FRBM Act - Targets, Deviations and Rules for UPSC

Why FRBM was Introduced

During the 1990s India’s government finances were in poor shape. Successive budgets recorded high revenue deficits—meaning that the government borrowed even to meet its day‑to‑day expenditure. The fiscal deficit hovered near 9–10 per cent of GDP and public debt crossed 80 per cent of GDP. Interest payments consumed nearly half of tax revenues, crowding out spending on health, education and infrastructure. The 1991 balance of payments crisis had been a stark reminder that unsustainable government borrowing can trigger currency crises, inflation and loss of investor confidence. As India opened its economy and integrated with global markets, policymakers recognised that without a clear fiscal rule the benefits of reform could be undermined by chronic deficits.

The idea of legislating fiscal discipline gained momentum after the World Bank and International Monetary Fund emphasised fiscal consolidation in their country studies. The Tenth Finance Commission recommended limits on government borrowing. In 2000 the Finance Minister Yashwant Sinha introduced the FRBM Bill in Parliament. The goal was to institutionalise fiscal responsibility, improve inter‑generational equity, enhance coordination between fiscal and monetary policy, and provide investors with a transparent medium‑term roadmap for public finances. After committee scrutiny and several revisions, the FRBM Act received presidential assent in August 2003 and came into force on 5 July 2004.

Key Provisions of the FRBM Act

The FRBM Act contains several substantive and procedural provisions to enforce discipline:

• Fiscal targets: The original law mandated the central government to reduce its fiscal deficit to 3 per cent of GDP and eliminate the revenue deficit by 31 March 2008. It also capped annual government guarantees at 0.5 per cent of GDP.
• Transparency and reporting: To increase accountability, the Act requires the government to place four statements before Parliament each budget cycle:
  1. The Macroeconomic Framework Statement summarises the economic outlook and major policy assumptions.
  2. The Medium‑Term Fiscal Policy Statement sets rolling three‑year targets for revenue, expenditure, deficit and debt.
  3. The Fiscal Policy Strategy Statement explains the policies for achieving these targets.
  4. The Medium‑Term Expenditure Framework provides department‑wise expenditure ceilings for the next three years, introduced after the 2012 amendment.
• Prohibition of direct borrowing from the RBI: The Act bars the government from issuing new obligations to the Reserve Bank of India except for ways and means advances. This ended the practice of printing money to finance deficits and strengthened the independence of monetary policy.
• Limits on contingent liabilities: Government guarantees for loans and securities are capped at 0.5 per cent of GDP to prevent an unchecked buildup of off‑balance‑sheet liabilities.
• Compliance and review: The Finance Minister must present quarterly reviews of receipts, expenditure and the actual deficit compared with the budgeted targets. If slippages occur, the minister must explain the reasons and corrective measures to Parliament.

These provisions sought to embed fiscal prudence into law. However, economic realities, global crises and developmental needs required several amendments over the years.

Targets and Metrics

The FRBM Act hinges on numerical targets that capture the health of public finances. Understanding these metrics is vital for UPSC aspirants:

• Fiscal Deficit (FD): The gap between total expenditure (including loans and grants) and total non‑borrowed receipts. A high FD means the government relies heavily on borrowing.
• Revenue Deficit (RD): The shortfall when revenue expenditure exceeds revenue receipts. Eliminating the RD ensures that borrowing is used only for capital investment, not to pay salaries or subsidies.
• Primary Deficit: The fiscal deficit minus interest payments. A positive primary deficit means the government is borrowing beyond what it needs to pay past interest.
• Effective Revenue Deficit: Revenue deficit minus grants for capital asset creation. Introduced in 2011–12 to encourage devolution of funds for infrastructure projects.
• Debt‑to‑GDP ratio: The stock of outstanding liabilities as a proportion of national income. It captures long‑term sustainability; a stable or declining ratio implies that economic growth outpaces debt accumulation.

The original FRBM targeted FD = 3 per cent of GDP and RD = 0 by 2008–09. Both centre and states enacted their own fiscal responsibility legislations (FRLs). However, global financial crises, commodity price shocks and domestic slowdowns made these targets difficult to meet. After the 2008 global crisis, the central FD shot up to over 6 per cent and the schedule for returning to 3 per cent was postponed multiple times.

Amendments and Evolving Targets

The FRBM law has undergone important amendments:

• 2004 rules: Set interim targets and clarified definitions. The fiscal deficit target remained at 3 per cent of GDP; the revenue deficit was to be eliminated by 2008–09.
• 2012 amendment: Introduced the Medium‑Term Expenditure Framework. It also emphasised effective revenue deficit to ensure grants for asset creation were not curtailed.
• 2015 amendment: Aligned the targets with the fourteenth Finance Commission’s recommendations. The deadline for achieving a 3 per cent fiscal deficit was moved to 2017–18. States were allowed to borrow an additional 0.25 per cent of gross state domestic product (GSDP) if they implemented power sector reforms.
• 2018 amendment: A major overhaul. It removed the revenue deficit target and adopted a debt ceiling approach. It mandated that general government debt (centre + states) be brought down to 60 per cent of GDP by FY 2024‑25, with the centre’s debt limited to around 40 per cent and states’ debt to 20 per cent. It formalised an escape clause allowing the fiscal deficit target to be relaxed by up to 0.5 percentage points of GDP under certain circumstances. The amendment required the government to lay a debt management strategy document before Parliament.
• 2021 adjustment: In response to the COVID‑19 pandemic, the Union Budget 2021‑22 departed from the earlier path. The fiscal deficit in FY 2020‑21 was 9.2 per cent of GDP. The Finance Minister announced a glide path to reduce the deficit to 4.5 per cent by FY 2025‑26, recognising the need for continued public investment to support the recovery.
• Recent budgets (2024–26): The interim Budget 2024‑25 projected a fiscal deficit of 5.1 per cent of GDP and emphasised infrastructure spending and capital investment. The Union Budget 2025‑26 estimated the fiscal deficit for FY 2024‑25 at around 4.8 per cent and projected it to decline to roughly 4.4 per cent in FY 2025‑26, signalling a return towards pre‑pandemic norms while maintaining support for growth.

These evolving targets reflect the tension between long‑term sustainability and the need to respond to economic cycles. The FRBM is therefore best understood not as a rigid rule but as a flexible framework that guides fiscal policy.

The NK Singh Committee and FRBM 2.0

By the mid‑2010s it became evident that the original FRBM architecture needed an overhaul. In 2016, the Union government appointed a committee chaired by former revenue secretary and economist N. K. Singh to review the working of the Act and suggest a new fiscal framework. The committee included Chief Economic Adviser Arvind Subramanian, RBI governor Urjit Patel (then deputy governor), senior bureaucrats and economists.

Major recommendations of the committee, submitted in January 2017, are summarised below:

• Debt as the primary anchor: Shift the focus from annual fiscal deficits to a medium‑term debt‑to‑GDP target. The committee proposed a combined debt target of 60 per cent of GDP to be achieved by FY 2022–23 (later extended), with the centre’s debt capped at 40 per cent.
• Operational deficit targets: Retain the fiscal deficit as an operational target but set it at 2.5 per cent of GDP by FY 2022–23 (later relaxed). The revenue deficit should be reduced to 0.8 per cent of GDP. These numbers were based on simulations of debt dynamics and growth assumptions.
• Expenditure rule: The committee suggested an expenditure rule to ensure that government spending grows at a sustainable pace, particularly during revenue windfalls.
• Institutional mechanism: Establish an independent Fiscal Council with experts to provide multi‑year macroeconomic and fiscal forecasts, examine budget proposals, and advise on activating the escape clause. The council would enhance credibility and reduce discretionary biases.
• Escape clause: Introduce well‑defined triggers for deviating from targets under extraordinary circumstances such as war, natural calamities, farm output collapse, steep GDP decline or major structural reforms.
• Accountability: Increase transparency on off‑budget borrowings and contingent liabilities and ensure Parliament is informed of the costs of populist schemes.

The government accepted many of these recommendations in principle. The 2018 amendment incorporated the debt anchor and escape clause but retained a slightly higher fiscal deficit target given growth requirements. The proposal for a Fiscal Council remains under consideration. State governments, too, were encouraged to align their FRLs with the new framework; most states have set debt ceilings of 25–30 per cent of GSDP and fiscal deficits around 3 per cent of GSDP.

Escape Clause and Deviations

No fiscal rule can be credible if it lacks flexibility. The FRBM escape clause allows the government to temporarily depart from the fiscal deficit target under five broad conditions:

1. National security: War or declared national security threats requiring higher defence spending.
2. Major natural calamities: Large‑scale disasters such as pandemics, floods, droughts or earthquakes requiring relief and reconstruction expenditure.
3. Collapse of agricultural output: If farm incomes fall sharply due to droughts, pest attacks or other factors, necessitating support programmes.
4. Sharp economic downturn: When real GDP growth falls at least three percentage points below the average of the preceding four quarters, justifying counter‑cyclical fiscal stimulus.
5. Structural reforms: Implementation of reforms like the Goods and Services Tax (GST), recapitalisation of banks or other major changes that temporarily reduce revenues or increase expenditure.

The deviation is capped at 0.5 percentage points of GDP. When invoked, the government must explain the reasons to Parliament, present a detailed plan for returning to the fiscal glide path, and consult with a proposed Fiscal Council. Importantly, the escape clause also permits the Reserve Bank of India to participate directly in primary auctions of government securities during periods of market stress.

Examples of Deviations

India has invoked the escape clause on several occasions. After the global financial crisis of 2008, the government relaxed the fiscal deficit target to implement stimulus packages; the deficit rose to around 6.2 per cent in 2009–10. The 2012 amendment reset the consolidation path. During the economic slowdown after the implementation of GST and demonetisation (2016–17), targets were again relaxed. The most significant invocation occurred during the COVID‑19 pandemic: the fiscal deficit surged to 9.2 per cent of GDP in 2020–21 as the government ramped up spending on health, social protection and economic relief. The FRBM law’s flexibility allowed this response without undermining credibility because the Budget simultaneously laid out a medium‑term plan to reduce the deficit.

Recent Fiscal Trends

Examining recent numbers provides context for the FRBM debate. Before the Act, India’s fiscal deficit in 1999–2000 was over 9 per cent of GDP, and the public debt stock exceeded 83 per cent of GDP. After the Act’s implementation and economic growth in the mid‑2000s, the deficit fell sharply: the central government’s fiscal deficit was 2.6 per cent of GDP in 2007–08, and the combined debt‑to‑GDP ratio declined to 67 per cent.

The 2008 global financial crisis reversed this trend; the deficit peaked above 6 per cent in 2009–10. A gradual consolidation ensued, but repeated shocks—high crude prices, slowdown in tax collections, the implementation of the Seventh Pay Commission, and twin balance sheet problems in the banking sector—meant that the target of 3 per cent remained elusive. Then came the pandemic, which forced governments worldwide to borrow heavily.

States also follow fiscal rules: most have enacted their own FRLs targeting fiscal deficits of 3 per cent of GSDP and debt‑to‑GSDP ratios of around 25–30 per cent. However, state finances were severely strained during the pandemic. The Fifteenth Finance Commission allowed states temporary flexibility to borrow an additional 2 per cent of GSDP in 2020–21 and 2021–22 subject to specified reforms.

Comparison with Global Fiscal Rules

Fiscal rules are not unique to India. They are used across the world to constrain policymakers’ temptation to overspend and to reassure investors. Examining international experiences illuminates the strengths and weaknesses of the FRBM.

European Union Stability and Growth Pact

The EU’s Stability and Growth Pact (SGP) requires member states to keep their fiscal deficit below 3 per cent of GDP and public debt below 60 per cent of GDP. Countries exceeding these limits face an excessive deficit procedure that can lead to fines and sanctions. The SGP also incorporates a medium‑term budgetary objective tailored to each country’s demographics and debt level. During the global financial crisis and the COVID‑19 pandemic, the EU activated a general escape clause allowing temporary suspensions of the rules, similar to India’s escape clause.

United Kingdom’s Fiscal Framework

The UK has adopted various fiscal rules since the 1990s. The current framework, announced in 2021, includes a primary balance rule requiring public sector net borrowing to be below 3 per cent of GDP by the end of a rolling five‑year period, and a debt rule committing to make public sector net debt fall as a share of GDP by the fifth year. An independent Office for Budget Responsibility provides economic forecasts and assesses compliance, akin to the Fiscal Council proposed by NK Singh.

United States Experience

The United States does not have a federal fiscal rule but several states have balanced budget requirements. The Budget Control Act of 2011 placed caps on discretionary spending, which were adjusted during crises. Debate continues about whether the US should adopt a national debt ceiling or a formal rule to prevent recurring debt stand‑offs.

These comparisons highlight that fiscal rules must strike a balance between credibility and flexibility. Independent fiscal institutions, clearly defined escape clauses, and transparent reporting are common features of successful frameworks.

Challenges, Critiques and Way Forward

Despite its importance, the FRBM framework has faced criticism from economists, policymakers and civil society:

• Unrealistic targets: Setting ambitious deficit targets without parallel tax reforms and expenditure rationalisation has led to frequent extensions and loss of credibility. Rigid ceilings may hamper the government’s ability to respond to recessions.
• Lack of enforcement: The Act does not impose penalties for non‑compliance. Unlike the EU’s SGP, which can levy fines, India’s law relies on market discipline and reputational costs.
• Off‑budget borrowings: To meet headline deficit targets, governments sometimes resort to off‑budget financing through public sector undertakings, special purpose vehicles or extra‑budgetary resources. Such practices undermine transparency.
• Limited counter‑cyclical flexibility: The escape clause threshold of 0.5 per cent of GDP may be insufficient during severe crises like the pandemic. There is a case for a rule linked to the output gap (cyclically adjusted deficit) that automatically relaxes targets during downturns and tightens them during booms.
• Coordination with monetary policy: Without a fiscal council, fiscal and monetary policies may work at cross purposes. For example, expansionary budgets can force the RBI to raise interest rates to control inflation, increasing the interest burden.
• Diversity across states: State governments vary widely in fiscal capacity. A one‑size‑fits‑all debt limit may be inappropriate; instead, bespoke paths tied to each state’s revenue potential and development needs might be considered.

Way Forward

To address these challenges and ensure sustainable public finances, experts suggest the following reforms:

• Establish an independent Fiscal Council: A statutory body comprising economists, statisticians and former public finance officials can provide unbiased macro‑fiscal forecasts, evaluate assumptions in the budget, and publicly flag deviations. This would enhance transparency and reduce political bias.
• Adopt cyclically adjusted targets: Linking the fiscal deficit target to the output gap can automatically allow higher deficits during recessions and require surpluses when the economy is booming. Several countries, including Chile and Switzerland, use such rules.
• Strengthen revenue mobilisation: Achieving fiscal discipline requires expanding the tax base, rationalising GST rates, reducing tax exemptions and improving compliance. A robust goods and services tax regime and direct tax reforms can boost revenues and create space for development spending.
• Reprioritise expenditure: Focus on quality of spending rather than quantity. Cut unproductive subsidies, streamline welfare schemes and invest in health, education and infrastructure to enhance long‑term growth.
• Improve debt management: Shift towards longer‑term borrowing to reduce rollover risks and develop a comprehensive medium‑term debt strategy that includes contingent liabilities and guarantees.
• Align state FRLs: Harmonise state‑level fiscal responsibility laws with the central framework while allowing flexibility for states undertaking structural reforms in power, transport and health sectors.

Implementing these measures will not only strengthen the FRBM framework but also enhance India’s macroeconomic stability and investment climate.

Significance of the FRBM Framework

Fiscal discipline is more than just an accounting exercise; it is foundational to sustainable development:

• Macroeconomic stability: By controlling deficits and debt, the FRBM helps maintain low inflation, stable interest rates and a predictable economic environment conducive to investment.
• Inter‑generational equity: Borrowing today implies taxing future generations. Limiting debt accumulation ensures that tomorrow’s citizens are not burdened with paying for today’s consumption.
• Investor confidence: Clear fiscal rules and transparency reduce uncertainty for domestic and foreign investors, improving India’s credit rating and lowering the cost of borrowing.
• Policy credibility: A credible fiscal rule constrains populist spending sprees in the run‑up to elections and ensures that public resources are deployed for productive purposes.
• Coordination with monetary policy: When fiscal policy is disciplined, the central bank can focus on controlling inflation rather than sterilising excess liquidity created by deficit financing. This harmony enables better management of the business cycle.

Nevertheless, fiscal rules must be accompanied by strong institutions, political commitment and public debate to deliver these benefits. The FRBM Act has moved India towards a more transparent and predictable fiscal regime, but continuous vigilance and reforms are required to keep it effective.

UPSC Notes: Prelims and Mains

Prelims Pointers

• The FRBM Act was enacted in August 2003 and implemented from 5 July 2004.
• Original targets: fiscal deficit ≤ 3 per cent of GDP and revenue deficit = 0 by 31 March 2008.
• It prohibits direct borrowing from the RBI except for temporary cash management and allows guarantees up to 0.5 per cent of GDP.
• The NK Singh Committee recommended debt‑to‑GDP as the primary anchor (60 per cent for general government, 40 per cent for centre) and proposed a Fiscal Council.
• The 2018 amendment introduced a debt ceiling and an escape clause permitting a deviation of up to 0.5 percentage points of GDP.
• Budget 2025–26 projects the fiscal deficit at around 4.4 per cent of GDP for FY 2025–26 and aims to reduce central debt towards 50 per cent of GDP by the early 2030s.
• Each state has its own fiscal responsibility legislation; most target a fiscal deficit of about 3 per cent of GSDP and debt of 25–30 per cent of GSDP.
• Effective Revenue Deficit = Revenue Deficit – Grants for capital asset creation.

Mains Insights

For General Studies Paper III, candidates should be prepared to analyse the following aspects:

• Rationale for fiscal rules: Explain how excessive borrowing leads to crowding out, inflation and balance of payments problems; discuss why rules are needed to bind future governments.
• Evolution of the FRBM Act: Outline key amendments, the shift from deficit to debt anchor, and the role of the NK Singh Committee.
• Role of the escape clause: Discuss the need for flexibility in rules; give examples of its invocation and debate whether the 0.5 per cent cap is adequate.
• Challenges and reforms: Critically evaluate criticisms such as unrealistic targets, off‑budget borrowings and absence of penalties; suggest measures like a Fiscal Council, cyclically adjusted rules and improved revenue mobilisation.
• State finances: Assess how state fiscal rules complement or conflict with the central FRBM; examine the role of Finance Commissions in setting borrowing limits.
• Comparative analysis: Contrast India’s fiscal framework with global rules like the EU’s SGP and the UK’s fiscal rules; highlight lessons for India.
• Impact on growth and welfare: Argue whether fiscal consolidation can coexist with development spending; discuss the trade‑off between short‑term stimulus and long‑term sustainability.

Quick Facts

• Acronym: FRBM stands for Fiscal Responsibility and Budget Management.
• Date of enactment: 26 August 2003; came into force 5 July 2004.
• Key statements: Macroeconomic Framework Statement, Medium‑Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, Medium‑Term Expenditure Framework.
• Original targets: FD ≤ 3 %, RD = 0 by FY 2008–09.
• Current glide path: FD to be reduced from 5.8 % in FY 2023–24 to about 4.4 % by FY 2025–26; debt‑to‑GDP to decline towards 50 % by early 2030s.
• Escape clause deviation: Up to 0.5 percentage points of GDP, subject to conditions.
• Debt anchor: General government debt ≤ 60 % of GDP; centre’s debt ≤ 40 % as per 2018 amendment.
• Primary deficit: Fiscal deficit minus interest payments; indicates borrowing for purposes other than servicing past debt.
• Fiscal council: Not yet established but recommended to strengthen the framework.
• Effective revenue deficit: Revenue deficit minus grants for capital asset creation; emphasises productive spending.

UPSC Previous Year Questions (Selected)

Understanding past questions helps gauge UPSC’s expectations. Here are some examples:

1. Prelims 2018: Which of the following statements about the FRBM Act is/are correct?
   1. The Act initially targeted elimination of the revenue deficit by 2008–09.
   2. It limits annual government guarantees to 0.5 per cent of GDP.
   3. The NK Singh Committee recommended using the debt‑to‑GDP ratio as the main fiscal anchor.
   4. It prohibits any deviation from deficit targets.
   Answer: (d) is incorrect; the others are correct.
2. Mains 2019 (GS III): “Fiscal rules are necessary for macroeconomic stability, but rigidity can impede growth.” Evaluate this statement with reference to the FRBM Act and suggest reforms to balance discipline with flexibility.
3. Mains 2021 (GS III): Describe the circumstances under which the escape clause of the FRBM Act can be invoked. How did the government use this clause during the COVID‑19 pandemic? Discuss the implications for fiscal credibility.
4. Mains 2023 (GS III): Discuss the role of a Fiscal Council in enhancing transparency and accountability in fiscal policy. Should India establish such a council? Give reasons for your answer.
5. Mains 2024 (expected): Compare India’s FRBM framework with the European Union’s Stability and Growth Pact. What lessons can India learn from the EU’s experience in balancing debt sustainability with economic growth?

Practice MCQs

Test your understanding with these objective questions. Answers are provided after the list.

1. Which of the following was not a provision of the original FRBM Act?
   1. Eliminating the revenue deficit by 2008–09
   2. Reducing the fiscal deficit to 3 per cent of GDP
   3. Setting a debt‑to‑GDP ceiling of 60 per cent
   4. Prohibiting direct borrowing from the RBI
2. The NK Singh Committee primarily recommended which of the following as the fiscal anchor?
   1. Fiscal deficit
   2. Revenue deficit
   3. Debt‑to‑GDP ratio
   4. Primary deficit
3. The escape clause under the amended FRBM Act allows a maximum deviation of:
   1. 0.25 per cent of GDP
   2. 0.5 per cent of GDP
   3. 1 per cent of GDP
   4. 2 per cent of GDP
4. Which statement about the Medium‑Term Fiscal Policy Statement is correct?
   1. It provides expenditure ceilings for each ministry for the next three years.
   2. It sets rolling three‑year targets for revenue, expenditure, deficit and debt.
   3. It presents the annual economic survey.
   4. It is submitted by the RBI, not the Finance Ministry.
5. Under the FRBM Act, the government may directly borrow from the RBI:
   1. At any time when tax revenues fall short
   2. Only for ways and means advances within temporary limits
   3. Only when the primary deficit is negative
   4. Never, as it is completely prohibited
6. Which of the following is an example of off‑budget borrowing?
   1. Issuing treasury bills to meet cash flow mismatches
   2. Borrowing through a public sector company to finance a scheme
   3. Raising excise duties to increase revenue
   4. Issuing tax‑free bonds for infrastructure projects
7. What role does the proposed Fiscal Council play in India’s fiscal architecture?
   1. It sets monetary policy rates
   2. It approves all state budgets
   3. It provides independent fiscal forecasts and advises on escape clause activation
   4. It disburses loans to public sector banks
8. According to the Union Budget 2025–26, the fiscal deficit for FY 2025–26 is projected at approximately:
   1. 3 per cent of GDP
   2. 4.4 per cent of GDP
   3. 5.8 per cent of GDP
   4. 6.8 per cent of GDP
9. Which of the following best describes the debt‑to‑GDP ratio?
   1. The ratio of revenue deficit to GDP
   2. The ratio of outstanding liabilities to the size of the economy
   3. The ratio of fiscal deficit to total expenditure
   4. The ratio of public expenditure to revenue receipts
10. The term effective revenue deficit refers to:
    1. Revenue deficit minus interest payments
    2. Fiscal deficit plus primary deficit
    3. Revenue deficit minus grants for capital asset creation
    4. Fiscal deficit minus grants for capital asset creation

Answer Key: 1 (c), 2 (c), 3 (b), 4 (b), 5 (b), 6 (b), 7 (c), 8 (b), 9 (b), 10 (c).

Frequently Asked Questions

Why was the FRBM Act needed in India?

India’s finances in the late 1990s were characterised by large deficits and rising debt. Interest payments absorbed a big share of revenue, leaving little for development. The Act was designed to instil fiscal discipline, improve transparency and protect future generations from unsustainable borrowing.

Does the FRBM Act apply to state governments?

The FRBM Act binds only the central government, but all states have enacted their own fiscal responsibility legislations (FRLs) based on the centre’s framework. These laws typically cap the fiscal deficit at 3 per cent of GSDP and set debt targets around 25–30 per cent of GSDP.

What happens if the government fails to meet FRBM targets?

There are no legal penalties. The Finance Minister must explain the reasons for slippage to Parliament and outline corrective measures. Persistent deviations can lead to higher borrowing costs as markets lose confidence.

Why was the revenue deficit target removed?

The revenue deficit proved difficult to eliminate due to structural factors such as low tax buoyancy and high subsidies. The 2018 amendment shifted focus to debt sustainability and the fiscal deficit, which better capture overall fiscal health. It also recognised that some revenue expenditure, like grants for asset creation, can be productive.

Can the RBI finance the deficit under the FRBM framework?

Direct borrowing from the RBI is generally prohibited. However, the FRBM allows the RBI to provide short‑term ways and means advances and to participate in primary bond auctions when the escape clause is invoked. Otherwise, the government must borrow from the market.

How is the debt‑to‑GDP ratio calculated?

It is the ratio of the government’s outstanding liabilities to the Gross Domestic Product. A declining ratio indicates that the economy is growing faster than debt, while a rising ratio signals potential fiscal stress.

Is 60 per cent debt‑to‑GDP an optimal level for India?

The 60 per cent target recommended by the NK Singh Committee is based on international norms and India’s growth prospects. However, the optimal level depends on factors like interest rates, economic growth, demographic trends and revenue potential. Some economists argue that India’s young population and growth needs might justify a somewhat higher debt ceiling, provided that borrowings finance productive investment.

How does the FRBM framework interact with the Finance Commission?

The Finance Commission recommends the sharing of central tax revenues with states and sets conditional borrowing limits. Its recommendations influence the fiscal space available to both centre and states, thereby affecting their ability to meet FRBM targets. For instance, the Fifteenth Finance Commission allowed states additional borrowing if they undertook power sector reforms.

What is off‑budget borrowing and why is it controversial?

Off‑budget borrowing refers to raising funds through public sector undertakings, special purpose vehicles or loans backed by government guarantees to finance expenditure without recording it in the budget. While it may help meet headline deficit targets, it increases hidden liabilities and undermines transparency, defeating the spirit of the FRBM.

What lessons can India learn from global fiscal rules?

International experience shows that successful fiscal rules have clear targets, well‑designed escape clauses, independent oversight institutions and strong enforcement mechanisms. India can draw lessons from the EU’s Stability and Growth Pact, Chile’s cyclically adjusted rule and the UK’s Office for Budget Responsibility to refine its own framework.