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What is the FRBM Act, 2003?

To ensure discipline in government finances and keep a check on fiscal profligacy, a legislation was enacted almost two decades ago - the FRBM Act, 2003. This report demystifies it

Topics
Fiscal prudence | Finance Ministry | Budget 2022

Krishna Veera Vanamali  |  New Delhi 

Atal Bihari Vajpayee government had brought the Fiscal Responsibility and Budget Management (FRBM) Bill in Parliament in the year 2000 to give a legal backing to the fiscal discipline. Enacted in 2003, it sets targets for the government to reduce fiscal deficits. Calculated as a percentage of its GDP, fiscal deficit is the total money spent by the government in excess of its income.

It also brings greater transparency in fiscal operations of the government. Another objective was to introduce more equitable distribution of India's debt over the years.

During the Union Budget, FRBM documents are presented under the provisions of the Act. These documents are the medium-term fiscal policy, macro-economic framework and fiscal policy strategy.

The medium term fiscal policy statement lays down the limits on the size of the budget deficits for three years and target for tax and non-tax receipts. The macroeconomic framework gives the government’s outlook on growth prospects of the economy.

While the fiscal policy strategy explains how the current policies follow sound fiscal management principles and give reasoning for any deviation from the deficit targets set by it under the Act.

The FRBM Act mandates the central government to bring down its fiscal deficit to 3% of GDP.

The initial deadline to reach the 3% target was 2007-08 but it has been extended several times over the years. In 2018, the deadline was again extended to 2020-21.

However, in the FY21 Budget, the target was relaxed to 3.5% as permitted under the FRBM Act. The Centre made use of escape clause to deviate from the fiscal consolidation road map. The option allows the government to widen the deficit by 0.5 percentage points in times of exigencies such as a war or calamities of national proportion.

Because of higher expenditure and lower revenues on account of COVID-19, the number in FY21 came in at 9.3% of the GDP. To enable the fiscal deficit beyond the permissible limit, the government amended the FRBM Act in the Bill last year. For the ongoing fiscal, the Centre is targeting a fiscal deficit of 6.8%, to be gradually brought down to below 4.5% in the next four years.

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First Published: Fri, January 14 2022. 08:45 IST
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