What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) Act, 2003…

Question

What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) Act, 2003 ? Discuss critically its salient features and their effectiveness.

Ghissu Editorial · Accepted Answer

The FRBM Act, 2003 was introduced to end borrowing for consumption, curb the interest burden and stop monetisation, and it cut the Centre's deficits sharply before bending under later shocks. By 2007-08 the fiscal deficit had fallen to 2.7% of GDP.

**Introduction**

By 2001-02 the Centre's fiscal deficit was about 6.2% of GDP, and a revenue deficit of about 4.4% meant borrowing mostly paid for consumption. The FRBM Act, 2003 made fiscal discipline a legal duty.

**Reasons for Introducing the FRBM Act**

1. **Borrowing for consumption**: Revenue deficits breached the golden rule that borrowing should create assets.
2. **Interest burden**: Interest absorbed close to half of the Centre's revenue receipts by the early 2000s, crowding out development spending.
3. **Crowding out and inflation**: Government borrowing raised private credit costs, and monetisation through ad hoc treasury bills had fuelled inflation.

**Salient Features and Their Effectiveness**

SKETCH: timeline | FRBM Journey
- 2003 :: Act passed
- 2007-08 :: Deficit at 2.7%
- 2009 :: Paused for stimulus
- 2012 :: Effective revenue deficit
- 2018 :: Debt anchor adopted
- 2020-21 :: Deficit at 9.2%

1. **Targets**: The fiscal deficit was to fall to 3% of GDP and the revenue deficit to zero by 2008, and by 2007-08 they stood at 2.7% and 1.1%.
2. **Transparency**: Three fiscal statements and quarterly reviews improved disclosure, though off-budget oil and fertiliser bonds escaped the count.
3. **No RBI financing**: From April 2006 the RBI stopped buying primary government securities, the most durable gain.
4. **Slippage**: The 2008 crisis stimulus pushed the deficit above 6% in 2009-10, and the 2012 amendment diluted the path.

**Conclusion**

The FRBM Act delivered real consolidation and transparency in its first five years but bent under every shock because its targets could be amended at will. With Central debt at 58.46% of GDP in 2024-25 (CAG) against a 40% target, enforceable rules and an independent fiscal council are needed to make discipline credible.

What were the reasons for the introduction of Fiscal Responsibility and Budget Management (FRBM) Act, 2003 ? Discuss critically its salient features and their effectiveness.

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