3. The Fiscal Responsibility & Budget Management Act , 2003
FRBM is an Act of Parliament to institutionalize financial discipline,
reduce India’s Fiscal deficit , improve macroeconomic management
and overall management ooff tthhee PPuubblliicc ffuunnddss bbyy mmoovviinngg ttoowwaarrddss aa
Balanced Budget. The main purpose was to eliminate Revenue deficit
of the Country and to bring Fiscal deficit to a manageable 3 %.
It also casted an obligation on Central Government to take suitable
measures to ensure greater transparency in its fiscal operations in the
public interests .
4. Budget Deficit
Budget deficit – excess of expenditure over revenues- a case of fiscal
imbalance.
harmful consequences like mounting inflation, deficit in balance of
ppaayymmeenntt,, eettcc..
Adverse affect on growth of the economy.
FRBM Act has been introduced as fiscal correction policy to
overcome the deficit budget and fiscal crisis.
In the fiscal year 2013-2014 a Budget deficit is equal to 4.50 % GDP.
5. Borrowings From Reserve Bank Of India
Prior to FRBM Act
Central Govt. deficits monetization by RBI – deficit financing
State Govt.’ss ddeeffiicciittss ffiinnaanncciinngg tthhrroouugghh bboorrrroowwiinnggss ffrroomm tthhee
Central Govt.
Post FRBM Act
Complete phase out of deficit monetization by RBI from 2006
Central Govt. to borrow from Market for funding budget deficits
State Govt.’s could borrow from market as well.
FRBM equivalents were proposed for State Govt.’s also.
6. Borrowings From Reserve Bank Of India..post FRBM Act
Central Govt. to borrow from the RBI only in exceptional
circumstances.
RBI allowed ttoo ssuubbssccrriibbee ttoo tthhee pprriimmaarryy iissssuueess ooff CCeennttrraall GGoovvtt..
securities up to March 31, 2006.
But RBI was allowed to buy and sell Central Govt. securities in the
secondary market.
Unfortunately as on Jan 30, 2012, the accommodation by RBI was
Rs.16,177 Crore in the form of Ways & Means Advances and
Overdraft. This is nothing but monetization of deficit by RBI.
7. Monetary Policy
Management of money by RBI based on demand and supply
parameters
QQuuaannttiittaattiivvee ppoolliiccyy aanndd rraattee aaddjjuussttmmeennttss
Quantitative policy involves increasing or decreasing central bank
money through OMO
Rate adjustments involve calibrating the Repo and Reverse Repo rates.
The key parameters monitored are inflation and GDP.
8. Government Securities Market
Need of Govt. for large amount of money
Revenue by way of taxes and income from ownership of assets.
Government SSeeccuurriittiieess MMaarrkkeett –– IImmpp ssoouurrccee ooff GGoovvtt bboorrrroowwiinngg
Issuance of Govt. securities for short-term and long-term funds
Govt securities are sovereign debt obligations of any authority of govt
9. Government Securities Prices , RBI & FRBM Act
Prior to FRBM Act
Prices of Government securities ( G sec ) Market were
characterized by Administrative interest rates & captive Investors.
Such administrated rates affected yield structure and led to high
interest rate environment .
Post FRBM Act & Withdrawal of RBI from Primary Market
Introduction of auction process
Development of primary market for G –Sec
Development of an efficient process for price discovery
Encouragement of secondary market for these securities
Greater flexibility to RBI with a greater flexibility in its conduct
of Monetary Policy.
10. Government Securities Prices , RBI & FRBM Act
Post FRBM Act & Withdrawal of RBI from Primary Market
Continuous High Fiscal Deficit financed by issuance of G-Sec
Absorbs large amount of free funds with Banks and FIs
LLeessss aavvaaiillaabbllee ffuunnddss wwiitthh BBaannkkss ffoorr pprroodduuccttiivvee ccrreeddiitt
Impact on pushing cost of funds upwards
Pressure on Monetary Policy of RBI for management of Yields
Market encouraged by news that new Govt. to struck to the fiscal deficit
of 4.1% of the GDP.
Govt. has planned to bring down fiscal deficit to 3 % by 2016-17.