Explain the circumstances that necessitated the FRBM Act of 2003. Also highlight the shortcomings in the FRBM Act 2003.

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Explain the circumstances that necessitated the FRBM Act of 2003. Also highlight the shortcomings in the FRBM Act 2003.

Approach

  • Briefly discuss FRBM in the introduction.
  • Explain the need of FRBM act.
  • Then discuss the various shortcomings in the FRBM act 2003.
  • Conclude with suggestions of N.K. Singh Committee.
Model Answer :

The Fiscal Responsibility and Budget Management Act, 2003 (FRBM) is an law enacted by the government of India to ensure fiscal discipline by reducing India’s fiscal deficit and improving the macroeconomic management.

Need for FRBM Act:

High revenue deficit due to higher expenditure on subsidies, salaries, defense etc. compelled the government to make big borrowing since 1990s. The rising government borrowing and the resultant government debts have seriously eroded the financial health of the country. And high borrowings further lead to payment of higher interests. Thus to institutionalize fiscal prudence and discipline, FRBM was needed.

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. It set targets for the union government to bring down revenue and fiscal deficits.

However, the targets mostly went unmet and were revised several times. Over the last few years, the government of India again paid greater attention to fiscal responsibility, and announced in the budget 2016-17 its decision to realize the 3% fiscal deficit, as originally set.

Despite the good intentions, FRBM Act suffered from certain shortcomings:

  • The Act prescribes a target fiscal deficit of 3% of GDP for the centre but with no explicit justification for the number.
  • 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.
  • Other issue is about apportioning the debt between centre and states. As the 14th Finance Commission has gone for greater devolution of taxes to the states, changes are required.
  • FRBM act is outdated as it was passed in 2003 which is not suitable in present context.

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, reduction of combined debt-to-GDP ratio of the centre and states to 60 per cent by 2023 etc. may be incorporated.

Subjects : Economy