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Kerala PSC Indian Economy Book Study Materials Page 492Book's First Page
18.20 ndian onom be hampered. This is considered a bias in the government’s powers to create deficit was economic policies of the elected governments. introduced.47 But there has always been a consensus among the (iii) Some countries introduced the so-called experts and policymakers that an external (i.e., ‘Currency Board’ type of arrangement outside the government) and some form of a to serve the same purpose—this is the statutory check must be over the government on third variant. In this arrangement, its powers of money creation (i.e., by borrowings money supply in the economy is directly or printing). With the objective of removing the linked to changes in the supply of foreign bias—to make fiscal policy less sensitive to electoral assets—neither the government nor the considerations, several countries had introduced central bank has any independent powers some legal provisions on their governments before to create money, as growth in money India enacted its FRBMA. We see mainly three supply is not allowed to exceed growth in variants of it around the world: the foreign assets.48 (i) It was New Zealand which first It was in 1994 that India took the first step introduced such a legal binding on the in this direction when the central government government’s powers of money creation. had a formal agreement with the RBI to limit Here the central bank is legally bound its borrowing through ad hoc treasury bills to a to ensure that money creation by the predetermined amount (Rs. 6,000 crores in 1994– government does not increase the rate 95).49 However, it was a highly liberal arrangement of inflation target—it means that the with the government having the ultimate powers central bank has the overriding powers on to revise the aforesaid predetermined amount by the government there in the area of extra a fresh agreement with the RBI. The importance money creation.46 this beginning had was finally in the enactment of the FRBMA 2003—a historic achievement in the (ii) The second variant is putting some firm area of fiscal prudence in the country. legal or constitutional limit on the size of government deficits or the power of fIscal consolIdatIon In IndIa the government to borrow. Germany and Chile had such an arrangement—today The average combined fiscal deficits, of the Germany is bound to the fiscal limits Centre and states after 1975, had been above 10 prescribed by the Maastricht Treaty. In per cent of the GDP till 2000–01. More than the late 1990s, an upper limit on the half of it had been due to huge revenue deficits. The governments were cautioned by the RBI, 46. Opposite to it, in the UK, the government has overriding powers on the central bank and there is absence the Planning Commission as well as by the IMF of any legal checks on money creation powers of 47. By the Congress passing the Balanced Budget Act, 1997 the government. Once the UK becomes part of the which promised to eliminate federal deficit spending European Union it will come under such a check y see icholas Henry, Public Administration through the Maastricht Treaty. Before the enactment and Public Policy ew elhi rentice Hall, , of the FRBMA, 2003. India was like the UK, however, p. 217. the Constitution of India has a provision for imposing a statutory limit on the centre s orrowing powers under 48. Argentina introduced this arrangement in the late 1990s. rticle But the Article is not mandatory and has 49. Ministry of Finance, Economic Survey 1994–95 (New not been invoked by any of the governments till date. Delhi: Government of India, 1995).