With reference to the Fiscal Responsibility and Budget Management (FRBM) Act, consider the following statements:

1. The FRBM Act prohibits the borrowings by the government from the RBI.

2. The Government cannot move away from the path of fiscal consolidation mandated under the Act.

3. Effective revenue deficit has now become a new fiscal parameter due to the Act.

Which of the statements given above is/are incorrect?

Solution

Statement 1 is correct: The Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy. The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit. Statement 2 is incorrect: FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce the fiscal deficit, eliminate revenue deficit and generate revenue surplus in the subsequent years. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify. Statement 3 is correct: The concepts of the “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are the two important features of the amendment to the FRBM Act in the direction of expenditure reforms.