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What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) Act, 2003? What were the shortcomings in the Act that undermined its effectiveness? Approach:  ● Briefly discuss FRBM in the introduction  ● Explain the need of FRBM act  ● Discuss the various shortcomings in the Act that made it less effective  ● Conclude with suggestions

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM) was introduced to institutionalize financial discipline, reduce India’s fiscal deficit, and improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget.

Reasons for The Introduction of FRBM Act

  ● High revenue deficit due to higher expenditure on subsidies, salaries, defence etc. forced government to make big borrowing from early 1990s onwards.


  ● The borrowing again produced high interest payments. The interest payments became the largest expenditure item of the government.


  ● The rising government borrowing and high interest payments seriously eroded the financial health of the government. The high fiscal deficit not only threatened financial stability of the nation but also raised the risk of credit default and possible downgrade by credit rating agencies. 


  ● So, in light of these scenario, FRBM Act was seen as an important institutional expression to ensure fiscal prudence and support for macro-economic balance


Why Ineffective?

FRMB Act aimed to achieve fiscal discipline through limits on the Central Government borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government etc. While there were some early successes, the targets mostly went unmet due to some shortcomings and were revised several times in 2012-13, 2015, 2017 etc. The shortcomings in the Act are -

  ● The Act prescribes a target fiscal deficit of 3% of GDP for the centre but with no explicit justification for the number. The limits set have been mostly violated.


  ● There is no flexibility in the Act to deal with cyclical shocks like financial crisis of 2008.


  ● There is no mechanism like fiscal accountability council to review fiscal performances under the act.


  ● As the 14th Finance Commission has mandated greater devolution of taxes to the states, changes are required in terms of apportioning the debt between centre and states.


Way forward and Conclusion

FRBM brought focus on fiscal discipline and provided benchmarks to measure the same. However, there is a need for fiscal management, including FRBM, to evolve to the changing needs to the time. The recommendations of the N.K Singh committee on flexible targets with escape clause, creation of fiscal council, focus on reduction of combined debt-to-GDP ratio of the centre and states to 60 % by 2023 etc. may be incorporated

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