Fiscal Responsibility and Budget Management | Economics Optional Notes for UPSC PDF Download

Introduction

• FRBM full form stands for “Fiscal Responsibility and Budget Management.” It refers to the legislative framework that aims to promote fiscal discipline and prudent management. The FRBM Act, or the Fiscal Responsibility and Budget Management Act, is a significant legislative measure implemented by the Indian Parliament to ensure fiscal discipline, manage fiscal deficit, and maintain macroeconomic stability. The act aims to achieve these objectives by presenting a balanced budget and promoting prudent financial management of public funds.
• The primary objective of the FRBM Act was to address the revenue deficit and bring down the fiscal deficit to a sustainable level of 3% of GDP by March 2008. However, the global financial crisis of 2007 led to the deferment and eventual suspension of the Act’s targets in 2009.
• In 2011, the Economic Advisory Council recommended the Government of India to consider reinstating the provisions of the FRBM Act, as the recovery process was underway. N. K. Singh currently serves as the Chairman of the Review Committee for the Fiscal Responsibility and Budget Management Act, 2003, which operates under the Ministry of Finance (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.

Enactment of the FRBM Act

• The Fiscal Responsibility and Budget Management (FRBM) Act was enacted by the Indian Parliament in the year 2003. It was introduced to establish a legal framework for fiscal management in India, with the aim of ensuring fiscal discipline, prudent financial management, and the reduction of fiscal deficits.
• The FRBM Act came into effect on July 5, 2004, after receiving Presidential assent. The act marked a significant step in India’s fiscal governance by setting clear targets and rules for managing government finances and controlling fiscal deficits.
• The enactment of the FRBM Act was driven by the need to address the growing fiscal imbalances and deficits faced by the Indian economy. It aimed to bring greater transparency, accountability, and sustainability to fiscal policies, thereby promoting macroeconomic stability and long-term fiscal health.
• The act introduced specific fiscal targets, such as reducing the revenue deficit and fiscal deficit over a period of time. It also laid down guidelines for managing government borrowings, public debt, and revenue generation. The FRBM Act was a pivotal reform in India’s economic and fiscal landscape, emphasizing responsible fiscal practices and the importance of maintaining fiscal discipline for sustainable economic growth.

Need of FRBM Act

The need for the Fiscal Responsibility and Budget Management (FRBM) Act in India arose from various economic and fiscal challenges that the country faced. The primary reasons for enacting the FRBM Act include:

• Fiscal Imbalances: India was experiencing significant fiscal imbalances, with high levels of fiscal deficit and revenue deficit. These imbalances were leading to excessive government borrowing, which could have adverse effects on the economy, including inflation and interest rate volatility.
• Public Debt Management: The increasing public debt burden was becoming a concern for the government. Effective debt management was necessary to ensure that public borrowing did not reach unsustainable levels, which could hinder long-term economic growth.
• Macroeconomic Stability: Fiscal discipline is crucial for maintaining macroeconomic stability. Unchecked fiscal deficits can lead to inflation, trade imbalances, and overall economic instability. The FRBM Act aimed to address these issues and promote a stable macroeconomic environment.
• Investor Confidence: Sound fiscal policies and responsible budget management are key factors that influence investor confidence. By demonstrating commitment to fiscal discipline, the government aimed to attract more investments, both domestic and foreign.
• Long-Term Economic Growth: Unsustainable fiscal practices can hinder the prospects of long-term economic growth. The FRBM Act intended to create a framework that would ensure fiscal sustainability and enable the government to allocate resources effectively to productive sectors.
• Resource Allocation: A disciplined fiscal policy allows for efficient allocation of resources. By curbing unnecessary expenditures, the government could allocate resources to essential sectors like education, healthcare, and infrastructure.
• External Creditworthiness: A country’s fiscal management practices impact its creditworthiness in international markets. Responsible fiscal policies enhance a country’s credibility and borrowing capacity in global financial markets.
• Government Accountability: The FRBM Act aimed to bring transparency and accountability to government finances. It set specific targets for fiscal deficits, encouraging the government to adhere to prudent fiscal management practices.
• Safeguarding Future Generations: By controlling fiscal deficits and managing public debt, the FRBM Act aimed to safeguard the interests of future generations, preventing them from inheriting excessive debt burdens.

Objectives of the FRBM Act

The Fiscal Responsibility and Budget Management (FRBM) Act in India was enacted with several key objectives in mind. These objectives were aimed at promoting responsible fiscal management, reducing fiscal deficits, and ensuring long-term fiscal sustainability. The main objectives of the FRBM Act include:

• Fiscal Discipline: One of the primary objectives of the FRBM Act was to instill fiscal discipline in the management of public finances. It aimed to control government expenditures and borrowing, thereby curbing fiscal deficits and promoting overall fiscal responsibility.
• Reduction of Fiscal Deficit: The act sought to progressively reduce both the revenue deficit and fiscal deficit to more sustainable levels. This reduction was expected to contribute to macroeconomic stability, control inflation, and reduce the government’s reliance on borrowings.
• Debt Management: The act aimed to manage the levels of public debt and ensure that it remains within reasonable limits. Effective debt management was crucial to prevent the government from burdening future generations with excessive debt.
• Fiscal Transparency: The FRBM Act intended to enhance fiscal transparency and accountability by setting specific targets for fiscal indicators and requiring the government to report its fiscal performance regularly.
• Long-Term Fiscal Sustainability: By controlling fiscal deficits and managing public debt, the act aimed to ensure the sustainability of government finances in the long run. This was vital for maintaining economic stability and promoting sustainable economic growth.
• Resource Allocation: The act aimed to optimize resource allocation by reducing wasteful expenditures and prioritizing spending on essential sectors such as education, healthcare, and infrastructure.
• Investor Confidence: Responsible fiscal policies enhance investor confidence in the economy. The act aimed to create a favorable environment for investments by showcasing the government’s commitment to fiscal discipline.
• Macroeconomic Stability: Through fiscal prudence, the act aimed to contribute to macroeconomic stability by controlling inflation, maintaining exchange rate stability, and avoiding economic imbalances.
• Improvement in Public Financial Management: The act sought to improve the overall quality of public financial management by setting clear fiscal targets and guidelines for budgeting and expenditure.
• Credibility in International Markets: Sound fiscal policies improve a country’s credibility in international financial markets, allowing for better access to external financing at favorable terms.

Features of FRBM Act

The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in India, is characterized by several key features that are designed to promote responsible fiscal management, reduce deficits, and enhance overall fiscal discipline. Some of the prominent features of the FRBM Act include:

• Fiscal Targets: The act sets specific fiscal targets to be achieved over a stipulated period. These targets include reducing the fiscal deficit and revenue deficit to predetermined levels.
• Medium-Term Fiscal Policy: The FRBM Act emphasizes a medium-term fiscal policy framework, which outlines the government’s fiscal strategies and targets for a period of five years.
• Binding Nature: The fiscal targets set by the act are binding on the government, which means that the government is legally obligated to adhere to these targets.
• Fiscal Responsibility Statements: The act requires the central and state governments to prepare and publish fiscal responsibility statements detailing their strategies and actions to achieve the fiscal targets.
• Debt Limitation: The act imposes limits on the levels of government debt, both at the central and state levels. This is aimed at ensuring that the government’s borrowing remains within sustainable limits.
• Transparency and Accountability: The FRBM Act emphasizes transparency in fiscal operations. It requires the government to present the annual budget in a way that clearly displays the impact of fiscal policies on fiscal indicators.
• Fiscal Deficit and Revenue Deficit Reduction: The act aims to progressively reduce the fiscal deficit and revenue deficit over time. It sets targets for these deficits as a percentage of the GDP.
• Zero Revenue Deficit Target: The act seeks to eliminate the revenue deficit over a period of time, signifying that the government should generate sufficient revenue to cover all its expenditures, excluding interest payments.
• Contingent Liabilities and Off-Budget Transactions: The FRBM Act requires the government to disclose contingent liabilities and off-budget transactions, ensuring greater transparency in fiscal reporting.
• Role of Fiscal Policy Statement: The government is required to present a fiscal policy statement alongside the annual budget, outlining its fiscal policies and strategies to achieve the targets set under the act.
• Fiscal Council: The act allows for the establishment of a Fiscal Responsibility and Budget Management Council to provide recommendations and assess the government’s compliance with the fiscal targets.
• Exemptions and Escape Clauses: The FRBM Act allows for certain exemptions and escape clauses during exceptional circumstances such as national security concerns, natural calamities, and collapse of agriculture.

FRBM Act – N K Singh Committee

• In 2003, India introduced the Fiscal Responsibility and Budget Management (FRBM) Act, which outlined specific goals for the government to achieve in order to eliminate fiscal deficits and promote responsible fiscal management. The act set targets for reducing fiscal deficits, revenue deficits, and controlling public debt.
• Over time, the established targets underwent revisions due to evolving economic conditions and fiscal priorities. To evaluate the effectiveness of the FRBM Act, the Indian government constituted a committee in May 2016, chaired by N.K. Singh, a prominent economist and former bureaucrat.
• The N.K. Singh Committee’s assessment found that the existing fiscal deficit targets set by the act were deemed to be overly stringent, considering the need for flexibility in responding to changing economic dynamics and priorities. As a result, the committee proposed revised targets to strike a balance between fiscal discipline and economic growth.
• The committee recommended that the government target a fiscal deficit of 3% of the Gross Domestic Product (GDP) in the years leading up to March 31, 2020. Following this, the fiscal deficit was suggested to be reduced to 2.8% in the financial year 2020-21 and further down to 2.5% by the financial year 2023. These revised targets aimed to ensure a gradual reduction in fiscal deficits while accommodating the need for public spending and promoting sustainable economic growth.
• The recommendations of the N.K. Singh Committee provided valuable insights for adjusting the fiscal deficit targets under the FRBM Act, with the goal of aligning fiscal policy with economic realities and development imperatives.

Latest Changes in FRBM Act 2003

The recent amendments and changes to the Fiscal Responsibility and Budget Management (FRBM) Act. These changes reflect the evolving economic conditions and fiscal priorities of the government. Here is a summary of the key amendments and targets mentioned:

• Rolling Targets and Medium Term Fiscal Policy Statement: The rolling targets for budget deficits were not included in the recent amendments to the FRBM Act’s Medium Term Fiscal Policy Statement for both the fiscal years 2021-22 and 2022-23.
• Fiscal Deficit Reduction Goal for 2025-26: The government’s aim in the Union Budget for 2022 was to lower the fiscal deficit to less than 4.5% of the Gross Domestic Product (GDP) by the fiscal year 2025-26. This indicates a commitment to gradually reducing the deficit over the medium term.
• Budget Deficit Target for 2022-23: The budget deficit target for the fiscal year 2022-23 is projected to be 6.4% of the GDP. This figure represents the extent to which the government borrows funds to cover its expenses, indicating fiscal support to manage economic challenges.
• Revenue Shortfall: The anticipated revenue shortfall for the fiscal year 2022-23 is expected to be 3.8% of the GDP. This indicates the government’s need to borrow funds to cover expenses that may not yield profits in the future.
• Fiscal Deficit and Revenue Shortfall Forecasts: According to revised calculations, the fiscal deficit is projected to be slightly higher than the budget forecast of 6.9%, while the revenue shortfall is expected to be lower at 4.7%. This reflects adjustments made to account for changing economic conditions.
• Primary Deficit Objective: The primary deficit objective for the fiscal year 2022-23 is set at 2.8% of the GDP. The primary deficit is the fiscal deficit excluding interest payments, reflecting the government’s ability to meet its non-interest expenditure from its revenue.
• Rising Interest Payments: Interest payments have shown an upward trend, increasing from 36% in 2011-2012 to 42% in 2020-21. Budget predictions indicate that this share is expected to rise further to 43% by the fiscal year 2022-23.

FRBM Act UPSC

• The Fiscal Responsibility and Budget Management (FRBM) Act holds substantial importance in the economic and current affairs sections of the UPSC syllabus. A comprehensive understanding of this act is essential, and UPSC aspirants are encouraged to delve into UPSC-recommended books to grasp its intricacies. 
• The FRBM Act’s significance extends to both the preliminary and mains stages of the examination. Candidates can acquire detailed insights and knowledge through focused study, aiding them in achieving higher scores. In addition to studying the act’s provisions, practicing previous year papers and sample papers can offer insights into the exam pattern and syllabus, contributing to a well-rounded preparation strategy.