The Act, passed in 2003, establishes a target for the government to reduce the budget deficit.
What is FRBM Act?
In December 2000, the then-Finance Minister of India, Mr Yashwant Sinha, introduced The Fiscal Responsibility and Budget Management Bill (FRBM Bill)in India. The FRBM act intends to increase standardised transparency in India’s fiscal management system.
The FRBM Act is concerned with the maintenance of a balance between government revenue and government spending.
By March 31, 2021, the Act mandates that the fiscal deficit be limited to 3% of the country’s gross domestic product (GDP). Meanwhile, the government’s debt should get limited to 40% of GDP by 2024-25.
The FRBM Act intended to bring –
- fiscal discipline
- efficient expenditure, revenue, and debt management
- Stability in the macroeconomic environment
- improved coordination of fiscal and monetary policy.
- Transparency in the government’s fiscal operations
- acquiring a balanced budget
OBJECTIVES OF THE FRBM ACT
The main objectives of the act include:
- to implement transparent fiscal management systems throughout the country
- to implement a more equitable and manageable debt distribution for the country over time
- to strive for long-term fiscal stability in India.
Furthermore, the expectation from the act was to provide the Reserve Bank of India (RBI) with the necessary flexibility for managing inflation in India.
FISCAL POLICY STRATEGY STATEMENT
Under Section 3(4) of the 2003 Fiscal Responsibility and Budget Management (FRBM) Act, the Fiscal Policy Strategy Statement gets delivered to Parliament.
It outlines the government’s fiscal priorities for the upcoming fiscal year, including taxation, expenditure, lending and investments, administered pricing, borrowings, and guarantees.
The statement shows how current policies align with solid fiscal management principles and justifies any substantial deviations in necessary fiscal measures made in recent years.
The Interim Budget made no mention of such a statement. In its Fiscal Policy Strategy Statement for Budget 2018, the government aimed to achieve the following goals:
- Targeting both the fiscal deficit and the debt at the same time
- Establishing a fiscal deficit target as an operational goal and ensuring that the government achieves a fiscal deficit of 3% of GDP by FY21
- The central government shall strive to maintain a declining debt trajectory and a debt target of 40% of GDP by FY25, with general government debt of 60%.
- It decide whether the FRBM Act’s goals may be eased or strengthened by incorporating sufficiently defined escape and buoyancy clauses.
HISTORY OF THE FRBM ACT
Borrowing levels in India were extraordinarily high in the 1990s and 2000s.
By 2003, the constant government borrowing and the resulting debt severely harmed the Indian economy.
As a result, the Indian parliament felt that the government of India should be held accountable for not relying on excessive levels of borrowing to support its expenses and that it was necessary to institutionalise some kind of fiscal discipline framework.
The Indian parliament enacted a bill in 2003 that became known as the FRBM act.
RBI MONETARY POLICY
The monetary policy refers to the central bank policy about the use of financial instruments under RBI’s control to standardise magnitudes such as
- availability of credit
- interest rates, and
- money supply.
All this to achieve the ultimate objective of economic policy mentioned in the Reserve Bank of India Act, 1934.
The chief aim of fiscal policy is to maintain price stability while pursuing the goal of growth. For long-term growth, price stability is essential.
Amending the RBI’s 1934 Act in May 2016 laid the legal groundwork for adopting the flexible inflation targeting agenda.
The government made a committee to review the FRBM Act 2016 in May 2016, led by NK Singh. According to the committee, the government should aim for a fiscal deficit of 3% of GDP in the years leading up to March 31, 2020, then reduce it to 2.8 percent in 2020-21 and 2.5 per cent by 2023.
After consulting with the Reserve Bank, the revised RBI Act also calls for the Indian government to set the inflation target once every five years.
The Central Government has set a target of 4% Consumer Price Index (CPI) inflation in the Official Gazette from 5 August 2016 to 31 March 2021, with a higher tolerance limit of 6% and a lower tolerance limit of 2%.
The Central Government also announced the following factors that contribute to the failure to meet the inflation target:
- For any three consecutive quarters, average inflation exceeds the upper tolerance level of the inflation target.
- For three quarters in a row, the average rise has been less than the lower tolerance threshold.
The modified RBI Act explicitly grants the Reserve Bank of India a legislative mandate to operate the country’s policy framework.
The goal of the monetary policy framework is to determine the policy repo rate based on the current and changing macroeconomic condition. There are strategies to adjust money market rates at/around repo rates by changing liquidity conditions.
