Fiscal Responsibility and Budget Management Act Overview

The Fiscal Responsibility and Budget Management (FRBM) Act is piece of legislation in India aimed at ensuring fiscal discipline. Introduced in 2000 and enacted in 2004, it mandates the government to maintain fiscal stability. The Act outlines specific targets for fiscal deficit and revenue deficit to promote transparency and accountability in financial management.

Background of the FRBM Act

The FRBM Bill was first introduced by Finance Minister Yashwant Sinha in 2000. It was adopted by the Union Cabinet in 2003. The Act came into effect on July 5, 2004. Its primary aim is to reduce the fiscal deficit and achieve fiscal stability.

Key Features of the FRBM Act

The FRBM Act requires the government to present specific financial documents alongside the Union Budget. These documents include: 1. Medium Term Fiscal Policy Statement 2. Macroeconomic Framework Statement 3. Fiscal Policy Strategy Statement These documents contain projections on fiscal deficit, revenue deficit, and tax revenue as a percentage of GDP.

Exemptions Under the FRBM Act

The Act allows deviations from fiscal targets under special circumstances. Such cases may include economic crises or natural disasters. The flexibility helps the government respond to unforeseen challenges without breaching fiscal discipline.

Impact of the COVID-19 Pandemic

The pandemic affected fiscal targets. Government expenditure increased while revenues decreased. As a result, the fiscal targets were temporarily suspended. A new fiscal consolidation plan was introduced in the 2021-22 budget. This plan aims to reduce the fiscal deficit to below 4.5% by 2025-26.

Objectives of the FRBM Act

The FRBM Act has several important objectives: 1. Transparency – It promotes realistic and accountable fiscal conditions. 2. Debt Smoothing – The Act aims for gradual debt distribution to alleviate financial strain. 3. Flexibility to the Reserve Bank of India (RBI) – It provides the RBI with the ability to manage inflation effectively within fiscal policy.

Challenges and Amendments

Despite its long-standing presence, the government has struggled to meet the FRBM targets. Amendments have been made to the original law to address ongoing challenges. The need for fiscal discipline remains crucial to ensure sustainable economic growth.

Future Prospects

The future of fiscal management in India will depend on adherence to the FRBM Act. Continuous monitoring and timely amendments may be necessary to adapt to changing economic conditions. The government’s commitment to fiscal responsibility will be essential for long-term stability.

Questions for UPSC –

1. Examine the significance of the Fiscal Responsibility and Budget Management Act in promoting fiscal discipline in India.
2. Critically discuss the impact of the COVID-19 pandemic on India’s fiscal policy and the implications for future economic stability.
3. Analyse the objectives of the FRBM Act and how they contribute to effective financial management in India.
4. Point out the challenges faced by the Government of India in adhering to the targets set by the FRBM Act and suggest potential solutions.

Answer Hints:

1. Examine the significance of the Fiscal Responsibility and Budget Management Act in promoting fiscal discipline in India.

1. Introduced in 2000, the FRBM Act aims to reduce fiscal deficit and promote fiscal stability.
2. It mandates the presentation of specific financial documents to enhance transparency in government finances.
3. The Act establishes clear targets for fiscal and revenue deficits, encouraging accountability.
4. It allows for flexibility in fiscal management during economic crises, ensuring responsive governance.
5. Overall, the FRBM Act serves as a framework for sustainable economic growth through disciplined fiscal practices.

2. Critically discuss the impact of the COVID-19 pandemic on India’s fiscal policy and the implications for future economic stability.

1. The pandemic led to increased government expenditure due to health and welfare measures, straining fiscal resources.
2. Revenue generation was severely impacted, resulting in a temporary suspension of FRBM targets.
3. A new fiscal consolidation plan was introduced aiming to reduce the fiscal deficit to below 4.5% by 2025-26.
4. Long-term economic stability requires careful balancing of recovery efforts with fiscal discipline.
5. The pandemic brought into light the need for flexible fiscal policies to manage unforeseen economic shocks.

3. Analyse the objectives of the FRBM Act and how they contribute to effective financial management in India.

1. Transparency is a key objective, promoting clear and realistic fiscal conditions for better governance.
2. Debt smoothing aims to distribute debt obligations evenly, reducing financial strain on the economy.
3. It provides the Reserve Bank of India with flexibility to manage inflation within fiscal policy frameworks.
4. The Act encourages regular assessments of fiscal performance, encouraging accountability and responsible budgeting.
5. Overall, these objectives support sustainable economic growth and stability through disciplined financial management.

4. Point out the challenges faced by the Government of India in adhering to the targets set by the FRBM Act and suggest potential solutions.

1. Challenges include economic shocks (e.g., COVID-19) that disrupt revenue generation and increase expenditures.
2. Political pressures may lead to deviations from fiscal targets for short-term gains.
3. Amendments to the Act may be required to address evolving economic conditions and challenges.
4. Improving compliance requires stronger institutional frameworks and regular monitoring of fiscal performance.
5. Potential solutions include enhancing revenue collection mechanisms and prioritizing essential expenditures during crises.