FRBM Review Committee Report , UPSC PRELIMS 2018 GS , SET C ,Q 94


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?

a . 1 only

b . 2 & 3

c . 1 & 3

d . 1 , 2 & 3 

Answer – c


Report Summary FRBM Review Committee

The FRBM Review Committee (Chairperson: Mr. N.K. Singh) submitted its report in January 2017. The Report was made public in April 2017. The Committee proposed a draft Debt Management and Fiscal Responsibility Bill, 2017 to replace the Fiscal
Responsibility and Budget Management Act, 2003
(FRBM Act). Key recommendations of the Committee and features of the draft Bill are summarised below.

1 . Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for the states. It noted that majority of the countries that have adopted fiscal rules have targeted a debt to GDP ratio of 60%. The targeted debt to GDP ratio should be achieved by 2023. This ratio is expected to be around 70% in 2017.

2 . Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the centre. To maintain its independence, it proposed a non-renewable four-year term for the Chairperson and members. Further, these people should not be employees in the central or state governments at the time of appointment.

3 . Role of the Council: The role of the Council would
include: (i) preparing multi-year fiscal forecasts, (ii) recommending changes to the fiscal strategy, (iii) improving quality of fiscal data, (iv) advising the government if conditions exist to deviate from the fiscal target, and (v) advising the government to take corrective action for non-compliance with the Bill.

4 . Deviations: The Committee noted that under the
FRBM Act, the government can deviate from the
targets in case of a national calamity, national security or other exceptional circumstances notified by it. Allowing the government to notify these grounds diluted the 2003 Act. The Committee suggested that grounds in which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances.

5 . Further, the government may be allowed to deviate from the specified targets upon the advice of the Fiscal Council in the following circumstances: (i) considerations of national security, war, national
calamities and collapse of agriculture affecting output and incomes, (ii) structural reforms in the economy resulting in fiscal implications, or (iii) decline in real output growth of at least 3% below the average of the previous four quarters. These deviations cannot be more than 0.5% of GDP in a year.

6 . Borrowings from the RBI: The draft Bill restricts the government from borrowing from the Reserve Bank of India (RBI) except when: (i) the centre has to meet a temporary shortfall in receipts, (ii) RBI subscribes to government securities to finance any deviations from the specified targets, or (iii) RBI purchases government securities from the secondary market.

Central Government liability

Central Government liability at 46.1% of GDP at end-March 2017 has seen a decline from
47.7 % at end March 2016, in continuation with long term trend of decline being seen from
61.4% in 2001-02.

Article 293(3)

A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.