India introduced the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 to strengthen fiscal discipline and ensure long-term macroeconomic stability. However, its targets could not be achieved due to repeated global and domestic economic challenges.

Key Features of FRBM Act, 2003

• Fiscal Deficit Targets

1. 1. 1. Reduce fiscal deficit to 3% of GDP by 2008-09. (to reduce it by 0.3% per annum)
      2. Eliminate revenue deficit by 2008-09. (reduce it by 0.5% per annum)
      3. Targets revised periodically based on economic needs.

• Escape Clause

1. 1. 1. Allows relaxation of targets during national security threats, natural calamities, or severe economic downturns.

• Institutional Framework: Along with budget and demand for grants, government has to lay these 3 statements before the Parliament every financial year:

1. 1. Fiscal Policy Strategy Statement
   2. Medium-Term Fiscal Policy Statement
   3. Macro-economic Framework Statement
2. The government is not allowed to borrow from the RBI, except through Ways and Means Advances (WMA), which are used only to cover temporary mismatches between cash receipts and cash disbursements.

By the end of 2008-09, the set targets could not be achieved, largely due to the global sub-prime crisis. Subsequently, in 2012, the FRBM Act was amended with two key provisions:

1. Introduction of effective revenue deficit as a target in place of the conventional revenue deficit.
2. Requirement of a Medium-Term Expenditure Statement to be presented in Parliament alongside the Union Budget.

Later, in 2016, the government constituted the N.K. Singh Committee to review the implementation of the FRBM Act.

NK Singh Committee Recommendations

1. Replace FRBM Act: Enact a new Debt and Fiscal Responsibility Act by repealing the existing FRBM Act.
2. Debt as Key Parameter: Make debt the main anchor of fiscal policy instead of just fiscal deficit, with combined debt of the Centre and States to be targeted.
3. Debt Targets: Reduce overall government debt to 60% of GDP by 2022-23, with 40% for the Centre and 20% for the States (against then-existing levels of 49.4% for Centre and 21% for States).
4. Fiscal Deficit Target: Bring down fiscal deficit to 2.5% of GDP by 2022-23.
5. Revenue Deficit Target: Reduce revenue deficit by 0.25% of GDP annually, reaching 0.8% by 2022-23.
6. Escape Clause: Allow deviations up to 0.5% of GDP from the fiscal deficit target under exceptional circumstances such as:
   1. National security challenges
   2. Natural calamities
   3. Agricultural sector collapse
   4. Major structural reforms with unforeseen fiscal costs
7. Borrowings from RBI: Permit borrowings from RBI only in well-defined, exceptional situations.
8. Fiscal Council: Establish an independent Fiscal Council to prepare multi-year fiscal forecasts and recommend modifications in fiscal strategy.

The FRBM Act, 2003 laid the foundation of fiscal prudence in India, but its rigid targets proved difficult in the face of crises. The N.K. Singh Committee brought in a more realistic framework by shifting the focus to debt sustainability and calibrated flexibility. The government has adopted crucial recommendations like the 40% debt-GDP rule for the Centre and a flexible fiscal glide path, while others such as a statutory Fiscal Council remain pending. Going forward, full implementation of these reforms is essential to balance fiscal discipline with the developmental needs of a growing economy.