Fiscal Responsibility and Budget Management Act (FRBM)

The Fiscal Responsibility and Budget Management (FRBM) Act 2003 aims to provide a target to the government for setting up and ensuring financial discipline in the Indian economy. The objective behind the FRBM Act is to improve the management of public funds and to reduce the fiscal deficit in the country. The FRBM Bill was initially introduced in the parliament in 2000 by Yashwant Sinha who was the Finance Minister at that time. It was enacted in 2003 and finally implemented in July 2004.

The purpose of the FRBM Act is to introduce transparency in the fiscal management system of the country. This fiscal responsibility and budget management act required that the center must limit the fiscal deficit to 3 percent of the country's gross domestic product (GDP) by March 31, 2021. Another requirement under FRBM Act 2003 was to restrict the government's debt to 40 percent of GDP by 2024-25.

Let’s understand what is this fiscal deficit which is an important pillar in the foundation of this act. A fiscal deficit is a negative balance that occurs when the government expenditure is more than what it earns through taxes and revenues.

Why was FRBM Act introduced?

The Indian economy had faced huge borrowing levels between the period 1900 and 2000, This had resulted in high fiscal deficit numbers, high revenue deficit, and a high Debt-to-GDP ratio. All these factors had weakened the economy financially. The continuous borrowings made by the government resulted in a huge debt that impacted the Indian economy in an adverse manner. 

A large part of these borrowings was utilized towards the payment of interest accrued on the previous debt and not for a productive purpose. Due to this, interest payments became one of the largest expenditure heads for the government. Several economists advised the government that this was not a sustainable condition and would lead to the country falling into a debt trap, unless some immediate legal steps were taken to curb this situation.

The FRBM bill was introduced in the parliament in the year 2000 by the Atal Bihari Vajpayee government to provide some financial discipline and responsibility in expenditure and debt matters. The provisions included in the FRBM bill introduced in 2000 were considered too strict and a lenient version of the act was introduced in FRBM Act 2003. The introduction of this act was hailed as an important step towards fiscal consolidation in the country. 

FRBM Act Escape Clause 

Under the FRBM Act, there is a provision that allows for an escape clause in case of calamity and matters of national security. In such scenarios, the government is allowed to deviate from the target set for the annual fiscal deficit. Escape clause is applied during special circumstances. when the central government can be allowed to flexibly follow the fiscal deficit target This term was coined by the NK Singh Committee on FRBM.

The Escape Clause can be invoked:

• By the Government after formal consultations with the Fiscal Council

• The government needs to have a clear commitment for achieving the original fiscal target in the coming fiscal year.

This clause allows exemptions in cases of calamity or special circumstances like the COVID-19 pandemic which has already been declared a national disaster by the Government of India and thus falls under the exemption under the Act. The Finance Minister has revised the fiscal deficit for FY20 to 3.8 percent and the new fiscal deficit target for FY21 has been set at 3.5 percent.

Amendments Made to the Escape Clause

The Escape Clause in the act was amended in 2018. Specific details were updated in Section 4, sub-section (2). It allows the government to follow a relaxed fiscal deficit target up to 50 basis points or 0.5 percent. When the escape clause under the act is triggered to allow for a deviation from the fiscal deficit target, the RBI participates directly in the primary auction of government bonds. This formalizes deficit financing.

According to Finance minister Nirmala Sitharaman, the government does not need to worry about missing the fiscal deficit targets as the primary focus must be on reviving the economy. Prime Minister Narendra Modi has extended financial support of INR 30 crores ($12 billion) which amounts to 15 percent of the economy. This fiscal support was aimed at supporting small industries and the employment sector. 

Features of the FRBM Act 2003

It was mandatory to present few points in the parliament annually along with the Union budget after the Union Cabinet passed the FRBM bill. These points are the key features of the act. 

• Medium Term Fiscal Policy Statement

• Fiscal Policy Strategy Statement

• Macroeconomic Framework Statement

Four fiscal indicators were proposed under the act: fiscal deficit, revenue deficit, tax revenue, and the total outstanding liabilities need to be reflected as a GDP percentage in the medium-term fiscal policy statement.

FRBM act 2020

Some changes were introduced in the act in the Interim Budget of 2019-20 presented by Piyush Goyal. This interim budget for the Financial Year 2019-20 was presented in the parliament on Feb 1, 2019. The changes incorporated were:

• The fiscal deficit target was set at 3.4% of GDP for the year 2019-20

• The total expenditure was up by 13.30% in 2019-20 over the revised estimates for 2018-19 

• There was a 28% increase in the allocation for the welfare of STs and 35.6% for SCs.

• The disinvestment target for 2019-20 was set at INR 90,000 Crores 

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Recent Changes Made in FRBM Under the Union Budget 2021

• The fiscal deficit target was set at 6.8% of GDP in 2021-22.

• The total expenditure proposed by the government for the year 20121-22 is INR 34,83,236 crore.

• The expenditure allocated for Jal Jeevan Mission was changed by 123 percent

• A 26 percent drop in comparison to revised estimates 2020-21 in the budget allocation for the welfare of women 

• The budget allocation for welfare of SCs and 50 percent for STs increased by 52.7 percent

• 32.7 percent increase in the allocation for the North-Eastern region 

FRBM Act for the Financial Year 2021-22 

Fiscal deficit as a % of GDP

*Source: Union Budget 2021-22 PRS

FRBM Review Committee

The FRBM review committee was set up in the year 2016 by the Government of India. The committee was headed by NK Singh. The objective behind setting up the committee was to review the performance of the FRBM Act and to suggest any changes that need to be made to the provisions of the Act. The recommendations made by the committee included that the government must set a target of a fiscal deficit of 3% of the GDP by March 31, 2020. The recommendations also included that subsequently the deficit should be cut to 2.8% in 2020-21 and 2.5% by 2023.

Current Update on the Act

For the year 2021-22, no target has been set for the next three years. The government plans to amend the Act to make a provision for a higher fiscal deficit. For 2021-22, the fiscal deficit target has been set at 6.8% of GDP, which is 9.5% lower than the revised estimate of 2020-21 (4.6% in 2019-20). In her Union Budget 2021 speech, the Finance Minister announced that the government aims to reduce the fiscal deficit at a steady pace to 4.5% of GDP by 2025-26.

Conclusion

This article will help students preparing for competitive exams to understand the FRBM Act in detail. They can refer to the FRBM Act pdf also. It is however important to stay updated on this topic by following the news articles related to the topic.