GS Question

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was introduced in India to ensure fiscal discipline and sound management of public finances. The act was implemented for several reasons:

1. Controlling fiscal deficit: The act aimed to reduce and eventually eliminate the revenue deficit and bring down the fiscal deficit to a sustainable level. This would help in ensuring macroeconomic stability and reducing the burden of debt on the economy.

2. Long-term debt sustainability: The act aimed to maintain the debt-GDP ratio at a sustainable level, ensuring that the government's borrowing capacity does not lead to an excessive debt burden. This would help in maintaining investor confidence and preventing a debt crisis.

3. Efficient resource allocation: The act aimed to promote efficient utilization of public resources by prioritizing public expenditures and reducing wasteful expenditures. It also aimed to improve the quality of public expenditure and reduce revenue leakage.

4. Strengthening fiscal institutions: The act sought to establish a strong institutional framework for fiscal management. It provided for the setting up of a Fiscal Responsibility and Budget Management Committee, which would provide independent oversight and monitor the government's fiscal performance.

The salient features of the FRBM Act include:

1. Fiscal targets: The act prescribed fiscal targets to be achieved by the government, including reducing the fiscal deficit to a specified percentage of GDP and eliminating the revenue deficit. These targets were to be achieved over a specified time period.

2. Medium-term fiscal policy statement: The act required the government to present a medium-term fiscal policy statement, outlining its fiscal policy objectives, fiscal indicators, and strategies for achieving the targets.

3. Transparency and accountability: The act aimed to improve the transparency and accountability of fiscal management by requiring the government to present an annual fiscal policy statement, a medium-term expenditure framework, and an annual budget statement to the parliament.

4. Role of the fiscal responsibility and budget management committee: The act established a committee to provide oversight and monitoring of the government's fiscal performance. The committee would review the government's fiscal policies, assess compliance with fiscal targets, and suggest corrective measures if needed.

While the FRBM Act had several positive intentions, its effectiveness has been limited. The act did not have a mechanism for enforcing compliance with fiscal targets, leading to frequent deviations from the prescribed targets. The act also allowed for certain exceptional circumstances, such as national security concerns or natural calamities, which provided leeway for discretionary fiscal management.

Furthermore, the act focused excessively on reducing fiscal deficit, neglecting the quality of public expenditure and the need for counter-cyclical fiscal measures during economic downturns. This led to a prioritization of reducing spending without considering the impact on growth and development.

In conclusion, while the FRBM Act aimed to bring fiscal discipline and improve fiscal management in India, its effectiveness has been limited. The act needs to be revised to incorporate a flexible approach to fiscal management, considering the need for counter-cyclical policies and a focus on improving the quality of public expenditure.