Main Features

1. The Act mandates the central government to take appropriate measures to reduce fiscal deficit to not more than 3 per cent of GDP and to eliminate the revenue deficit by March 31, 2009 and thereafter build up adequate revenue surplus (amended later).

2. It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per cent. If this is not achieved through tax revenues, the necessary adjustment has to come from a reduction in expenditure.

3. The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.

4. The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.

5. Measures should be taken to ensure greater transparency in fiscal operations.

6. The central government to lay before both Houses of Parliament three statements – Medium-term Fiscal Policy Statement, The Fiscal Policy Strategy Statement, The Macroeconomic Framework Statement along with the Annual Financial Statement.

7. Quarterly review of the trends in receipts and expenditure in relation to the budget be placed before both Houses of Parliament.

The Act applies to the central government. However, the states have already enacted fiscal responsibility legislations which have made the rule based fiscal reform programme of the government more broad based.

4.5.1.1. Amendments to the FRBM Act

♤ The central government shall reduce the fiscal deficit by an amount equivalent to 0.1 percent or more of the gross domestic product at the end of each financial year beginning with the financial year 2018-19, so that fiscal deficit is brought down to not more than 3 percent of the GDP by 31st day of March, 2021.

♤ Budget 2018 has proposed to stop setting targets on Revenue Deficit reduction from next year year through amendment in the FRBMA.

While FRBM Act has improved the level of disclosures that government has to make about its finances, its main target of reducing the actual size of deficit remains elusive. It is because government budgets in a democracy are not just economics and are deeply political. So, merely setting a number may not help.