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Characteristics of the FRBM Act

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Over time, the fiscal deficit has become an essential aspect of every budget presentation. It is regarded as the most significant indicator of a government's financial well-being. Rating agencies and market participants, both national and international, place a higher value on a government that adheres to the FRBM or, the Fiscal Responsibility and Budget Management Act rules.

The FRBM or, the Fiscal Responsibility and Budget Management Act is an act of the parliament that sets goals for the Indian government to reduce its fiscal deficits, improve public fund management, and establish financial discipline. It was first introduced in India's parliament by the Vajpayee government in 2000 to provide legal support for the country's institutionalization of fiscal discipline. The FRBM Act was subsequently enacted in 2003.

Features

The act required the following items to be presented annually to Parliament alongside the Budget documents:.

1. Statement of the Macroeconomic Framework.

2. Statement of the Medium-Term Fiscal Policy

3. Statement of the Fiscal-Policy Strategy

4. Indicators of Fiscal Policy

The following four fiscal indicators were proposed to be projected in the medium-term fiscal policy statement:

1. Revenue Deficit expressed as GDP percentage

2. Fiscal Deficit expressed as GDP

3. Tax Revenue expressed as GDP percentage

4. Complete Outstanding liabilities expressed as GDP percentage

5. Different kinds of deficit

The excess between what the government intends to spend and what it anticipates receiving is known as a Fiscal Deficit. Obviously, the government will need to borrow money from the market to fill this gap. However, not all government expenditures are the same. For instance, if the expenditure is used to pay employees, it is referred to as "Revenue" expenditure; however, if it is used to construct a factory or a road, which in turn increases the economy's capacity to produce more goods, it is referred to as "Capital" expenditure. Another important indicator is the Fiscal Deficit, which depicts the difference between revenue received and revenue spent. The government's capital expenditures make up the difference between its fiscal deficit and its revenue deficit.

Significance of the FRBM Act

The FRBM or, the Fiscal Responsibility and Budget Management Act is commonly understood to be intended to "compress," or limit, government expenditures. However, that is a flawed comprehension. The FRBM Act is actually more of a spending switching mechanism than a spending compression mechanism. To put it another way, the FRBM Act is assisting governments in shifting their spending from revenue to capital by limiting the total fiscal deficit to 3% of nominal GDP and calling for the complete elimination of the revenue deficit. Also, this means that, contrary to popular belief, India's GDP should grow rather than shrink if the FRBM Act is followed.

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