Fiscal Responsibility and Budget Management Act (FRBMA)

Fiscal Responsibility and Budget Management Act

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an act of the parliament of India to infuse financial discipline, reduce India’s fiscal deficit, improve macroeconomic and the overall management of the public funds by moving towards a balanced budget.

Indian economy faced with the predicament of large fiscal deficit and its monetisation spilled over to external sector in the late 1980s and early 1990s. The large borrowings on part of the government led to such a dangerous situation that government was close to default and  was unable to pay even for two weeks of imports resulting in economic crisis of 1991. Hence, with the introduction of economic reforms in 1991 fiscal consolidation emerged as one of the key areas needing reforms.  After a good start in the early nineties, the fiscal consolidation tumbled after 1997-98 leading again to a rise in the fiscal deficit. The Government introduced FRBM Act, 2003 to check this deteriorating fiscal situation.

 

FRBM Bill was introduced in parliament by the then finance minister of India, Mr. Yashwant Sinha in December, 2000. The bill brought to light the terrible state of government finances in India both at the Union and the state levels. It also sought to propose the fundamentals of fiscal discipline at the various levels of the government. Several revisions later,a more relaxed version of the bill  was approved by the Cabinet of Ministers of the Union Government  in February, 2003 and following the enactment process it received the approval of the President of India on 26 August 2003. It became effective from 5 July 2004.

The main objectives of the act were

  1. to ensure a transparent fiscal management system in the country
  2. to contain the growth of public debt
  3. to aim for fiscal stability for India in the long run
  4. to restrict borrowings by central government from RBI
  5. the act was expected to give the required flexibility to RBI for managing inflation
  6. better coordination between fiscal and monetary policy

 

The Government notified FRBM rules in July 2004 specifying   the annual and progressive reduction targets for fiscal indicators. The FRBM rule stipulates progressive reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be completely eliminated by 2008-09 with annual reduction by 0.5% of the GDP per year.

The act lays down the specified path or entire road-map for the future government. It is mandatory for the Central government to take steps to reduce fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. This Act binds not only the present government but also the future Government to abide to the path of fiscal consolidation. Only in cases of natural calamity, national security and other exceptional grounds which Central Government may specify can the central government move away from the path of fiscal consolidation.

 

The main purpose was to progressively eliminate revenue deficit of the country and building revenue surplus thereafter, and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.

The states have achieved the targets set by FRBM act much ahead the prescribed timeline. The government on the other hand, by implementing the act had managed to reduce the fiscal deficit to 2.7% of GDP and revenue deficit to 1.1% of GDP in 2007–08 and was on the path to fiscal consolidation. However, due to the international economic crisis in 2007 leading to unanticipated changes in the prices of fertilizer, fuels which increased the outlay on subsidies from Rs 67,498 crore in 2007-08 to Rs 1,23,581 crore in 2008-09, the path to fiscal correction was halted. The crisis period required an increase in expenditure by the government to boost demand in the economy. As a result of the resultant fiscal stimulus, the government moved away from the path of fiscal consolidation. The fiscal deficit increased to 6.2% of GDP in 2008–09 against the target of 3% set by the Act for 2008–09. Although, International Monetary fund (IMF) estimated fiscal deficit to be 8% after accounting for oil bonds and other off budget expenses. The deadlines for the implementation of the targets in the act was initially postponed and subsequently suspended in 2009.

On August 28, 2008, the central government asked the 13th Finance Commission to lay down a revised road map for fiscal consolidation. The government then announced a path of fiscal consolidation starting from fiscal deficit of 6.6% of GDP in 2009–10 to a target of 3.0% by 2014–15.

 

The act prohibits the Indian government to borrow from the Reserve Bank of India (RBI) except under exceptional circumstances where there is temporary shortage of cash in any particular financial year. It prevents monetization of debt. It also laid down rules to prevent RBI from trading in the primary market for Government securities and restricting them to the secondary market.

As per the Finance Act 2015, the target dates were further extended. The effective revenue deficit which had to be eliminated by March 2015 will now need to be eliminated only after 3 years i.e., by March 2018. The 3% target of fiscal deficit to be achieved by 2016-17 has now been shifted by one more year to the end of 2017-18.

As per the finance ministry’s top bureaucrats, India is on track to meet the fiscal deficit target of 3% of GDP by financial year 2017-18.This is a healthy sign for the growth of the economy.

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