| GS Pre Cum Main Foundation Course for CSE-2022-23 by Kapuria Sir

GS PRE CUM MAIN

FOUNDATION COURSE
for CSE – 2022-23
INDIAN ECONOMY

FISCAL RESPONSIBILITY AND BUDGET

MANAGEMENT (FRBM) ACT, 2003
COMPOSITION OF CONSUMER PRICE INDEX

by
Kapuria
P a g e | Sir
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 | GS Pre Cum Main Foundation Course for CSE-2022-23 by Kapuria Sir

FISCAL RESPONSIBILITY AND BUDGET

MANAGEMENT (FRBM) ACT, 2003
The Act was passed in 2003. Its principal objective was that the government should adopt a path of fiscal
consolidation by reducing and rationalising its expenditure on the overhead and by increasing its revenue on
the other. The Act laid down some rules to be followed by the government for achieving fiscal consolidation.

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Three of these rules, among others, were as follows:
1. Government should bring down its Revenue Deficit from 2.1% of the GDP in 2003 by 0.5 percent every
year thereafter so that revenue deficit falls to zero by 2008-09.

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2. Fiscal deficit should be brought down from 4.5% in 2003-04 by 0.3 percent every year so that it is not
more than 3 percent by 2008-09.

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3. Government should cease to borrow from the RBI except by Ways and Means advances.
The targets laid down were not met as there was global financial crisis in 2008.
A comprehensive review of this Act was carried out by N.K. Singh Committee set up in 2016 which gave its

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report in early 2017. Major recommendations of this committee are as follows:
1. Government should reduce its revenue deficit from 2.1 percent in 2016-17 by 0.25 percent each year
thereafter so that by 2022-23 revenue deficit is not more than 0.8 percent of GDP.

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2. Fiscal Deficit should be brought down to 3 percent in 2017-18 and it should remain 3 percent till 2019-20.
Thereafter it should be reduced by 0.2 percent each year so that it is not more than 2.5 percent by 2022-23.
3. Total outstanding debt of the government should be brought down from 70 percent of GDP in 2016-17 (49
percent of the Centre and 21 percent of the States) to 60 percent by 2022-23

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(40 percent of the Centre and 20 percent of States).
4. Reduction of total debt should be the principal focus of Act instead of Fiscal Deficit because Global credit
rating agencies adopt total debt as the principal criteria for awarding rating.
5. There should be an ‘Escape Clause’ incorporated in the Act which would give flexibility to the government

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to escape meeting its laid down fiscal targets in the event of abnormal conditions in the economy like
threat of war, epidemics, natural calamities etc. However, deviation from targets should not been more
than 0.5 percent.
6. Government should set up an expert body called Fiscal Council which would prepare
multi-year fiscal projections, monitor fiscal parameters, assess fiscal situation from time to time and
recommend targets from time to time as an autonomous body.
7. The Act should be renamed ‘Debt Management and Fiscal Responsibility Act and Rules’
The government accepted the recommendation of the committee.
However, the Pandemic which struck the world in early 2020 led to unprecedented panic and financial stress
throughout the world. As a result the targets laid down in the revised Act had to be abandoned.
The government revised the fiscal target to 4.5 percent to be achieved by 2025-26.

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