WHAT IS FRBM ACT

FRBM Act
The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit.
When was the FRBM Act enacted? Who introduced it in India?
The FRBM Bill was introduced by the then finance minister, Yashwant Sinha, in 2000. The Bill, approved by the Union Cabinet in 2003, became effective from July 5, 2004.
What are the objectives of the FRBM Act?
The FRBM Act aims to introduce transparency in India's fiscal management systems. The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India. The FRBM Act was enacted to introduce more equitable distribution of India's debt over the years.
Key features of the FRBM Act
The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:
1. Medium Term Fiscal Policy Statement
2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy Statement
The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of gross domestic product (GDP) in the medium-term fiscal policy statement.
FRBM Act exemptions
On grounds of national security, calamity, etc, the set targets of fiscal deficits and revenue could be exceeded.
How effective has the FRBM Act been?
Several years have passed since the FRBM Act was enacted, but the Government of India has not been able to achieve targets set under it. The Act has been amended several times.
In 2013, the government introduced a change and introduced the concept of effective revenue deficit. This implies that effective revenue deficit would be equal to revenue deficit minus grants to states for the creation of capital assets. In 2016, a committee under N K Singh was set up to suggest changes to the Act. According to the government, the targets set under FRBM Act previously were too rigid.
N K Singh Committee's recommendations were as follows:
Targets: The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.
Fiscal Council: The committee proposed to create an autonomous Fiscal Council with a chairperson and two members appointed by the Centre (not employees of the government at the time of appointment)
Deviations: The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified
Borrowings: According to the suggestions of the committee, the government must not borrow from the RBI, except when...
a. the Centre has to meet a temporary shortfall in receipts
b. RBI subscribes to government securities to finance any deviations
c. RBI purchases government securities from the secondary market
Read full FRBM documents
Read full FRBM documents
RELATED BUDGET TERMS
FRBM ACT NEWS
-
Amending the FRBM Act
For two years running, the finance ministry has excused itself from providing a projection of its fiscal consolidation plan| February 22, 2022, Tuesday -
Fiscal consolidation: States lack the flexibility that the Centre enjoys
While the Centre has an escape clause to deviate from the fiscal consolidation road map by 0.5 percentage point of GDP in times ...| March 17, 2021, Wednesday -
Banking on slower recovery
The Centre's current deficit glide path reveals a conservative stance on growth| March 09, 2021, Tuesday -
In search of a new fiscal road map
Budget 2021 must overhaul the existing FRBM Act to set feasible targets on deficit and debt| December 29, 2020, Tuesday -
Govt may have to apply brakes on existing fiscal consolidation road map
Centre may have to amend FRBM Act once again to achieve this, which isn't an issue as such an amendment does not require a ...| December 23, 2020, Wednesday -
Barking up the wrong tree
Strengthening the revenue forecasting system will yield better results than fixing deficit targets within a range| October 20, 2020, Tuesday -
Centre, states may welcome N K Singh's plan for fiscal deficit range
The 15th Finance Commission Chairman had pushed for a range instead of a fixed number, saying it is more realistic and will lead ...| September 16, 2020, Wednesday -
UP to bring ordinance to raise borrowing limit to 5% of state GDP
The state gets additional elbow of Rs 35,000 crore amid lockdown| June 22, 2020, Monday -
India must shed its protectionist attitude: Ex-CEA Arvind Subramanian
If we turn protectionist, I don't know how can we be an exporting power. Self-sufficient exporting powerhouse is an oxymoron," he ...| June 04, 2020, Thursday -
Covid-19: FRBM framework will need to be updated, says Arvind Subramanian
Addressing a webinar organised by EY India, Subramanian further said while labour reforms were necessary, the way they have been ...| June 04, 2020, Thursday