Fiscal Responsibility and Budget Management(FRBM) Act

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News:Kerala Government has sought relaxation under the Fiscal Responsibility and Budget Management(FRBM) Act so as to ensure that the State’s finances are not adversely impacted in the wake of Coronavirus.

Facts:

  • The Fiscal Responsibility and Budget Management Act (FRBM Act) was enacted in 2003 to introduce transparency in India’s fiscal management systems by reducing fiscal deficit.
  • The act mandated the reduction of the fiscal deficit to 3% of GDP but it has been subsequently amended and the present target is 3.1% by March 2023.
  • The states have also enacted their own respective fiscal Responsibility Legislation which sets 3% of Gross State Domestic Product(GSDP) cap on their annual budget deficits.
  • Escape Clause:Under Section 4(2) of the Act, the Centre can exceed the annual fiscal deficit target citing grounds which includes a) National security b) war c) National calamity d) Collapse of agriculture e) Structural reforms and f) Decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.
  • However,the deviation from the stipulated fiscal deficit target must not exceed 0.5 percentage points in a year.

Additional Facts-Instances of the past FRBM relaxation:

Global financial crisis in 2008-09: 

  • The Centre resorted to fiscal stimulus to counter the fallout of the global slowdown.This led to the fiscal deficit climbing to 6.2%, from a budgeted goal of 2.7%.
  • The deficit goals for the States too were relaxed to 3.5% of Gross State Domestic Product(GSDP) for 2008-09 and 4% of GSDP for fiscal 2009-10.

Budget 2020-21 presentation:

  • The reductions in corporate tax were cited as structural reforms that triggered the escape clause.This enabled the government to adjust the fiscal deficit target for 2019-20 to 3.8% from the budgeted 3.3%.