Topic 04 of 6 ยท Chapter 07 ยท Indian Economy
FRBM Act 2003 & Fiscal Consolidation
Fiscal Responsibility and Budget Management Act, fiscal deficit targets, NK Singh Committee, and fiscal consolidation.
๐ In This Article
1. FRBM Act 2003
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 was enacted to ensure fiscal discipline and reduce fiscal deficit over time.
- Enacted: 2003
- Objective: Reduce fiscal deficit to 3% of GDP
- Reduce revenue deficit to 0% (eliminate revenue deficit)
- Reduce government debt to 40% of GDP (Centre) and 20% (States)
- Requires government to present Medium Term Fiscal Policy Statement with budget
โญ FRBM Escape Clause: The FRBM Act allows the government to deviate from fiscal deficit targets in case of national calamity, national security, or exceptional circumstances. This was invoked during COVID-19 (2020-21) when fiscal deficit shot up to ~9.2% of GDP.
2. Fiscal Deficit Targets
| Year | Fiscal Deficit (% of GDP) | Note |
|---|---|---|
| 2003-04 | ~5.9% | Before FRBM |
| 2007-08 | ~2.5% | FRBM target achieved |
| 2008-09 | ~6% | Global financial crisis stimulus |
| 2019-20 | ~3.8% | Pre-COVID |
| 2020-21 | ~9.2% | COVID-19 pandemic |
| 2024-25 | ~5.1% | Gradual consolidation |
| FRBM Target | 3% | Long-term target |
3. NK Singh Committee (2017)
The NK Singh Committee (Fiscal Responsibility Review Committee) was set up in 2016 to review the FRBM Act. Key recommendations:
- Fiscal deficit target: 2.5% of GDP by 2022-23
- Revenue deficit target: 0.8% of GDP
- Government debt target: 40% of GDP (Centre) by 2022-23
- Introduce Fiscal Council โ independent body to monitor fiscal targets
- Escape clause: Allow deviation of 0.5% in exceptional circumstances
4. Key Points for Exam
๐ Must-Remember Facts
- FRBM Act enacted: 2003
- FRBM fiscal deficit target: 3% of GDP
- FRBM revenue deficit target: 0% (eliminate)
- NK Singh Committee set up: 2016
- NK Singh Committee fiscal deficit target: 2.5% of GDP
- COVID-19 fiscal deficit (2020-21): ~9.2% of GDP
- FRBM escape clause: allowed during national calamity, security threats
- FRBM requires: Medium Term Fiscal Policy Statement with budget
- Fiscal consolidation = gradual reduction of fiscal deficit
- Crowding out effect: high fiscal deficit โ high interest rates โ less private investment