Fiscal Responsibility and Budget Management (FRBM) Act

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, is a key legislation in India aimed at ensuring fiscal discipline and sustainable public finances. This chapter covers its provisions, objectives, and significance, tailored for UPSC Prelims preparation.

Introduction to FRBM Act

Enacted in August 2003, the FRBM Act seeks to reduce fiscal deficits, eliminate revenue deficits, and promote intergenerational equity in fiscal management. It was introduced to address rising deficits in the 1990s and is implemented by the Ministry of Finance.

Legal Basis: Passed under Article 292 (borrowing powers) and Article 293 (state borrowings) of the Constitution.
Amendments: Key amendments in 2012, 2015, and 2018 introduced flexibility in targets and escape clauses.
FRBM Rules, 2004: Provide operational guidelines for implementing the Act.

Example: The 2018 amendment introduced a fiscal deficit target of 3% of GDP by March 31, 2021, later relaxed due to economic challenges like COVID-19.

Objectives

The FRBM Act aims to strengthen fiscal discipline and ensure long-term economic stability.

Reduce Fiscal Deficit: Target a fiscal deficit of 3% of GDP to limit government borrowing.
Eliminate Revenue Deficit: Achieve zero revenue deficit to ensure revenue receipts cover revenue expenditure.
Debt Management: Reduce central government debt to sustainable levels (e.g., 40% of GDP by 2024-25, per NK Singh Committee).
Transparency: Mandate fiscal transparency through documents like Medium-Term Fiscal Policy Statement.
Intergenerational Equity: Prevent burdening future generations with excessive debt.

Example: The 2024-25 Union Budget targeted a fiscal deficit of 4.9% of GDP, aligning with FRBM’s goal of gradual deficit reduction.

Key Provisions

The FRBM Act outlines specific targets and mechanisms to enforce fiscal discipline.

Fiscal Deficit Target: Reduce fiscal deficit to 3% of GDP (originally by 2008-09, revised multiple times).
Revenue Deficit Target: Eliminate revenue deficit (initially targeted by 2008-09, relaxed post-2018).
Debt Ceiling: Limit central government debt to 40% of GDP, as recommended by the NK Singh Committee (2017).
Escape Clause: Allows deviation from targets during national calamities, economic crises, or structural reforms (e.g., 0.5% GDP flexibility in 2020-21 due to COVID-19).
Mandatory Documents: Government must present three statements annually with the Union Budget:
- Medium-Term Fiscal Policy Statement
- Fiscal Policy Strategy Statement
- Macroeconomic Framework Statement
Prohibition on RBI Financing: Restricts RBI from directly subscribing to government securities (monetization of deficit) since 2006.

Example: The 2020-21 Budget invoked the escape clause, allowing a fiscal deficit of 9.5% of GDP due to pandemic-related spending.

Significance and Challenges

Significance

Promotes fiscal discipline, reducing borrowing costs and enhancing investor confidence.
Ensures sustainable public finances, preventing debt traps.
Enhances transparency through mandatory fiscal disclosures.
Aligns with global best practices in fiscal management.

Challenges

Frequent deviations due to economic shocks (e.g., 2008 financial crisis, COVID-19).
Off-budget borrowings (e.g., through PSUs) undermine transparency.
Balancing growth and fiscal discipline during slowdowns.
State-level fiscal irresponsibility affects consolidated deficit targets.

Example: Off-budget financing for schemes like food subsidies in 2019-20 masked the true fiscal deficit, challenging FRBM compliance.

Key Concepts for Prelims

Understanding related terms is vital for UPSC Prelims.

Fiscal Deficit: Total expenditure minus total receipts (excluding borrowings), targeted at 4.9% of GDP in 2024-25.
Revenue Deficit: Excess of revenue expenditure over revenue receipts, estimated at 2.0% of GDP in 2024-25.
Primary Deficit: Fiscal deficit minus interest payments, projected at 1.8% of GDP in 2024-25.
NK Singh Committee (2017): Recommended debt-to-GDP ratios (40% for center, 20% for states) and fiscal deficit targets.

Key Points for Prelims

FRBM Act, 2003, was enacted to ensure fiscal discipline under Article 292.
Original targets: 3% fiscal deficit, zero revenue deficit by 2008-09.
2018 amendment introduced debt-to-GDP targets and escape clauses.
Mandatory fiscal statements enhance transparency in budgeting.
States have their own FRBM Acts, aligned with central targets.

Summary of FRBM Act Provisions

Provision	Description	Example/Target
Fiscal Deficit	Limit to 3% of GDP	4.9% in 2024-25
Revenue Deficit	Eliminate revenue deficit	2.0% in 2024-25
Debt Ceiling	Central debt to 40% of GDP	~50% in 2024
Escape Clause	Flexibility during crises	9.5% deficit in 2020-21

Frequently Asked Questions (FAQs)

Q1: What is the primary goal of the FRBM Act?

Ans: To ensure fiscal discipline by reducing fiscal and revenue deficits and maintaining sustainable debt levels.

Q2: How does the escape clause in the FRBM Act work?

Ans: It allows temporary deviation from deficit targets during crises like pandemics or wars, as used in 2020-21 for COVID-19 relief.

Q3: Why is transparency important in the FRBM Act?

Ans: Mandatory fiscal statements ensure accountability, build investor trust, and align with global fiscal standards.

Practice Questions for Prelims

Explain the key provisions of the FRBM Act, 2003, with examples.
Discuss the significance of the NK Singh Committee recommendations for fiscal discipline.
How does the FRBM Act ensure fiscal transparency?

Download Revision Notes

Download a concise PDF of FRBM Act provisions for quick revision.

Download PDF