N K Singh Panel on FRBM review, RBI tightening norms on banks Current Affairs – 14th April, 2017

N K Singh Panel on FRBM review, RBI tightening norms on banks Current Affairs – 14th April, 2017

N K Singh Panel on FRBM review

Introduction

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) is an Act of the Parliament of India to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget and strengthen fiscal prudence. In recent year there have been persistent calls for review of the same.

Economic Survey 2016-17:

The Economic Survey has called for modifying the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act) to provide fiscal policy direction for “the India of tomorrow”, but cautioned against fiscal activism adopted by the western world to prop their economies. 

  • The country’s economic experience shows that the fiscal activism embraced by advanced economies — giving a greater role to counter-cyclical policies and attaching less weight to curbing debt — is not relevant for India.
  • It said the country’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the 13-year old FRBM Act. 
  • However, even as the basic tenets of the Act remain valid, the operational framework needs to be modified “for the fiscal policy direction of India of today, and even more importantly the India of tomorrow”, the survey said. 

Issue:

The Fiscal Responsibility and Budget Management (FRBM) Review Committee chaired by former Revenue Secretary N.K. Singh has recommended –

  • The Centre can take a pause on the fiscal consolidation front over the next three years by maintaining a fiscal deficit to GDP ratio of 3% till 2019-20,
  • On the FRBM roadmap for future, the panel has advocated reaching a fiscal deficit to GDP ratio of 2.8% in 2020-21, 2.6% the subsequent year and 2.5% in 2022-23.
  • The Panel has recommended an Escape Clause.

In case of contingencies:

  • The panel has introduced an escape clause that allows the government to skip the fiscal deficit target for a particular year, in situations that include
    • National security concerns; acts of war; national calamities; a collapse of the agriculture sector; and far-reaching structural reforms with unanticipated fiscal implications.
  • It recommended that deviations from the stipulated fiscal targets should not be more than 0.5%.
  • The Reserve Bank of India governor Urjit Patel was not in favour of such a large deviation.
    • Mr. Patel, who was also a member of the panel along with Chief Economic Adviser Arvind Subramanian, was inclined to only permit a 0.3% deviation.
  • The escape clause can also be triggered if the economy’s real output growth slips by three percentage points from the average of the previous four quarters.
  • A similar buoyancy clause has been proposed, so that fiscal deficit must fall at least 0.5% below the target if real output grows 3% faster than that average.

FRBM to make way for DFRA

  • The panel has recommended that the existing FRBM Act and rules be scrapped and a new Debt and Fiscal Responsibility Act be adopted and proposed the creation of a Fiscal Council that the government must consult before invoking escape clauses.

Conclusion:

FRBM Act is a European model of fiscal responsibility. There were concerns of India adopting it as it is. The review panel has suggested relevant reforms with required contingency clauses embedded. As the Economic Survey of the year referenced it is important to remain on the path of fiscal discipline but adopt an Indianised model of the same.

Connecting the dots:

  • Critically analyse the relevance of FRBM kind of legislation in the current era. Elaborate on the recommendations of the N K Singh panel.

RBI tightening norms on banks

Introduction

Under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 (as amended from time to time), the RBI enjoys extensive powers of supervision, regulation, and control over commercial and co-operative banks. In light of growing NPAs and nearing compliance of BASEL norms RBI has taken a host of measures for ensuring banks are regulated. The new prompt corrective action (PCA) is apt step in this direction.

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