About FRBM Act
- Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits. It was mandated that both states and centre would cut the fiscal deficit to 3% by 2008-09. The targets were put off several times.
- Fiscal deficit = Total Expenditure – Total Receipts except borrowings
- In 2016, the government set up a committee under NK Singh to review the FRBM Act.
- The committee recommended that the government should bring down the fiscal deficit to 3% of the GDP by 2020, cut it to 2.8% in 2020-21 and 2.5% by 2023.
- It also suggested that India should adopt debt-to-GDP ratio as a new anchor of fiscal policy along with the fiscal deficit and gradually bring it down to 60 per cent — comprising 40 per cent for the Centre and 20 per cent for the states.
- The committee also allowed an escape clause under the FRBM Act that provides for a deviation from the estimated fiscal deficit on some exception cases such as:
- Overriding considerations of national security, acts of war, and calamities of national proportion and collapse of agriculture severely affecting farm output and incomes
- Far-reaching structural reforms in the economy with unanticipated fiscal implications
- A sharp decline in real output growth of at least 3 percentage points below the average for the previous four quarters.
- The deviation from the stipulated fiscal deficit target must not exceed 0.5 percentage points in a year.
- Escape clauses provide flexibility to governments to overshoot fiscal deficit targets in times of need, enabling them to respond to economic shocks.
- During the Union Budget 2020-21, the Central government pegged the fiscal deficit target as a percentage of the GDP for FY20 and FY21 at 3.8 per cent and 3.5 per cent, respectively, invoking the escape clause in the FRBM Act.
Why in News?
- India’s fiscal deficit reached Rs 4.66 lakh crore, or 58.6%, of the budget estimate in the first two months of 2020-21 as a pandemic-led lockdown affected the government’s revenues.
- The government’s fiscal deficit target estimated in the Union Budget 2020-21 was Rs 7.96 lakh crore, or 3.5% of the GDP, but is likely to be revised due to the coronavirus’ impact on the Indian economy.