Fiscal Responsibility and Budget Management (FRBM) Act, 2003

December 21, 2024

The Fiscal Responsibility and Budget Management (FRBM) Act, enacted in 2003, aims to maintain fiscal discipline in India, introduced by Finance Minister Yashwant Sinha in 2000 and became effective on July 5, 2004. The Act mandates the government to manage its finances responsibly, reducing the fiscal deficit and ensuring financial stability.

Key Financial Documents Required

The FRBM Act requires the government to present specific documents to Parliament alongside the Union Budget. These documents include the Medium-Term Fiscal Policy Statement, the Macroeconomic Framework Statement, and the Fiscal Policy Strategy Statement. They provide projections for fiscal deficit, revenue deficit, and tax revenue as percentages of Gross Domestic Product (GDP).

Exceptions to Fiscal Targets

The Act allows for exceptions to fiscal targets under special circumstances, such as emergencies. For instance, during the COVID-19 pandemic, fiscal targets were temporarily suspended due to increased government expenditure and decreased revenue. This flexibility helps the government respond effectively to unforeseen economic challenges.

Long-term Fiscal Goals

The government introduced a plan in the 2021-22 budget to reduce the fiscal deficit to below 4.5% by 2025-26. This goal reflects the government’s commitment to restoring fiscal health post-pandemic while balancing economic growth.

The FRBM Act promotes transparency in financial practices. It encourages realistic budgeting and accountability in government spending. The Act also aims to establish a framework for sustainable debt management, preventing financial strain on the economy.

Over the years, the FRBM Act has undergone several amendments to adapt to changing economic conditions. These changes ensure that the Act remains relevant and effective in promoting fiscal responsibility in India. The Act also provides the Reserve Bank of India with the flexibility to manage inflation effectively.

GKToday Notes:
FRBM Act: The Fiscal Responsibility and Budget Management Act was enacted in 2003. It promotes fiscal discipline, transparency, and accountability in India’s financial practices and management.
Medium-Term Fiscal Policy Statement: This document outlines the government’s fiscal strategy over the medium term. It includes projections for fiscal and revenue deficits as percentages of GDP.
COVID-19 Pandemic Exceptions: During the COVID-19 pandemic, fiscal targets were suspended. This allowed increased government spending to address economic challenges and support recovery efforts in India.

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