The Fiscal Responsibility and Budget Management Act aimed for

1. Eliminating revenue deficit and fiscal deficit
2. Giving flexibility to RBI for inflation management

Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
c) Neither 1 nor 2

Ans-[B]

Explanation- In late 1980s and early 1990s, Indian economy faced  the problem of large fiscal deficit and its effects on to the external sector. Govt was not able to pay for large borrowings. This crisis ultimately scaled up to the economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal consolidation emerged as one of the key areas of reforms. Initially it gave good results but fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98.

The Government then introduced FRBM Act,2003 to check the fiscal situation. This act was brought in to institutionalise the financial discipline, introduce transparent fiscal management systems in the country, introduce a more equitable and manageable distribution of the country’s debts over the years, to aim for fiscal stability for India in the long run.

Main purpose of the act was elimination of the revenue deficit and building revenue surplus thereafter. It also aimed for reducing fiscal deficit to 3% of GDP till 2008. As statement 1 is saying elimination of revenue deficit and fiscal deficit, it is wrong. It only talked about elimination of revenue deficit. Zero fiscal deficit is bad for the country.

This law also gives flexibility to the Reserve Bank of India to undertake monetary policy to tackle inflation and take corrective measures in order to give an impetus to the economic environment. Statement 2 is correct.