Understanding India’s Fiscal Responsibility and Budget Management Act (FRBM Act)

Introduction

• Have ever thought how our Indian economy deals with money? Here comes the FRBM Act that sheds light on the government’s expenditure behaviors.
• Let me liken this to the operation of a tightrope walker – how the FRBM Act aids the Government balance out its expenditure to balance and borrowing to get an economy that is both sustainable and stable in the long run.

What is this FRBM Act?

• Originally enacted in 2003, FRBM Act is legal instrument for fiscal prudentialism. In layman terms, it establishes a framework of guidelines to balance between creating a fiscal policy that will constrain the government from borrowing too much of the nation’s money as well as borrowing money wisely.
• It is similar to a rule book addressing rationality in the spending habits of a country’s finances.

Why the FRBM Act is important?

• Curbing Debt:
  • Government debt can provide a mechanism to link the two aspects of the argument because it is possible for a country to accumulate too much debt and this can be detrimental to the advancement of the economy. The specific goal of the FRBM Act is to rein in the debt and make available resources particularly in education and infrastructure.
• Stable Budget:
  • The Act provides for better budgeting and constricts the likes of rapid fluctuation in government spending that might bring instability into the market.
• Transparency:
  • Due to the requirement of specific financial documents as dictated by the FRBM Act, the government spending is made clear enabling the citizens to press on the authorities.
• Monetary Policy Freedom:
  • A controlled fiscal deficit is beneficial in providing the flexibility of operation to the Reserve Bank of India especially in terms of reasonable control of inflation rate through the instrument of interest rates.

Important features of FRBM Act:

• Fiscal Goals:
  • The Act lays down paths for the timing and extent of fiscal balance (government income less expenditure or deficits) reductions.
• Medium-Term Planning:
  • The government offers a medium-term fiscal policy statement, this is the government spending proposals for the following years.
• Transparency Documents:
  • The Union Budget is presented and it has three critical annexures required by the FRBM Act in the subsequent sections:
• Medium-Term Fiscal Policy Statement:
  • Constructs the prognosis of revenue and fiscal deficit for the over the next three impending fiscal years.
• Macroeconomic Framework Statement:
  • Gives future expectation of important macro-economic variables including; growth in GDP and inflation rates.
• Fiscal Policy Strategy Statement:
  • Explain how the government will get to the fiscal policy it wants.

Challenges and Reforms

Nevertheless, pure and simple has been the implementation of FRBM Act been challenging even though it’s an Act of parliament well intended. While budgeting is important and should be maintained, there are instances that economic situations make it extremely hard to achieve and maintain these deficit levels. Several modifications have been done to the Act with suggestions including those by the NK Singh Committee in 2016. These suggestions focused on:

• Prioritizing Debt Repayment: Including the cut down on debt as one of its key objectives.
• Fiscal Council: Formulating of an autonomous institution to oversee fiscal conditions.
• Deviation Rules: Laying emphasis on which reasons would make fiscal strategies deviate from the fiscal targets, such as national emergencies.
• Borrowing Regulations: Decreasing the governmental ability to borrow more money than what they can afford to pay back.

The Fundamental Review of the Budgetary Manual Act in the Current Context
The general global economic environment is very unstable than it has ever been. We can conclude that the FRBM Act continues to be one of the important frameworks in governing India’s economy as it contributes to the enhancement of official fiscal responsibility along with the implementing of structured fiscal discipline. Thus, the FRBM Act’s flexibility shall remain the key to the country’s long-term economic growth as India moves into future economic uncertainities.

Impact on Fiscal Policy:

According to the provisions of the FRBM Act, there is a phased process of reduction in the fiscal deficit. This is important to avoid reaching breaking point on public debts and putting future generations deeper in debt than they already are. Thus, when the government provides clear fiscal targets, then it gets constrained to practice fiscal prudency in order to enhance the macroeconomic stability of the economy.

Economic Growth:

In this way, having introduced the idea that restricts excessive borrowing, the FRBM Act keeps the economy in a better state. Reduced necessities for fiscal deficits means that the government borrows less from the financial markets and hence releases more capital for borrowing by the private sector. It can also result in superior rates of economic growth in the long run, thus achieving economic development.

Public Confidence:

The use of information in the implementation of the provisions of the FRBM Act is characterized by transparency. Such recapitalization work specifications, most particularly the prepares and disclosure of comprehensive fiscal reports, aids in enhancing people’s confidence in the fiscal administration of the government. Citizens and investors are assured when there is clear and consistent information being relayed concerning the status of the firm’s finances.

Role of the RBI:

The rising ratio does not allow influence over monetary policy because a controlled fiscal deficit provides the RBI with effective freedom. Where the government has ensured that it doesn’t accrue large deficits, then the RBI can well maintain control of the inflation rates that may otherwise necessitate its provision of finances to fund the deficit.

FRBM Act and its Changes

• The Initial Phase:
  • In the initial formulation of the FRBM Act, the concentration was on holding the fiscal deficit to 3 % of GDP and eradicating the revenue deficit by 2008-09.
  • Nonetheless, due to occurrences in the economic situation and unexpected expenditures, the stated objectives were not achieved to the extent that was envisaged.
• NK Singh Committee Recommendations:
  • In December 2015, the functioning of the FRBM Act was revisited by the NK Singh Committee which also recommended a number of modifications. Key recommendations included:
• Debt-to-GDP Ratio:
  • Introducing goals that provided that the total public debt to GDP ratio should be not more than 60 percent as for central government is 40 percent and the rest 20 percent for the states to be achieved by 2023.
• Fiscal Council:
  • Create a new institution, the Fiscal Council, which will give impartial opinions and recommendations related to all the fiscal issues.
• Flexibility in Targets:
  • Permits flexibility in deviations from the fiscal objectives provided that the conditions are such as a severe contraction of an economy, security concerns, or natural calamities.
• Current Adjustments:
  • Due to the COVID-19 outbreak, the government has limitedly changed its fiscal policy by easing the fiscal deficit objectives in the short term. This has raised the imperative of flexibility within the consumption of the FRBM principles in a way that addresses unprecedented shocks while doing so in a way that does not threaten long term fiscal rectitude.

Future Outlook

In India, as the economy expands and new economic at the centre of the country, the FRBM Act is expected to change to fit the requirements of the growing economic environment. It cannot be argued that the Act is based on the principles that most developing countries, especially those aspiring to be economic power houses, should embrace these four cardinal principles of fiscal discipline, transparency and accountability. Future reforms may focus on:Future reforms may focus on:

Strengthening Institutional Frameworks: Exploring ways of strengthening the mandate and, specifically, autonomy of the bodies such as the Fiscal Council for the purpose of efficient supervision.
Integrating New Economic Indicators: Adopting the productivity of the modern economy and the new methods of data analysis to improve the management of fiscal policies.
Enhancing Public Engagement: In the light of identifying the objectives of public engagement in fiscal policy it could be considered that; There is need to establish public awareness and understanding of fiscal policies so that people can participate more and effectively in budgetary processes.

Conclusion

Fiscal Responsibility and Budget Management Act are proven to be extremely helpful in inculcating the long term stability in Indian Economy. This way, the FRBM Act contributes to keeping a balanced budget, as well as a healthy economy by offering guiding principles based on fiscal discipline, transparency, and responsible borrowing and lending. With this change in mind, the FRBM Act will alter with the change in economy and address all such issues that hinder the development for further generations.

FAQS

Q1: What is the FRBM Act?
Ans: The Fiscal Responsibility and Budget Management (FRBM) Act, passed in 2003, is a law that sets rules for the Indian government’s spending and borrowing habits. It aims to promote fiscal discipline and ensure long-term economic stability.

Q2: Are there exceptions to the FRBM Act?
Ans: Yes, the Act allows for deviations from deficit targets in extraordinary circumstances like natural disasters or war.

Q3: How does the FRBM Act impact me?
Ans: By ensuring responsible government spending, the FRBM Act contributes to a healthy economy, which ultimately benefits all citizens.