Economy Simplified: Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) explained.

In a multi-party parliamentary system, electoral concerns play an important role in determining expenditure policies. A legislative provision, it is argued, that is applicable to all governments – present and future – is likely to be effective in keeping deficits under control.

The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms, binding the government through an institutional framework to pursue a prudent fiscal policy.

The central government must ensure intergenerational equity and long-term macro-economic stability by achieving sufficient revenue surplus, removing fiscal obstacles to monetary policy and effective debt management by limiting deficits and borrowing.

Main Features of the Act 

1. The Act mandates the central government to take appropriate measures to reduce fiscal deficit to not more than three percent of GDP and to eliminate the revenue deficit by March 31, 2009 and thereafter build up adequate revenue surplus.

2. It requires the reduction in fiscal deficit by 0.3 percent of GDP each year and the revenue deficit by 0.5 per cent. If this is not achieved through tax revenues, the necessary adjustment has to come from a reduction in expenditure.

3. The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.

4. The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.

5. The Reserve Bank of India must not subscribe to the primary issues of central government securities from the year 2006-07.

6. Measures to be taken to ensure greater transparency in fiscal operations.

7. The central government must lay before both Houses of Parliament three statements – Medium-term Fiscal Policy Statement, The Fiscal Policy Strategy Statement, The Macroeconomic Framework Statement along with the Annual Financial Statement.

8. Quarterly review of the trends in receipts and expenditure in relation to the budget be placed before both Houses of Parliament.