The Reserve Bank of India on FRBM Meet

The Reserve Bank of India on FRBM Meet

Kamaraj IAS Academy | The Reserve Bank of India on FRBM Meet
  • November 29, 2018, 10:22 am

In news:


In the recent FRMB meet, The Reserve Bank of India has highlighted several risks to the Indian economy, including oil prices, the uncertainty over the effect of the minimum support price hike and the revenue impact of the lower-than-expected GST collections and the cut in excise duty on fuel.

These risks, the central bank said could pose a challenge to the government’s commitment to meeting the Fiscal Responsibility and Budget Management targets.


The key risks to growth are as follows:


1.High international commodity prices — especially of crude oil (although they have eased recently, there are significant uncertainties)


2.Spillovers from tightening global financial conditions(increasing interest rates across economies post 2008 stimulus_ as seen as effect in fall of rupee and crowding out effect)


3.Geopolitical tensions(Trump, Brexit, protectionism)


4.Impairment in domestic banking and corporate balance sheets(NPA, capital infusion plan of 42000cr for next year, credit transmission).

5.On the inflation side, while food inflation has remained unusually benign so far during the year, there is uncertainty about the exact impact of the announced MSPs on food inflation.

(Higher MSP increases the ineffective food subsidy burden, hinders market stability and increases food prices)

6.GST collections


GST collections and the cut in Union excise duties on petroleum products by the Centre as well as 18 State governments pose risks on the revenue side with increasing global oil prices, while higher MSPs combined with the ramping up of food procurement and “unbudgeted” farm loan waivers by States could put pressure on expenditure.

Accordingly, efforts towards consolidation will be needed for achieving the revised FRBM targets, i.e., the central government debt to GDP ratio of 40% and the general government debt to GDP ratio of 60% by 2024-25.


The FRBM Act was passed by the government to bring fiscal discipline and to implement a prudent fiscal policy. High fiscal deficit was the one major macroeconomic problem faced by Indian economy.  Thus arose a need to institutionalize a new fiscal discipline framework.

Features of FRBM Act:

•  The revenue deficit should be reduced to an amount equivalent by 0.5% or more of GDP every year.

•  The fiscal deficit should be reduced by 0.3% or more of the GDP every year.

•  The RBI should not subscribe to primary issues of Central Government securities.

•  The Finance Minister to make a quarterly review of trends in receipts and expenditure in relation to budget and place the outcome of such reviews before both the Houses of Parliament.

•  The Central Government should specify four fiscal indicators- Fiscal deficit as a percentage of GDP; Revenue deficit as a percentage of GDP; Tax revenue as a percentage of GDP; Total outstanding liabilities as percentage of GDP.

•  The Central Government should place in each financial year before houses of Parliament three statements-Medium Term Fiscal Policy Statement; Fiscal policy strategy statement; Macro-economic Framework statement along with Annual Financial Statement and Demands for grants.

•  The FRBM Act States that the Central Government shall not borrow from RBI except by way of means and advances to meet temporary excess of cash disbursements over cash receipts.