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      Question

      The Fiscal Responsibility and Budget Management (FRBM)

      Act, 2003 was enacted to ensure fiscal discipline in India. Which of the following is a key provision of the Act?
      A It mandates that the RBI cannot purchase government securities in the primary market, eliminating direct deficit financing Correct Answer Incorrect Answer
      B It requires the Finance Minister to present a monthly fiscal performance report to Parliament Correct Answer Incorrect Answer
      C It requires the government to achieve a zero fiscal deficit within three years of the Act coming into force Correct Answer Incorrect Answer
      D It prohibits the Union Government from taking any foreign currency borrowings Correct Answer Incorrect Answer
      E It empowers the RBI to refuse to credit the government's account if the fiscal deficit exceeds the prescribed limit Correct Answer Incorrect Answer

      Solution

      One of the most significant provisions of the FRBM Act, 2003 is that it prohibits the RBI from subscribing to the primary issuance of government securities from April 1, 2006 onwards. This means the government cannot directly borrow from the RBI by getting it to print money a practice known as monetisation of debt or direct deficit financing, which had been a major source of inflation in India before 1997. The government must now raise money through market borrowings, selling securities to banks, insurance companies, and other investors. The Act also requires the government to place before Parliament the Medium-Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Statement alongside the Budget.

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