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What is Fiscal Responsibilityand Budget Management Act?
The Fiscal Responsibility and and Budget Management Management (FRBM) (FRBM) Actwas legislated by the Parliamentin the year 2003. Its objectives can be identified as:
Toinstitutionalise fiscal discipline;
Reduce Fiscal Deficit;
ImproveMacroeconomic ImproveMacroeconom ic Management.
The law aims at promotingFiscal promotingFiscal Stability for the country ona ona long-term basis. basis.
It emphasisesa Transparent Fiscal Management System and a more equitable distributio distribution n of debts over the years. years. Bank of India toundertake monetary This law also gives flexibility tothe Reserve Bank policy totackleinflation and take take corrective measures in order to give give an impetus to the economic environment. As the Government Government needs resources resources for funding funding various various kinds of development developmental al schemes schemes androutine expenditures. Resources Resources are raised through taxes and borrowing. borrowing. The governmentcan raise funds by by borrowing from the Reserve Bank Bank of India, financial institutions or from thepublic by floating bonds. Fiscal deficit It is the Total Expenditure minus the Revenue Receipt, Loan Recoveries and Receipts from Disinvestmen Disinvestmentt etc. It is a measure measure of the government government borrowin borrowing g ina year. However, uncontrolled uncontrolled Fiscal Deficit is harmful not only for the health of economy but also for the Growth of the economic indicators and finally the development prospects in the road towards Inclusive Growth.
FRBM Act Act was notified notified in 2004 2004 in response response to the need felt felt to curb curb broadening broadening Fiscal Deficit. The FRBM rulesspecify annual annual reduction targetsfor targetsfor fiscal indicators. Originally, the act envisaged Revenue Deficit to be reduced to nil in five years beginning 2004-05. Fiscal deficit was required to be reduced to3 percent of GDP by 2008-09. 2008-09. The Act also also provides exception to the government government in case of Natural Calamity and whenever there is a threat to National Security.
The implantation of the act was put on hold in 2007-08 due to Global Financial Financial Crisis and the aggravating demand forFiscal Stimulus.
There was a need for increased government expenditure to create demand to fight off the financial downturn and hence the government moved away from the path of Fiscal Consolidation for this period.
This law also prohibits borrowing by government fromthe Reserve Bank of India and purchase of primary issues of central government securities after2006. The Act asked the Central government to lay in Parliament three statements in one financialyear about the fiscal policy. To enforce fiscal discipline at the state level, the Twelfth financecommission provided for incentives to states through conditional debt restructuring and interest raterelief. In 2012, the FRBM Act was amended and it was decided that the FRBMAct would target Effective RevenueDeficit in place of Revenue Deficit.
Effective Revenue Deficitexcludes Capital Expenditure from Revenue Deficit and thus provides space to the government to spend on formationof Capital Assets.
The critics of this Act usually point of out the demerits that it would put a curb on the government’s social sector spending, butno one can deny the fact that there is a rising need for Fiscal Sustainability in order to put the economic indicators back on the path of Growth as well as Development. Ankur Sachan