What is Fiscal Responsibilityand Budget Management Act?

The Fiscal Responsibility andBudget Management (FRBM) Actwas legislatedby the

Parliamentin the year 2003.
Its objectives can be identified as:
Toinstitutionalise fiscal discipline;
Reduce Fiscal Deficit;
ImproveMacroeconomicManagement.
Thelaw aims at promotingFiscal Stability for the country onalong-term basis.
It emphasisesa Transparent Fiscal Management Systemand a more equitable
distributionof debts over the years.
Thislaw also gives flexibility tothe Reserve Bank of India toundertake monetary
policy totackleinflation 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 areraised through taxes and borrowing. The
governmentcan raise funds by borrowing fromthe Reserve Bank of India, financial
institutions or from thepublic by floating bonds.
Fiscal deficit
It is the Total Expenditure minusthe Revenue Receipt, Loan Recoveriesand Receipts from
Disinvestment etc. It is a measure of the government borrowing ina year.
However, uncontrolled Fiscal Deficit is harmful not only for thehealth of economy but also
for the Growthof the economic indicatorsand finally the development prospects in the road
towards Inclusive Growth.
FRBM Act wasnotified in 2004 in response tothe need felt to curb broadeningFiscal
Deficit.
TheFRBM rulesspecify annual reduction targetsfor fiscal indicators.
Originally, theact envisaged Revenue Deficit tobe reduced to nil in five years
beginning2004-05.
Fiscal deficit wasrequired to be reduced to3 percent of GDP by 2008-09.
The Act also provides exception tothe 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 forFiscal Stimulus.
There was a need for increasedgovernment expenditure tocreate demand to fight off the
financial downturn and hence the government moved away from thepath of Fiscal
Consolidation for thisperiod.
This law also prohibits borrowingby government fromthe Reserve Bank of India and
purchaseof primary issues of central government securities after2006.
The Act asked the Central government to lay in Parliament threestatements in one
financialyear about the fiscal policy.
To enforcefiscal discipline at the statelevel, the Twelfth financecommission provided
for incentives tostates through conditional debt restructuringand interest raterelief.
In 2012, the FRBM Act was amended andit was decided that the FRBMAct would target
Effective RevenueDeficit in place of Revenue Deficit.
Effective Revenue Deficitexcludes Capital Expenditure from Revenue Deficitand
thus provides space to the government to spend on formationof Capital Assets.
The critics of this Act usually point of out the demerits that it would put a curb on the
governments social sector spending, butno one can deny thefact that there is a rising need
for Fiscal Sustainabilityin order to put the economic indicators back on the path of Growth as
well as Development.
Ankur Sachan