FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT

About:

• The FRBM Act, enacted in 2003 by Parliament aims to reduce India's fiscal deficit and improve macroeconomic management.
  
  
• The rules for implementing the Act were notified in July 2004 and since then every Budget of the Union government has included a Medium Term Fiscal Policy Statement that specifies the annual revenue and fiscal deficit goals over a three-year horizon.
  
  
• Under it, the present target is of reducing the fiscal deficit to 3.1% of GDP by March 2023.
  
  

Scenario in states:

• To ensure that the States too are financially prudent, the 12th Finance Commission’s recommendations in 2004 linked debt relief to States with their enactment of similar laws.
  
  
• The States have since enacted their own respective Financial Responsibility Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficits.
  
  

Relaxation under FRBM:

• The law does contain what is commonly referred to as an ‘escape clause’.
  
  
• Under Section 4(2) of the Act, the Centre can exceed the annual fiscal deficit target citing grounds that include national security, national calamity and decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.
  
  
• Given that the ongoing pandemic could be considered as a national calamity the current circumstances would be apt for suspending both the Centre’s and States’ fiscal deficit targets.
  
  
• This would allow both the Union government and States to undertake the much-needed increases in expenditure to meet the extraordinary circumstances.