Q27.What are the reasons for the introduction of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003? Discuss critically its salient features and their effectiveness.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, was a landmark legislative step by the Indian government to institutionalize fiscal discipline. Its primary objective was to eliminate revenue deficit and bring down the fiscal deficit to sustainable levels, thereby ensuring long-term macroeconomic stability and promoting inter-generational equity.

Reasons for Introduction of FRBM Act

The Act was necessitated by a period of significant fiscal stress, marked by several pressing economic challenges.

• Persistent high fiscal and revenue deficits.
• Unsustainable public debt burden.
• Need for fiscal discipline and inter-generational equity.
• Enhancing macroeconomic stability.

Salient Features of FRBM Act

To address these concerns, the FRBM Act introduced several key provisions.

• Mandated targets for fiscal and revenue deficit reduction.
• Imposed a debt ceiling on the government.
• Enhanced transparency through policy statements (e.g., Medium-Term Fiscal Policy Statement).
• Included an 'escape clause' for exceptional circumstances like national calamity or war.

Critical Discussion of Effectiveness of FRBM Act

The Act's effectiveness has been a subject of critical discussion, demonstrating both initial successes and significant challenges in consistent implementation over time.

• Initially successful in reducing deficits and improving fiscal health.
• Enhanced fiscal transparency and accountability.
• Institutionalized a framework for fiscal discipline.

• Frequent invocation of the escape clause undermined targets.
• Global financial crises and economic slowdowns made consistent adherence difficult.
• Debate on its rigidity vs. needed flexibility, sometimes leading to pro-cyclical policies.

Despite initial gains, the Act's inconsistent implementation and inherent rigidity led to calls for comprehensive reform. The N.K. Singh Committee notably advocated for a more flexible, debt-based fiscal framework to better balance discipline with economic growth needs.