Question
Consider the following statements:
Select the correct answer using the code given below:
- FRBM Act 2003 has provided for an escape clause in which the central government can deviate from the fiscal deficit target by 0.5%
- The central government has also approved for additional fiscal deficit to States by 0.5% over and above the normal limit of 3%
- The States require Finance Commission approval to deviate from their fiscal deficit target
Select the correct answer using the code given below:
Answer: Option C
Answer: (c)
New provisions were introduced in FRBM Act 2003 (through Finance Act 2018) and Escape Clause (in which govt. can deviate the targets of FRBM act 2003) was added: (for some conditions slippage was allowed earlier also) Following is the new escape clause:
"On grounds of national security, the act of war, national calamity, the collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, the decline in real output growth of a quarter by at least three per cent. points below its average of the previous four quarters" And in the above conditions, central govt. can deviate fiscal deficit by 0.5%. Govt. of India had earlier set a target of Fiscal Deficit as 3.3% for 2019-20 and 3% for 2020-21.
When GoI presented budget for 2020-21, it said that it is using the escape clause and revising the fiscal deficit target as 3.3% + 0.5% = 3.8% for 2019-20 and 3% + 0.5% = 3.5% for 2020-21. And GoI also said that it has maintained fiscal prudence.
This is so because the FRBM Act 2003 (with amendments in 2018) allowed slippage in fiscal deficit by 0.5% from the targeted (the target was 3.3% for 2019-20 and 3% for 2020-21) by using the escape clause.
As per the recommendation of the Fourteenth Finance Commission, the Union Government has approved year-to-year flexibility for additional fiscal deficit to States for the period 2016-17 to 2019-20 to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to the States subject to ……..the States maintaining the debt GDP ratio within 25 per cent and Interest Payments to the Total Revenue Receipts ratio within 10 per cent in the previous year.
However, the flexibility in availing the additional fiscal deficit will be available to State if there is no revenue deficit in the year in which borrowing limits are to be fixed and immediately preceding the year. (no need to remember the things after subject to…….)
As per the XV Finance Commission Chairman, no approval of the Finance Commission is required to amend the FRBM rules of the centre or States.
Some additional information
[As per article 293 of Constitution, 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.
Like Centre, every state has also a fixed Fiscal deficit limit of 3% as per their law.
Now as such it's nowhere written that if States want to breach the 3% Fiscal Deficit limit then they require Central Govt approval. But everywhere and in Economic Survey of this year also it is written that "Centre has approved extra borrowing by states and it has allowed states to borrow beyond 3% of their FD).
This Central Govt. approval was required because practically every State till now has some sort of debt from Central Govt. and as per article 293 above, States require centre approval if there is some debt due from the Centre.]
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Answer: (c)
New provisions were introduced in FRBM Act 2003 (through Finance Act 2018) and Escape Clause (in which govt. can deviate the targets of FRBM act 2003) was added: (for some conditions slippage was allowed earlier also) Following is the new escape clause:
"On grounds of national security, the act of war, national calamity, the collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, the decline in real output growth of a quarter by at least three per cent. points below its average of the previous four quarters" And in the above conditions, central govt. can deviate fiscal deficit by 0.5%. Govt. of India had earlier set a target of Fiscal Deficit as 3.3% for 2019-20 and 3% for 2020-21.
When GoI presented budget for 2020-21, it said that it is using the escape clause and revising the fiscal deficit target as 3.3% + 0.5% = 3.8% for 2019-20 and 3% + 0.5% = 3.5% for 2020-21. And GoI also said that it has maintained fiscal prudence.
This is so because the FRBM Act 2003 (with amendments in 2018) allowed slippage in fiscal deficit by 0.5% from the targeted (the target was 3.3% for 2019-20 and 3% for 2020-21) by using the escape clause.
As per the recommendation of the Fourteenth Finance Commission, the Union Government has approved year-to-year flexibility for additional fiscal deficit to States for the period 2016-17 to 2019-20 to a maximum of 0.5 per cent over and above the normal limit of 3 per cent in any given year to the States subject to ……..the States maintaining the debt GDP ratio within 25 per cent and Interest Payments to the Total Revenue Receipts ratio within 10 per cent in the previous year.
However, the flexibility in availing the additional fiscal deficit will be available to State if there is no revenue deficit in the year in which borrowing limits are to be fixed and immediately preceding the year. (no need to remember the things after subject to…….)
As per the XV Finance Commission Chairman, no approval of the Finance Commission is required to amend the FRBM rules of the centre or States.
Some additional information
[As per article 293 of Constitution, 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.
Like Centre, every state has also a fixed Fiscal deficit limit of 3% as per their law.
Now as such it's nowhere written that if States want to breach the 3% Fiscal Deficit limit then they require Central Govt approval. But everywhere and in Economic Survey of this year also it is written that "Centre has approved extra borrowing by states and it has allowed states to borrow beyond 3% of their FD).
This Central Govt. approval was required because practically every State till now has some sort of debt from Central Govt. and as per article 293 above, States require centre approval if there is some debt due from the Centre.]
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