Fiscal Responsibility and Budget Management Act 2003: Objectives & Features

Introduction

FRBM Act of 2003 is an important piece of legislation in India aimed at institutionalizing fiscal discipline and prudence in the management of the country’s finances. It seeks to ensure that the government maintains fiscal stability, reduces fiscal deficits, and manages its debt responsibly. The FRBM Act imposes targets for fiscal indicators like fiscal deficit and public debt, fostering transparency and accountability in fiscal management.

Objectives of FRBM Act, 2003

• Reduce Fiscal Deficits: by limiting government spending and revenue gap.
• Control Government Debt: by bringing it to a sustainable level.
• Promote Macroeconomic Stability: by avoiding excessive government borrowing and inflation.
• Ensure Intergenerational Equity: by distributing fiscal benefits and burdens fairly across generations.
• Enhance Transparency and Accountability: by providing detailed information on fiscal performance and liabilities.
• Medium-term Fiscal Policy Planning: by presenting a statement of fiscal policies for the next three to five years.

Important Features of FRBM Act, 2003

• Fiscal Targets for Union Government:

• • The union government was mandated to take measures to limit the fiscal deficit to 3% of GDP by March 31, 2021.
  • The government aims to ensure that the 
    • General Government Debt: (central government debt plus state government debt) does not surpass 60% of GDP by 2024-25, 
    • Union Government Debt: Remains below 40% of GDP by the same period.
  • Additional guarantees for loans secured against the Consolidated Fund of India should not exceed 0.5% of GDP in any financial year.
  • The union government is committed to avoiding the exceeding of fiscal targets after the specified target dates.
• Annual Targets for Fiscal Deficit Reduction: The union government is responsible for prescribing annual targets for the reduction of fiscal deficit in case it exceeds the specified limit. 
  • Exceptions to annual fiscal deficit targets may be allowed based on conditions such as national security, acts of war, national calamities, and others (escape clause).
• Limit on Deviation from Fiscal Deficit Target: Any deviation from the fiscal deficit target under the escape clause shall not exceed 0.5% of GDP in a year.
• Responsiveness to Real Output Growth: In the event of a significant increase in real output growth, the union government is required to reduce the fiscal deficit by at least 0.25% of GDP in a year. 
  • Despite the challenges posed by the unprecedented Covid-19 crisis, there have been deviations from Fiscal Deficit and Debt parameters from the target levels. 
  • The government, however, has not proposed an amendment to the FRBM Act, stating that retaining fiscal flexibility is crucial for effectively responding to emerging contingencies until uncertainties from the pandemic ease. 
  • The government aims to pursue a path of fiscal consolidation to achieve a fiscal deficit lower than 4.5% of GDP by FY 2025-26.

Financial Stability and Development Council (FSDC)

• Establishment: The FSDC was set up in December 2010 by an Executive Order of the Union Government as a non-statutory measure in response to the global financial crisis of 2007-08, to address systemic risks to the financial stability of the country. 
• The Raghuram Rajan Committee (2008) on financial sector reforms first proposed the creation of FSDC.

Composition

• Initial compositions
  • The membership of the FSDC is discussed below
  • The Finance Minister is the Chairman of the FSDC.
  • Members of FSDC include Heads of the Financial Sector Regulators listed below:
    • Reserve Bank of India (RBI)
    • Insurance Regulatory and Development Authority (IRDA)
    • Securities and Exchange Board of India (SEBI)
    • Pension Fund Regulatory and Development Authority (PFRDA)
  • Other members are Finance Secretary, Chief Economics Advisor and  Secretary of the Department of Financial Services.
• Membership reforms  (Later additional members were added)
  • In 2018, The government has reconstituted the Financial Stability and Development Council.
  • New members added to the FSDC include:
    • Minister of State responsible for the Department of Economic Affairs (DEA).
    • Secretary of the Department of Electronics and Information Technology.
    • Revenue Secretary.
    • Chairman of the Insolvency and Bankruptcy Board of India (IBBI).
  • The restructuring aims to make the FSDC more broad-based.
  • The changes are intended to incorporate adjustments in the economic regulatory framework of the country.
• The FSDC sub-committee is headed by the Governor of RBI. 
• The Council can invite experts to its meeting if required.

Conclusion

• By imposing targets for fiscal indicators and promoting transparency, the act aimed to enhance the credibility of government finances and ensure long-term fiscal sustainability. 
• While its effectiveness has been subject to debate and revisions over time, the FRBM Act remains an important framework for guiding fiscal policy and maintaining macroeconomic stability in India.