Enforcement of Budgetary Restraint by FRBMA Act

In spite of all the efforts made by the government to improve the financial conditions of India, it failed to maintain efficiency and financial discipline. Deficit bias was the result of multiple activities like scarce resources, time distorted incentives, electoral cycles and the tendency of the authorities to spend recklessly in the good financial years. But the interesting thing is that the authorities are taking various measures to cope with the imbalances and fiscal deficit. One such objective of the state is to strengthen the coordination between the monetary and fiscal policies of the nation. Various monetary policy tools need to be adopted to accomplish the intention of guaranteeing sustainability in the economic system of the country. 

Fiscal Responsibility and Budget Management Act, 2003

The Fiscal Responsibility and Budget Management Bill ( FRBM Bill) was inaugurated in the country by the then finance minister, Mr. Yashwant Sinha, in December 2000. However, the Bill got its final approval by the Union Cabinet in 2003 where it came into ultimate effectiveness from July 5, 2004.

It enhances the across-the-board administration and supervision of the public funds by progressing towards a symmetrical budget and strengthening fiscal prudence, thus reducing the fiscal deficit and ensuring surplus. 

Objectives

1)The first and foremost objective is to introduce and launch various apparent and noticeable fiscal management systems in our country that would improve and provide efficiency in the financial system of the nation. 

2) The next one is to initiate a more impartial and effortless diffusion of the country’s debts over the years, which can be repaid in equal intervals of time.

3) The last purpose is for fiscal stability for our country India in the long run and to apply the fiscal deficit formula of reduction wherever possible. 

How does the Fiscal Responsibility and Budget Management Bill ( FRBM Bill) function?  

To put it completely, the Fiscal Responsibility and Budget Management Act prohibits the expense and outlay of the central government. It reduces and at the same time switches the expenditure of the country to the side of  more revenues and earnings. With the assistance of the FRBM Act, the state discovers a means to transfer the expenditure at the edge of the day into capital expenditure from the revenue expenditures. It is also significant to point out that by prohibiting the fiscal deficit to 3% of the significant gross domestic product, the FRBM Act does not diminish the GDP with the Fiscal deficit formula but relatively heightens it at a productive rate. 

ESCAPE CLAUSE IN FRBM ACT

The concessional provision and expenditures that goes above the allowed fiscal deficit target is popularly comprehended as the escape clause. 

Grounds for the usage of the escape clause

There are various protections and immunities to the Fiscal Responsibility and Budget Management Bill ( FRBM Bill). The list of these Exemption grounds in the FRBM Act includes :-

1)The first one is the maintenance of the National security (act of war)

2) National calamity is also an exceptional case in the usage of the escape clause of the FRBM Act. 

3) Collapse of agriculture also leads to an unusual and exceptional existence of the Fiscal Responsibility and Budget Management Act (FRBM Act).

4) Last one in the list of exceptions is the Structural reforms in the economy.

Significance of FRBM Act 2003 

1)The prominent perception regarding the FRBM Act is that it is implied to “compress” or constrain the governmental expenditure to reduce the acts of fiscal deficit. But that is a flawed understanding. Rather, it helps in gaining up a lot of surplus and helps in the application of fiscal deficit formula.

2) The truth behind the existence of FRBM Act is that it is not considered as a mechanism of compressing the expenditure, rather an expenditure switching one, where only the useful expenditures are taken into reference.

3)In other words, the Fiscal Responsibility and Budget Management Bill ( FRBM Bill) restricts and curbs the total fiscal deficit of the country and assists in creating revenue or the surplus for the economy. 

4) This also suggests that – again, unfavorable to popular understanding – attaching to the FRBM Act should not curtail or lessen India’s GDP, rather increase it at a decent rate. 

Conclusion

Apart from its good and promising points, the Act was still criticised by the Finance Minister, P. Chidambaram on the aspects that the cutting of the government expenditures for reducing the fiscal deficit may lead to deductions in the expenditure of significant and crucial social activities as well. Other potential downfalls of the Fiscal Responsibility and Budget Management Act ( FRBM Act) are the vagaries of Indian monsoon, over-optimistic behaviour of the members of the programme and elevated dependency on agriculture.