The Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) is an Act of the Parliament of India, enacted to institutionalize financial discipline and improve macroeconomic management. The Act originated from the need to address rising fiscal deficits in the 1990s, which threatened India's economic stability. Its main purpose was to ensure inter-generational equity in fiscal management and long-term macroeconomic stability by setting targets for reducing the fiscal deficit and eliminating the revenue deficit.
The Act works by mandating the Central Government to take measures to limit the fiscal deficit and requires the presentation of three policy statements before Parliament each financial year: the Medium Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Policy Statement. A key mechanism is the prohibition, under Section 5, of the Central Government borrowing from the Reserve Bank of India (RBI), except under specific circumstances, which helps make monetary policy independent of fiscal policy. Section 4(1) originally provided for measures to limit the fiscal deficit to 3 per cent of GDP.
The FRBM Act has undergone significant changes, notably with the 2018 amendments based on the recommendations of the N.K. Singh Committee, which was constituted in 2016 to review the Act. The 2018 amendment introduced 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 exceptional circumstances like national security, war, or national calamity. The amendment also shifted the focus by introducing a target for the Central Government's debt-to-GDP ratio, aiming for 40% by 2024-25, and removed the strict targets for the revenue deficit. The Act connects to the broader concept of fiscal consolidation and the proposed establishment of a Fiscal Council, a key recommendation of the N.K. Singh Committee, to provide independent assessments and oversight.