FRBM Act – Objectives, Features, Full Form, FRBM Act UPSC

What is FRBM Act?

FRBMA Full Form is Fiscal Responsibility and Budget Management Act. The FRBM Act was implemented by the Indian Parliament to integrate fiscal stability, mitigate India’s fiscal deficit, uplift macroeconomic stability, and regulate funds of the public by presenting a balanced budget and reintegrating fiscal frugality.

• The primary goal of the FRBM Act was to mitigate the revenue deficit of the country and trim off the fiscal deficit to an acceptable 3% GDP by March 2008.
• But, due to the onset of the global financial crisis of 2007, the time limit for executing the FRBM Act’s aims was initially deferred and then suspended in 2009.
• In 2011, the Economic Advisory Council formally encouraged the Government of India to explore reinstating the provisions of the FRBM Act, citing the ongoing recovery process.
• N. K. Singh is the current Chairman of the Review Committee for the Fiscal Responsibility and Budget Management Act, 2003, which is overseen by the Ministry of Finance (India).

Enactment of the FRBM Act

The former Finance Minister of India, Yashwant Sinha, launched the Fiscal Responsibility and Budget Management Bill in the year 2000. The FRBM law was enacted by the Indian Parliament in order to ensure fiscal discipline, management of public finances, and long-term economic stability. Moreover, it was proposed due to the high fiscal & revenue deficit, and high debt-to-GDP ratio.

• The FRBM bill was submitted with the broad goals of eliminating the revenue deficit by March 31, 2006, preventing government borrowing from the Reserve Bank of India for three years following its enactment, and lowering the fiscal deficit to 2% GDP by March 31, 2006.
• The bill also aimed to teach the foundations of budgetary restraint to government officials at all levels.
• Under the declaration of purposes and reasons, the bill first underlined the dire state of government finances in India, both at the national and state levels.
• The FRBM Act has been amended several times since its enactment to facilitate more flexibility for the government in meeting its fiscal targets during times of economic crisis.

Need of FRBM Act

The FRBM Act 2003 was enacted by the Indian government to address the issue of fiscal deficit and its negative impact on the Indian economy. It aimed to promote and encourage the proper management of public finances by setting targets for reducing the fiscal deficit and outstanding debt. Here are some important reasons for the enactment of the FRBM Act:

• High levels of deficit financing by the government can lead to an increase in the money supply, which can in turn lead to inflation.
• The FRBM Act aimed to improve fiscal transparency and government accountability by disclosing the fiscal policy objectives, strategies, and targets of the government.
• High levels of public debt can lead to the crowding of private investment. As a result, the government will have to compete with the private sector for funds.
• Hence, the Act would help to promote greater public awareness and scrutiny of the government’s fiscal policies.
• Lastly, the FRBM Act also aimed to promote fiscal discipline and economic stability by ensuring that the government’s policies were sustainable over the long term.

Objectives of the FRBM Act

The objective of the FRBM Act was to get financial and macroeconomic stability. The fiscal policy has been established to balance the economic condition in India. The Fiscal Responsibility and Budget Management Act’s principal goals were to:

• Establish transparent fiscal management mechanisms in the country.
• Provide a more equitable and controllable distribution of the country’s debts over time.
• Achieve fiscal stability for a longer time period in India.
• Furthermore, the act was supposed to provide the Reserve Bank of India with the required flexibility in managing inflation in India.

Features of FRBM Act

The FRBM Act aims to provide stability to the macroeconomic and financial status of the country. The Central Government was required to specify the following via rules enacted by it:

• A strategy to reduce the revenue shortfall by March 31, 2008, by setting annual reduction targets beginning on the day the act was signed into law.
• Annual targets for acquiring contingent liabilities in the form of guarantees and total liabilities as a percentage of GDP reduction of the country’s annual fiscal deficit.

As per the FRBM Act, the following documents must be released along with the Budget annually.

• Macroeconomic Framework Statement
• Medium-Term Fiscal Policy Statement
• Fiscal Policy Strategy Statement

In the Medium Term Fiscal Policy Statement, four factors for fiscal health will be discussed as projections

• Revenue deficit as a percentage of GDP
• Fiscal deficit as a percentage of GDP
• Tax revenue as a percentage of GDP, and
• Total outstanding liabilities as a percentage of GDP

FRBM Act – N K Singh Committee

In 2003, the Fiscal Responsibility and Budget Management (FRBM) Act was passed, which established goals for the government to meet in order to eliminate fiscal deficits. The targets were moved around a few times.

• The government formed a committee to evaluate the FRBM Act in May 2016, led by NK Singh. The targets were seen to be overly rigorous by the government.
• According to the committee, the government should aim for a fiscal deficit of 3% of GDP in the years leading up to March 31, 2020, then reduce it to 2.8 percent in 2020-21 and 2.5 percent in 2023

Latest Changes in FRBM Act 2003

The rolling targets for budget deficits were not included in recent amendments to the FRBM Act Medium Term Fiscal Policy Statement in both 2021-22 and 2022-23. The Union Budget 2021 saw some amendments to FRBM Act which are as follows:

• The government’s goal in Budget 2022 was to reduce the fiscal deficit to less than 4.5% of GDP by 2025-26.
• The budget deficit target for 2022-23 is anticipated to be 6.4% of GDP. It’s a measure of how much money the government borrows to cover its expenses.
• The revenue shortfall for 2022-23 is expected to be 3.8% of GDP. It describes the government’s need to borrow money to cover expenses that may not provide a profit in the future.
• According to the revised calculations, the fiscal deficit will be somewhat higher than the budget forecast of 6.9%, while the revenue shortfall will be lower at 4.7%.
• In 2022-23, the primary deficit objective is expected to be 2.8% of GDP.
• Interest payments have increased from 36% in 2011-2012 to 42% in 2020-21. Budget predictions show that by 2022-23, this share will have risen to 43%.

FRBM Act UPSC

FRBM Act is an important topic in the economic and Current affairs syllabus. To know more about this act read the UPSC Books. FRBM Act is a crucial topic from the angle of the Prelims and Mains. The candidates can get elaborated and elucidated knowledge to score well in the upcoming exam. The aspirants must practice the previous year papers and sample papers to get ideation of the exam pattern and syllabus.

FRBM Act UPSC Notes

UPSC aspirants appearing for the IAS Exam in the current or upcoming year can get the syllabus here. You can also practice the questions from the UPSC Previous Year’s Question Papers.

FRBM Act Questions

The FRBM Act is an essential part of the UPSC syllabus, it is of prime importance for the candidates to practice the questions in order to solve the questions pertaining to this topic in the stipulated time frame. The questions from FRBM Act can be asked in prelims and mains, as this holds immense importance in stabilizing the economy. You can walk through the questions that have been facilitated here, to get hold of the concepts.

Q1. The Financial Responsibility and Budgeting Management Act (FRBM Act) was enacted by the Indian Parliament to: a) institutionalize fiscal stability, b) reduce the fiscal deficit, c) enhance macroeconomic stability, d) All of the above

Correct Answer – Option D [All of the above]

Question: Identify the incorrect statement amongst the following with reference to the ‘Fiscal Responsibility and Budget Management Act 2003.’ [A] Government is necessitated to trim off the Revenue Deficit up to 3% of the GDP. [B] Government cannot borrow the money. [C] The targets of the fiscal deficit and revenue deficit may exceed the limits only on the grounds of calamity and national security.

Answer: Option [A] Government is necessitated to trim off the Revenue Deficit up to 3% of the GDP.

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