Fiscal Responsibility and Budget Management (FRBM) Act is the statute to induce discipline and restrictions on expenditure and debt-related things was introduced and was passed by the Parliament in 2003. The FRBM Bill was introduced in 2000 by then-finance minister Yashwant Sinha with the goal of increasing transparency in India's fiscal management system. In this article, we will study the FRBM act which is important for the UPSC examination.

What is FRBM Act?

• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 sets a bar for the government to lay a foundation of monetary limitations in the Indian Economy.
• It contributes to the improvement of the management of public funds and lowers the fiscal deficit rate as well.
• The FRBM Act also allows for the use of an escape clause in times of disaster or national security. In such cases, the government may deviate from its target annual fiscal deficit.

FRBM Act - Background

• In the 1990s and 2000s, India stood at the top in borrowing capital. Indian Economic Status was feeble as it had a high Fiscal Deficit, high Revenue Deficit, and the degree of high Debt-to-GDP was also lofty.
• In the latter half of 2002-03, the continuous borrowing by the government led to high debt, which critically affected the Indian Economic Status.
• More than half of the borrowed capital was used for the payments of interest on the previous loans and had nothing much left for progressive purposes or productivity growth.
• Many economists then warned the government and were made well aware of the strategic conditions that could be the result of this borrowing culture.
• To prevent the country from falling into a debt ambush, they also suggested going "de-jure."
• Parliamentarians then pointed out the need for a systematic regulation of the government of India on resorting to a high level of borrowing.
• Henceforth, the Fiscal Responsibility and Budget Management (FRMB) Act was established in 2003.

Objectives of the FRBM Act

• The primary objective of the said act was to strike out of revenue deficit and bring the fiscal deficit down.
• It was the first acquaintance of transparency in the fiscal management system in the country, ascertaining the ethical dispensation of debt with the passing years, making sure of fiscal solidity in the macroeconomics
• The act is also purposeful in terms of giving necessary modifications to the Central Bank while overseeing the expanding economy of India.

Key features of the FRBM act

• The FRBM is responsible for maintaining and placing things in a union budget document in parliament every year which is mandatory.
• Items that the government should maintain along with the budget documents are - Specifications of Medium Term Fiscal Policy Statement, Specifications of Macroeconomic Framework Statement, and Specifications of Fiscal Policy Strategy Statement.
• It was recommended that all the four fiscal indices which are - Revenue deficit as GDP percentage, Fiscal deficit as GDP percentage, Tax revenue as GDP percentage, and total remaining due as GDP percentage, to be shown in the statement of medium-term fiscal policy.

Recommendations of N.K.Singh Committee

• Replacement of the FRBM Act 2003 with Debt Management and Fiscal Responsibility Bill, 2017.
• The debt to GDP ratio by 2022-23 should be 38.7% for the central government and 20% for the state governments.
• The fiscal deficit target should be 2.5% of GDP by FY 2022-23.
• Setting up an autonomous fiscal council that deals with the preparation of multi-year fiscal forecasts, improves fiscal data quality, could advise the government on fiscal matters.
• Target commitments could deviate under certain circumstances such as a national calamity, war, agricultural collapse, etc.
• The debt path to be followed by each state based on their track record of fiscal health and prudence should be recommended by the 15th Finance Commission.
• Borrowing from RBI should occur when the center is to recover from a temporary shortfall in receipts.
• Monetary and fiscal policies should complement each other and help accomplish economic stability and growth.

Escape Clause in FRBM Act

• The escape clause was recommended by the NK Singh committee to provide flexibility in situations where the central government can show some flexibility in following fiscal deficit targets under special circumstances.
• FRBM Act was further amended in 2018, where the escape clause enables the government to relax the fiscal deficit target for up to 50 basis points or 0.5 percent.
• Under the escape clause, RBI participates directly in the primary auction of government bonds, thus formalizing deficit financing.
• It can be applied after formal discussions and advice from the Fiscal Council.
• It exempts the government from sticking to FRBM guidelines in case of war or a national calamity.
• It was invoked by Finance Minister Nirmala Sitharaman in 2020 to allow the relaxation of the target and revised it for FY20 to 3.8 percent and pegged the target for FY21 to 3.5 percent.

Latest Changes in FRBM Act with Union Budget 2022-23

• In the Budget speech, the finance minister noted that the government aims to reduce the fiscal deficit to below 4.5% of GDP by 2025-26.
• The estimated fiscal deficit for 2022-23 is 6.4% of GDP and the estimated revenue deficit for 2022-23 is 3.8% of GDP.
• In 2021-22, the government had set a budget estimate of 6.8% of GDP for fiscal deficit, and 5.1% of GDP for revenue deficit.
• As per the revised estimates, the fiscal deficit is expected to marginally exceed the budget estimate to 6.9% while the revenue deficit is estimated to be lower at 4.7% for 2022-23.
• The primary deficit is estimated to be 2.8% of GDP in 2022-23.
• The interest payments as a percentage of revenue receipts have increased from 36% in 2011-12 to 42% in 2020-21.
• As per the budget estimates, this figure is expected to increase further to 43% in 2022-23.
• Outstanding liabilities constituting the accumulation of borrowings over the years is estimated to decrease marginally to 60% of GDP in 2022-23.

Conclusion

Over the years, with several amendments and even after the act was enacted, the Government of India has been facing difficulties to cope with the set targets. In 2016, under N K Singh, a committee was set up to review and suggest necessary changes in the Act so as to ensure fiscal expansion with credit creation in the economy.