Q12) consider the following statements about the FRBM act of 2003
i) It mandates the government to ensure inter-generational equity, long term macro-economic stability, and effective debt management
ii) It mandates the government to reduce fiscal deficit by 0.3% of GDP every year and Revenue deficit by 0.5% GDP every year
iii) This act implies only to the center government
iv) The center government shall not borrow from RBI except by other ways and means advances.
Identify the correct statement/s
Q12) consider the following statements about the FRBM act of 2003
i) It mandates the government to ensure inter-generational equity, long term macro-economic stability, and effective debt management
ii) It mandates the government to reduce fiscal deficit by 0.3% of GDP every year and Revenue deficit by 0.5% GDP every year
iii) This act implies only to the center government
iv) The center government shall not borrow from RBI except by other ways and means advances.
Identify the correct statement/s
The correct option is D d. i, ii, iii and iv
Ans: D Explanation: 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. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.
Objectives
The main objectives of the act were
1. to introduce transparent fiscal management systems in the country
2.to introduce a more equitable and manageable distribution of the country's debts over the years
3.to aim for fiscal stability for India in the long run
Fiscal management principles
The Central Government, by rules made by it, was to specify the following:
1. a plan to eliminate revenue deficit by 31 Mar 2008 by setting annual targets for reduction starting from day of commencement of the act.
2. reduction of annual fiscal deficit of the country
3. annual targets for assuming contingent liabilities in the form of guarantees and the total liabilities as a percentage of the GDP
Borrowings from Reserve Bank of India
The Act provided that the Central Government shall not borrow from the Reserve Bank of India(RBI) except under exceptional circumstances where there is temporary shortage of cash in particular financial year. It also laid down rules to prevent RBI from trading in the primary market for Government securities. It restricted them to the trading of Government securities in the secondary market after an April, 2005, barring situations highlighted in exceptions paragraph.
Exceptions
National security, natural calamity or other exceptional grounds that the Central Government may specify were cited as reasons for not implementing the targets for fiscal management principles, prohibition on borrowings from RBI and fiscal indicators highlighted above, provided they were approved by both the Houses of the Parliament as soon as possible, once these targets had been exceeded
Targets and fiscal indicators
Subsequent to the enactment of the FRBMA, the following targets and fiscal indicators were agreed by the Central government
• Revenue deficit
•Date of elimination – 31 March 2009 (postponed from 31 March 2008)
•Minimum Annual reduction – 0.5% of GDP
•Fiscal Deficit
•Ceiling – 3% of the GDP by 31 Mar 2008
•Minimum Annual reduction – 0.3% of GDP
•Total Debt – 9% of the GDP (a target increased from the original 6% requirement in 2004–05)
•Annual Reduction – 1% of GDP
•RBI purchase of Government bonds – to cease from 1 April 2006
Four fiscal indicators to be projected in the medium term fiscal policy statement were proposed. These are, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP.
Ans: D
Explanation: 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. The main purpose was to eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.
Objectives
The main objectives of the act were
1. to introduce transparent fiscal management systems in the country
2.to introduce a more equitable and manageable distribution of the country's debts over the years
3.to aim for fiscal stability for India in the long run
Fiscal management principles
The Central Government, by rules made by it, was to specify the following:
1. a plan to eliminate revenue deficit by 31 Mar 2008 by setting annual targets for reduction starting from day of commencement of the act.
2. reduction of annual fiscal deficit of the country
3. annual targets for assuming contingent liabilities in the form of guarantees and the total liabilities as a percentage of the GDP
Borrowings from Reserve Bank of India
The Act provided that the Central Government shall not borrow from the Reserve Bank of India(RBI) except under exceptional circumstances where there is temporary shortage of cash in particular financial year. It also laid down rules to prevent RBI from trading in the primary market for Government securities. It restricted them to the trading of Government securities in the secondary market after an April, 2005, barring situations highlighted in exceptions paragraph.
Exceptions
National security, natural calamity or other exceptional grounds that the Central Government may specify were cited as reasons for not implementing the targets for fiscal management principles, prohibition on borrowings from RBI and fiscal indicators highlighted above, provided they were approved by both the Houses of the Parliament as soon as possible, once these targets had been exceeded
Targets and fiscal indicators
Subsequent to the enactment of the FRBMA, the following targets and fiscal indicators were agreed by the Central government
• Revenue deficit
•Date of elimination – 31 March 2009 (postponed from 31 March 2008)
•Minimum Annual reduction – 0.5% of GDP
•Fiscal Deficit
•Ceiling – 3% of the GDP by 31 Mar 2008
•Minimum Annual reduction – 0.3% of GDP
•Total Debt – 9% of the GDP (a target increased from the original 6% requirement in 2004–05)
•Annual Reduction – 1% of GDP
•RBI purchase of Government bonds – to cease from 1 April 2006
Four fiscal indicators to be projected in the medium term fiscal policy statement were proposed. These are, revenue deficit as a percentage of GDP, fiscal deficit as a percentage of GDP, tax revenue as percentage of GDP and total outstanding liabilities as percentage of GDP.
