An economy can be considered to be growing positively when the government’s revenue is more than its expenditure. If a government does not have enough revenue, its borrowing level increases and thus create more burden on the existing debt. The government would borrow money to clear the existing debt, then again borrow money to repay the last borrowed amount, and in this way, the borrowing gets increased and creates a burden on the economy. Thus to ensure positive economic growth and sustain the government treasury, the GOI has adopted enacted Fiscal Responsibility and Budget Management (FRBM) Act.
What is FRBM Act?
The FRBM (Fiscal Responsibility and Budget Management) bill was first introduced in the Indian Parliament in the year 2000 by the Finance Minister of that time Mr. Yashwant Sinha. But the Initial versions of this act seemed to be very drastic and impractical. Thus after a lengthy discussion in 2003, a revised version of the FRBM bill was introduced in the Indian Parliament which later became the FRBM Act, 2003. But this act came into force in July 2004. The FRBM Act is all about compelling the government to maintain a balance between its revenue and expenditure. The FRBM Act, of 2003 aimed to bring fiscal discipline, macroeconomic stability, transparency in the government fiscal operations, and efficient management of funds. The major objective of the FRBM act was to bring clarity to the financial management system of the government, thus providing stability to the economy.
Why there was a need for FRBM Act?
During 1990-2000 the Indian economy was getting very weak as the fiscal deficit was very high due to high levels of borrowing and the Debt-to-GDP ratio was also continuously increasing. Then many economists warned that if it continues then India will be soon under great debt. Before the FRBM act came into power, the government was borrowing significant proportions of money in front of which the revenue collection was significantly lesser. So more than half of the money was used for paying off the previous borrowings. Thus in this way, the government’s revenue always falls short in front of its expenditure. Thus taking into account the warning of many economists, the parliament of India too felt that there is a need for a regulatory act, that makes sure the government’s expenditure should not exceed its revenue. Hence to deal with this issue in, a responsibility and discipline bill was passed in the Indian parliament, which later became the FRBM act, 2033.
What are the Provisions of the FRBM Act?
Under the FRBM act, it became compulsory for the government to indicate 4 fiscal indicators in the medium-term fiscal policy statement. The FRBM act also made it mandatory for the government to present its Fiscal Policy Strategy Statement, Medium-term Expenditure Framework Statement, Medium-term Fiscal Policy Statement, and Macro-economic Framework Statement along with the budget documents in the parliament.
- Provision 1: Total outstanding liabilities as a percentage of GDP
- Provision 2: Fiscal deficit as a percentage of GDP
- Provision 3: Revenue deficit as a percentage of GDP
- Provision 4: Tax revenue as a percentage of GDP
Amendments in the FRBM Act
In the FRBM amendment act, many changes were made to the existing act like Effective Revenue Deficit (E.R.D) was introduced for the first time.
Amendments in 2012:
- The target for a minimum annual reduction of revenue deficit was set to 0.5% of the GDP, and the revenue deficit must be cleared out before 31st march, 2015.
- The target for a minimum annual reduction of fiscal deficit was set to 0.3% of the GDP, and the fiscal deficit must be reduced to a minimum of 3% of the GDP before 31st march, 2015.
Amendments in 2015:
- The target for a minimum annual reduction of revenue deficit was set to 0.5% of the GDP, and the revenue deficit must be cleared out before 31st march, 2018.
- The target for a minimum annual reduction of fiscal deficit was set to 0.3% of the GDP, and the fiscal deficit must be reduced to a minimum of 3% of the GDP before 31st march, 2018.