KingMakers IAS Academy logo

FRBM Act

FRMB

When was the FRBM Act enacted? Who introduced it in India?

The FRBM Bill was introduced by the then finance minister, Yashwant Sinha, in 2000. The Bill, approved by the Union Cabinet in 2003, became effective from July 5, 2004.

What are the objectives of the FRBM Act?

  • The FRBM Act aims to introduce transparency in India’s fiscal management systems.
  • The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.
  • The FRBM Act was enacted to introduce more equitable distribution of India’s debt over the years.

Key features of the FRBM Act

The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

1Medium Term Fiscal Policy Statement

2. Macroeconomic Framework Statement

3. Fiscal Policy Strategy Statement

The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of GDP in the medium-term fiscal policy statement.

Budget 2020-21:

The fiscal deficit is at 3.5% in FY21 (2020-21) and at 3.8% for FY20 (2019-20).

FRBM Act exemptions

On grounds of national security, calamity, etc, the set targets of fiscal deficits and revenue could be exceeded.

image 98

Why fiscal stimulus is necessary:

  • The Covid- 19 pandemic has caused an economic slowdown, demand reduction, supply side disruption.
  • In order to boost the aggregate demand there is a need to increase the fiscal stimulus.
  • Consider US (US) and Eurozone governments’ reactions to the global financial crisis over the last decade, respectively.
  • Vigorous fiscal stimulus meant that the US recovered briskly, while the conservative European Central Bank’s cautious intervention has meant that they fared poorly.

Issue:

  • The Fiscal Responsibility and Budget Management Act (FRBM) of 2003 is a hindrance to fiscal expansion.
  • It ties expansionary economic policy to a 3 per cent fiscal deficit cap of the gross domestic product. The fiscal deficit of the Center in 2019-20 was already at 8 per cent.  

What is needed: 

The government can amend the FRBM act to allow for an emergency.

Greater expenditure is required in four buckets,

  1. Relief
  2. Medical response
  3. Aggregate demand stimulus
  4. Ramping up the public health infrastructure.  

This pandemic is an opportunity to undertake structural reforms.

Two areas,  stand out.

  1. Manufacturing:
  2. Many countries turn inward and many global manufacturing centers seek to move from China.
  3. Hence, India must cut red tape, reform its key production factors, and encourage enterprises that can provide mass employment.
  4. New ways of doing business — including mass manufacturing — will have to be found in line with social distancing  
  • Agriculture:
  • The PM indicated in a meeting the need for integrated markets and a new legislative framework for the sector. 
  • Reforming the APMC’s, facilitating the agri- transport, creating FPC’s all are necessary.

Source:” Hindustan Times“.

POSSIBLE UPSC CSE MAINS QUESTION:

How important is to increase the fiscal stimulus to revive the economy now? What are the impediments against it?