What is FRBM Act?

The Fiscal Responsibility and Budget Management (FRBM) Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The FRBM Rules impose limits on fiscal and revenue deficit. As per the initial targets, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP. The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09. The implementation of Act was put on hold in year 2007-08 due to global financial crisis and the need for fiscal stimulus. In 2012 FRBM Act was amended and it was decided that the FRBM would target effective revenue deficit in place of revenue deficit.

After the recommendation of the 12th Finance Commission, States also adopted legislations prescribing a limit of 3% of state domestic product. The FRBM Act requires the government to come to Parliament and explain the reasons for exceeding the mandated level. For the Union government, the ceiling on fiscal deficit has been set at 3% ofGDP from 2016-17, the 14th Finance Commission said on Tuesday. Fiscal deficit of states will be anchored to an annual limit of 3% of gross state domestic product ( GSDP) and they will have the flexibility of 0.2% over and above this limit for which borrowing limits would be fixed if their debt-GSDP ratio is less than or equal to 25% in the preceding year. The 14th Finance Commission also suggested that the existing Fiscal Responsibility and Budget Management Act be replaced with a Debt Ceiling and Fiscal Responsibility law, invoking Article 292 of the Constitution. The Article says that Parliament can, by law, fix borrowing limits on the Union government. (Borrowing limits broadly means capping the fiscal deficit.)