Q2. What are the reasons for the introduction of the Fiscal Responsibility and Budget  Management (FRBM) Act, 2003? Discuss critically its salient features and their effectiveness.

Model Answer:

Introduction

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was introduced to ensure fiscal discipline, control India's mounting debt, and increase transparency in fiscal policy, strengthening macroeconomic stability.

Body

Purpose of FRBM Act, 2003

  1. Fiscal Discipline: Mandated a reduction in fiscal deficit to curb unsustainable government borrowing and promote economic stability.
  2. Transparency: Improved accountability by requiring the government to publish fiscal projections and adhere to a medium-term fiscal policy.
  3. Debt Control: Targeted reduction of public debt, focusing on macroeconomic sustainability.

Salient Features of the Act

  1. Deficit Targets: Set fiscal deficit at 3% of GDP and revenue deficit at 0% by 2008–09.
  2. Annual Policy Statements: Required government to submit Medium-term Fiscal Policy, Fiscal Policy Strategy, and Macroeconomic Framework statements annually.
  3. Expenditure Control: Imposed limits on government expenditure and borrowing.
  4. Escape Clause: Allowed flexibility during emergencies, such as war, national calamity, or severe economic downturns.

Effectiveness and Criticisms

  1. Achievement of Targets: Mixed success, as targets were revised multiple times due to crises like the 2008 financial crisis, GST rollout, and the COVID-19 pandemic.
  2. Transparency Improvement: Enhanced transparency, but inconsistent adherence has affected credibility.
  3. Economic Flexibility: The escape clause is essential for flexibility but has sometimes led to deviation from long-term fiscal goals.
  1. State Compliance: State governments have varied in adhering to FRBM goals, with debt accumulation challenges persisting.

Conclusion

The FRBM Act has promoted fiscal discipline and transparency but requires continuous reform to adapt to economic realities and maintain sustainable public finance without stifling growth.

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