The Fiscal Responsibility and Budget Management (FRBM) Act was implemented in 2003 to enhance transparency and discipline in India’s fiscal management systems. It marked a significant milestone in fiscal reforms by establishing an institutional framework to ensure a prudent fiscal policy.
Objectives of the FRBM Act, 2003:
- Inter-generational equity: The central government is responsible for ensuring fairness and equality among different generations in fiscal management.
- Long-term macroeconomic stability: Achieving sufficient revenue surplus to maintain stability in the macroeconomic environment.
- Removing fiscal obstacles to monetary policy: Addressing fiscal imbalances that could hinder effective implementation of monetary policy.
- Effective debt management: Limiting deficits and borrowing to manage debt efficiently.
- Providing flexibility to the Reserve Bank of India (RBI): Granting the RBI the necessary flexibility to combat inflation in India.
- Equitable distribution of debt: Introducing a fair distribution of India’s debt over the years.
Key features of the FRBM Act:
- Deficit reduction targets: The Act mandates the central government to take appropriate measures to reduce fiscal and revenue deficits, aiming to eliminate the revenue deficit originally by 2009 and subsequently build up an adequate revenue surplus.
- Expenditure adjustments: If tax revenues fall short of achieving deficit targets, the necessary adjustments must be made by reducing expenditures.
- Exceptions to deficit targets: The actual deficits may exceed the specified targets only in exceptional cases such as national security, natural calamities, or as specified by the central government.
- Restrictions on borrowing: The central government is prohibited from borrowing from the Reserve Bank of India, except for temporary cash disbursements exceeding cash receipts.
- Limits on RBI subscription: The Reserve Bank of India is not permitted to subscribe to primary issues of central government securities starting from the year 2006-07.
- Enhanced transparency: Measures are to be taken to ensure greater transparency in fiscal operations.
- Reporting requirements: The central government is required to present three statements, including the Medium-term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Statement, along with the Annual Financial Statement, before both Houses of Parliament. Additionally, a quarterly review of budget-related receipts and expenditures must be presented to Parliament.
These targets have been delayed multiple times. In 2016, the NK Singh Committee reviewed the Act and recommended targeting the debt-to-GDP ratio instead, aiming to reduce it to 60% by 2023 (with 40% for the Centre and 20% for states). The committee also suggested reducing the fiscal deficit from 3.5% (2017) to 2.5% by 2023 and advocated for a fiscal range with an ‘escape clause’ to accommodate countercyclical issues and emergencies.