Compliance with Annual Reduction Targets specified under the

FRBM Act and Rules

Legal Framework of FRBM in India: Act and Rules
The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in
the parliament of India in the year 2000 by Atal Bihari Vajpayee Government for providing
legal backing to the fiscal discipline to be institutionalized in the country. Subsequently, the
FRBM Act was passed in the year 2003. It is an act of the parliament that set targets for the
Government of India to establish financial discipline, improve the management of public
funds, strengthen fiscal prudence, and reduce its fiscal deficits. The Fiscal Responsibility and
Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal
deficit. The FRBM is an act of the parliament that set targets for the Government of India to
establish financial discipline, improve the management of public funds, strengthen fiscal
prudence and reduce its fiscal deficits.

Page | 2
In other words, It was first introduced in the parliament of India in the year 2000 by Vajpayee
Government for providing legal backing to the fiscal discipline to be institutionalized in
the country. Subsequently, the FRBM Act was passed in the year 2003.
Why was the FRBM Act passed?

The primary objective was the elimination of revenue deficit and bringing the fiscal

down deficit.
The other objectives included:
 Introduction of a transparent system of fiscal management within the country

 Ensuring equitable distribution of debt over the years

 Ensuring fiscal stability in the long run

 The act also intended to give the required flexibility to the Central Bank for
managing inflation in India.

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The FRBM Act aims to introduce transparency in India's fiscal management systems. The
Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank
of India (RBI) flexibility to deal with inflation in India. The FRBM Act was enacted to
introduce more equitable distribution of India's debt over the years.

Features of the FRBM Act

 It was mandated by the act that the following must be placed along with the
Budget documents annually in the Parliament:

1. Macroeconomic Framework Statement

2. Medium Term Fiscal Policy Statement and

3. Fiscal Policy Strategy Statement

 It was proposed that the four fiscal indicators i.e., revenue deficit as a percentage of GDP,
fiscal deficit as a percentage of GDP, tax revenue as a percentage of GDP, and
total Page | 4
 outstanding liabilities as a percentage of GDP be projected in the medium-term
fiscal policy statement.

Targets and Fiscal Indicators as per the FRBM Act

As per the latest target of the FRBM Act:

1. Government is required to limit the fiscal

deficit to 3% of the GDP by March 31, 2021.

2. Government is required to limit debt of the central government to 40% of the GDP by
the year 2024-25.

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Why FRBM is critical?

 Not letting the fiscal deficit go completely out of control has been one of the
standout achievements of the incumbent NDA government.

 However, as India’s economic growth has decelerated, there have been growing
pressures on the government to breach the FRBM orthodoxy and spend in excess of
fiscal deficit targets to reboot domestic growth.

 Others, however, continue to caution that the “real” fiscal deficit is already far more
than the official number, and as such, there is no room for further increasing the
expenditure by the government.

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What is the 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
Page | 7
overall GDP by 2.5 times the amount of money borrowed. So, adhering to FRBM Act is a
win- win.

What has been India’s record on adhering to FRBM Act?

Between 2004 and 2008, the Indian government had made giant strides on reducing
both revenue deficit and fiscal deficit. But this process was reversed thereafter thanks largely
to the Global Financial Crisis and a domestic slowdown. Since then, there have been
several amendments to the Act essentially postponing the targets. But the worst development
happened in 2018 when the Union government stopped targeting revenue deficit and instead
focussed only on fiscal deficit.

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Latest Changes in FRBM Act with Union Budget 2021

The target of Fiscal deficit at 6.8% of GDP in 2021-22.

In 2021-22, the total expenditure proposed by the government is Rs 34,83,236

crore. 123 percent change is seen in the expenditure allocated for Jal Jeevan

Mission.

The budget allocation for the welfare of women has seen a drop of 26 percent in comparison
to revised estimates 2020-21.

52.7 percent increase in allocation for welfare of SCs and 50 percent for STs.

The allocation for the North Eastern region has been increased by 32.7

percent.

The latest information related to the FRBM Act for the 2021-22 Financial year Page | 9

is given below:
Page | 10
An Act to provide for the responsibility of the Central Government to ensure inter-
generational equity in fiscal management and long-term macro-economic stability by
achieving sufficient revenue surplus and removing fiscal impediments in the effective
conduct of monetary policy and prudential debt management consistent with fiscal
sustainability through limits on the Central Government borrowings, debt and deficits,
greater transparency in fiscal operations of the Central Government and conducting fiscal
policy in a medium-term framework and for matters connected therewith or incidental
thereto.BE it enacted by Parliament in the Fifty-fourth Year of the Republic of India as follows:
—

1. Short title, extent and commencement.—(1) This Act may be called the
Fiscal Responsibility and Budget Management Act, 2003.

(2) It extends to the whole of India.

(3) It shall come into force on such date1

Page | 10
as the Central Government may, by notification in the
Official Gazette, appoint in this behalf.

2. Definitions.—In this Act, unless the context otherwise requires,—

(a)“fiscal deficit” means the excess of total disbursements, from the Consolidated Fund
of India,

excluding repayment of debt, over total receipts into the Fund (excluding the debt
receipts), during a financial year;

2[(aa) “effective revenue deficit” means the difference between the revenue deficit and
grants for creation of capital assets;]

(b)“fiscal indicators” means the measures such as numerical ceilings and proportions to gross
domestic product, as may be prescribed, for evaluation of the fiscal position of the
Central Government;

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2[(bb) “grants for creation of capital assets” means the grants in aid given by the
Central Government to the State Governments, constitutional authorities or bodies,
autonomous bodies, local bodies and other scheme implementing agencies for creation of
capital assets which are owned by the said entities;]

(c)“prescribed” means prescribed by rules made under this Act;

(d)“Reserve Bank” means the Reserve Bank of India constituted under sub-section (1) of
section 3 of the Reserve Bank of India Act, 1934 (2 of 1934);

(e)“revenue deficit” means the difference between revenue expenditure and revenue
receipts which indicates increase in liabilities of the Central Government without corresponding
increase in assets of that Government;

(f)“total liabilities” means the liabilities under the Consolidated Fund of India and the public
account of India.

Page | 13
3. Fiscal policy statements to be laid before Parliament.—(1) The Central Government
shall lay in each financial year before both Houses of Parliament the following statements of
fiscal policy along with the annual financial statement and [demands for grants except the
Medium- term Expenditure Framework Statement], namely:—

(a) the Medium-term Fiscal Policy Statement;

(b) the Fiscal Policy Strategy Statement;

(c) the Macro-economic Framework Statement;

[(d) the Medium-term Expenditure Framework Statement.]

1[(1A) The statements referred to in clauses (a) to (c) of sub-section (1) shall be followed
up with the Medium-term Expenditure Framework Statement with detailed analysis of
underlying assumptions.

Page | 14
(1B) The Central Government shall lay the Medium-term Expenditure Framework
Statement referredto in clause (d) of sub-section (1) before both Houses of Parliament,
immediately following the session of Parliament in which the policy statements referred to in
clauses (a) to
(c) were laid under sub-section (1).]

(2)The Medium-term Fiscal Policy Statement shall set forth a three-year rolling target
for prescribed fiscal indicators with specification of underlying assumptions.

(3)In particular, and without prejudice to the provisions contained in sub-section (2), the
Medium-term Fiscal Policy Statement shall include an assessment of sustainability relating to—

(i) the balance between revenue receipts and revenue expenditures;

(ii) use of capital receipts including market borrowings for generating productive assets.

(4) The Fiscal Policy Strategy Statement shall, inter alia, contain—

Page | 15
(a)the policies of the Central Government for the ensuing financial year relating to
taxation, expenditure, market borrowings and other liabilities, lending and investments,
pricing of administered goods and services, securities and description of other
activities such as underwriting and guarantees which have potential budgetary implications;

(b)the strategic priorities of the Central Government for the ensuing financial year in the fiscal
area;

(c)the key fiscal measures and rationale for any major deviation in fiscal measures pertaining to
taxation, subsidy, expenditure, administered pricing and borrowings;

(d)an evaluation as to how the current policies of the Central Government are in conformity
with the fiscal management principles set out in section 4 and the objectives set out in
the Medium-term Fiscal Policy Statement.

(5) The Macro-economic Framework Statement shall contain an assessment of the

growth prospects of the economy with specification of underlying assumptions.
Page | 16
(6)In particular and without prejudice to the generality of the foregoing provisions the Macro-
economic Framework Statement shall contain an assessment relating to—

(a)the growth in the gross domestic product;

(b)the fiscal balance of the Union Government as reflected in the revenue balance and gross
fiscal balance;

(c)the external sector balance of the economy as reflected in the current account balance of the
balance of payments.

1[(6A) (a) The Medium-term Expenditure Framework Statement shall set forth a three-
year rolling target for prescribed expenditure indicators with specification of underlying
assumptions and risk involved.

(b) In particular and without prejudice to the provisions contained in clause (a), the
Medium- term Expenditure Framework Statement shall, inter alia, contain—

Page | 17
(i)the expenditure commitment of major policy changes involving new service, new instruments
of service, new schemes and programmes;

(ii)the explicit contingent liabilities, which are in the form of stipulated annuity payments over a
multi-year time-frame;

(iii) the detailed breakup of grants for creation of capital assets.]

(7) The Medium-term Fiscal Policy Statement, 1[the Fiscal Policy Strategy Statement,
the Medium-term Expenditure Framework Statement] and the Macro-economic
Framework Statement referred to in sub-section (1) shall be in such form as may be prescribed.

Page | 18
4.Fiscal management principles.—(1)The Central Government shall,—
(a) Take appropriate measures to limit the fiscal deficit up to three percent. Of
gross
domestic product by the31st March,2021;
(b) Endeavour to ensure that—
(i)The general Government debt does not exceed sixty per cent.; (ii)the
Central Government debt does not exceed forty percent.,of

gross domestic product by the end of financial year2024-2025;

(c) not give additional guarantees with respect to any security of the
loan Fund
Consolidated on of India in excess of one-half per cent. of gross domestic product, in
any financial year;
(d)endeavourtoensurethatthefiscaltargetsspecifiedinclauses(a)and(b)arenotexceededafter
stipulatedtargetdates.
(2) The Central Government shall prescribe the annual targets for reduction of
fiscal deficit for the period beginning from the date of commencement of Part XV of Chapter
VIII of the Finance Act, 2018andendingon the 31stMarch, 2021:
Page | 19
 Provided that exceeding annual fiscal deficit target due to ground or grounds of
national security, act of war, national calamity, collapse of agriculture severely affecting
farm output and incomes, structural reforms in the economy with unanticipated fiscal
implications, decline in real output growth of a quarter by at least three per cent. points
below its average of the previous four quarters, may be allowed for the purposes of this
section.
(3)Any deviation from fiscal deficit target under sub-section (2) shall not exceed one-
half per cent. of the gross domestic product in a year.
(4)The Central Government shall, in case of 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 gross domestic product in a year.

(5)Where the fiscal deficit is allowed to vary from the target prescribed under the
proviso to sub-section (2) or deviation is initiated under sub-section (4), a statement
explaining the reasons thereof and the path of return to annual prescribed targets under this
section shall be laid, as soon as may be, before both the Houses of Parliament.]

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 5. Borrowing from Reserve Bank.—(1) The Central Government shall not borrow
from the Reserve Bank.
(2) Notwithstanding anything contained in sub-section (1), the Central Government
may borrow from theReserve Bank by way of advances to meet
temporary excess of cash disbursement
over cash
receiptsduringanyfinancialyearinaccordancewiththeagreementswhichmaybeenteredintobythatG
overnment with the Reserve Bank:
Provided that any advances made by the Reserve Bank to meet temporary excess
cash disbursement over cash receipts in any financial year shall be repayable in accordance
with the provisions contained in sub-section(5) of section 17 of the Reserve Bank of India
Act,1934(2 of 1934).
[(3) Notwithstanding anything contained in sub-section (1), the Reserve Bank may
1

subscribe to the primary issues of Central Government Securities due to ground or grounds
specified in the proviso to sub-section(2) ofsection 4.]
(3) Notwithstanding anything contained in sub-section (1), the Reserve Bank may buy and sell
the Central Government securities in the secondary market 2[or converts Central
Government Securities held by it with other Securities of the Central Government as
mutually agreed between the Reserve Bank and the Central Government].
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 6. Measures for fiscal transparency.—(1) The Central Government shall take
suitable measures to ensure greater transparency in its fiscal operations in public interest and
minimise as far as practicable, secrecy in the preparation of the annual financial statement
and demands for grants.
(2) In particular, and without prejudice to the generality of the foregoing provision, the
Central Government shall, at the time of presentation of annual financial statement and
demands for grants, make such disclosures and in such form as maybe prescribed.
7. Measures to enforce compliance.—(1) The Minister-in-charge of the Ministry
of Finance shall review, 3[on half-yearly basis], the trends in receipts and expenditure in
relation to the budget and place before both Houses of Parliament the outcome of such
reviews.
[(1A) The Central Government shall prepare a monthly statement of its accounts.]
(2) Whenever there is either shortfall in revenue or excess of expenditure over the
5
[prescribed levels] during any period in a financial year, the Central Government shall
take appropriate measures for increasing revenue or for reducing the expenditure
(including curtailing of the sums authorised to be paid and applied from and out of the
Consolidated Fund of India under any Act so as to provide for the appropriation of such sums):
Provided that nothing in this sub-section shall apply to the expenditure charged on
the Consolidated Fund of India under clause (3) of article 112 of the Constitution or to Page
any| 22
other
expenditure which is required to be incurred under any agreement or contract or such
other expenditure which cannot be postponed or curtailed.
(3)(a) Except as provided under this Act, no deviation in meeting the obligations cast on
the Central Government under this Act, shall be permissible without approval of Parliament.

Where, owing to unforeseen circumstances, any deviation is made in meeting the

(b)
obligations cast on the Central Government under this Act, the Minister-in-charge of
the Ministry of Finance shall make a statement in both Houses of Parliament explaining—
Any deviation in meeting the obligations cast on the Central Government under this
(i)
Act;
Whether
(ii) such deviation is substantial and relates to the actual or the
potential budgetary outcomes; and
(iii) the remedial measures the Central Government proposes to take.

7A. Laying of review reports.—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 on the table of both Houses of Parliament.]
8. Power to make rules.—(1) The Central Government may, by notification in
the Official Gazette, make rules for carrying out the provisions of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such
rules may provide for all or any of the following matters, namely:— Page | 23
 (a)theannualtargets tobespecified undersub-section(2) of section4;
(b) thefiscal indicatorsto beprescribedfor thepurposeof sub-section(2)ofsection3;

[(ba) the expenditure indicators with specifications of underlying assumptions and

risk involvedunderclause(a)ofsub-section (6A) of section 3;]
(c)theforms of the Medium-term Fiscal Policy Statement, 3[Fiscal Policy
Strategy Statement,Medium-termExpenditureFrameworkStatement]andMacro-
economicFrameWorkStatementreferredto in sub-section(7) ofsection 3;
* * * *
(d) the disclosures and form in which such disclosures shall be made under sub-section (2)
ofsection6;
[(da)thelevelofshortfallinrevenueorexcessofexpenditureundersub-section(2)ofsection7;]
(e) anyother matterwhich isrequiredtobe,or maybe, prescribed.

9. Rules to be laid before each House of Parliament.—Every rule made under this
Act shall be laid,as soon as may be after it is made, before each House of Parliament, while
it is in session, for a
totalperiodofthirtydayswhichmaybecomprisedinonesessionorintwoormoresuccessivesessions,a
ndif, before the expiry of the session immediately following the session or the
successive sessions aforesaid,both Houses agree in making any modification in the rule or
both Houses agree that the rule should not bemade, the rule shall thereafter have effect
only in such Page | 24
modified form or be of no effect, as the case maybe; so, however, that any such
modification or annulment shall be without prejudice to the validity
ofanythingpreviouslydone underthatrule.
10.Protection of action taken in good faith.—No suit, prosecution or other legal
proceedings
shalllieagainsttheCentralGovernmentoranyofficeroftheCentralGovernmentforanythingwhichisi
ngoodfaith done orintendedto bedoneunder this Actorthe rulesmade thereunder.
11.Jurisdiction of civil courts barred.—No civil court shall have jurisdiction to
question the legality of any action taken by, or any decision of, the Central Government,
under this Act.
12.Application of other laws not barred.—The provisions of this Act shall be in
addition to, and not in derogation of, the provisions of any other law for the time
being in force.

Page | 25
13.Power to remove difficulties.—(1)If any difficulty arises in giving effect to the
provisions of this Act, the Central Government may, by order published in the Official Gazette,
make such provisions not inconsistent with the provisions of this Act as may appear to be
necessary for removing the difficulty:
Provided that no order shall be made under this section after the expiry of two years from
the commencement of this Act.
(2) Every order made under this section shall be laid, as soon as may be after it is made,
before each House of Parliament.

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Escape Clause: Review of N.K Singh Committee, Review of FRBM

Escape clause generally refers to a contract provision that specifies the conditions under
which a party can be freed from an obligation. The escape clause under the
FRBM (Fiscal Responsibility and Budget Management) Act details a set of events in
which the Central government can deviate from fiscal deficit targets. “Escape clauses” are an
accepted feature of all types of international trade agreement and are an expression of
national sovereignty. Following the bitter experience of the 1930s, governments involved
in the negotiation of commercial treaties since 1945 have been anxious to retain adequate
powers to safeguard their economies from unexpected problems that might arise, either
directly from their commitments to an agreement or indirectly from unrelated
developments which adherence to an agreement might exacerbate. The actual contents of
escape provisions therefore have a decisive influence on the scope of obligations undertaken in
international trade agreements.

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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.

In 2018, the FRBM Act was further amended. Specific details were updated in sub-section (2)
of Section 4. The clause allows the govt to relax the fiscal deficit target for up to 50 basis
points or 0.5 per cent. Under FRBM, if the escape clause is triggered to allow for a breach
of fiscal deficit target, the RBI is then allowed to participate directly in the primary
auction of government bonds, thus formalising deficit financing.

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The Escape Clauses can be invoked:

 by the Government after formal consultations and advice of the Fiscal Council.

 with a clear commitment to return to the original fiscal target in the coming fiscal year.

In 2020, Finance Minister, Nirmala Sitharaman used the escape clause provided under
the FRBM Act to allow the relaxation of the target. Finance Minister revised the fiscal
deficit for FY20 to 3.8 per cent and pegged the target for FY21 to 3.5 per cent.

Note: The Act exempts the government from following the FRBM guidelines in case of war
or calamity.

The 'escape clause' allows the government to breach its fiscal deficit target by 0.5
percentage points at times of severe stress in the economy, including periods of structural
change and those when growth falls sharply. The breach in itself may not seem alarming in a
year when growth has fallen to 5 percent from 8 percent in a six-quarter period, but the
implications of invoking the ‘escape clause are serious and will take India back towards
‘automatic monetisation’ of Page | 29
fiscal deficits — a practice done away with when the Fiscal Responsibility and
Budget Management Act, 2003 was passed. The amendments made to the FRBM Act in 2018
allow the Reserve Bank of India to buy bonds as part of primary auctions in the event that the
government invokes the ‘escape clause’,

Under FRBM, if the escape clause is triggered to allow for a breach of fiscal deficit target,
the RBI is then allowed to participate directly in primary auction of government bonds. If
this is activated, it would further formalise the implicit deficit financing that is in the past few
quarters.

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N.K. Singh Committee

In 2016, a committee under N K Singh was set up to suggest changes to the Act. According
to the government, the targets set under FRBM Act previously were too rigid. In the year 2016,
the NK Singh committee was set up by the government to review the FRBM Act. The task
was to review the performance of the FRBM Act and suggest the necessary changes to the
provisions of the act. The recommendations of the committee read that the government must
target a fiscal deficit of 3 percent of the GDP in years up to March 31, 2020, subsequently cut
it to 2.8 percent in 2020-21 and 2.5 percent by 2023.

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Committee's recommendations were as follows:

The FRBM Review Committee was formed in 2016 under the chairmanship of N.K.Singh with
a mandate to review the Fiscal Responsibility & Budget Management (FRBM) Act.

Targets: The committee suggested using debt as the primary target for fiscal policy and that
the target must be achieved by 2023.

1. Debt to GDP ratio: The review committee advocated for a Debt to GDP ratio of 60% to
be targeted with a 40% limit for the centre and 20% limit for the states.

2. Revenue Deficit Target – revenue deficit should be reduced to 0.8% of GDP by March
31, 2023. The minimum annual reduction target was 0.5% of GDP.

3. Fiscal Deficit Target – fiscal deficit should be reduced to 2.5% of GDP by March
31, 2023. The minimum annual reduction target was 0.3% of GDP.

Page | 32
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 appointment)

Deviations: The committee suggested that the grounds for the government to deviate from
the FRBM Act targets should be clearly specified

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Borrowings: According to the suggestions of the committee, the government must not
borrow from the RBI, except when...

a. the Centre has to meet a temporary shortfall in

receipts

b. RBI subscribes to government securities to finance any

deviations

c. RBI purchases government securities from the secondary

market

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The committee submitted its report in January 2020 and it was made public in April that
year. The major recommendations of the N.K.Singh Committee are discussed below.

 It proposed to replace the FRBM Act, 2003 with a Debt Management and
Fiscal Responsibility Bill, 2017.

 Debt to GDP Ratio

o The debt to GDP ratio should be 38.7% for the central government, 20% for the
state governments together by the FY 2022 – 23.

 Fiscal deficit

o By FY 2022 – 23, the fiscal deficit should be 2.5% of GDP.

 The committee recommended achieving the above targets by a ‘glide path’, that is, a
steady progress towards them, by achieving annual targets until 2023.

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  Fiscal Council

o It recommended the setting up of an autonomous Fiscal Council, whose role would

be:

 To prepare multi-year fiscal forecasts.

 To improve fiscal data quality.

 To suggest changes to the fiscal strategy.

 To advise the government on fiscal matters.

The committee recommended that the government could deviate from the targets in
the following scenarios:

 National calamity, war, in considerations of national security, agricultural

collapse affecting incomes and outputs.

Page | 36
  Structural reforms in the economy having fiscal implications.

 A decline in real output growth of at least 3% below the average of the previous
four quarters.

The 15th Finance Commission should recommend the debt trajectory for each state
based on their track record of fiscal health and prudence.

The centre should borrow from the Reserve Bank of India only when:

 It has to meet a temporary shortfall in receipts.

 RBI subscribes to g-secs to fund any deviation from the prescribed targets.

RBI buys g-secs from the secondary market.

Compatibility of monetary and fiscal policies

 The committee recommended that both the monetary and fiscal policies must
ensure macroeconomic stability and growth in a complementary manner.
Page | 37
 To this end, the inflation targeting regime and fiscal rules have to interact with
each other.

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