FRBM Act

ECONOMY

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

FRBM Act

In order to deal with crisis created by COVID-19 pandemic, Kerala government announced a package of ₹20,000 crores and urged the centre to provide flexibility under the FRBM Act.

What is Fiscal responsibility and Budget Management (FRBM) Act?

• It was enacted by Parliament in 2003.
• Background: Reckless borrowing by government to finance its programmes had led to high Fiscal Deficit, high Revenue Deficit, and high Debt-to-GDP ratio.
• The objectives of the act are
  • To ensure fiscal discipline in government finances
  • Inter-generational equity in fiscal management 
  • Long-term macro-economic stability.
• Following documents were supposed to be placed in the Parliament annually along with the Budget, to ensure transparency & accountability in fiscal operations:
  • Macroeconomic Framework Statement
  • Fiscal Policy Strategy Statement
  • Medium Term Fiscal Policy Statement 
  • Medium Term Expenditure Framework Statement
• Among other targets, the act mandated the reduction of the fiscal deficit to 3% of GDP – Initial goal was March 31, 2009 but it has been postponed since 2008 to the most recent target of 3.1% for March 2023.

FRBM Act and State government

• To ensure that the States too are financially prudent, the 12th Finance Commission’s recommendations in 2004 linked debt relief to States with their enactment of similar laws. 

• The States have since enacted their own respective Financial Responsibility Legislation, which sets the same 3% of Gross State Domestic Product (GSDP) cap on their annual budget deficits.

Why is Kerala seeking flexibility under the FRBM?

• Kerala’s current fiscal position means that it can borrow about ₹25,000 crores during the financial year 2020-21.
• As per its COVID relief package, it plans to borrow ₹12,000 crore in April 2020 itself.
• FRBM limitations means constraints on its borrowing and spending ability over the remaining 11 months of the fiscal year.
• Thus, it has asked for relaxation of the FRBM act

How does a relaxation of the FRBM work?

• The law does contain an ‘escape clause’ (section 4(2) of act) whereby the Centre can exceed the annual fiscal deficit target citing grounds that include national security, war, national calamity, structural reforms, decline in real output etc.
• The ongoing pandemic could be considered as a national calamity which is apt for suspending both the Centre’s and States’ fiscal deficit targets.

• This would allow both the Union government and States including Kerala to undertake the much-needed increases in expenditure to fight COVID pandemic.

When have the FRBM norms been relaxed in the past?

• Most significant one was in 2008-09 – during the global financial crisis, when the Centre resorted to fiscal stimulus – lead to fiscal deficit climbing to 6.2% of GDP, from a budgeted goal of 2.7%.
• Simultaneously, the deficit goals for the States too were relaxed to 3.5% of GSDP for 2008-09 and 4% of GSDP for fiscal 2009-10.
• In the recent Union Budget for 2020-21 – Reductions in corporate tax was considered as structural reforms so as to trigger the escape clause – fiscal deficit target for 2019-20 was recalibrated to 3.8%, from the earlier 3.3%

Connecting the dots:

• N K Singh Panel on review of FRBM act
• Impact on economy due to relaxation of Fiscal Deficit
• 15th Finance Commission’s interim report