Fiscal Responsibility and Budget Management (FRBM) Act, 2003

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is an Act of the Parliament of India aimed at institutionalizing financial discipline, reducing India's fiscal deficit, improving macroeconomic management, and ensuring overall sound management of public funds by moving towards a balanced budget.

The key provisions of the FRBM Act, 2003 include:

• •Reducing fiscal deficit to 3% of GDP (originally, target dates have been revised).
• •Eliminating revenue deficit and generating revenue surplus.
• •Setting targets for debt-to-GDP ratio.
• •Prohibiting the RBI from directly subscribing to primary issues of government securities.
• •Requiring the government to lay before Parliament three statements: Medium-term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and Macroeconomic Framework Statement.

The FRBM Act works by setting targets for fiscal indicators like fiscal deficit and debt-to-GDP ratio. It mandates the government to take measures to achieve these targets, such as controlling expenditure and increasing revenue. The Act also promotes transparency by requiring the government to present fiscal policy statements to Parliament.

Limitations of the FRBM Act include:

• •The Act's targets have been frequently revised, indicating a lack of strict adherence.
• •Relaxation of fiscal deficit targets during crises like the COVID-19 pandemic shows flexibility but also potential weakness.
• •The Act does not explicitly address issues like off-budget borrowings.

The FRBM Act is significant as it aims to promote fiscal discipline, reduce debt burden, and improve macroeconomic stability. It signals the government's commitment to responsible fiscal management, which can enhance investor confidence and promote sustainable economic growth.

Challenges in implementation include:

• •Political pressure to increase spending, especially during elections.
• •Economic downturns that necessitate fiscal stimulus, leading to deviations from targets.
• •Difficulty in accurately forecasting economic variables like GDP growth and tax revenues.

Reforms suggested for the FRBM Act include:

• •The NK Singh Committee recommended a new debt ceiling and escape clauses for exceptional circumstances.
• •Emphasis on counter-cyclical fiscal policy to allow for flexibility during economic cycles.
• •Greater transparency and accountability in fiscal reporting.

The important articles related to the FRBM Act include Article 112 (Budget) and Article 293 (State Borrowing).

The FRBM Act has evolved through amendments and reviews. Originally enacted in 2003, its targets have been revised multiple times. The NK Singh Committee review led to recommendations for a new debt ceiling and escape clauses. Recent developments include relaxation of fiscal deficit targets during the COVID-19 pandemic and emphasis on counter-cyclical fiscal policy.

Frequently asked aspects include the objectives of the Act, its key provisions, the impact on fiscal discipline, and recent developments like the NK Singh Committee recommendations and relaxation of targets during the COVID-19 pandemic. Questions also focus on the challenges in implementation and the Act's role in macroeconomic stability.

While the concept data does not provide specific comparisons with other countries, it is generally understood that many countries have adopted fiscal responsibility legislation. These laws often vary in terms of targets, enforcement mechanisms, and flexibility. India's FRBM Act is notable for its focus on reducing fiscal deficit and debt, but it has faced challenges in maintaining strict adherence to its targets.

Relaxing fiscal deficit targets during the COVID-19 pandemic was a pragmatic response to an unprecedented crisis. While it deviated from the strict targets of the FRBM Act, it allowed the government to provide necessary fiscal stimulus to support the economy and protect vulnerable populations. However, it is crucial to return to a path of fiscal consolidation once the crisis subsides to ensure long-term economic stability.