What is Full Form of FRBM?
The Full Form of FRBM stands for Fiscal Responsibility and Budget Management. It is an important Act that was enacted to guide the government of India regarding fiscal health and reduce the fiscal deficit of the country through better management of public finances.
Fiscal Responsibility and Management Bill was first introduced by Indian Parliament in the year 2000 and was enacted in the form of the Fiscal Responsibility and Budget Management Act in the year 2003 and is an important guiding light for the Government in its Budgetary exercise, Fiscal planning as well as it provides guidance to Reserve Bank of India (the Central Bank of India) in managing Inflation in the country.
Some of the most peculiar features of FRBM are enumerated below:
- Elimination of Revenue DeficitRevenue DeficitThe term "revenue deficit" refers to a situation in which a company's actual net income for a quarter or fiscal year is less than the net income projected at the start of the period. This could be the result of a change in business that has had a negative impact on the company and is responsible for the lag in actual net income. and Fiscal deficitFiscal DeficitFiscal deficit refers to the situation where the total budget expenditure exceeds the total budget receipts, excluding the government borrowings in a given fiscal year. It determines the amount the government needs to borrow for meeting its excess expenditure. in a planned manner by an equivalent percentage amount every year to completely avoid a deficit. At the time of the Fiscal Responsibility and Budget Management Act initiation, it was proposed to reduce 0.5% of GDP every year for Revenue Deficit and 0.3% of GDP every year for Fiscal Deficit.
- Limiting the quantum of Guarantee the Central Government can provide in any Financial Year to 0.5% of GDP.
- Prohibit Central Bank, i.e., Reserve Bank of India, to subscribe to the primary issue of G-Sec issued by Govt. of India.
- Prohibit Central Government from borrowing from RBI for permanent deficit items.
- Central Government to place on record in both houses of parliament, i.e., Lok Sabha and Rajya Sabha, every year it’s Macro-Economic framework, Fiscal PolicyFiscal PolicyFiscal policy is a government policy that is used to control a country's finances and revenue, and it includes various taxes on goods, services, and individuals, i.e., revenue collection. It has an impact on spending levels, so it is referred to as monetary policy's sister policy. Statement, as well as Medium-Term Policy Statement during the Annual Budget Exercise.
- Central Government to specify the reasons in cases where they cannot meet the Revenue and Fiscal Deficit Targets.
- The major objective of FRBM is to develop the habit of meeting fiscal balance and managing fiscal expenditure by the Government in a prudent manner.
- Another objective is to allow the government to reduce its external borrowing and curtail its expenditure in the most optimum way.
- Finally, the objective is to set targets of Fiscal deficit and Revenue (later changed to Effective Revenue) deficit and achieving the same and act as a guide to the government in achieving its medium-term objective of Fiscal Deficit and Fiscal Operations.
- Ensuring equal benefit to all generations by keeping the country in order. In other words, by borrowing in excess in the present so that the Government may benefit the current generation, but the future generation will have to pay it dues, so there needs to be a balancing Fiscal Responsibility and Budget Management Act to ensure all generations of people of the country benefit.
- Attaining the Long-run stability on macroeconomic factors is another important objective of FRBM.
- Limiting the Fiscal deficit to 3% of GDY by the end of Financial Year 2021.
- Limiting the Debt of the Central Government to 40% of the GDP by Financial Year 2025.
- Provide a clear picture of the country Fiscal Situation, the position of Government Borrowings, and ensure that the country’s borrowings are spread evenly over the years to avoid any high fiscal slippage over any particular year.
- To guide the government against large borrowing at higher Interest Rates, leading to a higher Fiscal Deficit level.
- To reduce the large expenditure outflow, i.e., Interest on Borrowings of the Government.
- To make the Government accountable and also to bring in transparency in the monetary affairs of the Government. By fixing targets on the deficit, the government is made accountable for any expenditure that results in a deepening deficit. The government has to explain the reasons for doing so, which makes a democratic country like India more accountable towards the people who voted for the Government.
- Post-FRBM multiple amendments were made to make it effective, which includes shifting from a Fiscal deficit target to a Fiscal deficit range.
- Government expenditure declined to result in achieving, if not completely, then partially Fiscal Deficit Targets.
- It was observed that Government Expenditure on Social Sectors declined, such as on Education, Social Security and Agriculture, etc., which is a big disadvantage in a country like India where high population and social security measures are already at very low levels and need government support to reach modest levels.
- Despite being a good check to keep the government manage its finances well, FRBM has failed to achieve its objective. The Government always fails to achieve its targets on Revenue and Fiscal Deficit. Also, FRBM has a severe impact on the development and credit growth in the Economy, which was engines of GDP expansion.
- FRBM is an important Act enacted by India’s Government to make our country manage its fiscal balance in a more prudent and systematic manner.
- It is a well-known fact that higher levels of Fiscal deficit impact Inflation level and also led to the accumulation of a large amount of Debt borrowing, whereas a lower level of Fiscal deficit leads to higher growth, which is sustainable as well.
- It aims to reduce the debt borrowing of the country and make the financial health of the country better, which ultimately improve the ranking of India and consequently, the rating of the country on the global Index, which makes India a favorable destination for foreign investors as well as enabling the Government to properly channelize its resources to the most productive use and avoid unnecessary enlarging of Government Balance Sheet and social expenditure through excess borrowing.
- It also aims to curtail the government Interest expenditure, which will ultimately result in the reduction of Fiscal Deficit and make India a Fiscal Surplus Country in the future. However, the paradox is that the fiscal deficit is always not bad as long as it is done for capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year., which will benefit the future through higher revenue generation.
This has been a guide to the Full Form of FRBM and its definition. Here we discuss the features, objectives of FRBM along with its functions, impact, and importance. You may refer to the following articles to learn more about finance –