About Fiscal Responsibility and Budget Management Act, 2003

Expenditure without thought and proper planning can lead to the destruction of a country’s economy, no matter how good its revenue is. Therefore, it is essential that the government of a country carefully thinks through all financial activities and plans out all the measures to ensure that the budget it has is not laid to waste.

It was in this spirit that the government, in 2003, came up with the Fiscal Responsibility and Budget Management Act, FRBMA (2003). The main motive of this act was to instil a higher amount of responsibility in the government to maintain its budget and keep its financial activities in check. The main reason behind the implementation of the Fiscal Responsibility and Budget Management Act was to reduce the growing fiscal deficit in the country.

What is the Fiscal Responsibility and Budget Management Act?

Brought by the Atal Bihari Vajpayee-led BJP government, the FRBM Act was introduced to ensure that the government in power would maintain a certain fiscal discipline. It was also introduced to provide legal backing to fiscal discipline. The bill was passed in 2003. It set down guidelines to ensure that the government reduced the fiscal deficit in the economy.

A fiscal deficit is a situation when the total expenditure made by the government exceeds the total revenue that is generated by the government. Via the act, the government was given a certain benchmark of the fiscal deficit level that it had to maintain.

Along with reducing the fiscal deficit of the country, the FRBM Act also wanted to provide greater transparency to the fiscal operations that were undertaken by the government during the fiscal year. Along with that, the FRBM Act also sought to achieve a more equitable debt distribution of the country’s debt over the years.

Ever since its enactment and barring a few occasions, the FRBM Act has always been presented with the Union Budget and includes documents of the government’s fiscal activity. The consortium of documents that are presented in the FRBM Act includes medium-term fiscal policy, the macroeconomic framework, as well as the fiscal policy strategy. The FRBM also seeks to implement inter-generational equity in fiscal management for better catering to the future generations and establishing long-term macroeconomic stability.

Objectives of the FRBMA

The primary objective of the Fiscal Responsibility and Business Management Act was to ensure that the fiscal deficit of the government was not beyond a certain threshold. Along with that, the FRBM was also supposed to bring about intergenerational equity in fiscal management and long-term macro-economic stability. It was unveiled to ensure that the economy of the country did not become over-dependent on a certain sector. The FRBM Act started with a very rigid fiscal deficit rate.

The target set by the FRBM Act after its enactment in 2003 was to make sure that the government achieved a fiscal deficit rate of 3 percent by the fiscal year of 2007-2008. But certain provisions were also given to the government to ensure that the government did not hinder the social expenditure, from building productive projects to bringing upliftment to the rural sectors of India.

In 2016, after trying to achieve the objective of the FRBM Act to reduce the fiscal deficit, the government decided to set up a review committee under N K Singh to review the objectives of the FRBM Act.

This was because the government believed that the targets that were set in the FRBM Act were near impossible to achieve. The government was also saddled with many restrictions under the FRBM Act, like not being allowed to borrow money from the Reserve Bank of India unless there was a certain emergency.

The emergency was described as a war, or any natural calamity that affected the nation as a whole. In such situations, the government was also allowed to breach the ceilings that were set by the FRBM Act with regard to the fiscal deficit.

Drawbacks of the FRBMA

On paper, the Fiscal Responsibility and Budget Management act looked like the perfect solution to reducing the fiscal deficit of the country, long-term macro-economic stability, and bringing inter-generational equity in fiscal management. Even though the measures that the FRBM Act introduced were backed by logic and sound decision-making for prudential debt management of the government, it had one weak section that unravelled all the work that it was supposed to achieve. The measures to ensure the enforcement of the act were very weak.

The FRBM Act was enforced to ensure that the Central government did not breach the set ceiling for the fiscal deficit in a given fiscal year. But the powers to amend the act as well as to ignore the act in terms of special situations were also given to the central government. This meant that the government could freely amend the act every time it had a reason to breach the set ceiling of the fiscal deficit.

There were also no specific measures to enforce the compliance of the central government with any other civil body. The finance ministry of India was required to do only a quarterly review of all the revenue and expenditures of the government and then place the report in front of the parliament.

The approval of the parliament was necessary to allow the government to breach the ceiling of fiscal deficit. But the parliament is usually always with the majority of the central government, and hence, the very measure of compliance becomes nothing more than a facade. In order to judge the central government’s performance, the only variables that were considered as targets were the revenue deficit, the fiscal deficit, the total outstanding liabilities of the government, and the tax revenue that was generated by the government as revenue.

Conclusion

Brought by the Atal Bihari Vajpayee-led BJP government, the FRBM Act was introduced to ensure that the government in power would maintain a certain fiscal discipline. It was also introduced to provide legal backing to fiscal discipline.

The bill was passed in 2000 and again in 2003. It set guidelines to ensure that the government reduces the fiscal deficit in the economy. The target set by the FRBM Act after its enactment in 2003 was to make sure that the government achieved a fiscal deficit rate of 3 percent by the fiscal year of 2007-2008.

The FRBM Act was enforced to ensure that the Central government did not breach the set ceiling for the fiscal deficit in a given fiscal year. But the powers to amend the act as well as to ignore the act in terms of special situations were also given to the central government.