Consider the following statements: 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments. 2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments. 3. As per the Constitution of India, it is mandatory for a State to take the Central Government's consent for raising any loan if the former owes any outstanding liabilities to the latter. Which of the statements given above is/are correct?
Contents13
- A1 only
- B2 and 3 only
- C1 and 3 only
- D1, 2 and 3
Show answer
Answer: (C) 1 and 3 only
Correct Answer: (c) 1 and 3 only
- Statement 1 is CORRECT: The FRBM Review Committee (headed by N.K. Singh) recommended:
- Total debt-to-GDP ratio: 60% for combined government
- Centre's share: 40%
- States' share: 20%
- Target year: 2023
These numbers are important to remember.
Statement 2 is WRONG: The figures in the statement are swapped/incorrect. In reality, the Centre's domestic liabilities were about 46% of GDP, while States' liabilities were about 23% of GDP. The statement claims Centre has only 21% and States have 49% — this is the opposite of reality.
Statement 3 is CORRECT: Under Article 293(3) of the Constitution, if a state has any outstanding loans from the Central Government, it must get the Centre's prior approval before borrowing more money. This gives the Centre some control over state borrowing.
REMEMBER: FRBM debt target = 60% total (40% Centre + 20% States). Article 293(3) = States need Centre's permission to borrow if they already owe money to the Centre.
The FRBM Review Committee (N.K. Singh Committee) set specific debt-to-GDP targets: 60% combined (40% Centre, 20% States) by 2023, which became a key fiscal policy benchmark.
UPSC is testing whether students can distinguish between Centre and State debt levels - a common trap where the actual figures (Centre ~46%, States ~23%) are reversed in the incorrect option.
Article 293(3) gives the Centre veto power over state borrowing when states have outstanding Central loans, making it a crucial aspect of fiscal federalism.
FRBM Debt-to-GDP Targets
Indian Economy FRBM debt to GDP ratio 60% 40% 20%
FRBM Review Committee Debt Targets: 60-40-20 Formula
FRBM Review Committee recommended 60% debt-to-GDP for combined government by 2023
Split: Centre 40% + States 20% = 60% total
Committee headed by N.K. Singh in 2017
The FRBM Review Committee was set up to recommend changes to India's fiscal policy framework and debt management strategy.
FRBM Debt Targets Breakdown
Government Level | Debt-to-GDP Target | Timeline | Current Status |
|---|---|---|---|
Central Government | 40% | By 2023 | Was around 46% in 2017-18 |
State Governments | 20% | By 2023 | Was around 23% in 2017-18 |
Combined (Total) | 60% | By 2023 | Was around 69% in 2017-18 |
Key Recommendations
Fiscal deficit target: 3% of GDP for Centre (with escape clause for exceptional circumstances)
Debt anchor approach: Focus on debt-to-GDP ratio rather than just fiscal deficit
Medium-term framework: 3-year rolling targets for better fiscal planning
Independent Fiscal Council: Recommended to monitor fiscal performance
Trap: Memorize the exact split - 40% Centre, 20% States, 60% total (not 50-50 or other combinations)
Trap: Target year is 2023, not 2020 or 2025
Trap: Don't confuse N.K. Singh Committee (FRBM Review) with Vijay Kelkar Committee (earlier FRBM)
Centre vs State Debt Levels
Indian Economy domestic liabilities 21% 49% GDP
Actual Debt Distribution: Centre vs States Reality Check
Centre's debt is typically higher than States' debt as % of GDP
Statement 2 in question reverses the actual figures - classic UPSC trap
Centre borrows for national programs, States for development projects
Understanding the actual debt distribution between Centre and States is crucial because UPSC frequently tests reversed or swapped figures in statements.
Typical Debt Distribution Pattern
Government Level | Approximate Debt-to-GDP % | Main Borrowing Sources | Key Uses |
|---|---|---|---|
Central Government | 45-50% | Market borrowings, G-Secs, External debt | Defense, subsidies, interest payments |
State Governments | 20-25% | Market loans, Centre loans, bonds | Infrastructure, social sectors, salaries |
Why Centre's Debt is Higher
Revenue responsibilities: Centre handles costly items like defense, subsidies, and interest on past debt
Borrowing capacity: Centre has better credit rating and access to external markets
Transfer obligations: Centre borrows to fund devolution to States through Finance Commission
Counter-cyclical role: Centre increases spending during economic downturns
Major Trap: UPSC often swaps Centre and State debt figures - remember Centre's debt is typically 2x higher
Trap: Don't confuse debt-to-GDP ratio with absolute debt amounts
Trap: External debt is primarily Centre's responsibility, States have minimal external borrowing
Article 293 - State Borrowing Rules
Indian Polity Article 293 Central Government's consent outstanding liabilities
Article 293: Constitutional Control Over State Borrowing
Article 293(3): States need Centre's consent to borrow if they have outstanding dues to Centre
Gives Centre conditional control over State borrowing decisions
Part of Chapter IV (Right to Property) in Constitution
Article 293 establishes the constitutional framework for State borrowing powers, with specific conditions that maintain Centre's oversight role in fiscal matters.
Article 293 Provisions Breakdown
Clause | Provision | Practical Impact | Example Scenario |
|---|---|---|---|
293(1) | State can borrow within India | Basic borrowing power | State issues bonds in domestic market |
293(2) | Centre can set conditions on guarantees | Control over State guarantees | Centre limits guarantee amounts |
293(3) | Centre's consent needed if outstanding dues exist | Conditional borrowing | State owes ₹1000 cr to Centre, needs approval for new loan |
State Borrowing Decision Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**State wants to borrow**
State government identifies borrowing need`"]
s2["`**Check outstanding liabilities**
Verify if State owes money to Central Government`"]
s3["`**If no dues: Proceed freely**
State can borrow without Centre's permission`"]
s4["`**If dues exist: Seek Centre's consent**
Article 293(3) mandates prior approval from Centre`"]
s1 --> s2
s2 --> s3
s3 --> s4Practical Implications
Fiscal discipline tool: Centre uses this to ensure States don't over-borrow
Political leverage: Can influence State policies through borrowing approvals
Debt sustainability: Prevents States from creating unsustainable debt burdens
Coordination mechanism: Aligns State borrowing with national fiscal policy
Trap: Consent needed only when outstanding liabilities exist - not for all borrowing
Trap: It's Article 293(3) specifically, not the entire Article 293
Trap: Don't confuse with Article 292 (Centre's borrowing powers) or Article 266 (Consolidated Funds)
Centre-State Financial Relations Framework
Indian Polity
Constitutional Framework for Centre-State Financial Relations
Finance Commission recommends tax sharing and grants every 5 years
GST Council manages India's biggest indirect tax coordination
Article 280 establishes Finance Commission mechanism
Key Institutions & Mechanisms
# Centre-State Financial Relations
## Constitutional Bodies
- Finance Commission (Art 280)
- GST Council (Art 279A)
- Inter-State Council (Art 263)
## Revenue Sharing
- Tax Devolution (42%)
- Grants-in-aid
- Centrally Sponsored Schemes
## Borrowing Controls
- Article 293 (State borrowing)
- Article 292 (Centre borrowing)
- FRBM Act limits
## Dispute Resolution
- Supreme Court
- Inter-State Council
- Finance CommissionMajor Constitutional Articles
Article | Subject | Key Provision | Current Status |
|---|---|---|---|
280 | Finance Commission | 5-year recommendations on tax sharing | 15th FC (2021-26) operational |
279A | GST Council | Cooperative federalism in taxation | Active since 2017 |
292 | Centre's borrowing | Parliament controls Centre's borrowing | FRBM Act provides framework |
293 | State borrowing | Centre's consent if outstanding dues | Actively used for fiscal discipline |
Trap: 15th Finance Commission covers 2021-2026, not 2020-2025
Trap: GST Council decisions need 3/4th majority, not simple majority
Trap: States get 42% of divisible pool (not 50% or one-third)