Fiscal Responsibility and Budget Management (FRBM) Act

What Does the FRBM Act Do?

The act sets clear targets to control fiscal deficit and public debt. This helps prevent the government from overspending or borrowing too much. It requires the government to present annual fiscal policy statements. These statements explain how the government plans to manage deficits, generate revenue, and handle debt.

As of 2025, the government is aiming to bring the fiscal deficit down to 3 percent of GDP by 2025–26, following a steep rise during the pandemic years.

Example

If the government reduces its fiscal deficit from 6.8 percent in 2021–22 to 3 percent by 2025–26, it may not need to borrow as much. Lower government borrowing can reduce overall demand for funds in the economy, which may help bring down interest rates. This can lead to lower EMIs for home loans, car loans, and other personal borrowings.

Key Components of the FRBM Act

• Fiscal Deficit Target: Set at 3 percent of GDP for the central government

• Debt Management: Aims to limit central government debt to 40 percent of GDP by 2024–25

• Escape Clause: Provides flexibility to exceed targets in case of emergencies or structural reforms, with proper justification

Benefits of the FRBM Act

• Macroeconomic Stability: By reducing excessive borrowing, the Act helps keep inflation in check and contributes to stable interest rates

• Transparency and Accountability: Requires the government to publicly share its fiscal strategies and outcomes

• Investor Confidence: A disciplined fiscal approach enhances credibility and attracts both domestic and foreign investment

Challenges in Implementation

• Meeting Targets: External factors such as global slowdowns, natural disasters or wars can derail fiscal plans, making it hard to meet deficit targets

• Balancing Act: While flexibility is built into the law through the escape clause, using it too frequently can dilute the very discipline the Act intends to enforce

Conclusion

Though the FRBM Act is designed to manage the country's finances, its ripple effects are felt in the everyday financial lives of citizens. A fiscally disciplined government is more likely to maintain lower inflation, reduce interest rates, and create a stable economic environment — all of which contribute to better financial planning for individuals. As India moves towards its fiscal targets in 2025, the outcomes of the FRBM framework will continue to shape key aspects of personal finance.