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FRBM

The Fiscal Responsibility and Budget Management (FRBM) Act is a key legislation aimed at ensuring fiscal discipline in India. It was introduced to improve the sustainability of government finances, promote transparency in fiscal operations, and control public debt. The Act primarily targets controlling the fiscal deficit, which reflects the difference between the government’s total revenue and total expenditure, helping to avoid excessive borrowing and ensuring the long-term economic stability of the country.

1. Background and Purpose
  • The FRBM Act was passed by the Indian Parliament in 2003 to instill fiscal discipline and curb fiscal deficits. The objective was to bring down government borrowing, reduce inflationary pressures, and improve overall macroeconomic stability.
  • Key Goal: Achieving and maintaining fiscal discipline through a transparent budgetary process and controlling deficits, which directly impacts the country’s credit rating and its borrowing costs.
2. Key Features of the FRBM Act
  1. Targets for Fiscal Deficit:
    • The FRBM Act set clear targets for the Fiscal Deficit (FD), which is the difference between the government’s total expenditure and its total receipts (excluding borrowings).
    • The initial target set was to reduce the fiscal deficit to 3% of GDP by the fiscal year 2008-09.
  2. Medium-Term Fiscal Policy Framework:
    • The Act mandates the government to lay down a Medium-Term Fiscal Policy (MTFP) for the next 3-5 years, which includes targets for fiscal deficit, revenue deficit, and public debt. It provides a clear roadmap for fiscal consolidation.
  3. Revenue Deficit:
    • A key feature of the FRBM is controlling the Revenue Deficit, which refers to the gap between the government’s revenue receipts and its revenue expenditure. A higher revenue deficit suggests the government is borrowing to meet its day-to-day expenses.
    • The target was to eliminate the revenue deficit over time.
  4. Public Debt Management:
    • The FRBM Act emphasizes the management of public debt and encourages the government to aim for a sustainable debt-to-GDP ratio. It mandates that the government’s borrowing should not exceed certain limits, keeping in mind long-term economic stability.
  5. Transparency:
    • The Act requires the government to present fiscal reports regularly to the Parliament, ensuring transparency in financial operations and policy implementation. This includes annual reports on the fiscal position and adherence to targets set in the FRBM.
  6. Review Mechanism:
    • The government is required to review the fiscal position every year. The Finance Minister must report on the progress towards meeting the targets and take corrective measures if the targets are not met.
3. Amendments to the FRBM Act

The FRBM Act has undergone several amendments over time to adjust to changing economic circumstances:

  1. Amendment in 2012:
    • The government set up a Fiscal Responsibility and Budget Management Review Committee to revisit fiscal targets.
    • The target for fiscal deficit was revised, giving more flexibility to the government in times of economic downturn.
  2. Amendment in 2018:
    • The Fiscal Deficit Target was revised again to accommodate the socio-economic challenges like the global financial crisis and domestic growth concerns.
    • It allowed for deviation from the fiscal deficit target in certain circumstances, such as economic slowdown or national security needs.
  3. New Flexibility Provisions:
    • A savings clause was introduced that permits deviations from fiscal deficit targets in case of emergencies or other compelling reasons like natural calamities and economic crises.
4. Performance and Impact
  • Achievement of Fiscal Targets: The government made significant progress in reducing fiscal deficits in the early years after the FRBM Act’s implementation. However, achieving the fiscal deficit target of 3% of GDP has been a challenge in recent years due to various factors like:
    • Economic slowdown
    • Rising government expenditure (especially for welfare and infrastructure)
    • Reduced revenue receipts due to tax reforms like GST
  • Impact on Fiscal Discipline: The FRBM Act has led to more accountability and transparency in fiscal management. It has helped reduce excessive borrowing, though the targets have been adjusted in response to unforeseen circumstances.
5. Criticism and Challenges
  1. Rigid Targets:
    • Some critics argue that the 3% fiscal deficit target is too rigid, especially in times of economic downturn or global crises, limiting the government’s ability to boost economic growth through increased expenditure.
  2. Economic Slowdowns:
    • The FRBM framework sometimes faces criticism for not allowing enough flexibility to the government to implement large-scale stimulus measures during economic recessions. In such times, higher public spending is often needed to revive the economy, which can breach fiscal deficit targets.
  3. State Government Exemptions:
    • While the FRBM focuses on the central government’s fiscal discipline, the state governments have often been found not following similar fiscal targets. This undermines the overall fiscal responsibility at the federal level.
  4. Focus on Deficits:
    • Some critics believe the FRBM Act’s focus on fiscal deficit reduction often neglects other important economic indicators, such as economic growth, inflation, and social welfare.
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