The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is an Act of the Parliament of India designed to institutionalize financial discipline and promote long-term macroeconomic stability. It was enacted to address the problem of high fiscal deficits, revenue deficits, and a rising debt-to-GDP ratio that characterized the Indian economy in the 1990s and early 2000s. The FRBM Bill was introduced in 2000 and became law in 2003, coming into effect on July 5, 2004.
The Act works by setting clear targets for the Central Government's fiscal indicators and mandating transparency. A key initial provision was to eliminate the revenue deficit and bring the fiscal deficit down to 3% of GDP by March 2008. Section 4(1) of the Act requires the Central Government to take measures to limit the fiscal deficit. Furthermore, Section 5 generally prohibits the Central Government from borrowing from the Reserve Bank of India (RBI), except under exceptional circumstances. The Act also requires the government to present documents like the Medium-Term Fiscal Policy Statement to Parliament, ensuring transparency.
The FRBM Act is closely connected to the recommendations of the N.K. Singh Committee, which was constituted in 2016 to review the Act. The Committee recommended replacing the existing Act with a new Debt and Fiscal Responsibility Act and proposed a combined debt-to-GDP ratio target of 60% (40% for the Centre and 20% for the States). The Act has been amended multiple times, including in April 2018, which introduced an "escape clause" allowing the government to deviate from the fiscal deficit target by up to 0.5% of GDP under specific conditions like national security or a national calamity. The latest amendment, following the recommendation of the 15th Finance Commission, set a new fiscal deficit target of 4.5% of GDP by 2025-26.