Topic 04 of 6 · Chapter 07 · Indian Economy
FRBM Act 2003 & Fiscal Consolidation
Fiscal Responsibility and Budget Management Act, fiscal deficit targets, NK Singh Committee, and fiscal consolidation.
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
⭐ 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 — independent body to monitor fiscal targets
- Escape clause: Allow deviation of 0.5% in exceptional circumstances
4. Key Points for Exam
🔑 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 → high interest rates → less private investment