FRBM Act – what is it?

Financial responsibility and Budget Management Act

The act is aimed at bringing transparency and accountability in the fiscal and monetary actions of the government. The set of rules and targets are to be followed which will allow country to create realistic projections and medium term projections. The annual actions to be guided by the medium term plan.

The important documents that are available to public/Parliament are

1. Medium Term Fiscal Policy Statement

2. Macroeconomic Framework Statement

3. Fiscal Policy Strategy Statement

These documents give projections of the revenue, increase in expenditure in each sector etc.

Why the FRBM act is relevant?

India is a developing country and the investments (especially rate of interest of lending) will be based on the financial health of country. If the country has less debt and has relatively accurate projections, the investors would be willing to lend at low rates for longer time. If the credit rating + their own assessment is negative, then the investors won’t focus on the long term and will be ready to exit making profits. They will charge higher interest to cover the risk.

The targets set by the FRBM act can be exempted during the natural calamities, disasters etc.

What is this 3% fiscal deficit limit which you hear often about FRBM ?

The gap between the revenue and expenditure of a country to its GDP should be within 3 percentage. The 3-5 percentage is considered better for a country.

Concerns raised in various news:

1.       The deficits as a result of off-budget borrowings not being included in calculating the fiscal deficit has been criticised. The off-budget borrowings are also debt and to get a complete picture has to be included for getting full picture of the repayment schedule the country will have to bear.

2.       CAG report estimation of GDP 2019 has been higher than budget estimate.

3.       Doubts has been raised by certain economists on the revenue estimates.

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