[Economics] FRBM Act
Ranjith
What is the FRBM Act?
The Fiscal Responsibility and Budget Management Act was enacted by Parliament
in 2003 to bring in fiscal discipline and had notified the FRBM Rules in July
2004.
How will it help in redeeming the fiscal situation?
· The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets.
· It also empowers RBI for taking measures to control Inflation.
· The Act also provide exception to government in case of natural calamity and national security.
· As per the initial targets, revenue deficit have to be reduced to nil in five years beginning 2004-05. Each
· The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.
· The implementation of Act was put on hold in year 2007-08 due to global financial crisis and the need for fiscal stimulus.
· In 2012 FRBM Act was amended and it was decided that the FRBM would target effective revenue deficit in place of revenue deficit and Medium Term Expenditure Framework.
o Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending.
o Medium Term Expenditure Framework sets forth a three year rolling target for expenditure indicators.
How are these targets monitored?
The Rules have mid-year targets for fiscal and revenue deficits. The Rules
required the government to restrict fiscal and revenue deficit to 45% of budget
estimates at the first half of the financial year.
In case of a breach of either of the two limits, the FM will be required to explain to Parliament the reasons for the breach, the corrective steps, as well as the proposals for funding the additional deficit.
Reference:
http://www.simplydecoded.com/2013/03/25/revenue-deficit-fiscal-deficit/
http://www.rediff.com/money/slide-show/slide-show-1-budget-2012-amendments-to-frbm-act/20120316.htm