Regime shifts, first from the automatic monetisation of fiscal deficits to limited monetisation and then to Fiscal Responsibility and Budget Management Act-led further curbing of monetisation, have considerably enhanced the DEGREE of freedom for monetary policy setting in India. However, newer challenges have emerged for fiscal-monetary co-ordination under the new regime that requires attention on (i) the inflationary potential of large fiscal deficits even without conventional monetisation, (ii) pro-cyclicality of fiscal spending exerting demand management pressures on monetary policy and (III) debt dynamics causing crowding out of private investment and impacting monetary management. Against this backdrop, there is a need for new fiscal rules and for reassessing the welfare costs of fiscal dominance of monetary policy.I. Introduction3.1 This chapter provides an assessment of fiscal-monetary co-ordination in India, covering institutional developments and empirical trends and ANALYSIS. The evidence in the chapter suggests that while several institutional changes have helped bring about improved fiscal-monetary co-ordination and moderated the fiscal dominance of monetary policy, new challenges have surfaced that impinge on monetary policy efficacy.3.2 Section II discusses how large fiscal deficits and consequent large market borrowings pose risks of monetisation of deficits in newer forms and may lead to a game-theoretic environment of sharing the burden of adjustment amongst fiscal and monetary authorities. Section III covers the evolution of fiscal-monetary co-ordination in different phases of institutional frameworks. Section IV focuses on fiscal and monetary policy co-ordination in inflation management. Section V analyses cyclicality in government EXPENDITURE and its implications for aggregate demand management. Section VI provides the empirical analysis on debt-deficit dynamics in India. Section VII summarises the policy implications of the analysis undertaken in the chapter, making a case for tighter but cyclically adjusted fiscal rules to further reduce fiscal dominance of the monetary policy in India.II. Fiscal Imperatives on Monetary PolicyFiscal dominance of monetary policy moderates but has not waned3.3 Fiscal dominance of monetary policy has moderated in India as a result of a series of fiscal and monetary policy reforms undertaken over the past two decades. The most notable of these were (i) moving to a market-determined interest rate system by introducing auctions of government debt, (ii) PHASING out of the automatic monetisation of fiscal deficits through the two Supplemental Agreements between the Government of India and the Reserve Bank of India, and (iii) curbing the monetisation of debt by enacting the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 that prevented the Reserve Bank from subscribing to primary issuances of government securities from April 1, 2006. These landmark steps have considerably reduced the fiscal dominance of monetary policy.3.4 During the same period, the Reserve Bank undertook far-reaching monetary reforms, moving from direct instruments to indirect instruments of monetary policy by developing market-based public debt markets. This, in turn, helped the economy step out of a regime of financial repression based on administered interest rates to vibrant money and debt markets that allowed interest rates to be largely determined by the market. The reforms pursued by the fiscal and monetary authorities in tandem helped improve the efficacy of macroeconomic management. However, newer challenges emerged. Large subsidies, especially for fuel, apart from adding to fiscal deficits limited the demand adjustments and spilled over to the current account. Large capital inflows financed the current account gap but the capital flow volatility added to interest rate and exchange rate pressures. At the same time, open market operations (OMO), though essentially a monetary tool, had to factor in the large market borrowing at times to maintain orderly financial conditions. In periods when inflation was high, this, in turn, added to pressures on monetary management. These require revisiting the issues relating to fiscal-monetary co-ordination with a view to explore further changes in the broad framework provided by the institutional and legal arrangements, as well as instruments and practices. The changes should help improve the efficacy of monetary and fiscal policies by bringing about independence, accountability and greater co-ordination.3.5 On the one hand, there has been a regime shift from the days of financial repression. The automatic monetisation of debt has been phased out. On the other, fiscal dominance of monetary policy remains through high fiExplanation:pls pls mark me as brainliest..