FRBM Act, Introduction, Objective, Need & Features

FRBM Act

The Financial Responsibility and Budgeting Management Act, often known as the FRBM Act, was established by the Indian Parliament to improve fiscal stability, reduce the fiscal deficit, achieve macroeconomic stability, and regulate public money by advancing towards a balanced budget and reintroducing fiscal discipline. The FRBM Act fosters budgetary decision-making transparency and guarantees intergenerational equity.

FRBM Act Introduction

The Fiscal Responsibility and Budget Management Act is known by its full name. The Indian Parliament passed the FRBM Act in order to reintroduce fiscal discipline, present a balanced budget, reduce India’s fiscal deficit, improve macroeconomic stability, and regulate public finances.

The FRBM Act’s main objective was to reduce the nation’s revenue shortfall and reduce the fiscal imbalance to an acceptable 3% GDP by March 2008. However, the FRBM Act’s deadline for carrying out its objectives was originally postponed and subsequently stopped in 2009 as a result of the global financial crisis that began in 2007. The Economic Advisory Council publicly urged the Indian government to consider reinstating the FRBM Act’s provisions in 2011, citing the nation’s ongoing recovery progress. The Fiscal Responsibility and Budget Management Act, 2003 is governed by the Ministry of Finance (India), and N. K. Singh now serves as its chairman.

FRBM Act Enactment

The Fiscal Responsibility and Budget Management Bill were introduced by India’s former finance minister, Yashwant Sinha, in 2000. The Indian Parliament passed the FRBM law to enforce fiscal restraint, manage public finances, and promote long-term economic stability. Additionally, the huge fiscal and revenue deficit as well as the high debt-to-GDP ratio were reasons for its proposal.

The FRBM bill was introduced with the broad objectives of eradicating the revenue deficit by March 31, 2006, prohibiting government borrowing from the Reserve Bank of India for three years after its passage, and bringing down the fiscal deficit to 2% GDP by that date. Additionally, the legislation attempted to train all levels of government officials in the fundamentals of budgetary restraint.

The bill’s declaration of purposes and reasons began by emphasizing the catastrophic situation of India’s national and state governments’ finances. Since its passage, the FRBM Act has undergone numerous amendments to give the government additional flexibility in achieving its fiscal goals in times of economic crisis.

FRBM Act Need

Increased money supply brought on by the government’s high levels of deficit spending may result in inflation. By making public the government’s fiscal policy objectives, strategies, and targets, the FRBM Act aims to increase fiscal transparency and government accountability.

The crowding out of private investment may result from high amounts of public debt. The government will consequently have to compete with the business sector for funding. Thus, the Act would encourage more public criticism of the government’s economic policies and awareness of them. By guaranteeing that the government’s policies were long-term sustainable, the FRBM Act also attempted to foster economic stability and fiscal restraint.

FRBM Act Objective

The FRBM Act’s goal was to achieve macroeconomic and financial stability. To balance India’s economy, a fiscal policy has been put in place. Create open fiscal management systems throughout the nation. Allocate the nation’s obligations in a more fair and manageable manner throughout time. Ensure India’s financial stability for a longer length of time. Additionally, the act was meant to give the Reserve Bank of India the necessary freedom to control inflation in India.

FRBM Act Feature

Every year, the FRBM is required to update and include certain items in a union budget document that is presented to parliament. The Specifications of Medium Term Fiscal Policy Statement, Specifications of Macroeconomic Framework Statement, and Specifications of Fiscal Policy Strategy Statement are documents that the government should have on file in addition to the budget documents.

It was suggested that the statement of medium-term fiscal policy include all four fiscal indices, including revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as a percentage of GDP, and the total amount still owed as a percentage of GDP.

FRBM Act: N K Singh Committee

The Fiscal Responsibility and Budget Management (FRBM) Act, which was passed in 2003, set objectives for the government to achieve in order to reduce fiscal deficits. There was some shifting of the targets.

In May 2016, the government established a committee chaired by NK Singh to assess the FRBM Act. The government thought the goals were unduly strict. The committee recommends that the government strive for a budget deficit of 3% of GDP in the years leading up to March 31, 2020, then lower it to 2.8% in 2020–2021 and 2.5% in 2023.

FRBM Act: Last Change in 2023

Recent revisions to the FRBM Act Medium Term Fiscal Policy Statement for 2021–2022 and 2022–2023 omitted the rolling targets for budget deficits. In Budget 2022, the government set a target for lowering the fiscal deficit to less than 4.5% of GDP by 2025–2026. The 6.4% of GDP target for the budget deficit for 2022–2023 is expected. It serves as a gauge of the amount of money the government borrows to pay its bills.

It is anticipated that the revenue gap for 2022–2023 will be 3.8% of GDP. It explains how the government must take out loans to pay for expenditures that might not provide a profit in the future. The revised figures show that while the income shortfall would be lower at 4.7%, the fiscal deficit will be a little higher than the budget’s predicted 6.9%. The primary deficit goal is anticipated to reach 2.8% of GDP in 2022–2023. From 36% in 2011–2012 to 42% in 2020–21, interest payments have grown. According to budget projections, this percentage will have increased to 43% by 2022–2023.

FRBM Act Escape Clause

The escape clause was suggested by the NK Singh committee to give the central government some leeway in cases where it can follow fiscal deficit targets under unique circumstances. The FRBM Act was further changed in 2018, and now the government has the option to flex its budgetary muscles by up to 50 basis points, or 0.5 percent.

RBI officially formalizes deficit funding by taking part in the primary government bond auction directly under the escape clause. After formal deliberations and guidance from the Fiscal Council, it may be implemented. In the event of a war or other major national disaster, the government is excused from adhering to the FRBM rules. It was used by Finance Minister Nirmala Sitharaman to reduce the aim in 2020, when she amended it to 3.8 percent for FY20 and set the target for FY21 at 3.5 percent.

FRBM Act & Latest Changes with Union Budget 2022-23

The government intends to lower the fiscal deficit to below 4.5% of GDP by 2025–26, according to the finance minister, who mentioned this goal in the Budget Speech. Estimated fiscal and revenue deficits for 2022–23 are 6.4% of GDP and 3.8% of GDP, respectively. The government had allocated 6.8% of GDP for the fiscal deficit and 5.1% of GDP for the revenue deficit in its budget for 2021–22.

According to the updated estimates, the fiscal deficit for 2022–23 is predicted to be somewhat higher than the budget estimate of 6.9%, but the revenue shortfall is predicted to be lower at 4.7%. In 2022–2023, the primary deficit is projected to be 2.8% of GDP. From 36% in 2011–12 to 42% in 2020–21, interest payments as a percentage of revenue receipts have climbed.

According to budget projections, this number is anticipated to rise even further to 43% in 2022–2023. It is anticipated that outstanding liabilities, which represent the accumulation of borrowings over time, will slightly decline to 60% of GDP in 2022–2023.

FRBM Act UPSC

The Indian government has struggled to meet the targets set despite numerous changes over the years and even after the act was passed. A committee was established in 2016 under the leadership of N K Singh to evaluate the Act and recommend any modifications that are necessary to enable fiscal expansion and credit creation in the economy.

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