Explainer: What is Fiscal Responsibility and Budget Management Act

The economic survey which was released by the finance ministry today said, there is a need for FRBM act ‘with teeth’.

“The Survey calls for putting public finances on the sustainable path through fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management.It argues that improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment,” a government release stated.

What is FRBM Act

Fiscal Responsibility and Budget Management (FRBM) Act was enacted by Parliament in 2003 to progressively cut fiscal deficit to 3 percent levels by 2008. Fiscal deficit is when the government’s expenditure outgrows its revenues. Controlling fiscal deficit, thus meant, controlling the government’s wasteful expenditure.

ThusFRBM Act put limits on the fiscal and revenue deficit of the country by setting targets for both. These targets were to be monitored through the year by setting mid-year targets.

The government was to provide make amedium-term fiscal policy statement,fiscal policy strategy statement and macro-economic framework statement to Parliament.

How it was breached

The global financial crisis forced the UPA to extend the deadline for the 3 percent fiscal deficit target and later suspended. The Economic Advisory Council then asked the government altogether restructure the Act.

Former finance minister P Chidambaram has targeted a fiscal deficit of 4.1 percent of GDP for 2014-15 and planned to bring it down to 3 percent by 2016-17.

What experts say

According to Planning Commission member Pronab Sen, the FRBM Act always had teeth. What is required is a way to stop politicians from pressing the pause button, he told CNBC-TV18.