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

Reasons for Introduction

Several factors necessitated the introduction of the FRBM Act, 2003:

• High Fiscal Deficit & Public Debt: In the late 1990s and early 2000s, India’s fiscal deficit was consistently high, often exceeding 6% of GDP. This led to a burgeoning public debt, creating a debt trap scenario.
• Lack of Fiscal Discipline: There was a perceived lack of fiscal discipline among governments, with spending often exceeding revenue projections.
• Influence of International Institutions: Organizations like the IMF and World Bank advocated for fiscal consolidation as a prerequisite for sustained economic growth and stability.
• Growing Concerns about Crowding Out: High government borrowing was crowding out private investment, hindering economic expansion.
• Need for Transparency & Accountability: The Act aimed to enhance transparency in government finances and hold policymakers accountable for fiscal outcomes.

Salient Features of the FRBM Act, 2003

The FRBM Act, 2003, laid down a framework for fiscal management with the following key features:

• Fiscal Deficit Targets: The Act initially mandated the government to reduce the fiscal deficit to 3% of GDP within a specific timeframe.
• Revenue Deficit Targets: It also aimed to eliminate the revenue deficit (the difference between revenue receipts and revenue expenditure) over a period of time.
• Debt Targets: The Act set targets for reducing the total public debt as a percentage of GDP.
• Transparency Requirements: It mandated the publication of Fiscal Policy Statement, Budget Implementation Report, and Macroeconomic Framework Statement to enhance transparency.
• Responsibility of the Government: The Act placed the responsibility on the government to ensure fiscal discipline and prudent financial management.

Effectiveness and Criticisms

The FRBM Act has had a mixed record of success:

• Initial Successes: The Act initially led to a reduction in fiscal deficit from 6.9% of GDP in 2003-04 to 2.5% in 2007-08. Public debt also showed a declining trend.
• Deviation from Targets: However, the global financial crisis of 2008 and subsequent economic slowdown led to deviations from the prescribed targets. Fiscal stimulus packages were implemented, increasing the fiscal deficit.
• 2018 Amendment: The FRBM Act was amended in 2018 to provide greater flexibility to the government. The target year for achieving the fiscal deficit of 3% of GDP was removed, and the government was given the flexibility to deviate from the targets under extraordinary circumstances.
• Criticisms:
  • Lack of Enforcement Mechanism: The Act lacked a strong enforcement mechanism, allowing governments to deviate from the targets without significant consequences.
  • Focus on Targets over Quality: Critics argue that the focus on achieving numerical targets overshadowed the need for qualitative improvements in public spending.
  • Pro-Cyclicality: The Act’s emphasis on fiscal consolidation during economic downturns could be pro-cyclical, exacerbating economic slowdowns.
  • Limited Scope: The Act primarily focused on the central government and did not adequately address fiscal imbalances at the state level.

Recent Developments: The COVID-19 pandemic led to a significant increase in fiscal deficit, prompting the government to invoke the escape clause in the FRBM Act. The government has now set a target to achieve a fiscal deficit of 4.5% of GDP by 2025-26.

Feature	Original FRBM Act (2003)	FRBM Amendment (2018)
Fiscal Deficit Target	3% of GDP by 2009-10	Flexible; determined by government based on prevailing economic conditions
Revenue Deficit	Elimination	No specific target
Escape Clause	Limited scope	Expanded to include a wider range of extraordinary circumstances