FRBM Act: Objectives, Key Features, Amendments, Criticism

FRBM Act: India is a large country with different sets of people, resources, and responsibilities. To run the country, the government collects money through taxes. It spends money on different requirements like schools, hospitals, roads, and defence. Sometimes, the government spends more than it earns. In such cases, the government borrows money from within the country or from other countries.

But borrowing money can be harmful sometimes. To address this challenge, India introduced a special law in 2003 called the Fiscal Responsibility and Budget Management Act, or FRBM Act.

What is FRBM Act?

FRBM Act full form is Fiscal Responsibility and Budget Management. It is a law passed by the Indian Parliament in 2003 to control government spending and borrowing. The FRBM Act sets certain targets for the government. These targets make sure that India does not spend more than it can afford. It tells the government to:

• Keep fiscal deficit under control (this means the gap between what the government earns and what it spends).

• Reduce revenue deficit (this happens when the government’s income from taxes and other sources is less than its daily expenses).

• Show clear reports about income, expenditure, and borrowing in front of the people.

Historical Background of FRBM Act 2003

During the 1980s and 1990s, India’s government spent a lot more than it earned. The country had to borrow huge amounts to pay bills. Gradually, the debt became very high, and India faced a big financial crisis in 1991.

• In 1991, India’s foreign exchange reserves were so low that the nation could only pay for imports for a few weeks. To handle this crisis, India had to borrow money from the International Monetary Fund (IMF). 

• This situation showed that the country must improve its money management. Economists and experts suggested that India should have a strong law to control borrowing and expenses. 

• Finally, in 2003, the FRBM Act was passed. The Finance Minister at that time, Yashwant Sinha, introduced this law in Parliament.

FRBM Act Objectives

The Fiscal Responsibility and Budget Management Act was passed in 2003 with very clear goals. The objectives of the FRBM Act 2003 are as follows:

• To reduce deficits: Lower both fiscal and revenue deficits step by step.

• To reduce debt: Stop the government from taking too many loans.

• To bring stability: Avoid situations where high spending leads to inflation or economic imbalance.

• To increase trust: Show investors and the global community that India’s economy is managed wisely.

• To promote transparency: Share details of spending and borrowing openly with the public.

• To ensure responsibility: Encourage the government to use money only where it is needed most.

Key Features of FRBM Act

FRBM Act has many important points that guide how the government should handle money. These features created a structure to keep the nation’s finances healthy and avoid sudden economic shocks. The key features of the FRBM Act are summarised in the table below:

FRBM Act Amendments

Since 2003, the FRBM Act has gone through several changes with respect to India’s fiscal policy. These changes were needed because sometimes the targets were too strict, or the economy faced unexpected problems. Some of the important amendments made to the FRBM Act 2003 are as follows:

Challenges and Criticism of FRBM Act

Although the FRBM Act 2003 is very significant in keeping the fiscal deficit of India under check, it still faces several challenges and criticisms. Some of the challenges associated with the FRBM for the country’s fiscal policy are as follows:

• Unrealistic Targets - Sometimes the targets are too tough and cannot be achieved.

• Frequent Missed Deadlines - Governments often fail to meet deadlines and push them forward.

• Political Pressure - Leaders may prefer higher spending to gain public support, which breaks the rules of the Act.

• Limited Flexibility - Except for special conditions like war or disaster, the Act does not allow much freedom. 

• Economic Shocks - Events like COVID-19 force governments to spend more, making FRBM goals hard to follow.

• Weak Enforcement - There are no strict punishments if targets are missed. This reduces the seriousness of the law.

FRBM Act UPSC

FRBM Act 2003 is very important for students preparing for the UPSC exams. It is linked to both the Indian economy and governance.

• Prelims: Questions may come on the year of the Act, main provisions, or amendments.

• Mains (GS Paper 3): It is connected to topics like budgeting, deficits, and reforms in public finance.

• Essay Papers: Aspirants may be asked to write about fiscal discipline, debt management, or economic stability.

• Current Affairs: Every Union Budget mentions FRBM targets, so it is always in the news.