About FRBM Act
- Fiscal deficit is the difference between total expenditure and total receipts except borrowing and other liabilities.
- 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 the centre would cut the fiscal deficit to 3% by 2008-09. The targets were put off several times.
FRBM Review Committee
- In 2016, the government set up a committee under NK Singh to review the FRBM Act.
- The committee recommended that the central 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.
- The committee also recommended that states should keep their fiscal deficit under 3% of their respective gross state domestic product (GSDP).
- It also allows 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.
- It also suggested that India should adopt a 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.
- In 2020, as a part of the Aatmanirbhar economic stimulus package, the Central government allowed state governments to hike their borrowing limits from 3% to 5% of Gross State Domestic Product (GSDP) on fulfilling certain conditions.
Why in News?
- According to the latest Economic Survey, India’s fiscal deficit is expected to be at 6.4% of GDP in FY 23.