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).