FRBM Act: Objectives and challenges

Introduction

1. The FRBM Act was enacted in 2003 to ensure fiscal discipline and long-term financial stability in India.
2. It aims to reduce the fiscal deficit, control public debt, and promote transparency in fiscal operations.
3. Applies to both the Central and State Governments.

Objectives of the FRBM Act

1. Ensure macroeconomic stability by reducing fiscal deficits and public debt.
2. Promote fiscal discipline in government expenditure.
3. Improve transparency in fiscal operations by mandating regular reporting.
4. Encourage efficient allocation of resources to productive sectors.
5. Boost investor confidence through a predictable and stable fiscal policy.

Key Provisions of the FRBM Act

1. The fiscal deficit should not exceed a prescribed limit of 3% of GDP.
2. Revenue deficit should be reduced to 0% over time.
3. The government is required to present a Medium-Term Fiscal Policy (MTFP) annually.
4. Introduction of a Fiscal Responsibility Statement in the Union Budget.
5. Periodic review by the Comptroller and Auditor General (CAG).

Challenges in Implementing the FRBM Act

1. Global economic fluctuations: Events like the 2008 financial crisis and the COVID-19 pandemic disrupted fiscal targets.
2. State-level compliance: Many states find it challenging to adhere to fiscal deficit limits.
3. High government spending on subsidies and welfare programs increases fiscal burden.
4. Lack of enforcement mechanisms for non-compliance.
5. Delays in implementing necessary reforms in taxation and expenditure management.

Amendments and Relaxations

1. The FRBM Act has been amended several times to accommodate economic needs and crises.
2. In 2018, the N.K. Singh Committee recommended a new framework with a debt-to-GDP ratio target of 60%.
3. Temporary relaxations were allowed during the COVID-19 pandemic to enable higher borrowing.

Impact of the FRBM Act

1. Improved fiscal discipline and accountability.
2. Reduced fiscal deficit levels, particularly during its initial years.
3. Enhanced transparency in budgetary processes.
4. Encouraged states to adopt similar fiscal responsibility laws.
5. Boosted investor confidence in the Indian economy.

Conclusion

1. The FRBM Act is a crucial step toward ensuring fiscal stability in India.
2. Its effective implementation requires a balance between fiscal discipline and developmental needs.
3. Regular updates and flexibility in the framework are essential to address economic challenges.