Fiscal Responsibility and Budget Management Act (FRBM Act), Objectives, Targets, Features

FRBM Act: The Fiscal Responsibility and Budget Management (FRBM) Act, which is commonly abbreviated as the “FRBM Act,” was enacted in 2003 to promote fiscal discipline and improve the management of public finances.

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Meaning of Fiscal Deficit

What is FRBM Act?

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Full Form of FRBM Act

FRBM Act Objectives

• Reducing Fiscal Deficit: The Act mandates fiscal deficit reduction targets to control the government’s overall debt.
• Controlling Public Debt: With a focus on reducing government borrowing, the Act seeks to keep India’s debt manageable.
• Promoting Transparency: It requires regular disclosures of government spending and revenue, fostering accountability.
• Macroeconomic Stability: The Act aims to create a stable macroeconomic environment by preventing excessive government borrowing and inflation.
• Establishing a Medium-term Fiscal Path: Present a clear statement of fiscal policies for the next three to five years to guide budgetary decisions and priorities.
• Intergenerational Equity: Distribute fiscal benefits and burdens fairly across generations to promote long-term fairness and sustainability.

Features of the FRBM Act

• Fiscal Deficit Reduction Targets: Originally aimed to reduce fiscal deficit to 3% of GDP by March 31, 2018, later revised to March 31, 2021, with annual reductions of 0.1% starting FY 2018-19.
• Debt Management: The focus has shifted from annual liability reductions to targets for General and central government debt as a percentage of GDP.
  1. General Government Debt: Targeted to remain below 60% of GDP by 2024-25, which includes both Central and State Government debt.
  2. Union Government Debt: Set to stay below 40% of GDP by the same deadline.
• Guarantee Restrictions: Additional guarantees for loans secured against the Consolidated Fund of India are capped at 0.5% of GDP per financial year.
• Borrowing Restrictions: The law generally prohibits the Central Government from borrowing from the Reserve Bank of India (RBI) except in emergencies.
• Fiscal Policy Statements: The FRBM Act mandated to present the following document along with the Union Budget -
  1. Macroeconomic Framework Statement
  2. Medium Term Fiscal Policy Statement and
  3. Fiscal Policy Strategy Statement

• Transparency in Fiscal Policy: The Government is required to present biannual reports on revenue and expenditure trends. 2018 amendment mandates the submission of Disclosure Forms with the Budget.
• Breach of Limits : This allows for exceeding deficit limits only in cases of emergency, with restrictions of 0.5% of GDP in a year.
• Three-year Rolling Targets: The Act required the government to set fiscal targets for the upcoming three years, allowing for a structured approach to achieving fiscal responsibility.

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Escape Clause in Fiscal Responsibility and Budget Management Act

• National Emergencies: War, national security threats, natural disasters, or unforeseen circumstances as seen during the COVID-19 pandemic.
• Economic Crisis: Severe recession or external economic shocks that impact India’s financial health.

N.K. Singh Committee on FRBM Act

• Debt as a Target: It recommended that the government use 'debt' as the primary target for fiscal policy, aiming to achieve this by 2023.
• Establishment of a Fiscal Council: The committee recommended a Fiscal Council to monitor government finances, offering advice on maintaining fiscal discipline.
• Deviations from Targets: The committee advised that the grounds for the government to deviate from the FRBM Act targets should be clearly specified to enhance accountability.
• Borrowing Guidelines: According to the committee's suggestions, the government should not borrow from the Reserve Bank of India (RBI) except under specific circumstances like a temporary shortfall in receipts.

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FRBM Act Recent Amendment