FRBM ACT 2003 (Fiscal Responsibility and Budget Management Act) Economics YouTube Lecture Handouts

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FRBM ACT 2003

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Economics

  • The FRBM Act (Fiscal Responsibility and Budget Management Act) was enacted in 2003. It aims to make the Central government responsible for ensuring inter-generational equity in fiscal management and long-term macroeconomic stability. Or it ensures financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits.
  • The Act sets limits on the Central government՚s debt and deficits. Fiscal deficit limit is set at 3 % to the GDP.
  • On the recommendation of 12th FC, State governments have enacted their own Financial Responsibility Legislation, which sets the same 3 % of Gross State Domestic Product (GSDP) cap on their annual budget deficits.
  • The act aims to ensure greater transparency in fiscal operations of the Central government and the conduct of fiscal policy in a medium-term framework.
  • The Budget of the Union government includes a Medium Term Fiscal Policy Statement which specifies the annual revenue deficit and fiscal deficit goals over a three-year horizon.
  • The NK Singh committee (set up in 2016) recommended that the government should target a fiscal deficit of 3 % of the GDP in years up to March 31,2020, and then cut it to 2.8 % in 2020 - 21 and to 2.5 % by 2023.
  • Thus, debt burden on successive government will come down.
  • As per the Act, following documents should also be placed along with the Budget. : Macroeconomic Framework Statement, Medium Term Fiscal Policy Statement and Fiscal Policy Strategy Statement.
  • In Medium term Fiscal policy four fiscal indicators are projected. i.e.. , 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.
  • FRBM committee also recommended reducing the Centre՚s debt to GDP ratio from 49.4 % in 2016 - 17 to 40 % by 2022 - 23.

Escape Clause

  • Under Section 4 (2) of the Act, the Centre can exceed the annual fiscal deficit target citing certain grounds like War, national security, calamity, collapse of agriculture, Structural reforms etc.
  • This, implies that Fiscal deficit targets can be breached by the government on these ground.
  • Recently, this section was in news due to government Fiscal deficit remaining high.
  • In budget 2020 - 21, government used this clause by terming reduction in corporate tax as a structural reform. Government revised FD targets of 2019 - 20 to 3.8 % from budgeted 3.3 % .
  • Similarly, during 2008 crisis, the clause was used and FD stood at 6.2 % against target of 2.7 %
  • COVID 19 has led to rapid rise in the healthcare expenditures of the states, whereas the stringent lockdown had serious impacts on economy which impacted the revenue of the states.
  • Lesser revenue receipts and Higher expenditure = More borrowing.
  • Thus, High FD.
  • The state government have to use money for socio-economic goals as well and thus, High FD is the need of the Hour.

MCQs

Q1: Fiscal Responsibility and Budget Management Act (FRBMA) was passed to keep check on

a) Fiscal deficit only

b) Revenue deficit only

c) Both fiscal deficit and revenue deficit

d) Interest rates

Answer: C

Q 2 Fiscal Policy refers to a policy of:

(a) Money lenders

(b) Government Finance

(c) Commercial banks

(a) Monetary authority

Answer: B

Q 3 According to the provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and FRBM Rules, 2004, the government is under obligation to present three statements before the Parliament along with the annual budget.

Which one of the following is not one of them?

a) Macroeconomic framework statement

b) Fiscal policy strategy statement

c) Medium-term fiscal policy statement

d) Short-term fiscal policy statement

Answer: D

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