Fiscal Policy and Revenue (Part – III)

11. Assertion (A) : Deficit financing leads to inflation. [U.P.P.C.S. (Mains) 2003]

Reason (R) : It increase money supply as compared to goods and services.

In the context of the above which one of the following is correct:

Codes:

(a) Both (A) and (R) are true, and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true, but (R) is not the correct explanation of (A)
(c) (A) is true, but (R) is false
(d) (A) is false, but (R) is true

Correct Answer: (a) Both (A) and (R) are true, and (R) is the correct explanation of (A)

Solution:Deficit financing means generating funds to finance the deficit, which results from excess of expenditure over revenue. The gap being covered by borrowing from the public by the sale of bonds or printing new currency notes. Printing new currency notes increases the flow of money in the economy. This leads to increase in inflationary pressures which leads to rise of prices of goods and services in the country. Deficit financing is inherently inflationary. Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand in comparison to supply of goods and services, the danger of inflation looms large. Hence, both (A) and (R) are true, and (R) is the correct explanation of (A).

12. Deficit financing creates additional paper currency to fill the gap between expenditure and revenue. This device aims at economic development. But if it fails, it generates: [U.P.P.C.S. (Pre) 1993]

(a) deflation
(b) demonetization
(c) devaluation
(d) Inflation

Correct Answer: (d) Inflation

Solution:Deficit financing means generating funds to finance the deficit, which results from excess of expenditure over revenue. The gap being covered by borrowing from the public by the sale of bonds or printing new currency notes. Printing new currency notes increases the flow of money in the economy. This leads to increase in inflationary pressures which leads to rise of prices of goods and services in the country. Deficit financing is inherently inflationary. Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand in comparison to supply of goods and services, the danger of inflation looms large.

13. What is the effect of deficit financing on economy? [U.P.P.C.S. (Pre) 2016]

(a) Reduction in taxes
(b) Increase in Wages
(c) Increase in money supply
(d) Decrease in money supply

Correct Answer: (c) Increase in money supply

Solution:Deficit financing means generating funds to finance the deficit, which results from excess of expenditure over revenue. The gap being covered by borrowing from the public by the sale of bonds or printing new currency notes. Printing new currency notes increases the flow of money in the economy. This leads to increase in inflationary pressures which leads to rise of prices of goods and services in the country. Deficit financing is inherently inflationary. Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand in comparison to supply of goods and services, the danger of inflation looms large.

14. Which one of the following is likely to be the most inflationary in its effects? [I.A.S. (Pre) 2021, 2013]

(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit

Correct Answer: (d) Creation of new money to finance a budget deficit

Solution:Among all the deficit financing methods, the creation of new money to finance a budget deficit is the most inflationary in its effects because it creates more money supply in the market while the amount of goods does not change and that creates high inflation in the economy. On the other hand, borrowing from the public or banks will decrease the money supply. Hence, option (d) is the correct answer.

15. In India, deficit financing is used for raising resources for: [I.A.S. (Pre) 2013]

(a) economic development
(b) redemption of public debt
(c) adjusting the balance of payments
(d) reducing the foreign debt

Correct Answer: (a) economic development

Solution:As in country like India, the main objective of deficit financing is to encourage economic development in the country. It is considered as the most popular method of raising additional resources for economic development. The erst- while Planning Commission has defined the term as "deficit financing is used to denote the direct addition to gross national expenditure through budget deficit whether the deficits are on the revenue account or on capital account." In the developing countries, it becomes mandatory for financing of development schemes, while for the developed countries it is used as a tool of economic policy to emerge the economy from economical stress.

16. The Budget for 2012-13 sought to restrict expenditure on subsidies to: [R.A.S./R.T.S.(Pre) 2013*]

(a) 4.0 percent of GDP
(b) 3.5 percent of GDP
(c) 3.0 percent of GDP
(d) 2.0 percent of GDP

Correct Answer: (b) 3.5 percent of GDP

Solution:As per the question year, option (b) was the correct answer. In the Interim Budget Estimates 2024-25, total subsidy expenditure is Rs. 409723 crore which is 1.25 percent of the GDP (Rs. 32771808 crore). In the revised estimates of 2023-24 the total subsidy expenditure stood at 1.49 percent of GDP.

17. Statement (A): A big source of deficit in the Government's budget is the financial subsidy. [U.P.P.C.S. (Mains) 2002]

Reason (R): The level of financial subsidy is much higher in Indian agriculture than in developed countries.

Select the correct answer with the help of following code:

(a) A and R both are true and R is the correct explanation of A.
(b) A and R both are true, but R is not the correct explanation of A.
(c) A is true, but R is false
(d) A is false, but R is true

Correct Answer: (c) A is true, but R is false

Solution:Statement (A) is correct, because during the question period India was providing about 12 percent of its expenditure as financial subsidy (in Interim Union Budget 2024-25 total subsidies are about 8.6% of total expenditure), which was a major source of budget deficit. Reason (R) is incorrect, because western countries provide much higher financial aid to their agriculture sector than India.

18. 119. Consider the following statements: [U.P.P.C.S. (Spl.) (Mains) 2004]

Assertion (A): There is a history of fiscal deficit in Central Government budgets in India.

Reason (R): Indian agriculture has enjoyed large amount of subsidies compared to Western countries.

Select the correct answer using the code given below:

Code:

(a) Both (A) and (R) are true, and (R) is the correct explanation of (A)
(b) Both (A) and (R) are true, but (R) is not a correct explanation of (A)
(c) (A) is true, but (R) is false
(d) (A) is false, but (R) is true

Correct Answer: (c) (A) is true, but (R) is false

Solution:There is a history of fiscal deficit in Central Government budgets in India. Hence, Assertion (A) is correct. While Reason (R) is wrong because India's subsidies to its agriculture sector are quite low as compared to Western countries. So option (c) is correct answer.

19. Regarding Money Bill, which of the following statements is not correct? [I.A.S. (Pre) 2018]

(a) A bill shall be deemed to be Money Bill if it contains only provisions related to imposition, abolition, remission, alteration or regulation of any tax.
(b) A Money Bill has provisions for the custody of the Consolidated Fund of India or the Contingency Fund of India.
(c) A Money Bill is concerned with appropriation of money out of the Contingency Fund of India.
(d) A Money Bill deals with the regulation of borrowing of money or giving any guarantee by the Government of India.

Correct Answer: (c) A Money Bill is concerned with appropriation of money out of the Contingency Fund of India.

Solution:As per the Article 110 of the Indian Constitution (Definition of Money Bill) a Money Bill is concerned with appropriation of money out of the Consolidated Fund of India (not Contingency Fund of India). Hence, statement of option (c) is incorrect. Statements of other options are correct regarding the Money Bill.

20. With respect to the procedure of Budget in the Parliament, "the amount of demand be reduced to Re 1" is called: [Jharkhand P.C.S. (Pre) 2013]

(a) Economy Cut Motion
(b) Policy Cut Motion
(c) Basic Cut Motion
(d) Token Cut Motion

Correct Answer: (b) Policy Cut Motion

Solution:A Cut Motion is a special power vested in members of the Lok Sabha (House of the People) to oppose a demand being discussed for specific allocation by the Government in the Finance Bill as part of the Demand for Grants. There are three types of Cut Motion (1) Disapproval of Policy Cut: A disapproval of policy cut demand seeks the amount of the demand be reduced to Rs. 1. (2) Economic Cut: It states that the amount of the demand be reduced by a specific amount. (3) Token Cut: A token cut motion is moved so that the amount of the demand is reduced by Rs. 100.