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.

Related Article : GDP India

Monetory Vs Fiscal Policy of Government

The Government can regulate the economy through monetary and fiscal policies. 

Monetary Policy

The supply of money is controlled by Government through monetary policy. The monetary policies are generally done by the central banks ( RBI in India). The interest rates and circulation of money is controlled by the central banks through monetary policy. 

The central banks according to the macro economic situation take stance needed for the nation. At times, the priority may be inflation control and at times, the priority may be growth. 

eg: The higher interest rate will reduce the money in circulation and bring down inflation. At the same time, the growth may reduce. 

Fiscal Policy 

The composition of spending and amount of spending showcases areas where the government wants to spend money. The fiscal policies is the way govt spends money according to its priorities. 

The taxes government imposes and the incentives given for various sectors highlight the way government wants to spend money. If there is slowing of economy, the government may decide to spend more to stimulate economy. Eg: - Heavy investments in infrastructure will improve employment, push more money to core sectors, which in-turn may stimulate growth.