NK Singh Committee on FRBM: Main Recommendations

Government had constituted a Committee in May, 2016 to review the Fiscal Responsibility and Budget Management (FRBM) Act under the Chairmanship of Shri N.K. Singh, former Revenue and Expenditure Secretary and former Member of Parliament.

The Committee consisted of Dr. Urjit R. Patel, Governor, Reserve Bank of India (RBI), Shri Sumit Bose, former Finance Secretary, Dr. Arvind Subramanian, Chief Economic Adviser and Dr. Rathin Roy, Director, National Institute of Public Finance & Policy (NIPFP) as members.

This Committee presented its Report to the Union Finance Minister Arun Jaitley.

List of Recommendations of NK Singh FRBM Committee:

New statutory framework for debt and fiscal targets:

1. Repeal the existing FRBM Act, 2003 and the FRBM Rules, 2004.

2. Enact a new Debt and Fiscal Responsibility Act and in pursuance of the new Act, enact and adopt the Debt and Fiscal Responsibility Rules, as per drafts suggested by the Committee.

3. Adopt a prudent medium-term ceiling for general government debt of 60% of GDP, to be achieved by no later than FY23.

4. Within the overall ceiling specified above, adopt a ceiling of 40% for the Centre, and the balance 20% for the States.

5. Adopt fiscal deficit as the key operational target consistent with achieving the medium-term debt ceiling.

6. The path of fiscal deficit to GDP ratio of 3.0% in FY18-FY20, 2.8% in FY21, 2.6% in FY22, and 2.5% in FY23 be adopted.

7. Revenue deficit to GDP ratio to decline steadily by 0.25 percentage points each year with the path specified as follows: 2.3% in FY17, 2.05% in FY18, 1.8% in FY19, 1.55% in FY20, 1.30% in FY21, 1.05% in FY22, and 0.8% in FY23.

8. Adhere to the operational fiscal deficit target specified above except as provided for in the manner of invocation and the ingredients prescribed in the Escape Clauses specified below.

9. Escape clause triggers are specified below:

a) Over-riding consideration of national security, acts of war; calamities of national proportion and collapse of agriculture severely affecting farm output and incomes.

b) Far-reaching structural reforms in the economy with unanticipated fiscal implications.

c) Sharp decline in real output growth of at least 3 percentage points below the average for the previous four quarters.

10. The deviations from the stipulated fiscal deficit target shall not exceed 0.5 percentage points in a year. (One of the members, Dr. Urjit Patel, however, is in favour of 0.3 percentage points).

11. If there is a sharp increase in real output growth of at least 3 percentage points above the average for the previous four quarters, fiscal deficit must fall by at least 0.5 percentage points below the target. Similar to the escape clause, this buoyancy clause can be invoked by the Government, after formal consultations and advice of the Fiscal Council.

12. The Escape Clauses can be invoked:

a) by the Government after formal consultations and advice of the Fiscal Council.

b) provided it is accompanied by a clear commitment to return to the original fiscal target in the ensuing fiscal year.

13. Constitute a Fiscal Council with the Terms and Conditions as stated herein under and do so by suitable provision in the new Debt Law and Rules suggested above.

14. Key Terms and Conditions of the Fiscal Council:

1. Composition. –

(1) There shall be a Fiscal Council consisting of a Chairperson and two Members.

(2) The Chairperson, Members and Member-Secretary shall be appointed by the Central Government.

2. Eligibility. –

(1) Only persons with domain expertise in public finance, economics, or public affairs shall be eligible to become Chairperson or Member.

(2) No person in current employment of the Central Government or State Government in any capacity shall be eligible to be the Chairperson or a Member of the Fiscal Council.

3. Terms. –

(1) The Chairperson and Members shall hold their offices as determined by the terms of their appointment.

(2) They shall be appointed for a term of four years which shall not be renewed.

(3) They shall draw a salary as may be fixed by the Central Government. Such salary shall not be reduced during their continuance in office.

4. Functions. – The Fiscal Council shall perform the following functions, namely:-

(a) prepare multi-year fiscal forecasts for Central and General Government;

(b) prepare a debt and fiscal sustainability analysis that makes projections on key fiscal indicators;

(c) provide an independent assessment of the Central Government’s fiscal performance and compliance with targets set under this Act;

(d) prepare the Macroeconomic Framework Statement;

(e) recommend suitable changes to fiscal strategy to ensure consistency of the annual financial statement with targets set under this Act;

(f) take steps to improve quality of fiscal data;

(g) prepare a comprehensive statement of liabilities;

(h) produce an annual fiscal strategy report relating to clauses (a) to (g) in such manner as may be prescribed;

(i) provide policy guidance to Central Government on any matter relating to fiscal policy where advice is sought;

(j) advise the Central Government on whether conditions exist to permit a deviation for invocation in the escape or buoyancy clause;

(k) make recommendations to the Central Government on the action plan for returning to the stipulated fiscal targets from which the deviations have taken place;

5. Procedure and powers. –

(1) The Fiscal Council shall determine its own procedure for carrying out its functions under this Act.

(2) The Fiscal Council may require any entity or person to furnish information on any matter under the consideration of the Council.

(3) Such person shall be deemed to be legally bound to furnish such information within the meaning of section 176 of the Indian Penal Code.

Institutional reforms in general government’s fiscal management:

15. Issue detailed policy guidelines on the procedure for Central Government consent to State borrowings under Article 293 of the Constitution of India, as a proactive guidance to the State Governments.

16. The Inter-State allocation for State Governments for the achievement of the overall debt and fiscal targets be assigned to the Fifteenth Finance Commission through a specific ToR.

17. Request the Reserve Bank of India to arrange for annual issuance of a consolidated annual prospectus for planned annual bond and loan issues by each government to provide guidance to the market on its intentions to borrow during the year

18. Introduce Credit Rating of each such Prospectus by approved Credit Rating Agencies.

19. Each Ministry must place a separate statement in their Annual Report, indicating the following (i) the total number of capital works/projects sanctioned along with the total value of the works sanctioned till the previous year; (ii) number of capital works and projects pending completion along with the estimated amount required for completing these works sanctioned in the past year; (iii) the total number of new capital works and projects sanctioned during the year and the estimated budgetary implications.

20. The Ministries and Departments may use and take into consideration the above information relating to commitments on account of past sanction of capital projects to take prudent financial decision while appraising and approving fresh proposals for new capital works/projects.

21. Issue guidelines to minimize interest payment on refund of taxes or advance deposits of taxes.

22. Evolve procedures to minimize delays and mismatches in actual collection of taxes and sharing of prescribed percent of net proceeds with the State Governments.

23. In order to avoid double counting issues, external borrowing by the Centre may not include the amount of external borrowing made on account of EAP (Externally Aided Projects) loans taken for passing on to state governments on a “back-to-back basis”. These are already included in the states’ borrowings, with the interest costs and risks emanating from currency and exchange rate fluctuations being passed on to the states.

Fiscal transparency:

24. Move towards international best practices for compilation and presentation of fiscal accounts, as laid out in the International Monetary Fund Government Finance Statistics Manual 2014 (GFSM 2014).

25. Effectively utilize provisions of Article 150 of the Constitution of India to improve accounting and fiscal reporting on Central and General Government finances. In particular, the Central government may:

a) Initiate a review of the principles and practices governing classification of expenditure as Revenue and Capital, based on best international practices, for uniform application by the central and all State governments.

b) Initiate standardization of Object Heads across Centre and States and publish Object-head wise summary of public expenditure on a fixed periodicity, say at least once in a year.

26. Expeditiously review and finalise the policy on management of the National Small Savings Fund.

27. Explore the feasibility of selling the portfolios of government loans or NSSF investments to raise resources for large financing requirements.

28. Transfer the unutilised proceeds of any Cess to designated Reserve Funds created in the Public Accounts at the end of the year, as has also been recommended by the Expenditure Management Commission.

29. Strengthen the Budget Division to effectively interface with the Fiscal Council.