Fiscal Responsibility and Budget Management (FRBM) Act

Recently, chief ministers of various states have sought a financial package from the Centre and called for an extension of lockdown to contain the spread of coronavirus.

Why there is a need for Financial assistance?

•  The states are not generating any revenue due to the lockdown hence they are not equipped to handle the situation.
•  There is the issue of migrant labourers and poor people losing their livelihood.
• Industrial units are shut and there is no money with the state governments to manage their day-to-day affairs.
• The states are facing a fund crunch and the chief ministers urged for a package for all the states and moratorium on debts.

Demands:

• The chief ministers sought a package for migrant labourers as well as for those working in the farm and construction sectors.
• They also urged the Centre for relaxations in the FRBM (Fiscal Responsibility and Budget Management) norms from the current three per cent to five per cent.

About the Fiscal Responsibility and Budget Management (FRBM) Act:

• The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act to institutionalize financial discipline and reduce India’s fiscal deficit.
• The act aims to improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget.
•  The main purpose is to eliminate revenue deficit.

Relaxation under FRBM:

• The law does contain what is commonly referred to as an ‘escape clause’.
• Under Section 4(2) of the Act, the Centre can exceed the annual fiscal deficit target citing grounds that include national security, national calamity and decline in real output growth of a quarter by at least three percentage points below the average of the previous four quarters.
• Given that the ongoing pandemic could be considered as a national calamity the current circumstances would be apt for suspending both the Centre’s and States’ fiscal deficit targets.
• This would allow both the Union government and States to undertake the much-needed increases in expenditure to meet the extraordinary circumstances.

Response from the Central Government:

•  The prime minister suggested that the agricultural activity should continue and farm produce should be picked up from the fields instead of being brought to the “mandi” (wholesale market).
•  The government has proposed to segregate the construction industry into “Green”, “Orange” and “Red” zones and will issue guidelines on how activity can be restarted in this sector in a graded manner.