The FRBM Act: a law that binds present and future governments to fiscal consolidation
Background
The Fiscal Responsibility and Budget Management (FRBM) Act became law in 2003.
Its objective is inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operations.
Its original provisions made it mandatory for the Central government to take measures to reduce the fiscal deficit, eliminate the revenue deficit and generate a revenue surplus; amendments in 2012 and 2015 revised the targets and their dates.
It bans the Reserve Bank of India from buying primary issues of Central Government securities after 2006, preventing monetisation of the government's deficit and making monetary policy independent of fiscal policy.
The government must lay three policy statements before Parliament in each financial year: the Medium Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement and the Macroeconomic Framework Policy Statement.
The government can move away from the fiscal consolidation path only in case of natural calamity, national security and other exceptional grounds.
In plain words
Fiscal deficit Gap between total expenditure and total non-debt receipts — The amount the government has to borrow in a year to meet its spending.
Revenue deficit Shortfall of revenue receipts against revenue expenditure — It shows the government is borrowing even to meet day-to-day spending.