The FRBM Act is a fiscal sector legislation enacted by the government of India in 2003, aiming to ensure fiscal discipline for the centre by setting targets including reduction of fiscal deficits and elimination of revenue deficit. It is a legal step to ensure fiscal discipline and fiscal consolidation in India.
The targets set under the Act was postponed several times in later years though some other goals of the Act including phasing out of government borrowing from the RBI were implemented.
Why FRBM became necessary?
The FRBM Act was enacted in 2003 as rising government borrowing and the resultant government debts have seriously eroded the financial health of the government. High revenue deficit due to higher expenditure on subsidies, salaries, defence etc. compelled the government to make big borrowing from early 1990s onwards. With inadequate revenues, government resorted to high level of borrowing.
The borrowing again produced high interest payments. In this way, interest payments became the largest expenditure item of the government. To arrest this financial weakness in its budget, the government has taken some serious deficit cut targets by introducing a law in the form of the FRBM.
What the FRBM says?
The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be realized with an annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by 2008-09. Later, the target dates were reset and deferred several times through amendments and budgetary statements. As of now, the government propsed to realise the Fiscal Deficit target of 4.5% by 2025-26.
The Act gives slight flexibility to the government regarding the realisation of the target as well. It gives the responsibility to the government to adhere to these targets. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach. Following are the provisions of the Act in detail.
- The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 2008-09 and thereafter, sizable revenue surplus has to be created.
- Setting annual targets for reduction of fiscal deficit and revenue deficit, contingent liabilities and total liabilities.
- The government shall end its borrowing from the RBI except for temporary advances.
- The RBI not to subscribe to the primary issues of the central government securities after 2006.
- The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of national security, calamity etc.
Though the Act aims to achieve deficit reductions prima facie, an important objective is to achieve inter-generational equity in fiscal management. This is because when there are high borrowings today, it should be repaid by the future generation. But the benefit from high expenditure and debt today goes to the present generation. Achieving FRBM targets thus ensures inter-generation equity by reducing the debt burden of the future generation.
Other objectives include: long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.
Amendments to the FRBM Act
Amendments to the Act were made after its initial version in 2003. Amendments were made in 2004, 2013, 2015 and in 2018. Though the FM proposed an amendment in 2021, details about that was not added in the budget statement. Over the last twenty years, various amendments have changed the structure of the Act. Initially, the Act proposed to reduce Fiscal Deficit and to eliminate Revenue Deficit. But with time, the reduction targets were removed. In 2018, a comprehensive amendement was made after the recommendations of the FRBM review committee. Introduction of the escape clause was another feature of this amendement. Following are the amendments made to the FRBM Act.
Amendments to the FRBM Act
|Amendments to the FRBM (First – 2004, Second – 2013, Third – 2015 and Fourth – 2018).
|FRBM Act and its amendments
|Features of the FRBM guidelines
|FRBM Act 2003 (Original)
|As per the initial FRBM framework notified in 2003, targets were fixed for containing FD at three per cent of GDP, and for completely eliminating RD by 31 March 2008. This was to be
achieved through an annual reduction of 0.3 per cent in FD and 0.5 per cent in RD.
1. Elimination of RD by 2008-09. For this, reduction of RD to an amount equivalent of 0.5 per cent or more of the GDP at the end of each financial year, beginning with 2004-05.
Reduction of FD to 3% of GDP by 2008-09.
Reduction of FD by an amount equivalent of 0.3 per cent or more of the GDP at the end of each financial year, beginning with 2004-05 and finally to 3% of GDP by 2008-09.
|The first amendment made in 2004, deferred the date for achieving deficit targets from 31 March 2008 to 31 March 2009.
|1. More documents to be produced with the budget: The central government has to present three documents.
(1) Macro-Economic Framework Statement,
(2) Medium Term Fiscal Policy Statement and
(3) Fiscal Policy Strategy Statement along with the Annual Financial Statement and Demands for Grants.
2. The amendment has given a statutory status to the concept of Effective Revenue Deficit as a fiscal indicator. The purpose of the step was not to consider revenues expenditures that result in the creation of durable assets as unproductive in nature and to reduce them from revenue deficit, indicating effective revenue deficit.
3. The amendment also provides that the Central Government may entrust the Comptroller and Auditor General of India to review periodically as required, the compliance of the provisions of this Act and such reviews shall be laid before both Houses of Parliament.
Under Section 7 of the Act, no deviation is permissible in meeting the obligations cast on the Central Government under the Act, without the approval of Parliament. In the event of a deviation, the Finance Minister should make a Statement in both the Houses of Parliament explaining the circumstances that have led to such a deviation; explaining whether such deviation is substantial and relates to actual or potential budgetary outcomes; and detailing the remedial measures the Government proposes to take.
|This amendment mainly deferred dates for achieving deficit targets to 31st March 2018.
The government should bring down both RD and FD by 0.4 per cent or more of the GDP at the end of each financial year beginning with financial year 2015-16. Effective revenue deficit should be brought down by 0.5 per cent or more of the GDP at the end of each financial year.
|A comprehensive change in the FRBM architecture was made by the government through Finance Act 2018 presented under Budget 2018-19. The restructuring was made in view of the recommendations made by the FRBM Review Committee. An important component of the amendment was the introduction of the escape clause that allows government to move away from the FRBM targets during emergency situations. An equally important provision is targeting debt indicators (instead of RD and ERD targets). According to the AG, “the amendment changed the reference from total liability of the Government to Central Government Debt with an expanded definition and introduced the concept of General Government Debt.” The following are the main features of the revised architecture under the amendment.
1. The Government will simultaneously target debt and fiscal deficit and treat fiscal deficit as an operational target. Primary deficit has been incorporated as a fiscal indicator.
2. Fiscal deficit as the key operational target with focus on achieving three per cent of GDP by the end of the FY 2020-21.
3. The revised FRBM framework has removed the requirements of achievement of targets on Revenue Deficit and consequently Effective Revenue Deficit.
4. The amendment widened the grounds (escape clauses) on which Central Government is allowed to breach the deficit targets including national security, act of war, national calamity, collapse of agriculture, structural reforms in the economy, decline in real output growth, etc. However, any deviation from the Fiscal Deficit target shall not exceed one-half per cent of the GDP.
4. There should be a General Government (central and states together) debt target of 60 per cent and Central Government debt target of 40 per cent by the end of FY 2024-25. The scope of ‘Central Government Debt’ has been expanded to include the total outstanding liabilities on the security of the Consolidated Fund of India and Public Account plus such financial liabilities of anybody corporate or other entity owned or controlled by the Central Government, which the Government is to repay or service. This may bring several extra budgetary resources under government debt.
5. When there is an increase in real output growth of a quarter by at least three per cent points above its average of the previous four quarters, reduce the fiscal deficit by at least one-quarter per cent of the GDP in a year (this is to make a contracyclical fiscal policy implying reduction of expenditure).
6. Medium-term Fiscal Policy cum Fiscal Policy Strategy Statement is now required to be prepared in place of earlier Medium-term Fiscal Policy Statement. This includes new indicators such as Primary deficit, non-tax revenue and Central Government debt.
7. Half-yearly review in place of quarterly review and preparation of monthly statement of accounts.
The FRBM Amendment of April 2018 shifted the date for achieving the FD target of three per cent of GDP to the end of 2020-21 and removed the targets for RD and ERD. Regarding FD, the amendment prescribed an annual reduction of FD equal to 0.1 per cent or more of the GDP from 2018-19 onwards and deferred the FD target realization to 2021.