No one can deny the importance of a sound fiscal environment for enhancing the flexibility and effectiveness of monetary policy, but at the same time India’s fiscal situation should not be seen in the prism of sovereign risk concerns in advanced economies.
India was on a path of fiscal consolidation prior to the global crisis, following a rule based approach under the FRBM (Fiscal responsibility and Budget Management) Act that came into force on July 5, 2004. The combined gross fiscal deficit (of the central and state governments) declined significantly from pre-FRBM period of 9.5 percent to 4.1 percent in 2007–08.