FRBM Act:

FRBM full form stands for “Fiscal Responsibility and Budget Management.” It refers to the
legislative framework that aims to promote fiscal discipline, long-run macroeconomic stability,
better coordination between fiscal and monetary policy, and transparency in the budgetary
operations of the Government.
● It was introduced by Atal Bihari Vajpayee in the year 2000. It was enacted by the Indian
Parliament in 2003 but came into effect on July 5, 2004, after receiving Presidential
assent. It was a parliamentary act.
● It aims to provide legal backing to institutionalize financial discipline, reduce the fiscal
deficit, and enhance the overall management of public funds.
● It sets targets for the government to establish fiscal discipline, improve the mngmnt of
public funds, strengthen fiscal prudence and reduce fiscal deficits.
● The primary goal is to achieve a balanced budget and reinforce fiscal prudence.
● FRBMA targeted eliminating revenue deficit and a manageable fiscal deficit of 3% of
GDP by March 2008. Due to the 2007 international financial crisis, deadlines for FRBMA
targets were postponed and later suspended in 2009.
● In 2011, the Economic Advisory Council suggested reconsidering reinstating FRBMA
provisions, considering ongoing economic recovery.
● N. K. Singh currently chairs the review committee for FRBMA under the Ministry of
Finance, Government of India.

The FRBM Act holds significance in shaping India’s fiscal policy and financial management
practices, with the aim of achieving sustainable fiscal stability and prudent economic
governance.

Primary Objectives:
● To maintain fiscal discipline
● For efficient management of
expenditure, revenue, and debt
● To maintain macroeco stability
● For better coordination between
fiscal and monetary policy
● To maintain proper transparency in
the budgetary operation of Government
● To achieve a properly balanced
budget
 Need for FRBM Act:

1. Fiscal Imbalances: It aimed to tackle high fiscal and revenue deficits, which were
causing excessive government borrowing and potential economic instability.
2. Public Debt Management: The Act focused on managing public debt effectively to
prevent it from reaching unsustainable levels, thus supporting long-term economic
growth.
3. Macroeconomic Stability: By promoting fiscal discipline, the FRBM Act aimed to
maintain macroeconomic stability and prevent inflation and trade imbalances.
4. Investor Confidence: It aimed to enhance investor confidence by demonstrating the
government's commitment to responsible fiscal policies.
5. Long-Term Economic Growth: The Act aimed to foster sustainable economic growth by
ensuring efficient resource allocation and curbing unnecessary expenditures.
6. Resource Allocation: It facilitated efficient resource allocation by prioritizing spending in
essential sectors like education, healthcare, and infrastructure.
7. External Creditworthiness: Responsible fiscal management practices enhanced India's
creditworthiness in global financial markets.
8. Government Accountability: The FRBM Act promoted transparency and accountability
in government finances by setting specific fiscal targets.
9. Safeguarding Future Generations: By controlling fiscal deficits and managing public
debt, the Act aimed to protect future generations from inheriting excessive debt
burdens.
10. Equitable fiscal stability in long run, equitable distribution of debt over the years,
transparent system of fiscal management, bringing down fiscal deficit and elimination of
revenue deficit

Features of FRBM Act:

1. Fiscal Targets: Sets specific targets to reduce fiscal and revenue deficits over a defined
period.
2. Medium-Term Fiscal Policy: Emphasizes a five-year fiscal strategy framework.
3. Binding Nature: Targets are legally binding on the government.
4. Fiscal Responsibility Statements: Mandates governments to publish strategies to
achieve targets.
5. Debt Limitation: Imposes limits on government debt to ensure sustainability.
6. Transparency and Accountability: Requires transparent budget presentations showing
fiscal impacts.
7. Deficit Reduction: Aims to reduce fiscal and revenue deficits as a percentage of GDP.
 8. Zero Revenue Deficit Target: Aims to eliminate revenue deficits over time.
9. Contingent Liabilities and Off-Budget Transactions: Requires disclosure of such
transactions for transparency.
10. Fiscal Policy Statement: Presented alongside the annual budget, outlining fiscal
strategies.
11. Fiscal Council: Allows for the establishment of a council to assess compliance and
provide recommendations.
12. Exemptions and Escape Clauses: Allows for exceptions during exceptional
circumstances like national security or natural calamities.

The Global Financial Crisis and Fiscal Policy:

The global financial crisis of 2008 severely tested India's fiscal policy, impacting the economy
through multiple channels, including financial sector contagion, decreased exports, and
domestic business sentiment dampening. The government responded with expansionary
fiscal measures, including stimulus packages and increased expenditure, resulting in a
significant rise in the fiscal deficit and revenue deficit, reaching unprecedented levels.

In response to the crisis, the government introduced stimulus packages in December 2008 and
early 2009, including excise duty cuts, increased plan expenditure, and interest subsidies.
These measures, amounting to about 1.8% of GDP, aimed to mitigate the crisis's impact.
However, the fiscal deficit for 2008-09 surged to 7.8% of GDP, far exceeding the budgeted
2.5%. The revenue deficit also ballooned, reaching 6.3% of GDP.

The FRBM Act lacked a clear correction path for returning to fiscal consolidation
post-breaching fiscal rules, leading to amendments in 2013 and 2015. These changes
introduced new deficit reduction targets and extended deadlines to provide fiscal space for the
government.

The need for reviewing the FRBM Act aligns with enhancing credibility, transparency, and
accountability in macroeconomic policy. The Act was amended in 2012 to entrust the
Comptroller and Auditor-General with periodic compliance reviews, as recommended by the
13th Finance Commission.
 The NK Singh Committee (FRBM Review Committee):

In May 2016, Government of India constituted a five-member committee to review the

working and functioning of FRBMA. On January 23, 2017, the committee submitted a report to
the Finance Minister. Its main policy recommendations are summarized below:

1. Medium-Term Debt Ceiling: Set a prudent medium-term ceiling for general government
debt at 60% of GDP by fiscal year 2022-23.
2. Allocation Between Centre and States: Allocate the debt ceiling, with 40% for the
central government and 20% for the states, within the overall ceiling.
3. Operational Target: Use fiscal deficit as the key operational target, aligned with
achieving the medium-term debt ceiling.
4. Fixed Operational Targets: Establish a path of fiscal deficit with fixed operational
targets, instead of a range, to ensure clarity and consistency.
5. Gradual Reduction in Fiscal Deficit: Implement a gradual reduction in the fiscal deficit
to GDP ratio: 3.0% in 2017-18 and 2019-20, 2.8% in 2020-21, 2.6% in 2021-22, and
2.5% in 2022-23.
6. Reduction in Revenue Deficit: Steadily reduce the revenue deficit to GDP ratio by
approximately 0.25 percentage points each year, aiming to reach 0.8% by 2022-23.
7. Inter-State Allocation for Fiscal Targets: Assign the inter-state allocation for achieving
overall debt and fiscal targets to the 15th Finance Commission through specific Terms of
Reference (ToR).
 Latest Changes in FRBM Act 2003

1. Rolling Targets and Medium-Term Policy: Recent amendments to the FRBM Act’s
Medium-Term Fiscal Policy Statement didn't include rolling targets for budget deficits in
fiscal years 2021-22 and 2022-23.
2. Fiscal Deficit Reduction Goal: The government aims to reduce the fiscal deficit to below
4.5% of GDP by fiscal year 2025-26, signaling a commitment to gradual deficit
reduction.
3. Budget Deficit Target for 2022-23: Projected at 6.4% of GDP, indicating government
borrowing to manage economic challenges.
4. Revenue Shortfall: Expected to be 3.8% of GDP in fiscal year 2022-23, necessitating
borrowing to cover non-profitable expenses.
5. Fiscal Deficit and Revenue Shortfall Forecasts: Revised forecasts show a slightly
higher fiscal deficit than budgeted (6.9%) and a lower revenue shortfall (4.7%),
adjusting for economic changes.
6. Primary Deficit Objective: Set at 2.8% of GDP for fiscal year 2022-23, reflecting the
government's ability to meet non-interest expenditure from revenue.
7. Rising Interest Payments: Share of interest payments in the budget has increased from
36% in 2011-12 to 42% in 2020-21, projected to rise further to 43% by fiscal year
2022-23.

Challenges of FRBM Act, 2003?

1. Reliance on Fixed Numbers: Focusing on a fixed target for the fiscal deficit restricts the
government from dealing with dynamic situations typical of market economies. The
requirement to achieve a fixed target has prevented fiscal policy from being
countercyclical when needed.
2. Escape Clauses: The FRBM Act has also been criticized because of incorporating
imprecisely defined fiscal deficit escape clauses and limited accountability in the event of
missed targets.
3. Weak Linkage between Policy Setting and Implementation: This has hindered the
ability to promptly and clearly adjust to changes in fiscal policy. The transparency and
accountability framework has not been able to provide sufficient coverage or assessment
of fiscal risks.
4. Lack of Debt Ceiling Law: India’s fiscal rules are mainly focused on traditional budget
balance rules with no debt ceiling law. Emerging best practices have moved toward a
structural budget balance rule or an expenditure rule.
 5. Insufficient Assessment of Fiscal Risks: There was no attempt to assess the potential
fiscal risks. For example: The impact of the announcement of the Pay Commission, the
increase in commodity prices and the implications on fiscal policy, the implications of
off-budget items such as contingent liabilities.

In summary, the FRBM Act is a vital tool for fostering fiscal discipline and transparency in
India's public finances. While it has contributed to macroeconomic stability, revisions have
been necessary to address challenges. Moving forward, ongoing efforts to strengthen the
framework will be crucial for navigating future fiscal challenges and promoting inclusive
growth.

Changes in the FRBM Act in the Union Budget of 2021:

● Target of fiscal deficit: 6.8% (2021-22)

● Total expenses: 34.8 Trillion rupees
● Jal Jivan Mission: More funds allocated
● Welfare of women budget shares drop of 26%.
● 53% increase for the welfare of SC’s and 50% increase for STs.
● Allocation for N-E region increased by 32.7%.
● Path of fiscal consolidation with FD below 4.5% in 2025-26, fairly steady decline.

Deficits (as % of GDP)

Actual 2019-20 Revised 2020-21 Budgeted 2021-22

Fiscal Deficit 4.6% 9.5% 6.8%

Revenue Deficit 3.3% 7.5% 5.1%

The fiscal deficit was 6.4% of the GDP in 2022-23 against the earlier estimate of 6.71%.
The fiscal deficit was 5.8%
Changes in the FRBM Act with Interim Budget 2019-2020

● Fiscal Deficit pegged at 3.4% for 2019-2020.

● In 2019-20 total expenditure rose by 13.30% over 2018-19 RE
● Disinvestment target of rs 90K crore for 2019-20
● 35.6% increase in allocation for welfare of SCs, 28% for STs

Fiscal targets as per interim budget of 2024-25

● India’s real GDP growth projected at 7.3% in FY 23-24: Finance and corporate affairs
minister Nirmala Sitharaman.
● FD in 24-25: 5.1% of gdp. The fiscal deficit for FY26 has been pegged at 4.5%.
● Capex to be increased by 11.1% (2023) to 11,11,111 crore that is almost 3.4% of gdp.
● FDI inflow: 596 Billion (2014-23) double of that which was brought in (2005-14).

Fiscal targets as per the budget of 2024-25:

● The union budget of 2023-24 presents a vision for Amrit Kal- Blueprint for an
empowered and inclusive economy.
● fiscal deficit at 5.9% of GDP later on revised at 5.8%.
● Government investment increase by 33%.
● Effective capital expenditure at 4.5% of GDP.
● real GDP growth 7%.

Target and Fiscal indicators as per FRBM act:

● Government is required to limit the fiscal deficit of 3% by March 31st 2021. Also limit
the debt of the Central government to 40% of GDP by 2024-25.
● The frbm act is based on Article 292 of Indian Constitution that gives power to the
Parliament to Limit borrowing of the government on the security of consolidated fund of
India.
● In 2012 the Act was amended and the aforementioned documents presented in the
Parliament were called “medium term expenditure Framework statement” (MTEF).
● MTEF: It presents 3 year rolling target for expenditure indicators and includes various
estimates like Education, health, rural development, energy, subsidies and pension.
 Fiscal Consolidation:

Fiscal consolidation is a reduction in the underlying fiscal deficit. Fiscal Consolidation refers to
the policies undertaken by Governments (national and sub-national levels) to reduce their
deficits and accumulation of debt stock.
This leads to an improvement in the government's fiscal health, evident through a decreased
budget deficit.
Path of fiscal consolidation with FD below 4.5% in 2025-26, fairly steady decline.

Three tools:
1. Government spending 2. transfer payments 3. taxes

Recommendations of the 15th finance commission on fiscal consolidation:

● The Union government should reduce its fiscal deficit to 4% of GDP by 2025-26, down
from 6.8% in FY22.
● Fiscal deficits in state governments should be 4% of GDP in 2021-22, 3.5 percent the
following year, and 3 percent over the next three years.
● According to the law, all centrally sponsored initiatives must be examined by a third
party within a set time range.
● If states achieve the prerequisites for power sector reforms, additional borrowing of 0.5
percent of GSDP should be permitted.