Understanding the FRBM Act of 2003: Key Features and Objectives

hello everyone and welcome to study iq english i'm joyce joy and we are going to discuss about the frbm act of 2003

fiscal responsibility and budget management act coming to frbm act of 2003 the fiscal

responsibility and the budget management act of 2003. as we know this is a legislature

or a statute that is a law that is passed by the parliament

the purpose of the act is to provide for responsibility of the central government to ensure intergenerational equity in

fiscal management and long-term macroeconomic stability by removing fiscal impediments in

effective conduct of monetary policy let's see what it is so first thing that you have to remember here is it's a

legislature passed by the parliament or it's a statute or a law passed by the parliament second thing the purpose

purpose is to create responsibility of the central government for ensuring inter-generational equity in financial

discipline that is inter-generational from one generation to another rational use of

financial resources or fiscal resources the government should rationalize their expenditure and borrowings in order to

ensure that the future generation does not suffer from the misuse of financial resources of the present government so

that is the inter-generational equity long-term macroeconomic stability what

is meant by macroeconomic stability macroeconomic stability refers to the overall stability of the economy macro

economy refers to the aggregate or it refers to the economy as a whole macroeconomic stability means the entire

country or the economy of the country should be stable in the long term now how can long-term macroeconomic

stability be ensured this can be ensured by ensuring that different parameters like inflation gdp the taxation the

revenue expenditure all the macro economic indicators of the economy are stable for

a very long time and how by removing fiscal impediments in an effective way

the frbm bill was introduced in the parliament in the year 2000 and this was passed only in the year

2003 this was introduced by the the then government led by atal bihari vajpayee

and the bill aimed at providing a legal backing that is a statutory backing to fiscal or financial discipline in an

institutionalized way so bringing financial discipline or fiscal discipline in the country through

institutionalized sources or to a legal backup it sets targets for the government to

establish financial discipline in the economy to reduce the fiscal deficit and improve the

constitutional amendment to reduce the fiscal deficit in a phased manner so we will see what is fiscal

deficit even though we have discussed it earlier we have to see two concepts revenue deficit

fiscal deficit first coming to revenue deficit revenue deficit is the excess of revenue

expenditure over revenue receipts it is excess of revenue expenditure over revenue research and fiscal deficit is

excess of the total expenditure over total receipts

other than borrowings that is in case of skill deficit total

expenditure is taken and total receipts are taken but in receipts borrowings are not included and the difference between

both these are fiscal deficit in effect the fiscal deficit actually refers to the

borrowings of the government how much borrowings are required by the government in order to meet its

expenditure that is what is the fiscal deficit so to reduce the fiscal deficit in a phased way that was the objective

now coming to the objectives of the frbm act first is to reduce the fiscal deficit we have seen what is fiscal

deficit excess of total expenditure over total revenue or receipts other than borrowings second is target for the

government to establish financial discipline in the economy what is meant by financial discipline

financial discipline uh it is not just for economy or for the government every individual needs to be financially

disciplined it means that you have to rationalize your spending you should not spend your money on unnecessary things

so same way government also should rationalize its expenditure or spending that is financial discipline

rationalization of spen spending or expenditure then third is to provide efficient debt

management and macro economic stability that is management of government borrowing debt management and macro

economic stability uh first there are two components for this first one is to manage the

borrowings of the government second one to ensure that the macro economy the economy of the country is stable over a

long period of time from the perspective of various indicators

third one introduce transparency in india's fiscal management system to bring more transparency or openness

in managing the fiscal system of the country there is borrowings or debt obligations of the

government long-term mission was to introduce more equitable distribution of india's debt

that is bring inter-generational equity and finally the act aimed at maintaining better

coordination between the fiscal and monetary policy why better coordination between fiscal and monetary policy

because fiscal policy is adopted by the central government of a country whereas the monetary policy is adopted

by the central bank that is the rbi there should be a coordination between both this that means the fiscal

authority and the monetary authority should work together to ensure that there is a

coordination now coming to the features of frbm act first thing is

it was mandated that along with the budget documents that are presented annually two more other documents should

be presented and this was a 2020 upsc csc prelims examination question the documents that are mandated under the

frbm act there are two documents that are mandated under the frbm act one is macroeconomic framework statement and

next is fiscal policy come fiscal policy medium term fiscal policy strategy statement these two can be combined so

these are the two documents that are mandated under the frbm act which means that along with the budget when budget

is presented in the parliament along with that these two documents should also be

produced before the parliament one is macroeconomic framework statement that is

the framework statement how is the macro economy going to be in the upcoming years second one is the

strategy statement what is the strategy adopted by the government in order to stabilize the macro economy it was

proposed that four indicators revenue deficit as a percentage of gdp fiscal deficit as a percentage of gdp tax

revenue as a percentage of gdp and total outstanding liabilities as a percentage of gdp should be projected in the

medium-term fiscal policy statement so these four indicators should be presented these four indicators to be

presented in the macroeconomic uh

statement now we are coming to the n casing committee the nkc committee

was appointed in the year 2016 and gave its report in 2017 this committee is also known as the frbm

review committee the purpose was to review the provisions of the frbm act the nk singh committee

was formed in 2016 the chairman of this committee was the former revenue and expenditure secondary secretary to the

government of india nan kishore singh that is why this committee is popularly known as nkc committee

this was actually the frbm review committee so we will see what were the

recommendations of the nkc committee the review committee replacement of frbm act with death

management and fiscal responsibility bill of 2017 the debt to gdp ratio

by 2020 to 23 should be 38.7 percentage for central government and 20 percentage for the state government

40 plus 20 overall 60 percentage this was also a previous year prelims

question the fiscal deficit target should be 2.5 percentage of gdp by the financial year

2020 to 23. by 2020 to 23 the maximum fiscal deficit of the government should be

2.5 percentage of the gdp the debt path to be followed by each state based on their track record of fiscal health and

prudence should be recommended by the 15th finance commission now with regard to borrowing from the

rbi from the central bank the draft legislation prohibits the government from borrowing from the rbi in case of

extraordinary situations that is the government should not resort to borrow from rbi except in case of some

extraordinary situations so what are these extraordinary situations the center must meet a temporary

shortfall in receipts rbi subscribes to government securities to finance any deviations from specified

targets rba purchases government securities on the secondary market so these were the situations where

government can borrow from the rbi the target commit commitment should be deviated under circumstances such as

national calamity war agricultural collapse structural reforms in the economy and real output is less than

three percentage so this is known as the escape close in the frbm act escape close refers to those situations

where the government can deviate from the targets and this is very important from the current perspective because

during the covert 19 pandemic in that financial year government has induced the escape close why because

structural reforms and also unexpected situations that was pointed out by the government in case of a

natural calamity war or agricultural collapse or when structural reforms are adopted by the economy the escape laws

can be used and government can use the escape close to deviate from the targets or the real output is less than three

percentage this was also a reason during the covet 19 pandemic now the fiscal council's

responsibilities prepare multi-year fiscal forecast recommend changes to fiscal strategy improve the quality of

the fiscal data advise the government to take corrective action if the

bill is not followed so these would be the functions or the responsibilities of the

fiscal council setting up of an autonomous fiscal council that deals with preparation of

multi-year fiscal forecast improve the data quality advise the government on fiscal matters that was the objective

the fiscal and monetary policy should complement to each other and help accomplish economic stability and growth

that is the monetary policy prepared by the rbi and the fiscal policy prepared by the central government should go hand

in hand they should complement each other in order to achieve two objectives economic

stability that is the parameters or economic indicators should be stable second one is growth

that is high rates of gdp growth rate this is very important and this was also previous here question

targets and fiscal indicators under the frbm act government is required to limit fiscal deficit to 3 percentage of gdp so

fiscal deficit should be limited to 3 percentage of gdp and debt of the central government it should be 40

percentage of the gdp by 2020 for 25 and along with that we need to learn about the state government as well it should

be 20 percentage along with the state and center total should be 60 percentage this is the

target set under the frbm act now we will discuss a few mcq questions which of the following is an example of

direct tax in india direct tax is a form of taxation on which the incidence and the impact of

taxation falls on the same entity end retirement tax stamp and registration fee sales tax wealth tax so in here in

this four um options wealth tax is the direct tax

which of the following tax gives maximum revenue to the government of india and according to this year's economic survey

and budget it is actually the income tax and corporate tax both

because the amount of taxation is almost the same but

one percentage high is income tax earlier it used to be corporate tax but now uh corporate tax in income tax

almost it is the same but one percentage high for income tax because uh last year if you remember the government had

reduced the corporate tax rates that's the reason dash deals with the taxation and

expenditure decisions of the government so taxation and expenditure decisions of the government is fiscal policy monetary

policies that policy taken by rbi so fiscal policy deals with taxation and expenditure revenue and expenditure

policies of the government falls under fiscal policy so

that is it with the mcqs the multiple choice questions and with regard to frbm act i hope this was a

useful one for you thank you so much for watching i wish you all the very best