FRBM Act 2003

• Mandatory Provision: The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:
• Medium Term Fiscal Policy Statement: It lays down the limits on the size of the budget deficits for three years and targets for tax and non-tax receipts.
• Macroeconomic Framework Statement: The macroeconomic framework gives the government’s outlook on growth prospects of the economy. 
• Fiscal Policy Strategy Statement: It explains how the current policies follow sound fiscal management principles and give reasoning for any deviation from the deficit targets set by it under the FRBM Act.
• Target for the Government: It sets a target for the Centre’s annual fiscal deficit ratio (FD) at 3% of gross domestic product (GDP). 
• The states had to legislate their own FRBM Acts, limiting a state’s FD to 3% of its own GDP.
• Continuing the path of fiscal consolidation, the Government intends to bring the fiscal deficit below 4.5 per cent of GDP by 2025-26.
• Prohibition on Borrowing: The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy.
• The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit.

Challenges of FRBM Act, 2003

• Reliance on Fixed Numbers:  Focusing on a fixed target for the fiscal deficit restricts the government from dealing with dynamic situations typical of market economies. 
• The requirement to achieve a fixed target has prevented fiscal policy from being countercyclical when needed. 
• Escape Clauses: The FRBM Act has also been criticized because of incorporating imprecisely defined fiscal deficit escape clauses and limited accountability in the event of missed targets.
• Weak Linkage between Policy Setting and Implementation: This has hindered the ability to promptly and clearly adjust to changes in fiscal policy. 
• The transparency and accountability framework has not been able to provide sufficient coverage or assessment of fiscal risks.
• Lack of Debt Ceiling Law: India’s fiscal rules are mainly focused on traditional budget balance rules with no debt ceiling law.
• Emerging best practices have moved toward a structural budget balance rule or an expenditure rule.
• Insufficient Assessment of Fiscal Risks: There was no attempt to assess the potential fiscal risks.
• For example: The impact of the announcement of the Pay Commission, the increase in commodity prices and the implications on fiscal policy, the implications of off-budget items such as contingent liabilities.

Suggestions

• Need for flexible fiscal policies, combining public and private spending.
• The arbitrary limits on budget deficits might not be the most effective approach. 

Time for Clearly defined Escape Clauses and Strengthening the enforcement of Fiscal Rules by

• The establishment of independent fiscal councils
• Full-fledged fiscal stability reporting, addressing the coverage of off-budget items like contingent liabilities
• Improving linkages between fiscal policy and budget processes
• Sharing of responsibilities and coordination within tiers of government for stabilization and sustainability
• Introducing state credit ratings for measuring fiscal performance

It’s time to update the fiscal rules to be more flexible and coordinated, ensuring a balance between discipline and adaptability in managing the country’s budget.