International experience indicates that a prudent fiscal policy remains the single largest prerequisite for monetary stability. In India, reforms in the monetary-fiscal interface during the 1990s have been a key factor that imparted greater flexibility to monetary policy. These reforms have taken a significant step forward with the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 by the Centre.
With the Centre’s GFD/GDP ratio at 4.1 per cent in 2004-05 (provisional accounts), the FRBM target of 3.0 per cent by 2008-09 appears to be within striking distance. However, with revenue deficit at 2.7 per cent in 2004-05, the elimination of the revenue deficit by 200809 will prove to be more difficult.