Q. Consider the following statements:

1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?

• 1 only
• 2 and 3 only
• 1 and 3 only
• 1, 2 and 3

Answer: (c) 1 and 3 only

Debt Profile of the Government

• India’s public debt profile is relatively stable and is characterised by low currency and interest rate risks.
• Of the Union Government’s total net liabilities in end-March 2021, 95.1% were denominated in domestic currency, while sovereign external debt constituted 4.9%, implying low currency risk.
  • Further, sovereign external debt is entirely from official sources, which insulates it from volatility in the international capital markets.
• Furthermore, Public debt in India is primarily contracted at fixed interest rates, with floating internal debt constituting only 1.7% of GDP in end-March 2021. The debt portfolio is, therefore, insulated from interest rate volatility.
• The General Government debt (including both State and Centre) has steeply declined from about 88 per cent in FY 2020-21 to about 81 per cent in 2022-23.
  • The central government’s debt stood at Rs 155.6 lakh crore or 57.1 per cent of the GDP at the end of March 2023.
    • “The Central Government’s debt has reduced from 61.5 per cent of GDP in 2020-21 to 57.1 per cent of GDP in FY 2022-23.

Fiscal Responsibility and Budget Management Act, 2003

• The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in the parliament of India in the year 2000 by the Atal Bihari Vajpayee Government to provide legal backing to the fiscal discipline to be institutionalized in the country. Subsequently, the FRBM Act was passed in the year 2003.
• It is an act of the parliament that sets targets for the Government of India to establish financial discipline, improve the management of public funds, strengthen fiscal prudence, and reduce its fiscal deficits.
• The objectives of the act are:
  • Fiscal discipline.
  • Efficient management of expenditure, revenue and debt.
  • Macroeconomic stability.
  • Better coordination between fiscal and monetary policy.
  • Transparency in the fiscal operation of the Government.
• It set deficit targets for Union and States to control their deficits.
• The target and parameter changed along with amendments in 2012, 2012, 2015 and 2018.

Salient Features

• Section 4 (1) of the FRBM Act provides that the Central Government shall
  • take measures to limit the fiscal deficit up to 3 per cent of GDP.
  • endeavor to ensure that by the end of Financial Year 2024-25
    • the General Government debt does not exceed 60 per cent of GDP.
    • the Central Government debt does not exceed 40 per cent of GDP.
  • not give additional guarantees with respect to any loan on security of the Consolidated Fund of India in excess of one-half per cent of GDP, in any Financial Year.
  • endeavor to ensure that the fiscal targets are not exceeded after stipulated target dates.
• Under Section 5 of the Act, except for certain circumstances, the Act does not allow the Central Government to borrow from Reserve Bank of India (RBI).
• The FM shall review, on half-yearly basis, the trends in receipts and expenditure in relation to the budget and place before both Houses of Parliament the outcome of such reviews.

CAG Audit

• The 2012 Amendment prescribed for periodical review by the CAG of the compliance of the provisions of FRBM Act by the Government.

FRBM Review Committee headed by NK Singh

• The government believed the targets set by FRBM Act were too rigid.
• In 2016, the government set up a committee under NK Singh to review the FRBM Act.
• The committee recommended that the government should target a fiscal deficit of 3 percent of the GDP in years up to March 31, 2020, cut it to 2.8 per cent in 2020-21 and to 2.5 per cent by 2023.
  • The Committee suggested using debt as the primary target for fiscal policy.
• Targets set by NK Singh Committee:
  • Debt to GDP ratio: The review committee advocated for a Debt to GDP ratio of 60% to be targeted with a 40% limit for the centre and a 20% limit for the states.
  • Revenue Deficit Target: It should be reduced to 0.8% of GDP by March 31, 2023.
    • The minimum annual reduction target was 0.5% of GDP.
  • Fiscal Deficit Target: It should be reduced to 2.5% of GDP by March 31, 2023.
    • The minimum annual reduction target was 0.3% of GDP.

FRBM Act – Escape Clause

• The FRBM Act was amended in 2018, adding Specific details that were given in Section 4(2).
• If the escape clause is triggered, RBI is then allowed to participate directly in the primary auction of government bonds, thus formalising deficit financing.
• FRBM Act Section 4(2), provides for a trigger mechanism to escape deficit control–related clauses in the act and the Government can over cross the targets in the following situations:
  1. National Security / Act of War
  2. National Calamity
  3. If agriculture output and farm incomes collapse
  4. Fall in real output/GDP growth rate beyond x%
  5. Structural reforms in the economy with unanticipated fiscal implications
• During the above trigger conditions
  • The government may over cross/deviate from the fiscal deficit target by up to 0.5% of GDP, as recommended by NK Singh’s FRBM Review Committee
  • Individual State Governments may also do similar (e.g. overcross by 0.5% of GSDP), after amending the state FRBM Act accordingly.
• Finance Minister cited structural reform to escape the FRBM targets for 2019-20 and 2020-21.