FRBM Act:
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FRBM Act is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence, and reduce its fiscal deficits.
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The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in the parliament of India in the year 2000 by Atal Bihari Vajpayee Government for providing legal backing to the fiscal discipline to be institutionalized in the country.
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Subsequently, the FRBM Act was passed in the year 2003.
Why was the FRBM Act passed?
The primary objective was the elimination of revenue deficit and bringing down the fiscal deficit. (RD to 0% and FD to 3%)
The other objectives included:
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Introduction of a transparent system of fiscal management within the country
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Ensuring equitable distribution of debt over the years
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Ensuring fiscal stability in the long run
The act also intended to give the required flexibility to the Central Bank for managing inflation in India.
Features of the FRBM Act
It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament:
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Macroeconomic Framework Statement
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Medium Term Fiscal Policy Statement and
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Fiscal Policy Strategy Statement
It was proposed that the four fiscal indicators i.e.
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revenue deficit as a percentage of GDP,
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fiscal deficit as a percentage of GDP,
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tax revenue as a percentage of GDP, and
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total outstanding liabilities as a percentage of GDP
be projected in the medium-term fiscal policy statement.
Targets and Fiscal Indicators as per the FRBM Act
The central government agreed to the following fiscal indicators and targets, after the enactment of the FRBMA
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Revenue deficit to be eliminated by the 31st of March 2009. A minimum annual reduction of 0.5% of GDP.
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Fiscal Deficit to be brought down to at least 3% of GDP by 31st of March 2008. A minimum annual reduction – 0.3% of GDP.
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Total Debt to be reduced to 9% of the GDP (a target increased from the original 6% requirement in 2004–05). An annual reduction of – 1% of GDP.
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The purchase of government bonds by RBI must cease from 1 April 2006.
Note: Many questions have been asked on FRBM Act. So, read carefully. Also, this can be extensively used in answers related to fiscal management.