In 2003, India passed the Fiscal Responsibility and Budget Management Act (FRBM Act), whose goal was to encourage fiscal control and good management of public funds. The goal of the Act was to make sure that India’s financial situation would be stable in the long run. It did this by focusing on specific financial measures and setting up a system for fiscal management that was open and accountable.
To reach its goals, the FRBM Act put in place a number of important rules. First, it told the central government that it had to cut its budget debt to a certain percentage of GDP within a certain amount of time. The Act told the government that it had to gradually bring the budget deficit down to 3% of GDP by 2008-09. Along the way, there were other goals that had to be met.
The FRBM Act also put boundaries on the total amount of debt and income deficit that the central government could have. It tried to bring the debt-to-GDP ratio down to a level that could be sustained and limit the revenue gap, which is the difference between revenue spending and revenue income, to zero within a certain amount of time.
The Act also tried to make the government more open and accountable by requiring it to make a Medium-Term Fiscal Policy Statement and a Fiscal Policy Strategy Statement. The goals of the government’s fiscal policy, the reasons behind the policy steps, and the medium-term fiscal road map were all explained in these papers.
The FRBM Act required the creation of an independent fiscal body called the Fiscal Responsibility and Budget Management Review Committee. This was done to make sure that the law was followed. This group was in charge of looking at how well the government met its financial goals and, if needed, making suggestions for how to fix things.
In the years that followed, the FRBM Act was changed to deal with new financial problems. For example, the 2012 change added a new idea of fiscal deficit called the “effective revenue deficit,” which did not include capital spending on useful assets. The goal of this change was to improve the standard of spending and encourage long-term growth through investment in capital.
Even though the FRBM Act says what the government should do, it was hard for the government to reach the goal fiscal deficit levels due to things like a slowing economy, a drop in income, and rising spending commitments. Because of this, the government often used “extraordinary circumstances” as an excuse to temporarily deviate from its budget goals.
In the end, the Fiscal Responsibility and Budget Management Act of 2003 was meant to teach India how to be responsible with its money and make sure that the state funds were managed well. With its rules, it tried to limit the budget deficit, debt, and revenue shortfall while supporting openness and accountability. But it was hard to reach the budget goals set, so the government had to make changes based on how the economy was doing at the time.