Ayan Verma - FRBM Act, 2003

Fiscal Responsibility and Budget
Management Act, 2003
Public Finance CCE Ayan Verma

B.Com
(Economics)
III-E
Fiscal Responsibility and Budget Management Act,
2003
The Fiscal Responsibility and Budget Management
Act, 2003 (FRBMA) is an Act of the Parliament of
India to institutionalize financial discipline, reduce
India's fiscal deficit, improve macroeconomic
management and the overall management of the public
funds by moving towards a balanced budget and
strengthen fiscal prudence. The main purpose was to
eliminate revenue deficit of the country (building
revenue surplus thereafter) and bring down the fiscal
deficit to a manageable 3% of the GDP by March 2008.
Enactment
The Fiscal Responsibility and Budget Management Bill (FRBM Bill) was
introduced in India by the then Finance Minister of India, Mr.Yashwant Sinha in
December 2000. The bill highlighted the terrible state of government finances in
India both at the Union and the state levels under the statement of objects and
reasons. It sought to introduce the fundamentals of fiscal discipline at the various
levels of the government. The FRBM bill was introduced with the broad
objectives of eliminating revenue deficit by 31 March 2006, prohibiting
government borrowings from the Reserve Bank of India three years after
enactment of the bill, and reducing the fiscal deficit to 2% of GDP. Further, the bill
proposed for the government to reduce liabilities to 50% of the estimated GDP by
year 2011. There were mixed reviews among economists about the provisions of
the bill, with some criticizing it as too drastic. Political debate ensued in the
country. Several revisions later, it resulted in a much relaxed and watered-down
version of the bill. The Bill became effective on 5 July 2004.
Objectives
The main objectives of the act were:
• To introduce transparent fiscal

management systems in the country.
• To introduce a more equitable and

manageable distribution of the country's
debts over the years.
• To aim for fiscal stability for India in the

long run and to give necessary flexibility
to RBI for managing inflation in India.
Content
Since the act was primarily for the management of the governments' behaviour, it
provided for certain documents to be tabled in the parliament annually with
regards to the country's fiscal policy. This included the following along with
the Annual Financial Statement and demands for grants:
• A document titled Medium-term Fiscal Policy Statement – This report was to

present a three-year rolling target for the fiscal indicators with any assumptions. It
also included an assessment of sustainability with regards to revenue deficit and
the use of capital receipts of the Government for generating productive assets.
• A document titled Fiscal Policy Strategy Statement – This was a tactical report
enumerating strategies and policies for the upcoming Financial Year including
strategic fiscal priorities, taxation policies, key fiscal measures and an evaluation
of how the proposed policies of the Central Government conform to the 'Fiscal
Management Principles' of this act.
•A document titled Macro-economic Framework Statement – This report was
to contain forecasts enumerating the growth prospects of the country. GDP
growth, revenue balance, gross fiscal balance and external account balance of the
balance of payments were some of the key indicators to be included in this report.
• A document titled Medium-term Expenditure Framework Statement – This

is to set forth a three-year rolling target for prescribed expenditure indicators with
specification of underlying assumptions and risk involved (vide Section 6 A of the
Act amended in 2012).
The Act further required the government to develop measures to promote fiscal
transparency and reduce secrecy in the preparation of the Government financial
documents including the Union Budget.
Fiscal Management Principles
The Central Government, by rules made by it,
was to specify the following:
• A plan to eliminate revenue deficit by 31

March 2008 by setting annual targets for
reduction.
• Starting from day of commencement of the

act.
reduction of annual fiscal deficit of the
country.
• Annual targets for assuming contingent

liabilities in the form of guarantees and the
total liabilities as a percentage of the GDP.
Borrowings from Reserve Bank of India
The Act provided that the Central Government shall not borrow from the RBI
except under exceptional circumstances where there is temporary shortage of cash
in particular financial year. It also laid down rules to prevent RBI from trading in
the primary market for Government securities. It restricted them to the trading of
Government securities in the secondary market after an April 2005, barring
situations highlighted in exceptions paragraph.
Exceptions
National security, natural calamity or other exceptional grounds that the Central
Government may specify were cited as reasons for not implementing the targets
for fiscal management principles, prohibition on borrowings from RBI and fiscal
indicators highlighted above, provided they were approved by both the Houses of
the Parliament as soon as possible, once these targets had been exceeded.
Measures to enforce compliance
This was a particularly weak area of The Act. It required the Finance Minister of
India to only conduct quarterly reviews of the receipts and expenditures of the
Government and place these reports before the Parliament. Deviations to targets set
by the Central government for fiscal policy had to be approved by the Parliament.
No other measures for failure of compliance have been specified.
Criticism
Some quarters criticized the act and its rules as adverse since it might require the
government to cut back on social expenditure necessary to create productive
assets and general upliftment of rural poor of India. The vagaries of monsoon in
India, the social dependence on agriculture and over-optimistic projections of the
task force in-charge of developing the targets were highlighted as some of the
potential failure points of the Act. However, other viewpoints insisted that the act
would benefit the country by maintaining stable inflation rates which in turn
would promote social progress.
Suspension and Reinstatement
Implementing the act, the government had managed to cut the fiscal deficit to 2.7%
of GDP and revenue deficit to 1.1% of GDP in 2007–08. However, given
the international financial crisis of 2007, the deadlines for the implementation of
the targets in the act were suspended. The fiscal deficit rose to 6.2% of GDP in
2008–09 against the target of 3% set by the Act for 2008–09.
It was reported that the Thirteenth Finance Commission of India was working on a
new plan for reinstating fiscal management in India. The initial expectation for
revival of fiscal prudence was in 2010–11 but was further delayed. Finally, the
government did announce a path of fiscal consolidation starting from fiscal deficit
of 6.6% of GDP in 2009–10 to a target of 3.0% by 2014–15. More recently, in
February 2011 the need for reinstatement of fiscal discipline of the Government of
India, starting 2011–12 financial year. In FY 2011–12, it was almost certain that
government would cross the budgetary fiscal deficit target of 4.6% and it would be
around 5%.
Budget 2020 Highlights
Presenting the Union Budget for 2020-21, Finance Minister Nirmala Sitharaman
said, “In May 2019, Prime Minister Narendra Modi received a massive mandate
to form the government again. People of India have unequivocally given their
janaadesh for not just political stability, but have also reposed their faith in our
economic policy. This is a budget to boost their income and enhance their
purchasing power.”
• Agriculture- A budget allocation of ₹2.83 lakh crore for the sector

comprising agriculture and allied activities. Doubling farmers incomes by 2022.
Agri-credit availability set at ₹15 lakh crore for 2020-21. Comprehensive
measures for 100 water stressed districts. Provide 20 lakh farmers to set up
standalone solar pumps. Help another 15 lakh farmers to solarise their power
grid. Village storage scheme proposed to be run by women SHGs. Indian
Railways to have refrigerated coaches capability in ‘kisan trains’ to carry
perishables and milk.
Krishi UDAN on international and national routes.
• Tax- A new tax regime has been announced. Those who want to be in the old
regime with exemptions, can continue to pay at the old rates.
Income Tax
₹5 lakh - ₹7.5 lakh Reduced to 10% from 20%
₹7.5 lakh - ₹10 lakh Reduced to 15% from 20%
₹10 lakh - ₹12.5 lakh Reduced to 20% from 30%
₹12.5 lakh - ₹15 lakh Reduced to 25% from 30%
Above ₹15 lakh 30%, without exemptions
Over 70 deductions have been removed. Companies will no longer be required to

pay DDT. Aadhaar based verification for GST compliance to be introduced.
Aadhaar-based quick issuance of PAN announced.
• Economy and Finance- Bank deposit insurance cover had been increased
from ₹1 lakh to ₹5 lakh per depositor. Government plans to amend the
Companies Act to decriminalize civil offences. Government to sell part of its
stake in LIC via public offering.
• Health and Sanitation- An allocation of ₹69,000 crore for the health

sector. ₹12,300 crore for Swachh Bharat this year.
Proposal to set up hospitals in Tier-II and Tier-III cities with the private sector
using PPP. Expand Jan Aushadhi scheme to provide for all hospitals under
Ayushman Bharat by 2025.
• Education- ₹99,300 crore for education sector in 2021 and about ₹3,000
crore for skill development. Urban local bodies to provide internship to young
engineers for a year.
Degree-level full fledged online education programmes by institutions ranked in
top 100 in NIRF rankings, especially to benefit underprivileged students. A
national police university and a national forensic science university is proposed to
be setup. IND SAT exam for students of Asia and Africa to promote “study in
India” programme.
• Infrastructure- Budget proposes to provide ₹1.7 lakh crore for transport

infrastructure in 2021 National Logistics Policy to be released soon. Chennai-
Bengaluru Expressway to be started. Aim to achieve electrification of 27,000 km
of lines.
Plan to have a large solar power capacity for Indian Railways.
The government also proposes a Bengaluru suburban rail project at a cost of
₹18,600 crore. Government to monetize 12 lots of national highways by 2024. 100
more airports will be developed by 2024 to support UDAN.
THANK YOU!
Public Finance CCE Ayan Verma

B.Com
(Economics)
III-E

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Fiscal Responsibility and Budget

Management Act, 2003

Public Finance CCE Ayan Verma

• To introduce transparent fiscal

• To introduce a more equitable and

• To aim for fiscal stability for India in the

• A document titled Medium-term Fiscal Policy Statement – This report was to

• A document titled Medium-term Expenditure Framework Statement – This

• A plan to eliminate revenue deficit by 31

• Starting from day of commencement of the

• Annual targets for assuming contingent

• Agriculture- A budget allocation of ₹2.83 lakh crore for the sector

Over 70 deductions have been removed. Companies will no longer be required to

• Health and Sanitation- An allocation of ₹69,000 crore for the health

• Infrastructure- Budget proposes to provide ₹1.7 lakh crore for transport

Public Finance CCE Ayan Verma

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