The FRBM (Fiscal Responsibility and Budget Management) framework mandates the Central Government to limit the Central Government…

Question

The FRBM (Fiscal Responsibility and Budget Management) framework mandates the Central Government to limit the Central Government Debt and the General Government Debt by 31st March 2025. What are the limits of the Central Government Debt and the General Government Debt, respectively?

1. A. 25 percent of GDP and 45 percent of GDP, respectively
2. B. 30 percent of GDP and 50 percent of GDP, respectively
3. C. 35 percent of GDP and 55 percent of GDP, respectively
4. D. 40 percent of GDP and 60 percent of GDP, respectively (Correct answer)

Correct Answer

Option D — 40 percent of GDP and 60 percent of GDP, respectively

Detailed Solution & Explanation

The correct answer is 40 percent of GDP and 60 percent of GDP, respectively.

Key Points

• The FRBM framework, as amended, sets debt ceilings to be reached by 31 March 2025:
  • Central Government Debt — not more than 40% of GDP
  • General Government Debt — not more than 60% of GDP
• General Government Debt means the debt of the Centre and the states taken together, so the states' collective share is implicitly the remaining 20%.

Additional Information

• The Fiscal Responsibility and Budget Management Act was enacted in 2003 and came into force in July 2004. Its purpose is to institutionalise fiscal discipline, reduce the fiscal deficit, improve macroeconomic management and ensure inter-generational equity in fiscal matters — the idea being that today's borrowing is tomorrow's tax burden.
• The debt targets came from the N.K. Singh Committee (FRBM Review Committee, 2017), which recommended a debt-to-GDP ratio as the primary anchor of fiscal policy, with the fiscal deficit as the operational target, and proposed the 40/60 split.
• The Act requires the government to lay several statements before Parliament with the Budget: the Medium-Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, the Macroeconomic Framework Statement, and the Medium-Term Expenditure Framework Statement.
• The escape clause in Section 4(2) allows the fiscal deficit target to be exceeded on grounds of national security, act of war, national calamity, collapse of agriculture, structural reforms or a sharp decline in output. It was invoked during the COVID-19 pandemic, when the fiscal deficit rose to about 9.2% of GDP in 2020-21, and general government debt rose well above the 60% mark.
• The government's stated glide path after the pandemic has been to bring the fiscal deficit below 4.5% of GDP by 2025-26, and thereafter to target a declining debt-to-GDP ratio rather than a fixed deficit number.
• The states are bound by their own FRBM legislations, with borrowing limits set under Article 293(3), which requires central consent for a state to borrow while it is indebted to the Centre.