FRBM Act

Fourteenth Finance Commission has adopted the fiscal deficit threshold limit of 3 per cent of Gross State Domestic Product (GSDP) for the States. FFC, taking into account the development needs and the current macro- economic requirement, relaxed the Fiscal Responsibility and Budget Management (FRBM) Act rules and provided additional headroom to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to the States that have no revenue deficit in the year in which borrowing limits are to be fixed and immediately preceding year. The FRBM Act was enacted by the Parliament in 2003 to institutionalise fiscal discipline, reduce fiscal deficit, and improve macroeconomic management. The government was supposed to wipe out revenue deficit and cut fiscal deficit to 3% of GDP by 2008-09, thus bringing much needed fiscal discipline. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP. Fiscal deficit is the total expenditure excluding revenue receipts, loan recoveries and receipts from disinvestment etc. It is a measure of the government borrowing in a year. Uncontrolled fiscal deficit is harmful not only for the health of economy but also for the growth of the economic indicators and finally the development prospects in the road towards inclusive growth. The Act applies only to the central government and the States have to enact suitable legislations to adopt the rules under the FRBM Act. The implementation of the Act was put on hold in 2007-08 due to global financial crisis and the need for fiscal stimulus. In 2012, the FRBM Act was amended and it was decided that the FRBM Act would target effective revenue deficit in place of revenue deficit. Effective revenue deficit excludes capital expenditure from revenue deficit and thus provides space to the government to spend on formation of capital assets. How are these targets monitored? FRBM requires the government before Parliament three statements covering - Medium Term Fiscal Policy, Fiscal Policy Strategy and Macroeconomic Framework, each year along with the Budget. 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. Requires the government to place.