Dear Readers,

The FRBM Act, 2003 has been in the news often and can be very important for your upcoming

exams. In this article, let us look at the Fiscal Responsibility and Budget Management (FRBM) Act’s

objectives, key provisions, criticisms of the same and the amendments made to it.

Background

The FRBM Act was passed to reduce fiscal deficit and
make the government responsible for achieving “long-term macroeconomic
stability”. As per this act, it is the government’s responsibility to ensure
overall financial discipline.

Objectives
of the FRBM Act

–
Maintain transparency in fiscal management
system in the country

–
Keep a check on governments living beyond
their means to reduce debt burden on future generations.

–
Restrict uncontrolled government
borrowings as it crowds out private investments, increases inflation or leads
to balance of payments deficit, thereby causing macroeconomic instability.

–
Do away with impediments to enable the RBI
frame an effective monetary policy and control inflation.

Main
provisions of the original act

The act stipulates the Union government to-

–
Annually reduce revenue deficit by 0.5%
and eliminate it wholly by 2008-09

–
Annually reduce fiscal deficit by 0.3% and
bring it down to 3% of GDP by 2008-09

–
Not give guarantee to loans acquired by
PSUs and state governments for over 0.5% of the GDP in a financial year

–
Present three additional documents along
with the annual budget, namely the Macroeconomic Framework Statement, the
Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.

–
Cease borrowing directly from the RBI from
2006.

Implementation
of the act

–
Implementation of the FRBM act yielded certain
positive outcomes in the Centre as well as the states. For instance: In
2007-08, the fiscal and revenue deficits of the Centre as a part of GDP at
market prices were 3.39 and 1.6 respectively.

–
The Union government’s interest payments
as percent of GDP declined (though not considerably) from around 4.5 % in
2003-04 to 3.57 in 2007-08.

–
The Centre’s total expenditure as a
proportion of GDP declined from around 17 % in 2003 to around 14 % in 2006-07.

–
However, its development expenditure as a
part of the GDP declined in the post FRBM period from 7.49% in 2002-03 to 6.42
% in 2005-06. In the states, it registered a marginal increase indicating that
in a high interest rate regime, states have been more sincere than the Centre
in fulfilling development needs.

Criticisms
of the act

–
While the act is based on the supposition
that fiscal deficit is the key parameter adversely affecting all other
macroeconomic variables, many development economists opine that if the fiscal
deficit is predominantly in the form of capital expenditure, it promotes growth
through demand and supply linkages. This can create so much demand in the
economy that private investment may crowd-in to add to autonomous investment.

–
Then Finance Minister P. Chidambaram said
that the act might require the government to severely cut back on social
expenditure essential to create productive assets and for overall upliftment of
India’s rural poor.

–
Drawing parallels of international laws,
experts have pointed out that its relevance of FRBM Act is bound to decrease over
time and is liable to be amended to suit lawmakers. For instance: enactment of
debt-ceilings in the US.

–
The act prohibited the Centre to directly
borrow from RBI, thereby ruling out a cheap source of funds and making the
Government to borrow at much higher rates.

Suspension
of the act and efforts for its reestablishment

–
Due to the global financial crisis in
2008, the deadlines for the implementation of the fiscal consolidation targets
were temporarily suspended.

–
As a result, fiscal deficit increased to
6.2% of GDP in FY09 as against the target of 3% set by the Act for FY09 period.
However, the crisis necessitated an increase in government expenditure in order
to boost demand in the economy.

–
The IMF in 2009 and recently in 2011 the
Economic Advisory Council to the Prime Minister (PMEAC) advised the Centre to
reconsider the provisions of the act and come up with a successor.

–
The Economic Survey 2013-14 called for a
new FRBM Act with stricter norms for high quality fiscal adjustment based on
improvements in both tax and expenditure. The Survey stated that the modified
act should consider business cycles, and have strong penalties.

Amendments
made to the original FRBM Act

Later through the 13th Finance Commission and
the Finance Act 2012, following were the amendments made:

–
In 2012, besides the three documents, the Centre
should present the Medium Term Expenditure Framework Statement (MTEF). This sets
forth a three-year rolling target for expenditure indicators, specifying
underlying assumptions and risks involved.

–
Effective revenue deficit (difference
between revenue deficit and grants for creation of capital assets) was made a
new fiscal parameter.

–
With the Finance Act 2015, the target
dates for achieving the approved effective deficit and fiscal deficit rates were
further extended. The effective revenue deficit, which had to be eliminated by
March 2015, will now need to be eliminated by March 2018. The 3% target of
fiscal deficit to be achieved by 2016-17 has now been shifted by one more year
to the end of 2017-18.

General
Knowledge and Current Affairs are an important component of many competitive
exams, such as the UPSC Civil Services Examination, SSC CGL Exam, Bank PO &
other PSU entrance tests, etc. Therefore, understanding the
concepts/terms/events that are significant in our daily lives is critical for
aspirants. To make your preparation easier and to help you score better in your
exams, we at PaGaLGuY bring you brief articles on important phenomena, concepts
and events. Spend just 15 minutes every day on pagalguy.com and score at least
10 more marks in your General Studies paper!

To access
all the content available on PaGaLGuY, login to https://testing.pagalguy.com/

To get fresh updates about different exams on your Facebook & Twitter timelines, subscribe to our pages created specifically for them. We will post only exam specific links on these pages:

Bank PO:

Facebook: https://www.facebook.com/pagalguybankpo

Twitter: https://twitter.com/PaGaLGuYBankPO

SSC – CGL:

Facebook: https://testing.pagalguy.com/ssc

Twitter: https://twitter.com/pagalguyssc

UPSC:

Facebook: https://www.facebook.com/pages/Pagalguy-UPSC/951926044840262

Twitter: https://twitter.com/PaGaLGuYUPSC