FRBM Act 2003

Along with the Union Budget, the term FRBM has significant mention each time. It intends to maintain the balance and discipline in the finance and Indian economy and increase the difference between fiscal deficit and primary deficit. Hence, it is necessary for constant growth and development in the economy of India. According to this act, it is the responsibility of the central government for a markable reduction in the fiscal deficit. For this reduction, the ministers and officials of the finance department hold variable schemes and steps to attain a significant discipline and balance in the financial infrastructure of the Indian budget.  

FRBM: Definition 

FRBM is primarily termed Fiscal Responsibility and Budget Management act was passed in Parliament and enacted in 2003. This act holds the responsibility to set targets concerning gaining the state of financial balance and discipline. In 2016, the Indian government framed an active committee to review and rephrase the FRBM act management and schemes to maintain the efficient difference between fiscal deficit and primary deficit. 

According to the committee’s review and research, the FRBM act’s set target was too rigid to attain and needed core renewal. Therefore, according to the committee, the set target of 3 percent of GDP for March 2020 must be reduced to 2.8 per cent for the current year (2020-2021) and 2.5 per cent for March 2023.

Right after this renewal, the covid19 repeated waves forced the essential burden and shortfall of revenue in the financial infrastructure of India. It was because of the frequent need for welfare and health funds. It had a massive impact on the economy of India.

According to the reports of the government of India, during the pandemic, the fiscal deficit and primary deficit for the financial year 2021 was 9.2 percent against the set target of the FRBM Act, i.e., 9.5 percent. The current fiscal year (2022-23) is 6.8 percent as the FRBM set target, and India’s government aims to reduce it to 4.5 per cent in the fiscal year 2026.

Need For FRBM Act In Indian Economy:

The Indian economy was highly disbalanced till 2003, with constant borrowing and increasing debt in 1990 and 2000. This state of the financial infrastructure resulted in a high revenue deficit and a high fiscal deficit, and the ratio of debt to GDP increased. These elevated ratios and difference between fiscal deficit and primary deficit made the Indian economy weak and imbalanced from the core.

Most of the borrowing was to settle the interest amount of the previous borrowing amounts, and India could not use it for any productive purposes. Hence, the interest payment was at the top of the financial statement and expenditure statistics. According to the economist and finance officials, this was alarming situation for the Indian economy with a non-sustainable fiscal deficit and primary deficit. 

With this advice, the Parliament houses have several sessions and discussions to attain governmental control over fund borrowing and expenditure management. During the fiscal year 2000, the bill’s proposal to attain the responsibility and disciplinary maintenance in terms of debt expenditure was presented in Parliament. The bill passed in 2003 and was made active as the fiscal responsibility and budget management act (FRBM).

Types Of Budget Deficit:

According to the statistics’ receipts, expenditure, and debt, three significant types of budget deficit are listed. All these budgets attain variable measures of calculation to attain the difference between fiscal deficit and primary deficit. Let’s discuss some of the features:

• Revenue Deficit: The revenue deficit relates to the government’s revenue expenditure and total revenue receipts. It significantly mentions the government’s incapability to function the governmental services and schemes with sustainable earnings. Hence, it is defined as, if the total revenue receipts shortfalls against the revenue expenditure, then it will be the revenue deficit of the current year. 

Formula: Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts

• Fiscal Deficit: The fiscal deficit in finance is the excess of total budget expenditure against total budget receipts, excluding the total borrowed funds during the fiscal year. It is the significant difference between fiscal deficit and primary deficit and its calculation. The increased fiscal deficit means a large amount of borrowing. 

Formula: Fiscal Deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing

• Primary Deficit: There are several significant points of difference between fiscal deficit and primary deficit. In finance, the primary deficit is the difference between the fiscal deficit of the current fiscal year and the interest amount on the previously borrowed funds.

Formula: Primary Deficit = Fiscal deficit – Interest payments

Conclusion: 

The enactment of the FRBM act was to bring a sustainable balance and disciplinary maintenance of finance practices of India. It refers to determining the set target of fiscal deficit to attain in the particular fiscal year for substantial growth in the GDP and economy of India. The difference between fiscal deficit and primary deficit and the revenue deficit is analyzed and managed by the fund borrowing, interest rates, and payment with the total expenditure on government policies, practices, and services.