What is the FRBM Act? – An Overview

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In India, whenever one reads or talks about fiscal balance or fiscal deficit, then one hears about the FRBM Act. In this article, we will look at what is the FRBM Act, its Objectives, the Mandate of the FRBM framework, and the Fiscal Consolidation Path. Let’s get started.

What is the FRBM Act?

The FRBM Act is one of the milestones in India’s economic history. The FRBM Act is a short form of the Fiscal Responsibility and Budget Management Act. The Act establishes prudent fiscal discipline to reduce fiscal deficit. The Act’s implementation calls for substantial changes in both expenditure and revenue.

The FRBM is a legislative framework for the reduction of the deficit and sustainable level of debt of the Union Government in the medium term to ensure intergenerational equity in fiscal management and long-term macroeconomic stability.

The FRBM Enactment and Introduction

In 2000, then-Finance Minister Yashwant Sinha first put out the idea for the FRBM Act. After discussions, the Union Cabinet approved it in 2003, and on July 5, 2004, it came into effect.

Objectives of FRBM ACT

The main goal of the FRBM Act is to bring transparency to India’s fiscal management system. However, other than this, the Act was designed with multiple goals, especially long-term goals and they are,

  1. To give the Reserve Bank of India to deal with Inflation, by ensuring fiscal stability.
  2. To bring equitable distribution of India’s debt burden over the years along with promoting long-term debt sustainability.

Key recommendations by the NK Singh Committee

In May 2016, the Union government established a committee led by renowned economist and former bureaucrat N.K. Singh to assess the efficacy of the FRBM Act.

According to the N.K. Singh Committee’s analysis, the act’s current fiscal deficit targets were judged unduly strict given the need for flexibility in adapting to shifting priorities and economic conditions. To reconcile budgetary restraint and economic expansion, the committee subsequently suggested updated goals.

  • Debt Reduction Priority: Make debt reduction a top priority for fiscal policy, and by 2023, make significant progress.
  • Autonomous Fiscal Oversight: To improve accountability, create an independent fiscal council with two central government appointees and a chairperson.
  • Deviations Framework: The committee report describes the specific conditions that allow for departures from fiscal targets.
  • Borrowing Guidelines: Limit government borrowing from the RBI to short-term financial gaps funded by government securities.

Mandate of the FRBM Framework

According to the FRBM framework, by March 31, 2021, the Central Government must keep the fiscal deficit at no more than 3% of GDP. Additionally, it stipulates that by the end of March 2025, the Central Government will make every effort to keep the General Government (including Centre, State and Local Bodies), debt below 60% of GDP and the Central Government Debt below 40% of GDP.

Key Features of the FRBM ACT

According to Section 3 of the FRBM Act, the Union Government must lay the fiscal policy statements in Parliament every year. The following are the fiscal policy statements placed in the Parliament along with the budget, every year,

  1. Medium-Term Fiscal Policy Statement: – This statement forecasts fiscal and revenue deficit, tax revenue and liabilities as percentages of GDP. The statement includes a three-year rolling target for prescribed fiscal indicators with the specification of underlying assumptions.
  2. Macroeconomic Framework Statement: – This statement provides an overview of the economy. In other words, it provides an assessment of the growth prospects of the economy along with specification of assumptions.
  3. Fiscal Policy Strategy Statement: – This statement gives the details of fiscal policy strategy. This includes the key fiscal measures and rationale for any major deviation in fiscal measures about taxation, subsidy, expenditure, administered pricing and borrowings.

Other Key Features and Exemption Clause

 Here are some of the other important/key features of the FRBM ACT.

  1. Fiscal and Revenue Deficit Targets:

The Union Government will state fiscal and revenue deficit as a percentage of GDP. The main objective of the Union Government is to reduce the fiscal deficit to 3% of GDP.

  1. Annual Targets:

Every year, the Union Government is supposed to set targets and achieve them. In case the targets are missed then it is supposed to explain the reasons for the same.

  1. Review Mechanism:

The fiscal targets shall be reviewed and set periodically in light of vibrant economic conditions and measures recommended by the finance commission under the supervision of the parliament.

  1. Exemption (or) Escape Clause:

There is a provision of an “Escape Clause’ (or Exemption), which permits a departure from fiscal targets on the grounds of unforeseen circumstances like natural calamities, national security, pandemics, etc.… along with steep economic recessions.

Fiscal Consolidation Path: FY 2026-27 to FY 2030- 31

The Union Government laid down the Fiscal Consolidation Path in its Union budget for 2025-26. Accordingly, the government would aim to maintain a budget deficit every year (from FY 2026–2027 to FY 2030–31) such that debt on a declining path to reach a debt-to-GDP level of approximately 50±1 per cent by March 31, 2031 from 56.1% as of 2025-26 (BE).

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