Previous Year Question
Which one of the following was not stipulated in the Fiscal Responsibility and Budget Management Act, 2003?
Elimination of Revenue Deficit by the end of the financial year 2007-08
Non-borrowing by the Central Government from the Reserve Bank of India except under certain circumstances
Elimination of Primary Deficit by the end of the financial year 2008-09
Fixing Government guarantees in any financial year as a percentage of GDP
Correct Answer: C
Detailed Solution
The Fiscal Responsibility and Budget Management Act, 2003—FRBM Act sought to strengthen fiscal discipline, control the Revenue and Fiscal Deficits and ensure the sustainability of public debt.
The question concerns the original FRBM framework. The Act and its fiscal targets have subsequently undergone several amendments.
Option (a) was stipulated
The original FRBM framework required the Central Government to progressively reduce and eliminate the Revenue Deficit by 31 March 2008, corresponding to the end of financial year 2007-08.
Revenue Deficit = Revenue Expenditure − Revenue Receipts
A Revenue Deficit indicates that the Government’s Revenue Receipts are insufficient even to meet its recurring expenditure.
Therefore, option (a) was stipulated.
Option (b) was stipulated
Section 5 of the FRBM Act restricted direct Central Government borrowing from RBI, subject to specified exceptions.
Ways and Means Advances—WMA were permitted for meeting temporary mismatches between the Government’s cash receipts and cash payments.
Special arrangements could also be made under exceptional circumstances such as national security or national calamity.
The purpose was to restrict automatic monetisation and uncontrolled deficit financing through money creation.
Therefore, option (b) was stipulated.
Option (c) was not stipulated
Primary Deficit is calculated by deducting Interest Payments from Fiscal Deficit:
Primary Deficit = Fiscal Deficit − Interest Payments
The original FRBM Act prescribed targets for eliminating the Revenue Deficit and reducing the Fiscal Deficit. It did not prescribe the elimination of the Primary Deficit by the end of financial year 2008-09.
Therefore, option (c) is the correct answer.
Option (d) was stipulated
The FRBM Act provided for limiting the guarantees issued by the Central Government during a financial year according to a prescribed percentage of GDP.
A guarantee does not create immediate expenditure, but it represents a Contingent Liability. If the original borrower defaults, the guarantee may become an actual Government liability.
Guarantee limits are therefore important for fiscal transparency and risk management.
Revenue, Fiscal and Primary Deficits
Deficit | Formula | Principal meaning |
Revenue Deficit | Revenue Expenditure − Revenue Receipts | Excess of recurring expenditure over current revenue |
Fiscal Deficit | Total Expenditure − Non-debt Receipts | Total Government borrowing requirement |
Primary Deficit | Fiscal Deficit − Interest Payments | Current fiscal imbalance after excluding interest on past debt |
Hence, elimination of the Primary Deficit by the end of 2008-09 was not stipulated in the FRBM Act, 2003.