The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India designed to institutionalize financial discipline and ensure long-term macroeconomic stability. It was enacted to address persistent fiscal imbalances, rising public debt, and a lack of transparency in government finances that threatened India's economic stability in the 1990s. The Act was introduced as a Bill in 2000 and became law in 2003, coming into effect on July 5, 2004.
The FRBMA works by setting mandatory targets for the Central Government's fiscal performance. Its original key provision was to eliminate the revenue deficit and bring the fiscal deficit down to a manageable 3% of GDP by March 2008. The Act also mandates greater transparency by requiring the government to present three key documents to Parliament along with the Budget: the Macroeconomic Framework Statement, the Medium-Term Fiscal Policy Statement, and the Fiscal Policy Strategy Statement. Furthermore, it connects to the Reserve Bank of India (RBI) by restricting the Central Government's ability to borrow from the RBI, thereby supporting the central bank's independence in conducting monetary policy.
The Act has been significantly changed, notably by the 2018 Amendment, which was based on the recommendations of the N.K. Singh Committee formed in 2016. The amendment introduced a focus on the Debt-to-GDP ratio, setting a target of 40% for the Central Government by the end of the financial year 2024-2025, and a combined 60% for the General Government (Centre + State). While the fiscal deficit target of 3% of GDP was retained, the amendment removed the strict targets for the revenue deficit, allowing for more flexibility. A crucial mechanism that stayed the same is the escape clause in Section 4(2), which allows the government to deviate from the fiscal deficit target by up to 0.5% of GDP under exceptional circumstances like a national calamity, national security, or an act of war.