Role of the FRBM Act

Role of the FRBM Act

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Fiscal responsibility and budget management are critical components of any nation's economic framework. Effective budget management ensures prudent financial decisions and promotes long-term fiscal sustainability. In India, the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 plays a significant role in guiding fiscal policy and promoting fiscal responsibility. The Act was enacted by the Government of India in 2003 to achieve fiscal discipline and consolidating the country's fiscal position. The primary objective of the Budget Management Act is to ensure that the government's fiscal deficits are reduced over time, leading to fiscal stability and sustainable economic growth.

Under the Fiscal Responsibility and Budget Management (FRBM) Act 2003, the government sets specific targets for deficit reduction. The Act mandates that the central government must work towards reducing the fiscal deficit to a certain percentage of the Gross Domestic Product (GDP) over time. Similarly, targets are set for the revenue deficit and the fiscal deficit of the state governments. By imposing these targets, the Act enforces fiscal discipline and encourages governments to adhere to responsible budgetary practices.

Fiscal policy refers to the government's use of taxation and spending to influence the overall economy. In India, fiscal policy works primarily through budget management. The government's annual budget serves as a tool to allocate resources, set revenue and expenditure priorities, and address various socio-economic challenges. The FRBM Act complements fiscal policy by providing a framework that guides budget management. It sets targets for fiscal deficit reduction, revenue generation, and expenditure control. By adhering to these targets, the government aims to maintain macroeconomic stability and avoid excessive borrowing, which could lead to inflationary pressures and undermine economic growth.

Fiscal responsibility in India goes beyond just complying with the targets set by the FRBM Act. It encompasses adopting a responsible approach to fiscal management, considering the long-term implications of budgetary decisions, and ensuring transparency and accountability in the budget process. Firstly, fiscal responsibility involves ensuring that public finances are managed in a manner that minimizes wasteful expenditures and maximizes the impact of public spending on the welfare of the citizens. Secondly, fiscal responsibility demands that the government remains committed to reducing fiscal deficits and debt burdens over time. By doing so, the government can create fiscal space for future contingencies, without resorting to excessive borrowing.