Fiscal Responsibility & Budget
Management Act, 2003 & Rules, 2004

The FRBM Act was enacted to provide for the responsibility of the Central Government to ensure intergenerational equity in fiscal management and long-term macro-economic stability by removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability.

• 📌Short Title: The Fiscal Responsibility and Budget Management Act, 2003.
• 🗺️Extent: Extends to the whole of India.
• 📅Commencement: Came into force on 5th July 2004 vide Notification No. G.S.R. 395(E) dated 2nd July 2004.

The Central Government shall lay before both Houses of Parliament the following fiscal policy statements — along with the annual financial statement and demands for grants (except MTEF Statement):

Annual Targets and Reduction Path (Sec. 4(2)):

• 📅Central Govt. shall prescribe annual targets for reduction of fiscal deficit for the period from commencement of Part XV of Chapter VIII of Finance Act, 2018 to 31st March 2021.

• 📐Sec. 4(3) — Deviation Cap: Any deviation from fiscal deficit target shall NOT exceed 0.5% of GDP in a year.
• 📈Sec. 4(4) — Upside Rule: Where real output growth of a quarter rises by at least 3 percentage points above its average of the previous four quarters → Central Govt. shall reduce fiscal deficit by at least 0.25% of GDP in that year.
• 📢Sec. 4(5) — Statement to Parliament: Where fiscal deficit varies from target (under Sec. 4(2) proviso) or deviation is initiated under Sec. 4(4), a statement explaining reasons and the path of return to annual prescribed targets shall be laid before both Houses of Parliament as soon as may be.

• 🚫Sec. 5(1) — General Bar: The Central Government shall NOT borrow from the Reserve Bank.
• ✅Sec. 5(2) — Exception: Ways & Means Advances: Central Govt. may borrow from RBI by way of advances to meet temporary excess of cash disbursements over cash receipts during any financial year, as per agreements with RBI. Such advances shall be repayable as per Sec. 17(5) of RBI Act, 1934.
• ✅Sec. 5(3) — Exception: Primary Subscription [Finance Act 2018]: RBI may subscribe to primary issues of Central Government Securities — but only on grounds specified in the proviso to Sec. 4(2) (i.e., the escape clause grounds).
• ✅Sec. 5(4) — Secondary Market: RBI may buy and sell Central Government Securities in the secondary market, or convert Central Govt. Securities held by it with other securities as mutually agreed between RBI and Central Govt. [conversion provision added by Finance Act 2018].

• 🔍Sec. 6(1): Central Govt. shall take suitable measures to ensure greater transparency in fiscal operations in public interest and minimise secrecy in preparation of annual financial statement and demands for grants.
• 📋Sec. 6(2): At the time of presentation of annual financial statement and demands for grants, Central Govt. shall make prescribed disclosures in prescribed form (see Rule 6 of FRBM Rules for specifics).

• 📊Sec. 7(1) — Half-yearly Review: The Finance Minister shall review trends in receipts and expenditure in relation to the budget on a half-yearly basis [earlier "quarterly" — amended by Finance Act 2018] and place the outcome before both Houses of Parliament.
• 📅Sec. 7(1A) — Monthly Accounts [Finance Act 2018]: Central Govt. shall prepare a monthly statement of its accounts.
• ⚠️Sec. 7(2) — Corrective Action: Whenever there is a shortfall in revenue or excess of expenditure over prescribed levels in any period of a financial year → Central Govt. shall take appropriate measures for increasing revenue or reducing expenditure (including curtailing authorised sums from the Consolidated Fund of India under any Act).

• 🏛️Sec. 7(3)(a): Except as provided under this Act, no deviation in meeting obligations under this Act shall be permissible without approval of Parliament.
• 📢Sec. 7(3)(b) — Statement on Deviation: Where unforeseen deviation is made, Finance Minister shall make a statement in both Houses explaining: (i) the nature of deviation; (ii) whether it is substantial and relates to actual or potential budgetary outcomes; (iii) the remedial measures the Govt. proposes to take.

• 🔍Central Govt. may entrust the Comptroller and Auditor-General (CAG) of India to periodically review the compliance of the provisions of this Act.
• 🏛️Such reviews shall be laid on the table of both Houses of Parliament.

Central Govt. may, by notification in the Official Gazette, make rules for carrying out the provisions of this Act. Rules may provide for:

• ▪️Sec. 8(2)(a): Annual targets to be specified under Sec. 4(2)
• ▪️Sec. 8(2)(b): Fiscal indicators to be prescribed for Sec. 3(2)
• ▪️Sec. 8(2)(ba) [Ins. 2012]: Expenditure indicators with underlying assumptions and risk under Sec. 3(6A)(a)
• ▪️Sec. 8(2)(c): Forms of MTFP cum FPSS, MTEF and Macro-economic Framework Statement under Sec. 3(7)
• ▪️Sec. 8(2)(d): Disclosures and their forms under Sec. 6(2)
• ▪️Sec. 8(2)(da) [Ins. 2018]: Level of shortfall in revenue or excess of expenditure under Sec. 7(2)
• ▪️Sec. 8(2)(e): Any other matter which is required to be or may be prescribed

• 🏛️Every rule made under this Act shall be laid before each House of Parliament as soon as may be after it is made, for a total period of 30 days (may be in one or more successive sessions).
• ✏️If before expiry of the session immediately following, both Houses agree to modify or annul any rule → the rule shall have effect only in such modified form or be of no effect.
• ✅Any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.

• 📌Short Title: Fiscal Responsibility and Budget Management Rules, 2004.
• 📅Commencement: 5th July 2004 (Notification No. G.S.R. 395(E) dated 2nd July 2004).

The Central Government shall lay before each House of Parliament:

• (a)The Medium-term Fiscal Policy cum Fiscal Policy Strategy Statement and the Macro-economic Framework Statement — along with the annual financial statement and demands for grants — in Forms F-1 and F-2 respectively.
• (b)The Medium-term Expenditure Framework Statement — in Form F-3.

In the Medium-term Fiscal Policy cum Fiscal Policy Strategy Statement (Form F-1), three-year rolling targets shall be set for the following fiscal indicators:

At the time of presenting the annual financial statement and demands for grants, the Central Government shall make the following disclosures:

• (a)Any significant change in accounting standards, policies and practices affecting or likely to affect the computation of prescribed fiscal indicators
• (b)Statements of receivables and guarantees in Forms D-1 to D-3 along with explanatory notes [Substituted by 2007 Amendment]
• (c)Statement of assets in Form D-4 along with explanatory notes [Substituted by 2007 Amendment]
• (d)Statement of explicit contingent liabilities in the form of stipulated annuity payments over a multi-year time-frame — in Form D-5 [Inserted by 2013 Amendment]

Based on the outcome of the half-yearly review [earlier "quarterly" — amended 2018] at the end of the first half [earlier "second quarter" — amended 2018] of any financial year beginning with FY 2015-16 [earlier "2012-13" — amended 2015], if any of the following conditions are met:

Then the following actions are required:

• (a)Central Govt. shall take appropriate corrective measures as required under Sec. 7(2) of the Act.
• (b)Finance Minister shall make a statement in both Houses of Parliament during the session immediately following the end of the first half, detailing: (i) corrective measures taken; (ii) how supplementary demands for grants are proposed to be financed; (iii) prospects for fiscal deficit for that financial year.

• 🔍The CAG of India shall carry out an annual review of compliance of the provisions of the Act and Rules by the Central Government — beginning with FY 2014-15.

Scope of the CAG's Annual Review [Rule 8(2)]:

• ▪️(i) Analysis of achievement and compliance of targets set out in the Act, Rules, MTFP cum FPSS, Macro-economic Framework Statement and MTEF Statement
• ▪️(ii) Analysis of trends in receipts, expenditure and macro-economic parameters
• ▪️(iii) Comments related to classification of revenue, expenditure, assets or liabilities having a bearing on the achievement of targets
• ▪️(iv) Analysis of disclosures made by Govt. to ensure greater transparency

CAG's Powers for Review [Rule 8(3)]:

• 📂(a) Call for such records or information as required for the preparation of the report
• 📂(b) Require that any accounts, books, papers and other documents which deal with or form the basis of, or are otherwise relevant to the review, shall be sent to such place as he may appoint for inspection

• 🏢Rule 8(4): Officers in charge of any office/department whose accounts are to be reviewed shall afford all facilities and comply with requests for records or information as expeditiously as possible and in complete form.
• 📜Rule 8(5): The CAG's review report shall be submitted to the President, who shall cause it to be laid on the table of both Houses of Parliament.

Form F-1 is a combined statement (merged by 2018 Amendment) comprising the following sections:

• AFiscal Indicators — Rolling Targets: 3-year rolling targets (Y-1 Revised Estimates, Y Budget Estimates, Y+1 and Y+2 Targets) for all 6 fiscal indicators (Rule 5): fiscal deficit, revenue deficit, primary deficit, tax revenue, non-tax revenue, and Central Govt. debt — all as % of GDP.
• BAssumptions Underlying the Fiscal Indicators: Revenue receipts (tax revenue — sectoral and GDP growth rates; non-tax revenue — policy stance; devolution to States — Finance Commission); Capital receipts (debt stock, repayment, fresh loans, recovery of loans, other receipts, borrowings); Total expenditure (revenue account: interest payments, major subsidies, others; capital account: loans and advances, capital outlay); GDP Growth.
• CAssessment of Sustainability: (i) Balance between revenue receipts and revenue expenditure — tax-GDP ratio, non-tax revenues, capital receipts, GDP projections; (ii) Use of capital receipts including market borrowings for generating productive assets.
• DFiscal Policy Strategy Overview: Overview of fiscal policy strategy currently in vogue.
• EFiscal Policy Strategy for Ensuing Year: Sub-paragraphs on: (1) Tax Policy — major changes in direct and indirect taxes, income tax exemption limits, principles regarding exemptions; (2) Expenditure Policy — major changes in allocation; (3) Govt. Borrowings, Lending and Investments — internal/external debt, average maturity structure, bunching of repayments; (4) Contingent and Other Liabilities — changes in policy on guarantees; (5) Pricing of Administered Goods.
• FStrategic Priorities for Ensuing Year: Resource mobilisation (tax, non-tax, other receipts); Expenditure management principles; Management of public debt.
• GRationale for Policy Changes: Direct and indirect tax changes; Budgeted expenditure including subsidies; Public debt management; Pricing of administered goods.
• HPolicy Evaluation: Evaluation of changes proposed in fiscal policy strategy for the ensuing year with reference to reduction of fiscal deficit, Central Govt. debt and MTFP objectives.

Form F-2 contains the following sections with actual data format appended:

• 1Overview of the Economy: Synoptic analysis of trends in growth rates, prices, output, external sector, money and capital markets with key macro-economic indicators.
• 2GDP Growth: Analysis of overall GDP growth and its sectoral composition.
• 3External Sector: Trends in exports, imports, foreign exchange reserves, current account balance and balance of payments.
• 4Money, Banking and Capital Markets: Trends in money supply, bank deposits and credit; developments in capital market.
• 5Central Government Finances: Analysis of trends in revenue collections and expenditure; trends in important fiscal deficit and debt indicators.
• 6Prospects: Assessment of growth prospects with underlying assumptions.

Key data reported: Real Sector (GDP at current and constant prices, IIP, WPI, CPI, M3, Imports, Exports, Trade Balance, Foreign Exchange Assets, Current Account Balance) and Government Finances (Revenue Receipts, Tax Revenue Net, Non-Tax Revenue, Capital Receipts, Recovery of Loans, Other Receipts, Borrowings, Total Receipts, Revenue Expenditure, Interest Payments, Capital Expenditure, Total Expenditure, Fiscal Deficit, Revenue Deficit, Primary Deficit).

Form F-3 contains 4 sections, providing projections for the previous year (Y-1 Revised Estimates), current year (Y Budget Estimates), and next two years (Y+1, Y+2):

• AMedium-term Expenditure Projections (Major Category-wise): Detailed projections in ₹ crore for Revenue Expenditure items (Salary, Interest, Pension, Subsidies — Food/Fertiliser/Petroleum, Defence, Education, Health, Rural/Urban Development, etc.) and Capital Expenditure items (Defence, Home, Finance, Transport, IT & Telecom, Loans to States, etc.).
• BAssumptions Underlying MTEF Projections: Revenue Expenditure — salaries, pensions, interest payments, subsidies, defence; Capital Expenditure — defence, road transport & highways, railway capital support, other capital expenditure.
• CMTEF Projections (Demand-wise, Net Basis): Projections disaggregated by demand number and name — revenue and capital separately.
• DMTEF Projections for Select Schemes (Net Basis): Revenue and Capital sections separately with scheme-wise projections.

Discloses tax revenue arrears as at the end of the reporting year, classified by:

• 📊Status: Amounts under dispute vs. amounts not under dispute
• 📅Age bands: Over 1 yr < 2 yrs; Over 2 yrs < 5 yrs; Over 5 yrs < 10 yrs; Over 10 yrs; with Sub-total and Grand Total
• 🏷️Tax Heads covered: Corporation Tax (0020), Income Tax other than Corp. Tax (0021), CGST (0005), IGST (0008), Customs (0037), Union Excise (0038), Service Tax (0044)

Discloses non-tax revenue arrears as at end of reporting year in age bands (0-1 yr, 1-2 yrs, 2-3 yrs, 3-5 yrs, above 5 yrs), covering: Fiscal Services (Interest receipts from State/UT Govts., Railways, Departmental Commercial Undertakings, PSUs; Dividend and Profits); General Services (Police receipts); Economic Services (Petroleum Cess/Royalty; Communications Licence Fees; Other Receipts).

Discloses guarantee position classified by class (with number of guarantees within brackets), covering 12 data columns: Maximum Amount Guaranteed, Outstanding at beginning of year, Additions during year, Deletions (other than invoked), Guarantees valid till, Invoked during year (Discharged + Not Discharged), Outstanding at end of year, Guarantees Commission Fee (Receivables + Received), and Other Material Details.

Discloses value of assets (cost in ₹ crore) at beginning of reporting year, acquired during reporting year, and cumulative total at end of reporting year, covering:

• 🏗️Physical Assets: Land (area in sq. km), Buildings (Office + Residential), Roads, Bridges, Irrigation Projects, Power Projects, Other Capital Projects, Machinery & Equipment, Office Equipment, Vehicles
• 💰Financial Assets: Equity Investment (Shares + Bonus Shares), Loans and Advances (to State Govts., UT Govts., Foreign Govts., Companies, Others), Other Financial Investment

Discloses explicit contingent liabilities in the form of stipulated annuity payments, project-wise by Ministry/Department, covering: Name of Project, Value of the Project (₹ crore), Total Annuity Committed (₹ crore), Term (years), Annuity Payment per year (₹ crore), Amount of unpaid annuity liability at end of financial year (₹ crore).