Fiscal Responsibility and Budget Management Act (FRBM)| UPSC Notes

The Fiscal Responsibility and Budget Management FRBM Act was introduced in the Parliament of India in 2000, and the act was passed in 2003 to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in the budgetary operations of the Government. FRBM also helps in providing a legal and institutional framework for fiscal consolidation.In a situation like this, it has been made a constitutional requirement for the federal government to engage in the fiscal deficit and earn a surplus in the years to come. 

The FRBM is a legislation that not only obligates the incumbent government to stick to fiscal consolidation but also obligates later governments to do the same. FRBM Act is a very important law in India that is responsible for the proper usage of government money and hence the reduction of the deficit. The act is an essential topic for IAS examination aspirants because of the fact that it has a major role to play in India's economy. This law was implemented in 2003 with the objective of achieving better financial discipline. 

The FRBM Act 2003 UPSC topic is indispensable in the context of economic reforms, fiscal policies, and government budgets. It is envisaged that the act recently introduced will secure fiscal deficits reduction, government borrowing control, and economic stability maintenance. The NK Singh finance panel's suggestions went even further and made the act even more appropriate for the present circumstances. The article covers key aspects of the act, its amendments, and recommendations of the FRBM Review Committee.

Fiscal Responsibility and Budget Management Act FRBM is one of the most important topics for UPSC IAS Examination. It falls under General Studies Paper 1 (preliminary) and General Studies Paper 3 (Mains) under the Indian Economy Section. 

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What is the FRBM Act?

The Fiscal Responsibility and Budget Management Act 2003 (FRBMA) is a parliamentary Act in India. It endeavors to introduce financial management principles, and limit the fiscal deficit to at least improve the performance of public resources. The main purpose of the project is to get a balanced budget and thus to achieve fiscal austerity. FRBMA was set to surpass revenue deficit and have a fiscal deficit of 3% of GDP to March 2008. Due to the 2007 international financial crisis, deadlines for FRBM targets were postponed and later suspended in 2009. In 2011, the Economic Advisory Council suggested reconsidering reinstating FRBM provisions, considering ongoing economic recovery. N. K. Singh currently chairs the review committee for FRBMA under the Ministry of Finance, Government of India.

Fiscal Responsibility and Budget Management (FRBM) Act – Key Details

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Why was the FRBM Act needed?

In May 2016, the government appointed NK Singh to chair a committee to evaluate the FRBM Act. The government thought the objectives needed to be more relaxed. The committee proposed that the government target a budget deficit of 3% of GDP in the fiscal years ending March 31, 2020, then reduce it to 2.8% in 2020-21 and 2.5% by 2023.

The Covid-19 epidemic resulted in a revenue gap and an added cost for expanding social measures. On better-than-expected collections, the government recorded a budget deficit of 9.2 percent in FY21, compared to a revised target of 9.5 percent. The current fiscal year (2021-22) goal is 6.8 percent of GDP. The government intends to reduce it to 4.5 percent by FY26. 

The FRBM Act aims to increase transparency in India’s fiscal management systems. The Act’s long-term goal is for India to attain budgetary stability and to provide flexibility to the Reserve Bank of India (RBI) in dealing with inflation in India. The FRBM Act was passed in order to achieve a more equal distribution of India’s debt over time.

Objectives of Fiscal Responsibility and Budget Management Act FRBM

FRBM Act, enacted by the Indian Parliament in 2003, has the instituting of financial discipline, reduction of fiscal deficit of India, and ensuring improvement in the quality of macroeconomic management as its main objectives. The key objectives can be enunciated as:

• Fiscal Discipline: To make the fiscal framework disciplined and ensure prudent fiscal management, the targets for reduction of the fiscal deficit, revenue deficit, and overall debt as a percentage of GDP are set.
• Transparency and Accountability: The accountability and transparency in India's fiscal and budgetary processes will be enhanced by stipulating that the presentation by the government on medium-term fiscal policy statements, fiscal policy strategies, and outcome budgets shall be done.
• Macroeconomic Stability: The hottest issue today is the major challenge to the macroeconomic stability in India, and the Indian government is recommended that they should follow the stable policy environment which will make the economic growth and foreign investments possible. So fiscal restrictions and inflation in the Indian economy are to be minimized through a stable policy environment.
• Long-term Fiscal Sustainability: To prevent the risk of high debt than income ratios from getting into the future and eliminate problems of a structural nature in the fiscal section, we should be more efficient in using the scarce resources available.

Salient Features of the FRBM Act

In trying to achieve such objectives, the FRBM Act has incorporated several features. Some of the important features are:

• Fiscal targets: Fiscal deficit and revenue deficit are fixed goals of the central government expressed as percentages of GDP, the primary objective of the government is to reduce the fiscal deficit to 3 percent of GDP by the year 2008 and the targets are revised from time to time.
• Fiscal Policy Statements: The government shall be required to introduce three policy statements annually. These three policy statements are Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and Macroeconomic Framework Statement.
• Annual Targets: Set fiscal targets for each year that the central government is supposed to achieve, and explain reasons in case targets are not achieved due to unforeseen circumstances.
• Escape Clause: Provide an 'escape clause' permitting departure from fiscal targets on grounds of inescapable circumstances like national security, natural calamities, etc., and steep economic downturns.
• Review Mechanism: Put in a provision that the fiscal targets shall be reviewed and set periodically in the light of dynamic economic conditions and recommend measures by the Finance Commission and oversight by the Parliament.

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Escape Clause in FRBM Act

The File Recovery Block Management's escape provision allows the government to take out debt that is more than the statutorily permissible amount if it is an extraordinary one. The government is seen as the entity that needs to minimize its borrowings or its fiscal deficit to be in compliance with the FRBM legislation.

The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003, and it establishes the fiscal standards that the government must follow to guarantee fiscal consolidation. The Act was revised in 2018 following a review by a committee chaired by Dr. NK Singh. The committee proposed numerous remedies, but it was clear that adhering to fiscal discipline based on a goal reduction in the budget deficit would benefit the government and the economy. Overspending disrupts the economy.

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Advantages of Implementing the FRBM Act

The FRBM Act is favorable to the nation’s economy because of the many benefits that exist. Some of the important merits of the Act are as follows:

• Fiscal Discipline: The use of borrowing and limits on government borrowings can be seen as a means to make the fiscal policy more sustainable as well as for the government to do things in a disciplined way, now, if fiscal slippages occur it is less likely that they occur.
• Much Higher Predictability: A higher degree of advanced fiscal transparency is always an obvious result of enforcement and disclosure requirements that come with publicly artikelged reports, as well as for detailed, written policy statements which in turn make up the rest of the compulsory information which can then both inform policymakers and satisfy the needs of the stakeholders but the obverse is also part of the truth.
• Macroeconomic Stability: An FRBM Act that properly manages fiscal deficits has the impact of creating macroeconomic stability and the advantage of reducing pressure on inflation and a catalyst-promoting economic growth.
• Investor Confidence: Fiscal management and its transparency, owing to enhanced credibility and accountability, bolster investor confidence and attract domestic and international investments, leading to economic growth.

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Issues Related to the Fiscal Responsibility and Budget Management Act

The FRBM Act, aimed at ensuring fiscal discipline and reducing India's fiscal deficit, faces several challenges that could impact its effectiveness. Key issues include:

• Rigidity in Targets: The rigidity in the fiscal targets may not be responsive to the changing economic conditions, which may lead to problems during periods of economic slowdown or crisis, when there is a requirement for higher public expenditure.
• Escape Clause: Whereas the escape clause certainly provides room for maneuverability, frequent recourse to it will bring down the credibility of the fiscal discipline framework and create apprehensions about actual adherence to the Act.
• Impact of Public Expenditure: The adherence to fiscal targets may put a straitjacket constraint on public expenditure, mainly on vital sectors of health, education, and infrastructure, with negative implications for long-term growth and social development.
• Implementation Challenges: Robust institutional mechanisms and the required political will may not be available uniformly across different regimes of the government, and this may affect the overall efficiency of the Act.
• State-level Coordination: Fiscal discipline at the state level is also extremely important, but FRBM Act has mainly concentrated on the central government, which may lead to unbalanced fiscal management in the country.

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Conclusion

The FRBM Act, 2003 aimed to ensure fiscal discipline, transparency, and long-term macroeconomic stability in India. While it laid down strict targets for deficit control, real-world challenges—like global crises and welfare demands—led to repeated relaxations. Yet, it remains a guiding framework for responsible financial governance. Moving forward, India must balance fiscal consolidation with development needs. Updating the Act to suit evolving economic realities, while retaining its core principles, is essential for sustaining growth and public trust in economic management.

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