80 [ ISSN 0973-936X (print); 2456 0936 (online)] MANAGEMENT INSIGHT

FRBM ACT- A STEP TOWARDS FISCAL DISCIPLINE

Management Insight
13(1) 80- 84
https://doi.org/10.21844/mijia.v13i01.8363

Shishir Kumar Gujrati*

Email: [email protected]

ABSTRACT
A developing economy has to spend more to increase the level of disposable income in the hands of
its citizens. It has to undertake various projects which can provide long term benefits to the people
and can raise their standard of living. Such projects involves huge amount of investment which are
met through borrowings. Reckless borrowings results in unproductive interest expenditure, thereby
depriving the nation with most of its income. In order to fix the responsibility with the government
and to prevent it from unnecessary borrowings for unproductive purposes, the FRBM Act was enacted
in 2003. However, due to the international financial crisis from 2007, the implementation of this act
was postponed and later on suspended in 2009. The current paper attempts to highlight the features
and the recommendations of this Act.
Key Words: FRBM Act, Fiscal deficit, Revenue deficit, GDP

INTRODUCTION liberalization policy in 1991. During the decade

Every country, especially developing of 90s, the Indian economy was trapped in high
countries, needs external financial assistance to revenue deficits due to increased expenditure on
meet its developmental and other expenses. These subsidies, pensions etc and reduced incomes
developmental projects help in increasing the through taxes and other sources. This situation
country’s income in long term and are helpful in continued till 2000 when it was first thought to
uplifting the status of the economy. There are, have a law to force government to limit its
however, few expenses which are unproductive unproductive expenditures and have a
and do not, in turn, benefit economy in the form responsibility to curtail its borrowings. The Fiscal
of increased income. All the money spent in such Responsibilities and Budget Management Act was
expenses is, thus, a burden on the economy. These passed in 2003 to put check on government’s
expenses such as pensions, subsidies, interest on fiscal responsibilities and fixed the target of
external loans etc needs to be curtailed and to be reducing fiscal deficits to 3% of GDP by 2008-09.
kept within the reasonable limits. This is because Later on, the implementation of FRBM Act was
more such expenses, less is the availability of postponed and suspended due to financial crisis
funds for the developmental projects and of 2007.
government will be forced to borrow money
from outside which will lead to heavy interest OBJECTIVES OF THE STUDY
burden. Moreover, reckless borrowings also 1. To understand the concept of Fiscal
downgrade the value of the currency and Responsibilities and Budget Management Act
economy as a whole. 2. To understand the salient features of the
In Indian context, high revenue deficit and Act.
high unproductive expenses shook the economy 3. To understand the important recommen-
during late 80s which was then overcome through dations under the Act.

* Assistant Professor, School of Management Sciences, Varanasi (Uttar Pradesh)

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Frbm Act- A Step Towards Fiscal Discipline 81
CONCEPT OF FRBM ACT Table 1 show that Indian economy has been
Fiscal deficit is defined as the difference continuously functioning under the deficit status.
between the total revenue and total expenditure This implies extended borrowing for which heavy
of the government in a particular year. This interest payment is to be made.
difference shows the amount of borrowings Table 2: Interest Payment by India (Rs. Billion)
needed by the government to meet out its Year Percent of GDP
expenditures. The fiscal deficit consists of two 2007 1502.72
components i.e. revenue deficits and capital
2008 1710.30
deficits. Revenue deficits occurs due to over
spending of government on recurring expenses 2009 1922.04
like salaries, pensions, subsidies etc while capital 2010 2130.93
deficits occurs due to delay in long term projects. 2011 2340.22
The government, in order to fill these deficits, 2012 2731.50
tend to borrow money either within the country
2013 3131.70
from the Central Bank or from issuing securities
or from outside the country from international 2014 3742.54
financial agencies. These loans needed to be 2015 4024.44
served through interest payment which take a 2016 4426.20
heavy toll on government’s revenue and create a Source : Handbook of Statistics on Indian Economy
deficit for another year. This traps the economy Table 3 : Debt to Percent of GDP
in a vicious circle of debt which can only be
Year Percent of GDP
broken through reducing the spending on revenue
2007 74
items or unproductive expenses like subsidies,
pensions etc and also on timely completion of big 2008 74.5
developmental projects. There need to be a check 2009 72.5
on the government on the amount borrowed as 2010 67.5
its interest part will be a burden on future 2011 69.6
generations and its benefits will be reaped by the
2012 69.1
current generation specially in case of revenue
expenses. 2013 68.5
Table 1: Fiscal deficits to percentage of GDP 2014 68.6
Year Percent of GDP 2015 69.6
2007 3.5 2016 69.5
2008 3.1 Source: Tradingeconomics.com, Ministry of Finance,
2009 7.8 Government of India
Table 3 shows that a considerable portion
2010 6.9
of GDP is entrapped under debt and the interest
2011 5.1 payment on debt has been constantly on rise
2012 5.8 (table 2).
2013 4.9 In order to curb the borrowing and to
2014 4.5 maintain the fiscal discipline, FRBM Act was
proposed in 2000 which was passed in 2003.
2015 3.9
This Act puts ceiling on the maximum amount of
2016 3.5
borrowings and put emphasis on the gradual
Source : Tradingeconomics.com, Ministry of reduction on the borrowings as percentage of
Finance, Government of India GDP and to bring it to 3% of GDP by the end of

Vol. XIII, No. 1; June 2017

82 [ ISSN 0973-936X (print); 2456 0936 (online)] MANAGEMENT INSIGHT
March 2018. limit every subsequent year.
4. Borrowings from RBI: The Act prohibits
OBJECTIVES OF THE ACT the government to borrow any money from RBI
The Act was passed with the following except in case of meeting excess cash payment in
objectives: the form of temporary advance from RBI in
a. To fix the responsibility of government for accordance with the agreement with RBI.
establishing a better and transparent fiscal 5. Medium Term Fiscal Policy Statement:
management system. The Act also directs government to present
b. To ensure long term macro economic Medium Term Fiscal Policy Statement in both the
stability by removing fiscal deficits. houses of Parliament along with the Annual
c. To ensure prudential debt management and Financial Statements which should indicate (a)
limiting the debts and borrowings of Revenue Deficit as percentage of GDP, (b) Fiscal
government for proper fiscal management. Deficit as percentage of GDP, (c) Tax Revenue as
percentage of GDP and (d) Total outstanding
FEATURES OF THE ACT liabilities as percentage of GDP.
The Act was enacted with the basic aim of
controlling the fiscal deficit of the government to FRBM COMMITTEE
reduce the interest burden on the coming The government, under the chairmanship of
generations. To achieve this objective, the various N.K. Singh, constituted a five member committee
provisions focusing over it includes mechanism in May 2016 to review FRBM Act according to
for increasing surplus and reducing deficits, current situations. The Committee consisted of N.
breach of fiscal targets only in case of national K. Singh – former Revenue & Expenditure
security and prohibition of borrowings by Sceretary, A. Subramaniam – Chief Economic
government from RBI. Advisor to Finance Ministry, Sumit Bose – former
1. Revenue Deficit : In the initial version Finance Secretary and Dr. Urjit Patel – the then
of the Act proposed, the target was to reduce the Deputy Governor of RBI. The committee was
revenue deficit by 0.5% of GDP or more every constituted to provide a rethinking and flexibility
year from 2004-05. It should have been reduced over fiscal deficit to cope up with difficult phase
to zero within five years by the end of 2008-09 of economy. The committee was entrusted with
and afterwards revenue surplus should have been the following responsibilities:
built up to discharge liabilities before time. 1. To review the current performance of FRBM
2. Fiscal Deficit: The draft proposal of the Act since 2003 and to suggest the way
Act emphasised that government should reduce forward for the achievement of targets set
the fiscal deficit by 3% per year of GDP from under the Act keeping in view the current
2004-05 and should bring it to 2% of GDP by the global economic scenario.
end of 2005-06. 2. To look into the various aspects and the
However, it was provided that both the factors affecting the performance of FRBM
above, revenue and fiscal deficit targets can be Act while determining the new fiscal targets.
breached only on the grounds of national security 3. The committee was asked to determine a
and any natural calamity faced being declared as fiscal target range in place of a static fiscal
“national”. target of 3% as per the changing economic
3. National Debt: As per the initial scenario.
provisions of the Act, the government should 4. The committee was asked to suggest to
ensure that total liabilities of government should government on the issue of adjustment on
not exceed 9% of GDP at the end of financial year fiscal deficit targets in alignment of the
2005 and there should be reduction of 1% in this expansion or contraction of credit in the

Vol. XIII, No. 1; June 2017

Frbm Act- A Step Towards Fiscal Discipline 83

economy. These expenses need to be curtailed so that

borrowings could be limited. The FRBM Act has
FRBM COMMITTEE RECOMMENDATION been passed with a view to put a ceiling on the
The committee under N. K. Singh submitted government’s limit to borrow. The Act has
its report on the future shape of FRBM Act and provided a way to gradual reduction in fiscal and
future fiscal deficit targets on January 23, 2017. revenue deficit to contain it within a reasonable
This report was made public on April 12, 2017. limit by March end 2023. The Act has, however,
The major recommendations of the reports exempted the government from following the
are : laid guidelines in case of war or calamity. The
1. Gradual lowering of debt to GDP ratio from FRBM committee has given its recommendations
presently around 68% to 60% comprising keeping in view the future economic scenario
40% of Centre and 20% of States. and it is expected that the Act, if followed in its
2. Limiting fiscal deficit to 3% of GDP by March true sense, will help the government in putting a
end 2020, to 2.8% by March end 2021 and to ceiling on the deficits and can be helpful in saving
2.5% of GDP by March end 2023. However, the high amount of money being paid as interest.
this limit can be breached in case of war,
NOTE: The author is grateful to the
natural calamity or severe agricultural
anonymous referees of the journal for their
setback but should not exceed 0.5% of the
suggestions to improve the overall quality of
stipulated limits of fiscal targets for that
the paper. Usual disclaimers are applicable.
concerned year.
3. Reduction in the revenue deficit to GDP
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