FRBM Act - 2003

FRBM Act 2003
FRBM Act 2003
FRBM (Fiscal Responsibility and Budget Management) Act 2003 - The FRBM Act was enacted in 2003 as rising government borrowing and the resultant government debts have seriously eroded the financial health of the government.
FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify.
The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09. This will be realized with an annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by 2008-09. Later, the target dates were reset and budget 2016-17 aims to realise the 3% fiscal deficit target by March 2018
The key provisions of the Act
1.  Total liabilities of the Union Government should not rise by more than 9% a year.
2. Union Government would not give guarantee to loans raised by PSUs and State governments for more than 0.5% of the GDP in aggregate.
3. Union Government would place three more documents along with the budget documents viz. Macroeconomic Framework Statement, Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.
The Act gives slight flexibility to the government regarding the realisation of the target as well. The Finance Minister has to explain the reasons and suggest corrective actions to be taken, in case of breach.
As per the Union Budget 2016-17, the government constituted a Committee headed by N.K. Singh to review the implementation of the FRBM Act.
The N.K. Singh-headed FRBM Review Committee report had recommended the Debt GDP ratio to be 40% for the Centre and 20% for the States, respectively, by 2023. The committee recommended that the government should target a fiscal deficit of 3 per cent of the GDP in years up to March 31, 2020 and cut it to 2.8 per cent in 2020-21 and to 2.5 per cent by 2023.