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

Why the FRBM Act was introduced

By the late 1990s India faced large and persistent fiscal and revenue deficits, mounting public debt, high interest payments crowding out development spending, and a lack of institutional discipline over government borrowing. To institutionalise fiscal prudence and inter-generational equity, Parliament enacted the Fiscal Responsibility and Budget Management (FRBM) Act, 2003.

Salient features

• Set targets to reduce the fiscal deficit and eliminate the revenue deficit within a fixed timeframe.
• Mandated presentation of statements to Parliament: the Medium-Term Fiscal Policy, Fiscal Policy Strategy and Macroeconomic Framework statements.
• Required greater transparency in budgeting and quarterly review of receipts and expenditure.
• Restricted government borrowing from the RBI (barring the primary market), curbing monetised deficits.
• Provided an escape clause for exceptional circumstances such as national security or calamity.

Critical assessment

• It improved fiscal transparency and disciplined states through their own FRLs, aiding consolidation up to 2008.
• However, targets were repeatedly deferred, especially after the 2008 global crisis, and off-budget borrowings diluted its spirit.
• The revenue-deficit goal was persistently missed.

Reform

The N.K. Singh Committee (2017) recommended replacing rigid deficit targets with a debt-to-GDP anchor (60%) and a flexible fiscal-deficit path with a clear escape clause.

Conclusion

The FRBM Act embedded fiscal responsibility as a norm, but credibility depends on adherence rather than repeated relaxation.