FRBM ACT

2003

By :
K006 - Anjali Bharani
K009 - Arnav Khurania
In 1980's the government of India was following the
populist policies i.e the main focus was to increase
the expenditure to increase the development rates
of the country which increased the imports of
consumable goods more than the capital goods and
it lead to the fiscal deficit. And this huge fiscal deficit
wasn't bearable as it was necessary to import the
consumable good again and again. Fiscal deficit
mainly means Total expenditure - Total receipts
excluding the borrowings. India was once in such a
situation where only 10-15days of reserve was left to
pay off the borrowings. That's when the government
introduced the LPG reforms in 1990. It pushed the
economy to a great extent and fiscal deficit
improved but down the line in 1999 or in 2000's the
fiscal deficit started to increase again and there was
need of fiscal discipline.

FRBM ACT was introduced in 2002 and it was

passed in 2003 and enacted in 2004.
Why was FRBM ACT enacted?

In India, the borrowing levels were very high in 1990's

and 2000's . Indian Economy was weak as it has high
fiscal deficit, high revenue deficit and high debt to
GDP ratio. By 2003 the continous government
borrowings and the resultant debt had severely
impacted the health of the Indian Economy. Much of
the borrowings was utilized to payback the previous
borrowings and the interest payments. Parliaments
of India felt that there should be control on the
government of India not to resort a high level of
borrowing to find its expenditure. Thus in 2000 a bill
to bring responsibility and discipline in matters of
expenditure and debt was introduced.

The intention of FRBM ACT was to bring :

Fiscal discipline
Efficient management of expenditure, Revenue
and Debt
Macroeconomic Stability
Better coordination between fiscal and monetary
policy
Transparency in the fiscal operation of
Government
Achieving a balanced budget
Features of FRBM ACT

Revenue deficit should be reduced by 0.5% or

more of GDP every year.
Fiscal deficit should be reduced by 0.3% or more
of GDP every year.
Government should not provide guarantees in
excess of 0.5% of GDP in any financial year.
Additional liabilities should not exceed 9% of
GDP .
Central Government cannot borrow from RBI.
Higher degree of transparency.
Exceptions- natural calamities and issues of
national security.
Quarterly review

Were the Targets met?

No. Implementing the act, the government had

managed to cut the fiscal deficit to 2.7% of GDP and
revenue deficit to 1.1% of GDP in 2007-08. However,
the targets were not met. The global financial crisis
(2007-08) led the government to infuse the
resources in the economy as the fiscal stimulus in
2008. Therefore, fiscal targets had to be postponed
temporarily in the view of global crisis.
Recommendations of N.K Singh Committee

Central government believed that the targets are

too rigid. So it set up a committee under N.K
singh to review the FRBM ACT.
The committee suggested using the debt as the
primary target for fiscal policy and that the
target must be achieved by 2023
Fiscal council : The committee proposed to
create an autonomous fiscal council with a
chairperson and two members appointed by the
centre (not employees of the government at the
time of the appointment)
Deviations: The committee suggested that the
grounds for the government to deviate from the
FRBM act targets should be clearly specified.
Borrowings : According to the suggestions of the
committee, the government must not borrow
from the RBI except when...
1. The centre has to meet a temporary shortfall in
receipts.
2. RBI subscribers to government securities to
finance any deviations.
3. RBI purchases government securities from the
secondary market.
Targets set by N.K singh :
Debt to GDP ratio: Debt to GDP ratio of 60%
(40% for centre and 20% for states.
Revenue Deficit - 0.8% of GDP , minimum annual
reduction target 0.5% of GDP.
Fiscal Deficit Target - 2.5% of GDP, minimum
annual reduction target 0.3% of GDP

What is significance of an FRBM Act?

The popular understanding of the FRBM Act is that it

is meant to "Compress" or restrict government
expenditure. But that is a flawed understanding. The
truth is that FRBM Act is not an expenditure
compressing mechanism, rather an expenditure
switching one. In other words, the FRBM Act - by
limiting the total fiscal deficit (to 3% of nominal GDP)
and asking for revenue deficit to be eliminated
altogether is helping the governments to switch their
expenditure from revenue to capital. This also means
that - again, contrary to popular understanding
adhering to the FRBM Act should not reduce India's
GDP, rather increase it. Here's how: When you cut on
revenue deficit - that is, reduce your borrowings for
funding revenue expenditure - and instead borrow
to only spend on building capital, you increase the
overall GDP by 2.5 times the amount of money
borrowed.
Escape Clause :

Escape clause refers to the situation under which

the central government can flexibly follow fiscal
deficit target during special circumstances. This
terminology was innovated by the NK Singh
Committee on FRBM.
In Budget 2017, Finance Minister Arun Jaitley
deferred the fiscal deficit target of 3% of the GDP
and chose a target of 3.2%, citing the NK Singh
committee report.
However, the Comptroller and Auditor General of
India (CAG) pulled up the government for deferring
the targets which it said should have been done
through amending the Act.

Ugly Truth :

Revenue deficit was completely ignored main focus

was on capital expenditure. Motive was to reduce
fiscal deficit. Capital expenditure was reduced. It
Breached the aim of FRBM and the goals were not
achieved.