Fiscal Responsibility and Budget Management (FRBM) Act: Navigating Fiscal Limits

Origins and Objectives:

• The FRBM Act, enacted in 2003 and subsequently amended, aimed to impose fiscal discipline on the government and ensure responsible management of public finances.
• Key Objectives:
1. Prevent the government from excessive borrowing.
2. Gradual elimination of borrowing for consumption.
3. Allow borrowing only for asset creation.
4. Limit the total debt of the Government of India (GOI).
5. Restrict the RBI from being the primary lender, curbing the practice of printing money to provide credit to the government.

Original Targets and Challenges:

• Original Aim: Achieve the above targets by 2008-09.
• Challenges: Global economic challenges, particularly the great recession of 2008, disrupted the feasibility of meeting the initial targets.

Amendments and Shifting Targets:

• Post-2008 Amendments:
1. Shift the fiscal deficit target of 3% GDP ratio to 2020-21.
2. No set target for revenue deficit.
3. Debt GDP ratios for General (Centre and states) and Central government to be reduced to 60% and 40% of GDP, respectively, by 2024-25.

"Escape Clause" Amendment (2018):

• Rationale:
• Responding to the recommendations of the NK Singh FRBM Review Committee in 2017.
• Recognized the need for flexibility in exceptional circumstances.
• Amendments Introduced:

1.               Conditions for Breach:

• Overriding considerations of national security, acts of war, and calamities of national proportion affecting agriculture severely.
• Far-reaching structural reforms with unanticipated fiscal implications.
• Sharp decline in real output growth of at least 3 percentage points below the average for the previous four quarters.

2.               Maximum Deviation:

• Allowed a maximum deviation of 0.5 percentage points in a year from the stipulated fiscal deficit target.

Conclusion: The FRBM Act and its subsequent amendments reflect the evolving nature of fiscal governance, acknowledging the need for flexibility under exceptional circumstances. Balancing fiscal discipline with the capacity to respond to unforeseen challenges remains a complex task, and the FRBM Act continues to be a critical framework in navigating these dynamics.

FRBM Act and Its Implementation: Navigating Fiscal Governance

Invocation of Second Condition in 2020-21:

• The government invoked the second condition of the "escape clause" in the FRBM Act in the 2020-21 Budget.
• Relevance: The conditions were particularly relevant in the context of the demand destruction caused by the COVID-19 pandemic in 2020-21.

Scope of FRBM Act on Government Guarantees:

• The FRBM Act not only limits government borrowing but also applies a cap on the level of guarantees that the Government stands for.
• The Act is based on Article 292 of the Indian Constitution, empowering Parliament to limit borrowing by the Government of India on the security of the Consolidated Fund of India (CFI).

Mandatory Documents Under FRBM Act:

1. Budget Session:
• Medium-Term Fiscal Policy Statement
• Fiscal Policy Strategy Statement
• Macroeconomic Framework Statement
2. Following Budget Session:
• Medium-Term Expenditure Framework Statement (MTEF)

Medium-Term Expenditure Framework (MTEF):

• Presents a three-year rolling target for expenditure indicators with specifications of underlying assumptions and risks.
• Estimates expenditure commitments for various sectors such as Education, Health, Rural Development, Energy, Subsidies, and Pension.

Medium-Term Fiscal Policy Statement (MTFP):

• Sets out three-year rolling targets for specific fiscal indicators in relation to GDP at market prices, including:
• Revenue deficit
• Effective revenue deficit
• Fiscal deficit
• Tax to GDP ratio
• Total outstanding debt as a percentage of GDP at the end of the year.

Quarterly Assessments:

• The government is mandated to present quarterly assessments of trends in receipts and expenditures before both Houses of Parliament.

Exceptional Circumstances and Corrective Measures:

• In exceptional circumstances leading to deviations, the government is required to take corrective measures.
• The Finance Minister is obligated to make a statement in both Houses of Parliament.

Borrowing from RBI and Monetization:

• Borrowing from the RBI through monetization is permitted in exceptional situations like natural calamities.

Global Context:

• FRBM Acts and similar legislations exist globally, such as New Zealand's Fiscal Responsibility Act (1994), Australia's Charter of Budget Honesty, and the UK's Code for Fiscal Stability.
• The global recession from 2008 led to deviations from FRBM targets, but fiscal consolidation has been on track since then.

Current Target:

• The target for fiscal deficit under the modified FRBM Act is 3% of GDP by 2020-21.