Fiscal Responsibility and Budget Management (FRBM) Act

The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2003, aims to ensure fiscal discipline and reduce India's fiscal deficit. Its primary objectives include setting targets for fiscal deficit, revenue deficit, and government debt to promote sustainable economic growth.

The key provisions of the FRBM Act include:

• •Mandating the government to reduce fiscal deficit to 3% of GDP (originally by 2008, later revised).
• •Eliminating revenue deficit and generating revenue surplus.
• •Setting targets for government debt as a percentage of GDP.
• •Prohibiting the RBI from directly purchasing government securities in the primary market (with some exceptions).
• •Requiring the government to present a Medium-Term Fiscal Policy Statement along with the annual budget.

The FRBM Act works by setting specific targets for fiscal deficit reduction. The government is required to take measures to control spending and increase revenue to meet these targets. Regular monitoring and reporting are also essential components.

The FRBM Act is significant because it promotes fiscal discipline, reduces government debt, and encourages sustainable economic growth. It also enhances transparency and accountability in government finances, leading to greater investor confidence.

Challenges in implementing the FRBM Act include:

• •Economic downturns that require increased government spending.
• •Political pressures to increase spending on social programs.
• •Difficulty in accurately forecasting revenue and expenditure.
• •Lack of coordination between the central and state governments.

The FRBM Act has been amended several times since its enactment in 2003. The original targets were revised, particularly after the 2008 financial crisis. Recent developments include relaxation of FRBM targets during the COVID-19 pandemic to allow for increased government spending.

Limitations of the FRBM Act include:

• •Its focus on numerical targets may lead to a neglect of the quality of government spending.
• •It may be too rigid in the face of unexpected economic shocks.
• •It does not adequately address the issue of off-budget liabilities.

Suggested reforms for the FRBM Act include:

• •Adopting a more flexible fiscal framework that allows for counter-cyclical policies.
• •Focusing on the quality of government spending rather than just numerical targets.
• •Improving transparency and accountability in fiscal reporting.
• •Strengthening the institutional framework for fiscal management.

The FRBM Act is related to Article 112 (Budget) and Article 293 (State Borrowing) of the Constitution. Article 112 deals with the presentation of the annual budget, while Article 293 relates to the borrowing powers of states. The FRBM Act provides a framework for managing government finances within the constitutional provisions.

Fiscal deficit is the difference between the government's total expenditure and its total revenue (excluding borrowings). Revenue deficit is the difference between the government's revenue expenditure and its revenue receipts. The FRBM Act mandates the reduction and eventual elimination of both deficits, with specific targets set for each.

India's FRBM Act is similar to fiscal responsibility laws in other countries in that it sets targets for fiscal deficits and government debt. However, the specific targets and the enforcement mechanisms may vary. Many countries have adopted similar frameworks to promote fiscal discipline and stability.

Frequently asked aspects of the FRBM Act in UPSC exams include its objectives, key provisions, impact on the Indian economy, amendments, and challenges in implementation. Questions may also focus on the relationship between the FRBM Act and other economic policies.