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What is Fiscal Responsibility and Budget Management Act

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The Fiscal Responsibility and Budget Management (FRBM) Act was legislated by the Parliament in the year 2003.

Its objectives can be identified as:

  • To institutionalise fiscal discipline;
  • Reduce Fiscal Deficit;
  • Improve Macroeconomic Management.
  • The law aims at promoting Fiscal Stability for the country on a long-term basis.
  • It emphasises a Transparent Fiscal Management System and a more equitable distribution of debts over the years.
  • This law also gives flexibility tothe Reserve Bank of India to undertake monetary policy to tackle inflation and take corrective measures in order to give an impetus to the economic environment.

As the Government needs resources for funding various kinds of developmental schemes androutine expenditures. Resources are raised through taxes and borrowing. The government can raise funds by borrowing from the Reserve Bank of India, financial institutions or from the public by floating bonds.

Fiscal deficit

It is the Total Expenditure minus the Revenue Receipt, Loan Recoveries and Receipts from Disinvestment etc. It is a measure of the government borrowing ina year.

However, uncontrolled Fiscal Deficit is harmful not only for the health of economy but also for the Growth of the economic indicators and finally the development prospects in the road towards Inclusive Growth.

  • FRBM Act was notified in 2004 in response to the need felt to curb broadening Fiscal Deficit.
  • The FRBM rules specify annual reduction targets for fiscal indicators.
  • Originally, the act envisaged Revenue Deficit to be reduced to nil in five years beginning 2004-05.
  • Fiscal deficit was required to be reduced to3 percent of GDP by 2008-09.
  • The Act also provides exception to the government in case of Natural Calamity and whenever there is a threat to National Security.

The implantation of the act was put on hold in 2007-08 due to Global Financial Crisis and the aggravating demand for Fiscal Stimulus.

There was a need for increased government expenditure to create demand to fight off the financial downturn and hence the government moved away from the path of Fiscal Consolidation for this period.

  • This law also prohibits borrowing by government from the Reserve Bank of India and purchase of primary issues of central government securities after2006.
  • The Act asked the Central government to lay in Parliament three statements in one financial year about the fiscal policy.
  • To enforce fiscal discipline at the state level, the Twelfth finance commission provided for incentives to states through conditional debt restructuring and interest rate relief.

In 2012, the FRBM Act was amended and it was decided that the FRBM Act would target Effective Revenue Deficit in place of Revenue Deficit.

  • Effective Revenue Deficit excludes Capital Expenditure from Revenue Deficit and thus provides space to the government to spend on formation of Capital Assets.

The critics of this Act usually point of out the demerits that it would put a curb on the government’s social sector spending, but no one can deny the fact that there is a rising need for Fiscal Sustainability in order to put the economic indicators back on the path of Growth as well as Development.