FRBMA Policies

In 2003, the Government of India introduced the FRBM Act with the aim of promoting responsible financial management. This law set specific targets, such as reducing fiscal deficits and eliminating revenue deficit, to ensure disciplined fiscal practices. Seen as a crucial legal measure, the FRBM Act marked a significant stride towards consolidating India’s finances, emphasizing the importance of mindful economic planning and sustainability.

What is the full form of FRBM?

The full form of FRBM is Fiscal Responsibility and Budget Management.

Why was the FRBM Act enacted?

In the 1990s and 2000s, India faced significant challenges with its economy marked by high borrowing levels, a weak fiscal position, and elevated debt-to-GDP ratios. By 2003, the consequences of continuous government borrowing had taken a toll on the country’s economic health. The government was using much of the borrowed funds to pay interest on previous debts rather than for productive purposes, making interest payments its largest expenditure.

Concerned economists and parliamentarians urged the government to take corrective measures, emphasizing the importance of sustainability. In response, in 2003, the Indian Parliament passed the Fiscal Responsibility and Budget Management Act, aiming to instill responsibility and discipline in fiscal matters and curb excessive government borrowing.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

In December 2000, Mr. Yashwant Sinha, the then Finance Minister of India, introduced the Fiscal Responsibility and Budget Management Bill (FRBM Bill). The initial provisions of the bill were quite stringent, sparking extensive discussion. The FRBM Rules took effect on July 5, 2004, marking a significant step in shaping India’s fiscal policies.

What is the FRBM Act all about?

Fiscal Responsibility and Budget Management Act is all about maintaining a balance between Government revenue and government expenditure. The intention of the Fiscal Responsibility and Budget Management Act was to bring:

Fiscal Discipline.
Efficient Management of expenditure, revenue and debt.
Macroeconomic Stability.
Better coordination between fiscal and monetary policy.
Transparency in the fiscal operation of the Government.
Achieving a balanced budget.

Objectives of the FRBM Act

The main objectives of the act were:

To introduce transparent fiscal management systems in the country.
To introduce a more equitable and manageable distribution of the country’s debts over the years.
To ensure long-term fiscal stability for India, the act aimed to provide the Reserve Bank of India (RBI) with the necessary flexibility to manage inflation effectively.

Provisions of the Fiscal Responsibility and Budget Management Act

The FRBM rules make it necessary to project four key fiscal indicators in the medium-term fiscal policy statement. These include the revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as a percentage of GDP, and total outstanding liabilities as a percentage of GDP. The FRBM Act establishes targets for both fiscal deficit and revenue deficit.

Furthermore, the FRBM act mandates that the Indian Parliament annually receives specific documents alongside the budget, presenting information about the country’s fiscal policy. These documents comprise the Medium-term Fiscal Policy Statement, Fiscal Policy Strategy Statement, Macro-economic Framework Statement, and Medium-term Expenditure Framework Statement. For more details, refer to the budget documents.

Initial FRBM Targets

Revenue Deficit Target – We should eliminate the Revenue Deficit completely by March 31, 2009. The minimum annual reduction target was 0.5% of GDP.

Fiscal Deficit Target – We should aim to bring down the Fiscal Deficit to 3% of the GDP by March 31, 2009. The minimum annual reduction target was 0.3% of GDP.

Contingent Liabilities – The Central Government shall not give incremental guarantees aggregating an amount exceeding 0.5 per cent of GDP in any financial year beginning 2004-05.

Additional Liabilities – We should aim to decrease additional liabilities, including external debt at the current exchange rate, to 9% of the GDP by 2004-05. The minimum annual reduction target in each subsequent year to be 1% of GDP.

RBI purchase of government bonds – to cease from 1 April 2006. This indicates the government not to borrow directly from the RBI.

Amendments in the FRBM Act

During this period, they introduced a novel concept called Effective Revenue Deficit (E.R.D), bringing a new dimension to fiscal discussions.
Additionally, there was an amendment to the Fiscal Responsibility and Budget Management Act (FRBMA) that brought in the necessity for a ‘Medium Term Expenditure Framework Statement,’ enhancing the overall financial planning process.

FRBM Targets after Amendment to FRBM Act in 2012 (to be achieved by 2015)

By March 31, 2015, the goal is to entirely eliminate the revenue deficit, with a minimum annual reduction target of 0.5% of the Gross Domestic Product (GDP).
The aim is to reduce the fiscal deficit to 3% of the GDP by March 31, 2015, with a minimum annual reduction target of 0.3% of the GDP.

FRBM Targets after Amendment to FRBM Act in 2015 (to be achieved by 2018)

By March 31, 2018, the goal is to entirely eliminate the revenue deficit. To achieve this, a minimum annual reduction target of 0.5% of GDP has been set.
The aim is to reduce the fiscal deficit to 3% of GDP by March 31, 2018. This involves a minimum annual reduction target of 0.3% of GDP.

Conclusion

The FRBM Act was designed to bring about long-term stability in the economy, with a focus on creating budget surpluses, prudent debt management, and curbing deficits and debt. It aimed to enhance transparency, remove fiscal obstacles, and establish a medium-term framework for budget implementation. However, various governments have struggled to meet the FRBM targets set for 2008, even as we reached 2020.

Beyond just reducing deficits, an essential goal of the Act is to ensure fairness between generations in fiscal management. The idea is that the debts incurred today, which result from current spending, should be repaid by future generations. Meeting the FRBM targets becomes crucial in promoting inter-generational equity by lessening the burden of debt on the generations to come.