Fiscal Policy & Revenue (Part – I)

31. The following table shows the percentage distribution of revenue expenditure of Government of India in 1989-90 and 1994-95: [I.A.S (Pre) 1996]

Expenditure Head (Percent of Total)
Years	Defence	Interest Payments	Subsidies	Grants to States/UTs	Others
1989-90	15.1	27.7	16.3	13.6	27.4
1994-95	13.6	38.7	8.0	16.7	23.0

Based on this table, it can be said that the Indian economy is in poor shape, because Union Government continues to be under pressure to:

(a) reduce expenditure on defence.
(b) spend more and more on interest payments.
(c) reduce expenditure on factors.
(d) spend more and more on grants-in-aid to State governments/Union Territories.

Correct Answer: (b) spend more and more on interest payments.

Solution:In the given table, it is shown that the Government of India's revenue expenditure on interest payments increased, so it laid pressure on the Central Government. Due to high interest payments other sectors of investment are getting affected.

Revenue expenditure is the expenditure incurred by the government to meet its day to day needs and does not create any productive assets. Revenue expenditure is basically a short-term expenditure of the government which covers the on-going operation expenses of running government business. It is a one time payment which means the government cannot recover the spent money. Revenue expenditure is recurring in nature.
It includes Interest payments, expenditure on defence and police, subsidies, salaries and pensions. Other expenditures such as Grants to the states, union territories and foreign countries, social services like expenditure on education, health, social security and poverty alleviation, economic services like non-capital expenditure on agriculture, industry, power, transport and communication and other general services like expenditure on tax collection, managing external affairs, etc. are also the parts of revenue expenditure.

32. Which one of the following is not an objective of fiscal policy of Government of India? [U.P.P.C.S. (Pre) 2006]

(a) Full employment
(b) Price stability
(c) Regulation of inter-state trade
(d) Equitable distribution of wealth and income

Correct Answer: (c) Regulation of inter-state trade

Solution:Fiscal policy, as a prime lever of economic stabilisation policy, seeks to influence the level of aggregate demand in the economy in pursuit of the larger societal goals of higher economic growth, full employment, equitable distribution of wealth and income and price stability. Regulation of inter- state trade is not an objective of fiscal policy in India.

33. Fiscal policy is concerned with which of the following? [M.P.P.C.S. (Pre) 1996]

(a) The volume of currency that banks put in the economic system
(b) The policy regarding taxation and government expenditure
(c) The policy for regulation of stock markets
(d) The policy for country's relations with IMF

Correct Answer: (b) The policy regarding taxation and government expenditure

Solution:Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty.

Key Takeaways on Fiscal Policy:
1. Fiscal policy refers to the use of government spending and taxation to influence the economy.
2. Expansionary fiscal policy involves increasing government spending and/or lowering taxes to stimulate economic growth during a recession.
3. Contractionary fiscal policy involves decreasing government spending and/or raising taxes to cool down an overheated economy and control inflation.
4. Fiscal policy works alongside monetary policy to help stabilize the economy and achieve macroeconomic objectives like full employment, price stability, and economic growth.
5. Government budget deficits occur when spending exceeds revenue, while budget surpluses occur when revenue exceeds spending.
6. The effectiveness of fiscal policy depends on various factors such as the timing of implementation, the magnitude of the policy changes, and the overall economic conditions.
7. Critics argue that fiscal policy can be subject to political biases, inefficiencies, and potential crowding out effects if government borrowing increases interest rates and reduces private sector investment.

34. Which one of the following is a part of fiscal policy? [Uttarakhand P.C.S. (Pre) 2012]

(a) Production policy
(b) Tax policy
(c) Foreign policy
(d) Interest rate policy

Correct Answer: (b) Tax policy

Solution:Taxation, public expenditure and public debt are the important instruments of Fiscal policy. In other words, a policy related to public expenditure, taxation and public debt is called fiscal policy.

Key Takeaways on Fiscal Policy:
1. Fiscal policy refers to the use of government spending and taxation to influence the economy.
2. Expansionary fiscal policy involves increasing government spending and/or lowering taxes to stimulate economic growth during a recession.
3. Contractionary fiscal policy involves decreasing government spending and/or raising taxes to cool down an overheated economy and control inflation.
4. Fiscal policy works alongside monetary policy to help stabilize the economy and achieve macroeconomic objectives like full employment, price stability, and economic growth.
5. Government budget deficits occur when spending exceeds revenue, while budget surpluses occur when revenue exceeds spending.
6. The effectiveness of fiscal policy depends on various factors such as the timing of implementation, the magnitude of the policy changes, and the overall economic conditions.
7. Critics argue that fiscal policy can be subject to political biases, inefficiencies, and potential crowding out effects if government borrowing increases interest rates and reduces private sector investment.

35. Which of the following is NOT a tool fiscal policy? [Raj. P.C.S. (Pre) 2023]

(a) Public expenditure
(b) Interest rate
(c) Deficit financing
(d) Taxation

Correct Answer: (b) Interest rate

Solution:Among the given options, public expenditure, deficit financing and taxation are tools of fiscal policy, while interest rate is an instrument of monetary policy.

Key Takeaways on Fiscal Policy:
1. Fiscal policy refers to the use of government spending and taxation to influence the economy.
2. Expansionary fiscal policy involves increasing government spending and/or lowering taxes to stimulate economic growth during a recession.
3. Contractionary fiscal policy involves decreasing government spending and/or raising taxes to cool down an overheated economy and control inflation.
4. Fiscal policy works alongside monetary policy to help stabilize the economy and achieve macroeconomic objectives like full employment, price stability, and economic growth.
5. Government budget deficits occur when spending exceeds revenue, while budget surpluses occur when revenue exceeds spending.
6. The effectiveness of fiscal policy depends on various factors such as the timing of implementation, the magnitude of the policy changes, and the overall economic conditions.
7. Critics argue that fiscal policy can be subject to political biases, inefficiencies, and potential crowding out effects if government borrowing increases interest rates and reduces private sector investment.

36. Which of the following economists, introduced fiscal policy as a tool to rectify the Great Depression of 1929- 30? [Uttarakhand P.C.S. (Pre) 2012]

(a) Prof. Keynes
(b) Prof. Pigou
(c) Prof. Marshall
(d) Prof. Crowther

Correct Answer: (a) Prof. Keynes

Solution:In the first half of the twentieth century, fiscal policy came to the centre stage of economic policy with its ascendancy attributed to the Keynesian policy perscription (described in Prof. J.M. Keynes 1936 book 'General Theory of Employment, Interest and Money'), that deficiency of aggregate demand could be overcome by expansionary fiscal policy through higher government spending. It became the principal tool in fighting wide-scale unemployment caused by the Great Depression of 1930s and rebuilding the war-ravaged economies of Europe and Japan after the Second World War.

37. Which one of the following statements appropriately describes the 'fiscal stimulus'? [I.A.S (Pre) 2011]

(a) It is a massive investment by the Government in manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth
(b) It is an intense affirmative action of the Government
(c) It is Government's intensive action of financial institutions to ensure disbursement of loans to agriculture and allied sectors to promote greater food. production and contain food inflation.
(d) It is an extreme affirmative action by the Government to pursue its policy of financial inclusion.

Correct Answer: (b) It is an intense affirmative action of the Government

Solution:A fiscal stimulus is a package comprising tax rebates and incentives. It is used by the government to stimulate the economy and prevent the country from a financial crisis. A fiscal stimulus package of tax rebates and incentives boosts spending. As spending increases demand, it creates a situation where employment rises. This, in turn, leads to a rise in income, which proportionately boosts spending. As this continues, the economy recovers from collapse.

38. Which among the following steps is most likely to be taken at the time of an economic recession? [I.A.S (Pre) 2021]

(a) Cut in tax rates accompanied by increase in interest rate
(b) Increase in expenditure on public projects
(c) Increase in tax rates accompanied by reduction of interest rate
(d) Reduction of expenditure on public projects

Correct Answer: (b) Increase in expenditure on public projects

Solution:Economic recessions occur when an economy contracts for at least two consecutive quarters, in terms of real Gross Domestic Product. It is a period of general economic decline and is typically accompanied by a drop in the stock market, industrial production, housing market, wholesale-retail sales and real income with an increase in unemployment. Increase in expenditure on public projects is most likely step to be taken at the time of an economic recession because public spending influences output growth and affects capital formation or productivity growth. As per Economic survey 2020-21, in a recession or slowdown, the government should increase public expenditure and reduce taxes to create a demand that can drive an economic boom.

39. The revenue estimates of the Budget in India are prepared by: [Jharkhand P.C.S. (Pre) 2013]

(a) The Central Board of Direct Taxes
(b) The Cabinet Secretariat
(c) The respective commissions
(d) The Ministry of Finance

Correct Answer: (d) The Ministry of Finance

Solution:The Department of Economic affairs of Ministry of Finance is the nodal agency of the Union Government to formulate and monitor country's economic policies and programmes. A principal responsibility of this department is the preparation and presentation of the Union Budget. The Department of Revenue of Finance Ministry exercises control in respect of revenue matters through the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC). The Ministry of Finance in consultation with CBDT and CBIC prepares revenue estimates of the Budget to be generated in the ensuing financial year.

40. Economic Survey of India is related to: [Chhattisgarh P.C.S (Pre) 2018, 2015]

Correct Answer: (c) Ministry of Finance

Solution:

The Economic Survey is an annual report presented by the government before the Union Budget to assess India's economic condition.
Prepared by the Economic Division of the Ministry of Finance under the Chief Economic Adviser's supervision, it is tabled in both houses of Parliament by the Union Finance Minister.
The survey assesses economic performance, highlights sectoral developments, outlines challenges and provides an economic outlook for the coming year.
The Economic Survey was first presented in 1950-51 as part of the budget and became a separate document from the Union Budget in 1964, tabled a day before the budget.
India's Gross Domestic Product (GDP) is projected to grow between 6.3-6.8% in FY26 (2025-26), with real Gross Value Added (GVA) estimated at 6.4% in FY25 (2024-25).