NK Singh Committee on FRBM Act was formed to review the FRBM act in 2003 and 2016. The chairman of the committee was former Revenue and Expenditure Secretary Nand Kishore Singh. RBI Governor Urjit Patel, former Finance Secretary Arvind Subramanian, etc were other members. It submitted its report in 2017. Fiscal policies must be carefully planned rather than embedded in haste. Due to greater and sometimes adverse effects of fiscal policy on the economy, NK Singh Committee on the FRBM act came into being to practice fiscal prudence.

In this article, we will see the mandate and objectives of the committee which is important for the UPSC examination.

What is FRBM Act?

• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 sets a bar for the government to lay a foundation of monetary limitations in the Indian Economy.
• It contributes to the improvement of the management of public funds and in lowering the fiscal deficit rate as well.
• The primary objective of the said act was striking out of revenue deficit and bringing the fiscal deficit down.
• It was the first acquaintance of transparency in the fiscal management system in the country, ascertaining the ethical dispensation of debt with the passing years, making sure of fiscal solidity in the macroeconomics
• The act is also purposeful in terms of giving necessary modifications to the Central Bank while overseeing the expanding economy of India.

Mandate of NK Singh Committee

• Over the last 12 years, review the working of the FRBM Act and suggest the way while focusing on the broader objective of fiscal consolidation and the changes required in times of uncertainty and volatility in the global economy.
• To focus on different factors, required for determining the FRBM targets.
• To examine the requirement of having a ‘fiscal deficit range’ as the target as compared to the present fixed numbers (percentage of GDP) as fiscal deficit target.
• To ascertain the need for aligning the fiscal expansion, contraction with credit contraction, expansion in the economy.

Recommendations of NK Singh Committee

• Replacement of the FRBM Act 2003 with Debt Management and Fiscal Responsibility Bill, 2017.
• The debt to GDP ratio by 2022-23 should be 38.7% for the central government and 20% for the state governments.
• The fiscal deficit target should be 2.5% of GDP by FY 2022-23.

• Setting up of an autonomous fiscal council that deals with the preparation of multi-year fiscal forecasts, improves fiscal data quality, could advise the government on fiscal matters.
• The Fiscal council's responsibilities would include
  • preparing multi-year fiscal forecasts,
  • recommending changes to the fiscal strategy,
  • improving the quality of fiscal data,
  • advising the government if conditions exist for deviating from the fiscal target, and
  • advising the government to take corrective action if the Bill is not followed.
• Target commitments could be deviated under certain circumstances such as a national calamity, war, agricultural collapse, structural reforms in the economy and the real output is less than 3% etc.
• The debt path to be followed by each state based on their track record of fiscal health and prudence should be recommended by the 15th Finance Commission.
• Borrowing from RBI: The draft Legislation prohibits the government from borrowing from the Reserve Bank of India (RBI) except in the following circumstances:
  • the centre must meet a temporary shortfall in receipts;
  • RBI subscribes to government securities to finance any deviations from specified targets, or
  • RBI purchases government securities on the secondary market.
• Monetary and fiscal policies should complement each other and help accomplish economic stability and growth.

Conclusion

The FRBM act served the central role for which it was legislated. It emphasized fiscal discipline in economic development and mainstreamed it as one of the central policies of the government. It also provided a robust framework for budgetary discussions. With the change in dynamics and economics of the country, it was changed as well based on recommendations of various committees.

FAQs

MCQs

1. What year was the N.K. Singh Committee constituted?

A) 2014
B) 2016
C) 2018
D) 2020

2. Which fiscal deficit target did the N.K. Singh Committee recommend?

A) 2% of GDP
B) 3% of GDP
C) 4% of GDP
D) 5% of GDP

3. What was a key recommendation regarding contingent liabilities?

A) They should be ignored
B) They should be assessed
C) They should be increased
D) They should be eliminated

4. Which of the following is a recommendation for state fiscal responsibility?

A) Elimination of state debts
B) Introduction of state-level FRBM norms
C) Centralization of fiscal management
D) Increased borrowing limits for states

5. What does the committee propose regarding fiscal targets?

A) To rigidly adhere to them at all times
B) To allow for flexibility in exceptional circumstances
C) To eliminate them entirely
D) To only focus on long-term targets

GS Mains Questions and Model Answers

Q1: Discuss the significance of the N.K. Singh Committee's recommendations for the Indian economy.

Answer: The N.K. Singh Committee's recommendations hold significant importance for the Indian economy, primarily by addressing the need for fiscal discipline and sustainable growth. The proposal to revise the fiscal deficit target to 3% of GDP aims to enhance the credibility of India's fiscal policy and restore investor confidence. By incorporating an assessment of contingent liabilities, the committee's recommendations facilitate a comprehensive understanding of fiscal health, allowing for better financial planning and risk management. Moreover, the emphasis on state-level fiscal responsibility norms promotes a decentralized approach to fiscal governance, ensuring that sub-national governments also adhere to fiscal prudence. Overall, these recommendations provide a roadmap for improving fiscal management, which is crucial for achieving long-term economic stability and growth.

Q2: Analyze the potential challenges in implementing the recommendations of the N.K. Singh Committee.

Answer: Implementing the recommendations of the N.K. Singh Committee may face several challenges, including political resistance from state governments that might be reluctant to adopt stringent fiscal norms. There could also be concerns regarding the flexibility of fiscal targets; while exceptions are necessary, the risk of misuse for populist policies may undermine fiscal discipline. Additionally, the lack of a robust monitoring framework could hinder the effective assessment of contingent liabilities, leading to unaccounted fiscal pressures. Furthermore, achieving the proposed fiscal targets requires consistent economic growth and effective revenue generation, which may be challenging in the context of economic fluctuations and external shocks. Therefore, while the committee's recommendations are well-intentioned, their successful implementation hinges on addressing these multifaceted challenges.

Q3: Evaluate the impact of the N.K. Singh Committee's recommendations on future fiscal policies in India.

Answer: The impact of the N.K. Singh Committee's recommendations on future fiscal policies in India is expected to be profound, as they aim to institutionalize fiscal discipline and enhance transparency in government finances. By advocating for a revised fiscal deficit target and the incorporation of a medium-term debt strategy, the recommendations provide a framework for sustainable fiscal management that can withstand economic volatility. The focus on assessing contingent liabilities encourages a proactive approach to risk management, enabling the government to prepare for potential fiscal shocks. Moreover, the proposed state-level fiscal norms can lead to a more uniform application of fiscal responsibility across the country, fostering cooperative federalism. As a result, the committee's recommendations are likely to shape a more resilient fiscal framework that supports balanced economic growth and reinforces investor confidence in India's economic prospects.

Previous Year Questions on the N.K. Singh Committee

1. UPSC CSE Prelims 2021:

Question: What was the primary focus of the N.K. Singh Committee regarding the FRBM Act?

A) Increasing tax revenues
B) Revising fiscal targets
C) Expanding social welfare schemes
D) Reducing public sector enterprises

Answer: (B)

Explanation: The primary focus of the N.K. Singh Committee was to recommend revisions to the fiscal targets set under the FRBM Act.

2. UPSC CSE Mains 2019 (GS Paper 1):

Question: "Analyze the impact of the N.K. Singh Committee on India's fiscal policy framework."

Answer: The N.K. Singh Committee significantly influenced India's fiscal policy framework by introducing recommendations aimed at enhancing fiscal discipline and sustainability. The revision of the fiscal deficit target to 3% of GDP aims to reinforce credibility in fiscal management. The inclusion of medium-term debt strategies and contingent liability assessments encourages comprehensive financial oversight, potentially preventing fiscal crises. By promoting state-level fiscal responsibility norms, the committee's recommendations also enhance the scope of fiscal accountability across all levels of government. Overall, the committee's proposals foster a more disciplined and transparent fiscal environment essential for sustainable economic growth.