The Fiscal
Responsibility and Budget Management (FRBM) Act was legislated by the
Parliament in the year 2003.
Its objectives
can be identified as:
·
To
institutionalise fiscal discipline;
·
Reduce
Fiscal Deficit;
·
Improve
Macroeconomic Management.
·
The
law aims at promoting Fiscal Stability for the country on a long-term basis.
Ø
It
emphasises a Transparent Fiscal Management System and a more equitable
distribution of debts over the years.
Ø
This
law also gives flexibility to the Reserve Bank of India to undertake monetary
policy to tackle inflation and take corrective measures in order to give an
impetus to the economic environment.
As the Government
needs resources for funding various kinds of developmental schemes and routine
expenditures. Resources are raised through taxes and borrowing. The government can
raise funds by borrowing from the Reserve Bank of India, financial institutions
or from the public by floating bonds.
Fiscal deficit
It is the Total
Expenditure minus the Revenue Receipt, Loan Recoveries and Receipts from Disinvestment
etc. It is a measure of the government borrowing in a year.
However,
uncontrolled Fiscal Deficit is harmful not only for the health of economy but
also for the Growth of the economic indicators and finally the development
prospects in the road towards Inclusive Growth.
Ø FRBM Act was notified in 2004 in response to the need
felt to curb broadening Fiscal Deficit.
Ø
The
FRBM rules specify annual reduction targets for fiscal indicators.
Ø
Originally,
the act envisaged Revenue Deficit to be reduced to nil in five years beginning
2004-05.
Ø
Fiscal deficit was required to be reduced to 3
percent of GDP by 2008-09.
Ø
The
Act also provides exception to the government in case of Natural Calamity and
whenever there is a threat to National Security.
The
implantation of the act was put on hold in 2007-08 due to Global Financial Crisis
and the aggravating demand for Fiscal Stimulus.
There was a
need for increased government expenditure to create demand to fight off the
financial downturn and hence the government moved away from the path of Fiscal
Consolidation for this period.
Ø This law also prohibits borrowing by government from the
Reserve Bank of India and purchase of primary issues of central government
securities after2006.
Ø
The
Act asked the Central government to lay in Parliament three statements in one
financial year about the fiscal policy.
Ø
To
enforce fiscal discipline at the state level, the Twelfth finance commission
provided for incentives to states through conditional debt restructuring and
interest rate relief.
In 2012, the
FRBM Act was amended and it was decided that the FRBM Act would target Effective Revenue Deficit
in place of Revenue
Deficit.
Ø Effective
Revenue Deficit excludes Capital
Expenditure from Revenue Deficit and thus provides space to the government to
spend on formation of Capital Assets.
The critics of
this Act usually point of out the demerits that it would put a curb on the government’s
social sector spending, but no one can deny the fact that there is a rising need
for Fiscal Sustainability in order to put the economic indicators back on the
path of Growth as well as Development.
