Passage of the Act was the only way to counter revenue deficits and budget deficits and save the economy from a debt trap, Kelkar said in a signed article forming part of the Tata memorial lecture organised by Ficci earlier this month.

Emphasising that the foremost reform measure required was to ensure fiscal health of the nation, Kelkar, however, warned that merely passing the Fiscal Responsibility Act would not achieve fiscal balance.

"What is required is simultaneous action both at the Centre and the states to increase user charges, particularly of electricity, water, transport etc so that resources are generated to increase investments and also improve the quality of these services", Kelkar said, adding that these measures would encourage private investment in these sectors and would reduce costs for consumers and improve quality by promoting competition.

The IMF executive director said one of the most important reform measures would be redefining the role of the government and downsizing government while improving the quality of governance. Downsizing the government would also mean privatisation of non-strategic public sector enterprises, including the banking sector.

He said the only strategic public sector enterprise should be those dealing with atomic energy, space and defence production. Also, "the new Parliament will need to review policies regarding size of government and also the principles of compensation to employees to government and semi-government agencies." Such new initiatives alone can ensure that the fiscal situation of the states and the Centre becomes sustainable and the taxpayers get their money's worth, he said.

Strongly advocating the creation of an institutional architecture for the management of the economy, Kelkar emphasised that India should have an independent monetary authority by giving greater independence to RBI on the lines of the autonomy enjoyed by the Federal Reserve in the US or the Bank of England in the UK.

The new institutional architecture will also imply strengthening of independent regulatory agencies such as Sebi, Trai etc. and treating their independence at par with that of the judiciary. "This will inspire confidence among both investors and consumers and promote competition in these sectors".

Kelkar said the most important outcome of the fiscal correction would be reduction of both short-term and long-term real interest rates in the economy.

Currently, they are at unprecedented levels of six to eight per cent. "No country in the world has achieved a sustained high growth rate with such high interest rates. Bringing real interest rates in the neighbourhood of three to five per cent can trigger a spectacular growth boom throughout the economy," he said.

Equally, he said, the Centre piece of reforms will have to be to promote competition in product markets and the services sector by allowing free entry and freer international trade. This also meant giving a level playing field to all entities, ie, private sector and public sector, he added.