The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 was introduced in India to address the persistent problem of fiscal deficit and ensure prudent management of public finances. The primary reasons for its introduction were to promote fiscal discipline, reduce the burden of public debt, and ensure long-term macroeconomic stability. With rising fiscal deficits and burgeoning public debt, there was a pressing need for a legislative framework to enforce fiscal discipline and accountability. The FRBM Act aimed to set targets for fiscal deficit reduction, limit government borrowing, and promote transparency in fiscal operations. Its salient features include setting targets for fiscal deficit and revenue deficit, specifying limits on government borrowings, and establishing a fiscal responsibility council for oversight. However, its effectiveness has been subject to debate, as achieving the prescribed targets has been challenging amidst economic fluctuations and political pressures. Moreover, the act’s rigidity during times of economic downturns has been criticized for hindering counter-cyclical fiscal policies.
Tag: Indian economy and issues related to planning, mobilization of resources, growth development and employment. Government budgeting.
Decoding the Question:
- In Intro try to write in brief about FRBM act.
- In Body,
- Discuss purpose and objectives of FRBM act 2003.
- Discuss the utility and failure of the Act
- Try to conclude your answer by mentioning the NK Singh committee.
Answer:
The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in the fiscal operations of the Government.
It provides a legal and institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce the fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation.
Objectives Under The Act:
- Reduction and Elimination of revenue deficit by 2008-09. Thereafter, build up adequate revenue surplus.
- Reduction of fiscal deficit to no more than 3 percent of GDP at the end of 2008-09.
- Reduce the Gross Fiscal Deficit (GFD) by March 31, 2008.
- Institutionalise India’s financial discipline.
- Improving macroeconomic management.
- Bring transparency in fiscal management of the country.
- To introduce more equitable and manageable debt over the years.
- The act aims to bring fiscal stability in India over the long run and additionally gives necessary flexibility to RBI to control inflation.
The Central government shall lay in each financial year before both houses of Parliament the following statements of fiscal policy along with the annual financial statement and demands for grants:
- The Medium-term Fiscal Policy Statement.
- The Fiscal Policy Strategy Statement.
- The Macro-Economic Framework Statement.
Challenges in Implementation:
- Unstable Targets: However, the targets set under the original act have been periodically changed or amendment made within the act due to unforeseen conditions. For example, the 2008-09 subprime crisis government revised targets under the act and successive governments have failed to achieve the targets of fiscal deficit under act.
- Debate on feasibility of the Act: After 17 years of enactment of the Act there is debate whether the Government of India should continue with the target or not.
- One group is against setting Fiscal Deficit targets, as India is a developing nation and it needs to spend a lot of money on creating social and capital assets which are prerequisite for growth and development. The upper ceiling on expenditure of the government will force the Government to reduce spending.
- The opposite group which is in favour of the FRBM Act argued that missing the targets will lead to higher unnecessary targets, inflation, increased burden of debt and facing several other micro economic problems.
- Infrastructure and SDGs: Spending on social infrastructure to create productive assets are necessary form India’s target to achieve Sustainable Development Goals and improve ranking in Human Development Index. But criticism is that the act prohibits the Government from higher spending.
- Agriculture and Monsoon: The vagaries of monsoon and one of the largest dependent populations on agriculture and over optimistic suggestions of the task force, which is in-charge of development of the target, highlighted some of the potential’s failures of the act.
Way Forward:
- The Government should consider a medium-term framework for fiscal policy and ensure that over the medium-term targets are met.
- On the basis of international developments, there is a need to build capacity in managing the fiscal policy of the government, and effective and efficient debt management of the government.
- Interest payments pre-empt a substantial part of revenue receipts. Given the limitations of enhancing tax collection, the Government increasingly resorts to borrowing. Therefore, there is a need to rationalize the interest expenditure of the Central Government.
- There is a need to be more specific on ‘exceptional circumstances’ when the ‘pause’ button can be used to stall the targets provided by the FRBM Act.
- Recommendations of the N.K. Singh Committee should be implemented in a time-bound manner so that the developmental needs of the economy are not unduly compromised while being on the path of fiscal prudence.
Hence, following fiscal targets and increasing social spending is the need of the hour. As NK Singh committee underlines that there are problems in setting up fiscal deficit targets in external situations or pandemic like situations. For example, in the 2020-21 financial year, the government has to borrow more for social sector spending like under various programmes of ATMA NIRBHAR BHARAT Abhiyaan.
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