The Fiscal Responsibility And Budget Management (FRBM) Act

Explanation :

• The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003, establishes financial discipline to reduce fiscal deficit
• The FRBM Bill was introduced by the then finance minister, Yashwant Sinha, in 2000. The Bill, approved by the Union Cabinet in 2003, became effective from July 5, 2004.
• It aims to introduce transparency in India's fiscal management systems.
• The Act’s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.

Key features

The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

• Medium Term Fiscal Policy Statement
• Macroeconomic Framework Statement
• Fiscal Policy Strategy Statement

Escape Clause

• Escape clause generally refers to a contract provision that specifies the conditions under which a party can be freed from an obligation.
• The escape clause under the FRBM Act details a set of events in which the Central government can deviate from fiscal deficit targets.
• It provide flexibility to governments to overshoot fiscal deficit targets in times of need, enabling them to respond to economic shocks.
• To ensure escape clauses are not misused, they are generally allowed only in exceptional circumstances, and with a check on the quantum of deviation.
• The term was used by FRBM Review Committee headed by NK Singh, in 2016.