Consider the following statements:

1. If the fiscal deficit ratio is too high, it leads to higher rates of interest for the borrowings of private entrepreneurs and businesses.

2. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 suggests bringing the fiscal deficit down to about 3% plus or minus 2% of the GDP.

Which of the above statements is/are correct?

Statement 1 is correct: This refers to the "Crowding Out Effect." When the government’s fiscal deficit is high, it borrows heavily from the market to bridge the gap. This massive demand for loanable funds reduces the supply available for the private sector and pushes up the interest rates. Consequently, it becomes more expensive for private entrepreneurs and businesses to borrow for investment.

Statement 2 is incorrect: While the FRBM Act, 2003, and subsequent amendments (including the N.K. Singh Committee recommendations) do target a fiscal deficit of 3% of the GDP, it does not include a "plus or minus 2%" flexibility clause like the inflation targeting framework of the RBI. The Act provides for specific "escape clauses" (up to 0.5%) under extraordinary circumstances like national security, calamity, or structural reforms, but the "3% +/- 2%" target is not a provision of the FRBM Act.