The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, is an Act of the Indian Parliament enacted to institutionalize financial discipline and ensure inter-generational equity in fiscal management. The FRBM Bill was introduced in 2000 by the Atal Bihari Vajpayee government to address high fiscal deficits and a lack of transparency in government finances. The Act became law in 2003 and commenced on July 5, 2004. The original objective was to eliminate the revenue deficit and reduce the fiscal deficit to 3% of GDP by March 2008.
The Act works by setting statutory limits on deficits and mandating transparency. Key provisions require the Central Government to present three documents annually with the Budget: the Macroeconomic Framework Statement, the Medium-Term Fiscal Policy Statement, and the Fiscal Policy Strategy Statement. Furthermore, Section 5 generally bars the Central Government from borrowing directly from the Reserve Bank of India (RBI), which helps remove fiscal impediments for the effective conduct of monetary policy. The Act is connected to the Comptroller and Auditor General of India (CAG), which is mandated to conduct an annual compliance review of its provisions.
The Act has undergone significant changes, notably the 2018 amendment, which was based on the recommendations of the N.K. Singh Committee (formed in 2016). This amendment removed the targets for Revenue Deficit and Effective Revenue Deficit. It introduced a target for the Central Government Debt to be limited to 40% of GDP by FY 2024-25. Crucially, the amendment added an escape clause in Section 4(2), allowing the government to deviate from the fiscal deficit target by up to 0.5% of GDP under specific circumstances like national security or a national calamity. The target of limiting the fiscal deficit to 3% of GDP was retained, with the deadline revised to March 31, 2021, in the April 2018 amendment.