Escape clause refers to the situation under which the central government can flexibly follow fiscal deficit target during special circumstances. Adopt the 3 Strategies for Success in the UPSC Civil Services Exam. Fiscal Responsibility and Budget Management Act, 2003 sets forth a three-year rolling target for the expenditure indicators with a specification of underlying assumptions and risks involved. Background After the presentation of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 and the related FRBM Rules in 2004, the target fiscal deficit to GDP ratio of 3% for the Union government was achieved only once, in 2007-08, when it was 2.5%. Your email address will not be published. The central government agreed to the following fiscal indicators and targets, after the enactment of the FRBMA. For more articles on important concepts for the IAS exam and updates on UPSC current affairs, please visit BYJU’S Free IAS Prep regularly. Total Debt to be reduced to 9% of the GDP (a target increased from the original 6% requirement in 2004–05). Further, the FRBM Act ignores the possible inverse link between fiscal deficit (fiscal expansion) and bank credit (monetary expansion). Under FRBM, if the escape clause is triggered to allow for a breach of fiscal deficit target, the RBI is then allowed to participate directly in the primary auction of government bonds, thus formalising deficit financing. High fiscal deficit was the one major macroeconomic problem faced … What is Fiscal responsibility and Budget Management (FRBM) Act? In 2012 and 2015, notable amendments were made, resulting in relaxation of target realisation year. Controlling fiscal deficit, thus meant, controlling the government’s wasteful expenditure. The FRBM is an act of the parliament that set targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence and reduce its fiscal deficits. But the benefit from high expenditure and debt today goes to the present generation. As per the latest data, the following changes have been incorporated : Read the summary of Union Budget 2020 for an upcoming exam in the linked article. total outstanding liabilities as a percentage of GDP. The act also intended to give the required flexibility to the Central Bank for managing inflation in India. The purchase of government bonds by RBI must cease from 1 April 2006. What is the significance of FRBM with respect to Indian economy? The intention of the Fiscal Responsibility and Budget Management Act was to bring –. transparency in the fiscal operation of the Government. The minimum annual reduction target was 0.5% of GDP. FRBM Act is all about maintaining a balance between Government revenue and government expenditure. Fiscal Responsibility and Budget Management (FRBM) Act. It was mandated by the act that the following must be placed along with the Budget documents annually in the Parliament: It was proposed that the four fiscal indicators i.e, revenue deficit as a percentage of. The FRBM act also provided for certain documents to be tabled in the Parliament of India, along with Budget, annually with regards to the country’s fiscal policy. Required fields are marked *, "Working 24*7 in the police for the last 5 years and been out of touch with the preparation, I took the guidance from your website, especially the ClearIAS prelims test series. The FRBM Act, enacted in 2003 by Parliament aims to reduce India’s fiscal deficit and improve macroeconomic management. The primary objective was the elimination of revenue deficit and bringing down the fiscal deficit. Alex Andrews George is a mentor, author, and entrepreneur. He is the author of many best-seller books like 'Important Judgments that transformed India' and 'Important Acts that transformed India'. About the Fiscal Responsibility and Budget Management (FRBM) Act: The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act to institutionalize financial discipline and reduce India’s fiscal deficit. Dec 12, 2020 - FRBM Act 2003 Video | EduRev is made by best teachers of UPSC. Why do we need a new Act? In the year 2016, the NK Singh committee was set up by the government to review the FRBM Act. The latest provisions of the FRBM act requires the government to limit the fiscal deficit to 3% of the GDP by March 31, 2021, and the debt of the central government to 40% of the GDP by 2024-25, among others. 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