What is Full Form of FRBM?

Fiscal Responsibility and Management Bill was first introduced by the 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 guides Reserve Bank of India (the Central Bank of India) in managing Inflation in the country.

Features

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.read more 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.read more in a planned manner by an equivalent amount every year to completely avoid a deficit. At the Fiscal Responsibility and Budget Management Act initiation, it was proposed to reduce 0.5% of GDP annually for Revenue Deficit and 0.3% of GDP yearly 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, from subscribing 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 its Macro-Economic framework, Fiscal PolicyFiscal PolicyFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more 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.

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Objectives

  • 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 optimally.Finally, the objective is to set targets of Fiscal deficit and Revenue (later changed to Effective Revenue) deficit and achieve the same and act as a guide to the government in achieving its medium-term objective of Fiscal Deficit and Fiscal Operations.It ensures 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 its dues, 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 of macroeconomic factorsMacroeconomic FactorsMacroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists.read more is another important objective of FRBM.

Functions

  • 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’s Fiscal Situation and the position of Government Borrowing. Ensure that the country’s borrowings are spread evenly over the years to avoid any high fiscal slippage over any particular year.

Importance

Impact

  • 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 achieve, if not completely, 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 managing 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 severely impacted the economy’s development and credit growth, which was the engine of GDP expansion.

Conclusion

  • FRBM is an important Act enacted by India’s Government to make our country manage its fiscal balance more prudently and systematically.It is a well-known fact that higher levels of Fiscal deficit impact the Inflation level and lead to the accumulation of a large amount of Debt borrowing. In contrast, a lower level of Fiscal deficit leads to higher growth, which is also sustainable.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 enlargement of Government Balance Sheet and social expenditure through excess borrowing.It also aims to curtail the government Interest expenditure, which will ultimately reduce the 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.read more, 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, and objectives of FRBM along with its functions, impact, and importance. You may refer to the following articles to learn more about finance –

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