surpluses in the coming years.


The Fiscal Responsibility and Budget Management Act of 2003 requires three policy statements (FRBMA) .


  • The Medium-Term Fiscal Policy Statement establishes a three-year rolling target for specific fiscal indicators and examines whether revenue expenditure can be financed on a sustainable basis through revenue receipts and how productively capital receipts, including market borrowings, are used.

  • The Fiscal Policy Strategy Statement establishes the government's fiscal priorities, examining current policies and justifying any deviation in key fiscal measures.

  • The Macroeconomic Framework Statement assesses the economy's prospects in terms of GDP growth rate, central government fiscal balance, and external balance.



FRBM Act exemptions- Escape Clause

The Act's subsection 4 (2) specifies the various grounds on which the FRBM's fiscal deficit target may be exempted during a fiscal year. The option allows the government to widen the deficit by 0.5 percentage points in times of exigencies such as a war or calamities of national proportion.


Exceeding the annual fiscal deficit target due to one or more of the following reasons may be permitted:


  • national security, act of war,

  • national calamity,

  • agricultural collapse, which has a significant impact on farm output and income.

  • economic structural reforms with unanticipated fiscal implications

  • decline in real output growth of a quarter by at least three per cent points below its average of the previous four quarters.


How successful has the FRBM Act been?


Several years have passed since the FRBM Act was passed, but the Government of India has yet to meet the targets it set. Several amendments have been made to the Act.


The government made a change in 2013, introducing the concept of effective revenue deficit. This means that the effective revenue deficit would be equal to the revenue deficit minus grants to states for capital asset creation. A committee chaired by N K Singh was formed in 2016 to recommend changes to the Act. The previous targets set under the FRBM Act, according to the government, were too rigid.


The recommendations of the N K Singh Committee were as follows:


FRBM Act was amended by the government in 2018. The amendment added a new road map and timeline to reduce the fiscal deficit to 3% of GDP by 31st March 2021.


The committee proposed establishing 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 recommended that the reasons for the government deviating from the FRBM Act targets be clearly stated.


Borrowings: According to the committee's recommendations, the government should not borrow from the RBI unless...


  • the Centre has to meet a temporary shortfall in receipts


  • RBI subscribes to government securities to finance any deviations


  • RBI purchases government securities from the secondary market

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