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FRBM framework

FRBM framework
Highlights

The Fiscal Responsibility and Budget Management (FRBM) Review Committee recommendations, made public earlier this week, offer a medium-term framework...

The Fiscal Responsibility and Budget Management (FRBM) Review Committee recommendations, made public earlier this week, offer a medium-term framework that focuses on India's fiscal consolidation, US rating agency Moody's said on Friday.

The FRBM committee, headed by former Revenue Secretary N K Singh and whose report was made public on Wednesday, recommended that the fiscal deficit should be brought down to 2.5 per cent of the gross domestic product (GDP) by the financial year 2023 in a phased manner.

It has also suggested a revenue deficit of 0.8 per cent and a combined Centre-state debt-to-GDP ratio ceiling of 60 per cent for fiscal 2022-23, which is the end point of its medium-term fiscal road map.

The Fiscal Responsibility and Budget Management Act, 2003, was enacted to institutionalise financial discipline, reduce India's fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence.

The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008. However, due to the 2007 international financial crisis, the deadlines were not met.

In 2011, given the process of ongoing recovery, Economic Advisory Council publicly advised the Government of India to reconsider reinstating the provisions of the FRBMA. N K Singh heads the council.

The N K Singh panel suggested adopting the debt-to-GDP ratio as a new anchor of fiscal policy along with the deficit, and setting up of an autonomous fiscal council.

The main functions of the proposed fiscal council will be preparing multi-year fiscal forecasts, preparing fiscal sustainability analysis, providing independent assessment of the central government's fiscal performance and improving quality of data, the committee said.

"It is proposed that an independent Fiscal Council may be constituted as part of the new institutional framework to be made part of the new proposed Debt Management and Fiscal Responsibility Act ('Debt Act') to replace the FRBM Act," the report said.

It recommended that India should monitor its debt-to-GDP ratio and gradually bring it down to 60 per cent – constituted by 40 per cent for the Centre as against the existing 49.4 per cent, and 20 per cent for the states as against the existing 21 per cent.

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