The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003, to introduce transparency and discipline in India’s fiscal management systems. It marked a turning point in fiscal reforms, binding the government through an institutional framework to pursue a prudent fiscal policy. Objectives of FRBM Act, 2003:

• The central government needs to ensure Inter-generational equity.
• Long-term macroeconomic stability by achieving sufficient revenue surplus.
• Removing fiscal obstacles to monetary policy.
• Effective debt management by limiting deficits and borrowing.
• To give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.
• To introduce a more equitable distribution of India’s debt over the years.

The FRBM Act has the following key features:

• The Act mandates the central government to take appropriate measures to reduce the fiscal deficit and revenue deficits to originally eliminate the revenue deficit by 2009 and thereafter build up an adequate revenue surplus.
• If the fiscal and revenue deficits are not achieved through tax revenues, the necessary adjustment has to come from a reduction in expenditure.
• The actual deficits may exceed the targets specified only on grounds of national security or natural calamity or such other exceptional grounds as the central government may specify.
• The central government shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements over cash receipts.
• The Reserve Bank of India must not subscribe to the primary issues of central government securities from the year 2006-07.
• Measures to be taken to ensure greater transparency in fiscal operations.
• The central government to lay before both Houses of Parliament three statements
  • Medium-term Fiscal Policy Statement,
  • The Fiscal Policy Strategy Statement,
  • The Macroeconomic Framework Statement along with the Annual Financial Statement.
• A quarterly review of the trends in receipts and expenditure concerning the budget be placed before both Houses of Parliament.

These targets were put off several times. The Act was reviewed in 2016 by the NK Singh Committee, which suggested targeting the debt-to-GDP ratio instead and bringing it down to 60% by 2023 (comprising 40% for Centre and 20% for states). It also recommended reducing the fiscal deficit from 3.5% (2017) to 2.5% by 2023 and advocated rather for a fiscal range with an ‘escape clause’ to accommodate countercyclical issues and situations of emergencies.