SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY

MARKET

www.practicemock.com 1 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
Table of Contents
MARKET
MONETARY POLICY ........................................................................................................ 3
Monetary Policy of India .................................................................................................................................... 3
Objectives of Monetary Policy: .......................................................................................................................... 3
To Regulate Money Supply in the Economy: ................................................................................................. 3
To Attain Price Stability: ................................................................................................................................ 3
To promote Economic Growth: ...................................................................................................................... 3
To Promote saving and Investment: ............................................................................................................... 4
To Control Business Cycles: ........................................................................................................................... 4
To Promote Exports and Substitute Imports: .................................................................................................. 4
To Manage Aggregate Demand: ..................................................................................................................... 4
To Ensure more Credit for Priority Sector:..................................................................................................... 4
To Promote Employment: ............................................................................................................................... 4
To Develop Infrastructure: .............................................................................................................................. 4
To Regulate and Expand Banking: ................................................................................................................. 4
Types of Monetary Policies ................................................................................................................................ 4
Monetary policy committee(MPC) ..................................................................................................................... 5
Establishment of MPC .................................................................................................................................... 5
The Monetary Policy Framework ....................................................................................................................... 5
The Monetary Policy Process ............................................................................................................................. 6
Instruments of Monetary Policy.......................................................................................................................... 6
Open and Transparent Monetary Policy Making ................................................................................................ 7
FISCAL POLICY ............................................................................................................. 8
What is Fiscal Policy: ..................................................................................................................................... 8
Objectives of Fiscal Policy: ............................................................................................................................ 8
Role of Fiscal Policy in Economic Development: .......................................................................................... 8
Techniques of Fiscal Policy: ........................................................................................................................... 8
Advantages of Fiscal Policy of India: ........................................................................................................... 10
Fiscal Responsibility & Budget Management (FRBM) Act – 2003 ................................................................. 11
Objectives of the FRBM Act ....................................................................................................................... 11
Major Provisions of the FRBM Act, 2003 .................................................................................................... 11

www.practicemock.com 2 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
MONETARY POLICY
MARKET
The on Monetary policy refers to the use of monetary instruments under the control of the central bank to
regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving
the ultimate objective of economic policy.

Monetary Policy of India

Monetary Policy of India is formulated and executed by Reserve Bank of India to achieve specific objectives.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This
responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

• It refers to that policy by which central bank of the country controls(i) the supply of money, and (ii) cost
of money or the rate of interest, with a view to achieve particular objectives.

• In the words, “The monetary policy is defined as discretionary act undertaken by the authorities designed
to influence (a) the supply of money, (b) cost of money or rate of interest, and (c) the availability of
money for achieving specific objective.”

• Thus, monetary policy of India refers to that policy which is concerned with the measures taken to
regulate the volume of credit created by the banks.

• The main objectives of monetary policy are to achieve price stability, financial stability and adequate
availability of credit for growth.

• Following are the main elements of the monetary policy of India:

1. It regulates the stocks and the growth rate of money supply.
2. It regulates the entire banking system of the economy.
3. It determines the allocation of loans among different sectors.
4. It provides incentives to promote savings and to raise the savings-income ratio.
5. It ensures adequate availability of credit for growth and tries to achieve price stability.

Objectives of Monetary Policy:

According to RBI, “The objectives of monetary policy in India are price stability and growth. These are
pursued through ensuring credit availability with stability in the external value of rupee and overall financial
stability.” Following are the main objectives of monetary policy:

To Regulate Money Supply in the Economy:

Money supply includes both money in circulation and credit creation by banks. Monetary policy is farmed to
regulate the money supply in the economy by credit expansion or credit contraction. By credit expansion
(giving more loans), the money supply can be expanded. By credit contraction (giving less loans) money
supply can be decreased.
The main aim of the monetary policy of the Reserve Bank was to control the money supply in such a manner
as to expand it to meet the needs of economic growth and at the same time contract it to curb inflation. In
other words monetary policy aimed at expanding and contracting money supply according to the needs of
the economy.

To Attain Price Stability:

Another major objective of monetary policy in India is to maintain price stability in the country. It implies
Control over inflation. Price level, is affected by money supply. Monetary policy regulates money supply to
maintain price stability.

To promote Economic Growth:

An important objective of monetary policy is to make available necessary supply of money and credit for
the economic growth of the country. Those sectors which are quite significant for the economic growth are
provided with adequate availability of credit.

www.practicemock.com 3 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
To Promote Savings and Investment:
MARKET
By regulating the rate of interest and checking inflation, monetary policy promotes savings and investment.
Higher rates of interest promote saving and investment.

To Control Business Cycles:

Boom and depression are the main phases of business cycle. Monetary policy puts a check on boom and
depression. In period of boom, credit is contracted, so as to reduce money supply and thus check inflation.
In period of depression, credit is expanded, so as to increase money supply and thus promote aggregate
demand in the economy.

To Promote Exports and Substitute Imports:

By providing concessional loans to export oriented and import substitution units, monetary policy
encourages such industries and thus help to improve the position of balance of payments.

To Manage Aggregate Demand:

Monetary authority tries to keep the aggregate demand in balance with aggregate supply of goods and
services. If aggregate demand is to be increased than credit is expanded and the interest rate is lowered
down. Because of low interest rate, more people take loan to buy goods and services and hence aggregate
demand increases and vice-verse.

To Ensure more Credit for Priority Sector:

Monetary policy aims at providing more funds to priority sector by lowering interest rates for these sectors.
Priority sector includes agriculture, small- scale industry, weaker sections of society, etc.

To Promote Employment:
By providing concessional loans to productive sectors, small and medium entrepreneurs, special loan
schemes for unemployed youth, monetary policy promotes employment.

To Develop Infrastructure:
Monetary policy aims at developing infrastructure. It provides concessional funds for developing
infrastructure.

To Regulate and Expand Banking:

RBI regulates the banking system of the economy. RBI has expanded banking to all parts of the country.
Through monetary policy, RBI issues directives to different banks for setting up rural branches for promoting
agricultural credit. Besides it, government has also set up cooperative banks and regional rural banks. All
this has expanded banking in all parts of the country.

Types of Monetary Policies

At a broad level, monetary policies are categorized as expansionary or contractionary.
• If a country is facing a high unemployment rate during a slowdown or a recession, the monetary authority
can opt for an expansionary policy aimed at increasing economic growth and expanding economic
activity.
• As a part of expansionary monetary policy, the monetary authority often lowers the interest rates
through various measures that make money saving relatively unfavorable and promotes spending. It
leads to an increased money supply in the market, with the hope of boosting investment and consumer
spending.
• Lower interest rates mean that businesses and individuals can take loans on convenient terms to expand
productive activities and spend more on big ticket consumer goods.

www.practicemock.com 4 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
• An example of this expansionary approach is the low to zero interest rates maintained by many leading
MARKET
economies across the globe since the 2008 financial crisis.

• However, increased money supply can lead to higher inflation, raising the cost of living and cost of doing
business.
• Contractionary monetary policy, by increasing interest rates and slowing the growth of the money
supply, aims to bring down inflation.
• This can slow economic growth and increase unemployment, but is often required to tame inflation.

Monetary policy committee(MPC)

The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute Monetary
Policy Committee (MPC) which aimed to bring more transparency and accountability in fixing India's
Monetary Policy. The monetary policy are published after every meeting with each member explaining his
opinions. The committee is answerable to the Government of India if the inflation exceeds the range
prescribed for three consecutive months.
• The Monetary Policy Committee of India is responsible for fixing the benchmark interest rate in India.
The meetings of the Monetary Policy Committee are held at least 4 times a year and it publishes its
decisions after each such meeting.

• The committee comprises six members - three officials of the Reserve Bank of India and three external
members nominated by the Government of India. They need to observe a "silent period" seven days
before and after the rate decision for "utmost confidentiality".
• The Governor of Reserve Bank of India is the chairperson ex officio of the committee. Decisions are
taken by majority with the Governor having the casting vote in case of a tie.

• The current mandate of the committee is to maintain 4% annual inflation until 31 March 2021 with an
upper tolerance of 6% and a lower tolerance of 2%.
• Monetary Policy Committee came into force on 27 June 2016.

Establishment of MPC
• Key decisions pertaining to benchmark interest rates used to be taken by the Governor of Reserve Bank
of India alone prior to the establishment of the Monetary Policy Committee.
• The Governor of RBI is appointed and can be disqualified by the Government anytime. This led to
uncertainty and resulted in friction between the Government and the RBI, especially during the times of
low growth and high inflation.
• To reslove this issue, a Technical Advisory Committee (TAC) on monetary policy was constituted to
advised the Reserve Bank on the stance of monetary policy. However, its role was only advisory in
nature.
• Meanwhile, Urjit Patel Committee proposed GoI to set up of a committee to decide on Monetary Policy,
which led to the creation of Monetary Policy Committee (MPC).

The Monetary Policy Framework

• The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to operate the
monetary policy framework of the country.
• The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving
macroeconomic situation; and modulation of liquidity conditions to anchor money market rates at or
around the repo rate. Repo rate changes transmit through the money market to the entire financial
system, which, in turn, influences aggregate demand – a key determinant of inflation and growth.
• Once the repo rate is announced, the operating framework designed by the Reserve Bank envisages
liquidity management on a day-to-day basis through appropriate actions, which aim at anchoring the
operating target – the weighted average call rate (WACR) – around the repo rate.
• The operating framework is fine-tuned and revised depending on the evolving financial market and
monetary conditions, while ensuring consistency with the monetary policy stance. The liquidity
management framework was last revised significantly in April 2016.

www.practicemock.com 5 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
The Monetary Policy Process
MARKET
• Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-member monetary
policy committee (MPC) to be constituted by the Central Government by notification in the Official
Gazette. Accordingly, the Central Government in September 2016 constituted the MPC.

• The composition of the current monetary policy committee (as on April 01, 2020) is as follows:

1. Governor of the Reserve Bank of India – Chairperson, ex officio - Shaktikanta Das

2. Deputy Governor of the Bank in charge of monetary policy — Michael Debrata Patra
3. Executive director of the Bank in charge of monetary policy — Dr. Janak Raj
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member
5. Professor Pami Dua, Director, Delhi School of Economics – Member
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad – Member

• Members referred to at 4 to 6 above, will hold office for a period of four years from the date of
appointment while the other three members are official.
• All the central government nominees are not eligible to be re-appointed

• The MPC determines the policy interest rate required to achieve the inflation target. The first meeting of
the MPC was held on October 3 and 4, 2016 in the run up to the Fourth Bi-monthly Monetary Policy
Statement, 2016-17.

• The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary
policy. Views of key stakeholders in the economy, and analytical work of the Reserve Bank contribute to
the process for arriving at the decision on the policy repo rate.

• The Financial Markets Operations Department (FMOD) operationalises the monetary policy, mainly
through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets
daily to review the liquidity conditions so as to ensure that the operating target of the weighted average
call money rate (WACR).

• Before the constitution of the MPC, a Technical Advisory Committee (TAC) on monetary policy with
experts from monetary economics, central banking, financial markets and public finance advised the
Reserve Bank on the stance of monetary policy. However, its role was only advisory in nature. With the
formation of MPC, the TAC on Monetary Policy ceased to exist.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.
• Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks
against the collateral of government and other approved securities under the liquidity adjustment facility
(LAF).

• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an
overnight basis, from banks against the collateral of eligible government securities under the LAF.

• Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo auctions.
Progressively, the Reserve Bank has increased the proportion of liquidity injected under fine-tuning

www.practicemock.com 6 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
variable rate repo auctions of range of tenors. The aim of term repo is to help develop the inter-bank
MARKET
term money market, which in turn can set market based benchmarks for pricing of loans and deposits,
and hence improve transmission of monetary policy. The Reserve Bank also conducts variable interest
rate reverse repo auctions, as necessitated under the market conditions.

• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow
additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity
Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against
unanticipated liquidity shocks to the banking system.

• Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the
weighted average call money rate.

• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or
other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act,
1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the
MSF rate changes alongside policy repo rate changes.

• Cash Reserve Ratio (CRR): The average daily balance that a bank is required to maintain with the
Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve
Bank may notify from time to time in the Gazette of India.

• Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain in safe and
liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often
influence the availability of resources in the banking system for lending to the private sector.

• Open Market Operations (OMOs): These include both, outright purchase and sale of government
securities, for injection and absorption of durable liquidity, respectively.

• Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in
2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through
sale of short-dated government securities and treasury bills. The cash so mobilised is held in a separate
government account with the Reserve Bank.

Open and Transparent Monetary Policy Making

Under the amended RBI Act, the monetary policy making is as under:
• The MPC is required to meet at least four times in a year.
• The quorum for the meeting of the MPC is four members.
• Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a
second or casting vote.

• The resolution adopted by the MPC is published after conclusion of every meeting of the MPC in
accordance with the provisions of Chapter III F of the Reserve Bank of India Act, 1934.

• On the 14th day, the minutes of the proceedings of the MPC are published which include:
1. the resolution adopted by the MPC;
2. the vote of each member on the resolution, ascribed to such member; and
3. the statement of each member on the resolution adopted.
• Once in every six months, the Reserve Bank is required to publish a document called the Monetary Policy
Report to explain: the sources of inflation; and the forecast of inflation for 6-18 months ahead

www.practicemock.com 7 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
FISCAL POLICY
MARKET
What is Fiscal Policy:
Fiscal policy is playing an important role on the economic and social front of a country. Traditionally, fiscal
policy in concerned with the determination of state income and expenditure policy. But with the passage of
time, the importance of fiscal policy has been increasing continuously for attaining rapid economic growth.
Accordingly, it has included public borrowing’ and deficit financing as a part of fiscal policy of the country.
An effective fiscal policy is composed of policy decisions relating to entire financial structure of the
government including tax revenue, public expenditures, loans, transfers, debt management, budgetary
deficit, etc.
• Harvey and Joanson, M., defined fiscal policy as “changes in government expenditure and taxation
designed to influence the pattern and level of activity.”
• According to G.K. Shaw, “We define fiscal policy to include any design to change the price level,
composition or timing of government expenditure or to vary the burden, structure or frequency of the
tax payment.”
• Otto Eckstein defined fiscal policy as “changes in taxes and expenditure which aim at short run goals of
full employment price level and stability.”

Objectives of Fiscal Policy:

In India, the fiscal policy is gaining its importance in recent years with the growing involvement of the
government in developmental activities of the country.
Following are some of the important objectives of fiscal policy adopted by the Government of India:
• To mobilise adequate resources for financing various programmes and projects adopted for economic
development.
• To raise the rate of savings and investment for increasing the rate of capital formation;
• To promote necessary development in the private sector through fiscal incentive;
• To arrange an optimum utilisation of resources;
• To control the inflationary pressures in economy in order to attain economic stability;
• To remove poverty and unemployment;
• To attain the growth of public sector for attaining the objective of socialistic pattern of society;
• To reduce regional disparities; and
• To reduce the degree of inequality in the distribution of income and wealth.

In order to attain all these aforesaid objectives, the Government of India has been formulating its fiscal
policy incorporating the revenue, expenditure and public debt components in a comprehensive manner.

Role of Fiscal Policy in Economic Development:

One of the important goals of fiscal policy formulated by the Government of India is to attain rapid economic
development of the country. To attain such economic development in the country, the fiscal policy of the
India has adopted following two objectives:
1. To raise the rate of productive investment of both public and private sector of the country.
2. To enhance the marginal and average rates of savings for mobilising adequate financial resources for
making investment in public and private sectors of the economy.

The fiscal policy of the country is trying to attain both these two objectives during the plan periods.

Techniques of Fiscal Policy:

Following are the four important techniques of fiscal policy of India:

1. Policy of Taxation of Government of India:

One of the important sources of revenue of the Government of India is the tax revenue. Both the direct and
indirect taxes are being levied by the Government of India. Direct taxes are progressive by nature and most
of indirect taxes are regressive in nature. Taxation plays an important role in mobilising resources for plan.
Mobilisation of taxes by the Government stands around 16 to 17 per cent of the national income of the
country during recent years.

www.practicemock.com 8 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
Main objectives of taxation policy in India includes:
MARKET
• Mobilisation of resources for financing economic development;
• Formation of capital by promoting saving and investment through time deposits, investment in
government bonds, in units, insurance etc.;
• Attainment of equality in the distribution of income and wealth through the imposition of progressive
direct taxes; and
• Attainment of price stability by adopting anti-inflationary taxation policy.

2. Public Expenditure Policy of Government of India:

Public expenditure is playing an important role in the economic development of a country like India. With
increase in responsibilities of the government and with the increasing participation of government in
economic activities of the country, the volume of public expenditure in India is increasing at a galloping
rate.

Following are some of the important features of the policy of public expenditure formulated by the
Government of India:

Development of infrastructure:
Development of infrastructural facilities which include development of power projects, railways, road,
transportation system, bridges, dams, irrigation projects, hospitals, educational institutions etc. involves
huge expenditure by the Government as private investors are very much reluctant to invest in these areas
considering the low rate of profitability and high risk involved in it.

Development of public enterprises:

Development of heavy and basic industries are very important for the development of underdeveloped
country. But the establishment of these industries involves huge investment and a considerable proportion
of risk. Naturally private sector cannot take the responsibility to develop these industries.
Development of these industries has become a responsibility of the Government of India particularly since
the introduction of Industrial Policy. A significant portion of public expenditure has been utilised for the
establishment and improvement of these public enterprises.

Support to Private Sector:

Providing necessary support to the private sector for the establishment of industry and other projects is
another important objective of public expenditure policy formulated by the Government of India.

Social Welfare and Employment Programmes:

Another important feature of public expenditure policy pursued by the Government of India is its growing
involvement in attaining various social welfare programmes and also on employment generation
programmes.

3. Policy of Deficit Financing of Government of India:

Following the policy of deficit financing as introduced by J.M. Keynes, the Government of India has been
adopting the policy for financing its developmental plans since its inception. The deficit financing in India
indicates taking loan by the Government from the Reserve Bank of India in the form of issuing fresh dose
of currency.

Considering the low level of income, low rate of savings and capital formation, the Government is taking
recourse to deficit financing in increasing proportion. Deficit financing is a kind of forced savings.

www.practicemock.com 9 info@practicemock.com 011-49032737

 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
“Deficit financing is the name of volume of those forced savings which are the result of increase in prices
MARKET
during the period of the government investment. Thus deficit financing helps the country by providing
necessary funds for meeting the requirements of economic growth but at the same time it also create the
problem of inflationary rise in prices. Thus the deficit financing must be kept within the manageable limit.”

4. Public Debt Policy of the Government of India:

As the taxation has got its limit in India due to poor taxable capacity of the people, thus the Government is
taking recourse to public debt for financing its developmental expenditure. In the post-independence period,
the Central Government has been raising a good amount of public debt regularly in order to mobilise a huge
amount of resources for meeting its developmental expenditure. Total public debt of the Central Government
includes internal debt and external debt.

Internal Debt:
Internal debt indicates the amount of loan raised, by the Government from within the country. The
Government raises internal public debt from the open market by issuing bonds and cash certificates and 15
years annuity certificates. The Government also borrows for a temporary period from RBI (treasury bills
issued by RBI) and also from commercial banks.

External Debt:
As the internal debt is insufficient thus the Government is also collecting loan from external sources, i.e.,
from abroad, in the form of foreign capital, technical knowhow and capital goods. Accordingly, the Central
Government is also borrowing from international financing agencies for financing various developmental
projects. These agencies include World Bank, IMF, IDA, IFC etc.

Advantages of Fiscal Policy of India:

Following are some of the important merits or advantages of fiscal policy of Government of India:

Capital Formation:
Fiscal policy of India has been playing an important role in raising the rate of capital formation in the country
both in its public and private sectors. The gross domestic capital formation as per cent of GDP in India has
increased sgnificantly since 1950-51.
Mobilisation of Resources:
Fiscal policy has been helping to mobilise considerable amount of resources through taxation, public debt
etc. for financing its various developmental projects.
Incentives to Savings:
The fiscal policy has been providing various incentives to raise the savings rate both in household and
corporate sector through various budgetary policy changes, viz., tax exemption, tax concession etc. The
saving rate has increased significantly since 1950-51.
Inducement to Private Sector:
Private sector of India has been getting necessary inducement from the fiscal policy to expand its activities.
Tax concessions, tax exemptions, subsidies etc. incorporated in the budgets have been providing adequate
incentives to the private sector units engaged in industry, infrastructure and export sector of the country.
Reduction of Inequality:
Fiscal policy has been making constant endeavour to reduce the inequality in the distribution of income and
wealth. Progressive taxes on income and wealth tax exemption, subsidies, grant etc. are making a
consolidated effort to reduce such inequality.
Export Promotion:

www.practicemock.com 10 info@practicemock.com 011-

49032737
 SEBI GRADE A 2020: ECONOMICS: MONETARY POLICY & FISCAL POLICY
The Fiscal policy of the Government has been
MARKET making constant endeavour to promote export through its
various budgetary policy in the form of concessions, subsidies etc. As a result, the growth rate of export has
been in consistent rise.
Alleviation of Poverty and Unemployment:
Another important merit of Indian fiscal policy is that it is making constant effort to alleviate poverty and
unemployment problem through its various poverty eradication and employment generation programmes,
like, IRDP, JRY, PMRY, SJSRY, EAS, NREGA etc.

Fiscal Responsibility & Budget Management (FRBM) Act – 2003

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.
It is an act of the parliament that set targets for the Government of India to establish financial
discipline, improve the management of public funds, strengthen fiscal prudence and reduce its
fiscal deficits.

Objectives of the FRBM Act

• Reduction of fiscal deficit and revenue deficit;
• To achieve inter-generational equity in fiscal management by reducing the debt burden of the future
generation;
• Achieving long-term macroeconomic stability;
• Better coordination between fiscal and monetary policy;
• Transparency in fiscal operations of the Government.
The act also intended to give the required flexibility to the Central Bank for managing inflation in India.

Major Provisions of the FRBM Act, 2003

• The FRBM rule set a target reduction of fiscal deficit to 3% of the GDP by 2008-09.
• This will be realized with an annual reduction target of 0.3% of GDP per year by the Central government.
• Revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination by 2008-09.
• Reduction of Public Debt
• The government has to take appropriate measures to reduce the fiscal deficit and revenue deficit so as
to eliminate revenue deficit by 2008-09 and thereafter, sizable revenue surplus has to be created.
• It mandated setting annual targets for the reduction of fiscal deficit and revenue deficit, contingent
liabilities and total liabilities.
• The government shall end its borrowing from the RBI except for temporary advances.
• The RBI was supposed to not subscribe to the primary issues of the central government securities after
2006.
• The revenue deficit and fiscal deficit may exceed the targets specified in the rules only on grounds of
national security, calamity and other exceptional grounds to be specified by the Central government.

• Amendments to FRBM Act: Fiscal Responsibility and Budget Management Act, 2003 was amended in
2012 that mandated the Central Government to lay before the Houses of Parliament, Macro-Economic
Framework Statement, Medium Term Fiscal Policy Statement and Fiscal Policy Strategy Statement along
with the Annual Financial Statement and Demands for Grants.
• NK Singh committee, that was set up in 2016 to review the FRBM Act, recommended that the
government must target a fiscal deficit of 3% of the GDP in the years up to March 31, 2020, subsequently
cut it to 2.8% in 2020-21 and to 2.5% by 2023.

www.practicemock.com 11 info@practicemock.com 011-

49032737