Full Form Of FRBM

The Full Form of FRBM stands for Fiscal Responsibility and Budget Management. It is an important Act enacted to guide India's government regarding fiscal health and reduce the country's fiscal deficit through better management of public finances.

Fiscal Responsibility and Management Bill was first introduced by the Indian Parliament in the year 2000 and was enacted in the form of the Fiscal Responsibility and Budget Management Act in the year 2003 and is an important guiding light for the Government in its Budgetary exercise, Fiscal planning as well as it guides Reserve Bank of India (the Central Bank of India) in managing Inflation in the country.

• FRBM stands for Fiscal Responsibility and Budget Management, which is an important Act implemented to provide guidance to the Indian government on fiscal health and to reduce its fiscal deficit by effectively managing public finances.
• FRBM aims to maintain fiscal balance, reduce external borrowing, and optimize expenditures. It sets targets for deficits and guides achieving medium-term objectives. It ensures equal benefits for all generations and achieves long-term stability in macroeconomic factors.
• The goal is to decrease the government's interest expenses, reducing the Fiscal Deficit and transforming India into a Fiscal Surplus Country.

FRBM is an important Act enacted by India's Government to make our country manage its fiscal balance more prudently and systematically. It is a well-known fact that higher levels of Fiscal deficit impact the Inflation level and lead to the accumulation of a large amount of Debt borrowing. In contrast, a lower level of Fiscal deficit leads to higher growth, which is also sustainable.

It aims to reduce the debt borrowing of the country and make the financial health of the country better, which ultimately improve the ranking of India and, consequently, the rating of the country on the global Index, which makes India a favorable destination for foreign investors as well as enabling the Government to properly channelize its resources to the most productive use and avoid unnecessary enlargement of Government Balance Sheet and social expenditure through excess borrowing.

It also aims to curtail the government Interest expenditure, which will ultimately reduce the Fiscal Deficit and make India a Fiscal Surplus Country in the future. However, the paradox is that the fiscal deficit is always not bad as long as it is done for capital expenditure, which will benefit the future through higher revenue generation.

Some of the most peculiar features of FRBM are enumerated below:

• Elimination of Revenue Deficit and Fiscal Deficit in a planned manner by an equivalent amount every year to completely avoid a deficit. At the Fiscal Responsibility and Budget Management Act initiation, it was proposed to reduce 0.5% of GDP annually for Revenue Deficit and 0.3% of GDP yearly for Fiscal Deficit.
• Limiting the quantum of Guarantee the Central Government can provide in any Financial Year to 0.5% of GDP.
•  Prohibit Central Bank, i.e., Reserve Bank of India, from subscribing to the primary issue of G-Sec issued by Govt. of India.
• Prohibit Central Government from borrowing from RBI for permanent deficit items.
• Central Government to place on record in both houses of parliament, i.e., Lok Sabha and Rajya Sabha, every year its Macro-Economic framework, Fiscal Policy Statement, as well as Medium-Term Policy Statement during the Annual Budget Exercise.
• Central Government to specify the reasons in cases where they cannot meet the Revenue and Fiscal Deficit Targets.

Given below are some important aims and objectives of the concept. Let us study them in details.

• The major objective of FRBM is to develop the habit of meeting fiscal balance and managing fiscal expenditure by the Government in a prudent manner.
• Another objective is to allow the government to reduce its external borrowing and curtail its expenditure optimally.
• Finally, the objective is to set targets of Fiscal deficit and Revenue (later changed to Effective Revenue) deficit and achieve the same and act as a guide to the government in achieving its medium-term objective of Fiscal Deficit and Fiscal Operations.
• It ensures equal benefit to all generations by keeping the country in order. In other words, by borrowing in excess in the present so that the Government may benefit the current generation, but the future generation will have to pay its dues, there needs to be a balancing Fiscal Responsibility and Budget Management Act to ensure all generations of people of the country benefit.
• Attaining the Long-run stability of macroeconomic factors is another important objective of FRBM.
• This can be done through control on inflation, bringing about a stability in exchange rate and minimise any disturbance or imbalance in the economic and political front.
• The concept aims at optimization of resource allocation through reduction in useless expenditure. Instead the expenditure should be aimed at the areas where spending is urgently required, like healthcare, education or infrastructural development.
• Due to responsible handling of fiscal policies by the government, the confidence and faith of the citizens increase. This leads to a boost in demand, production and investment which are important requirements for economic growth.
• On successful handling of all the above processes, the image of the economy reaches new heights in the global market. This is crucial in order to continue good relations, boost international trade and investment and get access to funding from the global market in times of need.

Thus, the above objectives aim at creating a responsible fiscal management process and reduce deficits to create a healthy and sustainable economic atmosphere.

Some noteworthy functions of the process are given below.

• Limiting the Fiscal deficit to 3% of GDY by the end of Financial Year 2021.
• Limiting the Debt of the Central Government to 40% of the GDP by Financial Year 2025.
• Provide a clear picture of the country's Fiscal Situation and the position of Government Borrowing. Ensure that the country's borrowings are spread evenly over the years to avoid any high fiscal slippage over any particular year.

Given below are the points that state why this process is to be used in any economy. Let us study them in details.

• To guide the government against large borrowing at higher Interest Rates, leading to a higher Fiscal Deficit level.
• To reduce the large expenditure outflow, i.e., Interest on Borrowings of the Government.
• To make the Government accountable and also to bring transparency to the monetary affairs of the Government. By fixing targets on the deficit, the government is made accountable for any expenditure that results in a deepening deficit. The government has to explain the reasons for doing so, which makes a democratic country like India more accountable to the people who voted for the Government.
• It leads to effective management of debt from public because unsustainable public debt hinders long term growth and expansion due to unnecessary debt burden.
• It is a very good method to raise the image of the economy in the global market and increase its creditworthiness so that borrowing becomes easy.
• If a country’s economic policies are managed well, through efficient resource allocation, debt management and budgeting, the future generations are in safe hands and their interests are protected because they are not burdened by useless problems.

The various functions and objectives of the process has some long-lasting impact on the economy. It is important to understand the same in detail.

• Post-FRBM multiple amendments were made to make it effective, which includes shifting from a Fiscal deficit target to a Fiscal deficit range.
• Government expenditure declined to achieve, if not completely, partially Fiscal Deficit Targets.
• It was observed that Government Expenditure on Social Sectors declined, such as on Education, Social Security and Agriculture, etc., which is a big disadvantage in a country like India where high population and social security measures are already at very low levels and need government support to reach modest levels.
• Despite being a good check to keep the government managing its finances well, FRBM has failed to achieve its objective. The Government always fails to achieve its targets on Revenue and Fiscal Deficit. Also, FRBM severely impacted the economy's development and credit growth, which was the engine of GDP expansion.

This has been a guide to what is Full Form Of FRBM. We explain the features, objectives, functions, importance and impact of the same. You may refer to the following articles to learn more about finance –

• Full Form of CRISIL
• IBPS Full Form
• Expansionary Policy
• Budget Surplus