With reference to the Fiscal Responsibility and Budget Management(FRBM) Act,consider the following statements:1. The FRBM Act bans the purchase ofprimary issues of the Central Government securities by the RBI.2. The rules under the FRBM Act aim to eliminate the fiscal deficit of the Central Government.Which of the statements given above is/arecorrect?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?

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With reference to the Fiscal Responsibility and Budget Management(FRBM) Act, consider the following statements:
1. The FRBM Act bans the purchase of primary issues of the Central Government securities by the RBI.
2. The rules under the FRBM Act aim to eliminate the fiscal deficit of the Central Government.
Which of the statements given above is/are correct?

a)
1 only
b)
2 only
c)
Both 1 and 2
d)
Neither 1 nor 2

Correct answer is option 'A'. Can you explain this answer?

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With reference to the Fiscal Responsibility and Budget Management(FRBM...

Explanation:

1. The FRBM Act bans the purchase of primary issues of the Central Government securities by the RBI:
- This statement is correct. The FRBM Act prohibits the RBI from directly subscribing to primary issues of Central Government securities in order to prevent monetization of the government's deficit.
2. The rules under the FRBM Act aim to eliminate the fiscal deficit of the Central Government:
- This statement is incorrect. The main objective of the FRBM Act is not to eliminate the fiscal deficit but to ensure inter-generational equity in fiscal management, long term macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the government.
Therefore, the correct answer is option 'A', 1 only.

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With reference to the Fiscal Responsibility and Budget Management(FRBM...

Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in the fiscal operation of the Government.
FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce the fiscal deficit, eliminate revenue deficit and generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds that Central Government may specify. Hence statement 2 is not correct.
Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy. The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit. The Act also requires the government to lay before the parliament three policy statements in each financial year namely Medium Term Fiscal Policy Statement; Fiscal Policy Strategy Statement and Macroeconomic Framework Policy Statement. Hence statement 1 is correct.
Through Finance Act 2012, amendments were made to the Fiscal Responsibility and Budget Management Act, 2003 through which it was decided that in addition to the existing three documents, the Central Government shall lay another document - the Medium Term Expenditure Framework Statement (MTEF) - before both Houses of Parliament in the Session immediately following the Session of Parliament in which Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement are laid.
The concepts of the “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are the two important features of the amendment to the FRBM Act in the direction of expenditure reforms. Effective Revenue Deficit is the difference between revenue deficit and grants for the creation of capital assets. This will help in reducing the consumptive component of the revenue deficit and create space for increased capital spending. Effective revenue deficit has now become a new fiscal parameter. The “Medium-term Expenditure Framework” statement will set forth a three-year rolling target for expenditure indicators.

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With reference to the Fiscal Responsibility and Budget Management(FRBM) Act,consider the following statements:1. The FRBM Act bans the purchase ofprimary issues of the Central Government securities by the RBI.2. The rules under the FRBM Act aim to eliminate the fiscal deficit of the Central Government.Which of the statements given above is/arecorrect?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?

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