Answer: 

Introduction:

Fiscal Responsibility and Budget Management (FRBM) Act, 2003 provides a legal and institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce the fiscal deficit, to eliminate revenue deficit and to improve the overall management of the public funds by moving towards a balanced budget. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation.

Body:

Reasons for the introduction of FRBM Act:

• High revenue deficit due to higher expenditure on subsidies, salaries, defence etc. forced the government to make big borrowing from early 1990s onwards.
• High fiscal deficit: This can be seen by the high fiscal deficit of centre and states at that time, with central deficit over 6% and combined states and centre deficit over 8%.
• High interest burden: The borrowings for bridging the budget deficit again produced high interest payments. The interest payments became the largest expenditure item of the government.
• Falling credit rating: The rising government borrowing and high interest payments seriously eroded the financial health of the government. The high fiscal deficit not only threatened financial stability of the nation but also raised the risk of credit default and possible downgrade by credit rating agencies.

Thus, FRBM was enacted to institutionalize fiscal prudence and discipline. FRBM Act aimed to achieve fiscal discipline through limits on the Central Government borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government etc.

Salient features of FRBM:

• Government is required to limit the fiscal deficit to 3% of the GDP by March 31, 2021.
• Government is required to limit debt of the central government to 40% of the GDP by the year 2024-25.
• It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
  • Macroeconomic Framework Statement
  • Medium Term Fiscal Policy Statement and
  • Fiscal Policy Strategy Statement

While there were some early successes under this Act, the targets mostly went unmet due to some shortcomings and were revised several times since then. The shortcomings in the Act are –

• Random target: The Act prescribes a target fiscal deficit of 3% of GDP for the centre but with no explicit justification for the number.
• Practicality is ignored: There is no flexibility in the Act to deal with cyclical shocks like financial crisis of 2008.
• No enforcement mechanism: There is no mechanism like fiscal accountability council to review fiscal performances under the act. Also, the limits set under the Act have been mostly violated.
• FRBM act is outdated as it was passed in 2003 which some say is not suitable in present context given the vast changes experienced by the Indian economy.

Conclusion:

FRBM brought focus on fiscal discipline and provided benchmarks to measure the same. The recommendations of the N.K Singh committee on flexible targets with escape clause, creation of fiscal council, focus on reduction of combined debt-to-GDP ratio of the centre and states to 60 % by 2023 etc. must be incorporated. However, there is a need for FRBM to evolve to the changing needs to the time.