Fiscal Policy

These flashcards cover key concepts of fiscal policy based on UPSC Economics notes.

What are the macroeconomic risks of adopting expansionary fiscal policy during high inflation?

It may worsen inflation, reduce purchasing power, and cause overheating of the economy.

How does counter-cyclical fiscal policy stabilize the economy?

It increases spending in recessions and cuts spending in booms, stabilizing output and employment.

What distortion occurs if government disinvestment is misclassified as revenue income?

It inflates revenue receipts falsely, reducing perceived deficit and distorting fiscal policy stance.

Why does monetized deficit lead to inflationary pressures in developing economies?

It increases money supply rapidly, leading to demand-pull inflation and weakening monetary control.

What happens if fiscal deficit is used for recurring revenue expenditure instead of capital formation?

It leads to unsustainable borrowing with no asset creation, worsening long-term fiscal health.

How does cutting capital expenditure to reduce fiscal deficit affect long-term growth?

It reduces infrastructure investment and slows down potential GDP growth.

Why is fiscal deficit a more comprehensive indicator of fiscal imbalance than revenue deficit?

It includes total borrowing needs and captures both revenue and capital imbalances.

How does pro-cyclical fiscal policy worsen economic downturns?

It amplifies economic fluctuations by increasing spending during booms and cutting during recessions.

What are the risks of frequently utilizing the escape clause under the FRBM Act?

It reduces credibility of fiscal targets and may raise concerns about fiscal indiscipline.

How does the separation of PDMA from RBI reduce conflicts in debt management?

It avoids conflict of interest as RBI acts as banker and debt manager to government.

What happens if Ways and Means Advances exceed 90 days?

It is treated as overdraft, attracting higher interest and reflecting cash management inefficiency.

How does an increase in interest-growth differential (IRGD) affect debt sustainability?

Higher IRGD implies faster debt accumulation relative to growth, making debt less sustainable.

What are the consequences of excessive borrowing through marketable debt instruments on private investment?

It increases cost of borrowing and reduces funds available for private sector credit needs.

How does the crowding out effect operate in the context of rising government debt?

High public borrowing raises interest rates, reducing private investment—a crowding-out effect.

What happens to the money supply if RBI purchases government securities in the secondary market?

It increases liquidity, potentially stoking inflation if not sterilized through open market operations.

How does zero-based budgeting differ from traditional incremental budgeting?

ZBB starts from scratch annually, ensuring all expenses are justified, improving efficiency.

What impact does a shift from outcome to input focus in budgetary allocation have?

It diverts focus from outcomes to mere fund utilization, reducing public service delivery effectiveness.

Why is fiscal neutrality not always desirable in a developing economy?

Developing economies need fiscal stimulus; neutrality may underprovide needed infrastructure.

What happens if revenue receipts remain stagnant while revenue expenditure increases?

Revenue deficit rises, signaling fiscal stress and over-reliance on borrowings for routine expenses.

How does performance budgeting ensure public accountability in government spending?

It links budgetary outlays to specific results, enhancing accountability of ministries and schemes.

What fiscal implications arise if tax expenditure grows faster than direct tax revenue?

It reduces effective tax collection and creates distortions in tax structure and equity.

How does gender budgeting influence resource allocation?

It ensures women’s needs are prioritized in policy and budgeting decisions.

What happens if states rely excessively on centrally sponsored schemes?

It leads to fiscal stress, delays in project execution, and overcentralization of development.

Why might balanced budget policies not be ideal during a recession?

It limits the government’s ability to stimulate demand and delays recovery.

How would a rising effective revenue deficit affect capital asset creation?

It implies more of borrowed funds are used for non-asset creating purposes, hurting long-term growth.

Why is outcome budgeting preferred for evaluating flagship government schemes?

It evaluates performance, not just allocation, making government spending outcome-oriented.

What role does NIC play in budget formulation?

NIC aggregates data from ministries, ensuring reliability and consistency in budget estimates.

How do debt capital receipts differ from non-debt capital receipts in budget financing?

Debt capital receipts increase liabilities; non-debt ones like disinvestment don’t require repayment.

What impact does a high fiscal deficit have on sovereign credit ratings?

High fiscal deficit implies reliance on borrowing, which may raise interest rates and risk ratings.

What governance issue arises if the Contingency Fund is not replenished post-emergency spending?

It bypasses accountability, reducing parliamentary oversight and creating a fiscal gap.

How does fiscal drag operate as a hidden increase in taxpayer burden?

Inflation pushes taxpayers into higher brackets without real income gain, raising tax burden stealthily.

What risk arises if majority disinvestment occurs in strategic sectors?

It may compromise national security and strategic autonomy if critical assets are sold.

Why is 'pump priming' significant during economic slowdown?

It stimulates demand and employment through government spending in economic downturns.

What fiscal risk emerges if public debt skews towards short-term instruments?

Refinancing risk increases, interest costs may rise, and debt sustainability worsens.

How do capital expenditures promote intergenerational equity?

They finance long-term assets benefitting future generations, ensuring intergenerational justice.

How is the revenue budget structurally different from the capital budget?

Revenue budget deals with recurring items; capital budget involves asset and liability transactions.

Why does fiscal consolidation not always mean reduction in welfare expenditure?

Fiscal discipline can be achieved by rationalizing subsidies and targeting, not cutting essential schemes.

If RBI directly finances the fiscal deficit, how does it impact monetary policy autonomy?

It blurs lines between fiscal and monetary policy, reducing RBI's inflation-targeting autonomy.

What role does the FRBM’s Macroeconomic Framework Statement play in fiscal transparency?

It presents key assumptions and projections, making budget intentions transparent.

How would frequent reclassification of schemes affect fiscal planning?

It reduces comparability and consistency, affecting policy continuity and performance tracking.

If public sector disinvestment targets are missed, how does it distort capital receipt estimates?

It causes fiscal slippage, widening gap between estimates and realizations.

What does a rising primary deficit indicate about current fiscal policies?

It means new borrowings exceed interest payments, showing poor fiscal health.

Why is monetized deficit seen as a last resort in fiscal management?

It increases inflation risk and undermines market-based financing discipline.

How do zero coupon treasury bills function as marketable debt instruments?

They are sold at discount and redeemed at par, with no periodic interest payment.

What currency risks are involved if fiscal deficit is financed through external commercial borrowing?

Exchange rate fluctuations can raise repayment cost, adding to external vulnerability.

Why is disinvestment considered a non-debt capital receipt?

It doesn’t create liability and involves asset sale, hence not classified as borrowing.

What challenge arises if grant-based capital creation is excluded from effective revenue deficit calculation?

It undervalues the deficit’s true consumption burden and underestimates fiscal pressure.

What governance issue is indicated if outcome budgets show poor performance despite full fund utilization?

It suggests inefficiency, weak monitoring, and poor utilization outcomes.

How does performance budgeting enhance cost-benefit accountability in ministries?

It links spending with quantifiable results, allowing better review and course correction.

Why is revenue deficit elimination critical before achieving fiscal deficit targets?

It ensures that borrowings are not used for daily expenses but for productive investment.

How do CPSE Exchange Traded Funds help meet disinvestment goals?

They allow pooled disinvestment across sectors with lower volatility and market resistance.

How does the FRBM Act aim to promote inter-generational equity?

It prevents excessive borrowing today by mandating sustainable deficit and debt levels for future generations.

What are the escape clause conditions under the FRBM Review Committee recommendations?

Escape clause can be triggered during war, national calamity, agricultural distress, or economic slowdown.

Why did the NK Singh Committee propose shifting from fiscal deficit to debt-GDP ratio?

Debt is more stable, reflects overall fiscal burden, and aligns with global practices for long-term sustainability.

What is the significance of the buoyancy clause proposed by NK Singh Committee?

If GDP grows 3% above average, government must reduce fiscal deficit 0.5% below target, ensuring fiscal prudence.

What borrowing mechanism can the government use if it exceeds the WMA limit?

It must move to overdraft facility, with higher interest and stricter conditions under RBI norms.

How does the Market Stabilization Scheme contribute to inflation control?

It absorbs excess liquidity by selling government securities, thus curbing inflationary tendencies.

Why is external debt often less volatile than internal debt in India’s case?

India’s external debt is mostly fixed-rate, concessional, and long-term, reducing exposure to rate or currency volatility.

How does RBI restrict monetized deficit under the FRBM framework?

It bans RBI from direct deficit financing except under Ways and Means Advances, ensuring fiscal discipline.

What distinguishes capital expenditure in general services from that in social services?

Capital expenditure on general services involves infrastructure like railways, while social services focus on health, education.

How does the use of grants-in-aid from states for capital asset creation impact effective revenue deficit?

It reduces effective revenue deficit, showing that some revenue spending is productive and asset-creating.

How do Treasury Bills differ from dated securities in terms of maturity and returns?

T-bills are short-term, zero-coupon and sold at discount; dated securities carry fixed coupon and long-term maturity.

Why is the ‘Revenue Deficit’ termed the most dangerous form of deficit?

It reflects inability to meet even regular expenses without borrowing, leading to long-term unsustainability.

How does zero-based budgeting help eliminate wasteful expenditures?

It forces all departments to justify expenditures anew, avoiding automatic rollover of unproductive schemes.

In what way does fiscal policy influence savings behavior in the household sector?

Tax exemptions like PPF and NSC incentivize household savings, raising national savings rate.

How does taxation as a fiscal tool affect aggregate demand?

Higher taxes reduce disposable income and demand; lower taxes can stimulate consumption and investment.

What happens if government raises revenue through disinvestment rather than borrowing?

Disinvestment does not create future repayment liabilities, unlike debt, improving fiscal sustainability.

How does contingency fund spending differ from consolidated fund withdrawals?

Contingency Fund needs post-facto approval and is used for emergencies, unlike budgeted consolidated fund spending.

What are the roles of various departments under the Ministry of Finance in budget making?

DEA drafts the budget; DoE manages expenditure; DoR handles taxation; DIPAM oversees disinvestment; DFS controls PSBs.

Why is the Department of Expenditure critical in implementing pay commission recommendations?

It processes salary structure, pension liabilities, and ensures fiscal discipline in wage reforms.

What makes tax expenditure a hidden burden on the budget?

It reduces visible fiscal deficit while still incurring cost via exemptions, leading to hidden subsidy.

Why is performance budgeting relevant for ministries implementing flagship schemes?

It assesses outcomes of spending, linking money with measurable results and justifying allocation.

How does outcome budgeting ensure transparency in public delivery?

It checks whether schemes delivered intended benefits, increasing efficiency and trust in governance.

Why is interest paid on internal debt included in revenue expenditure?

Because loans are internal liabilities, their interest payments are classified as recurring expenses.

How does fiscal policy affect exchange rate stability?

Fiscal policy can influence capital flows and investor confidence, affecting currency stability.

How do institutional investors impact the structure of internal public debt?

They hold government bonds long-term, stabilizing demand and reducing volatility in debt markets.

Why is public debt management separated from monetary policy operations?

To prevent conflict of interest, debt management is separated from RBI’s inflation targeting role.

What makes disinvestment through CPSE ETF attractive for the government?

It allows diversified equity sale, reduces price shocks, and involves retail and institutional investors.

How does privatization differ in objective from strategic disinvestment?

Privatization aims for complete ownership transfer; strategic disinvestment retains minority control or influence.

Why is the National Investment Fund kept outside the Consolidated Fund of India?

It ensures disinvestment proceeds are invested for long-term returns rather than financing current expenditure.

Why are centrally sponsored schemes divided into core, core of the core, and optional schemes?

To prioritize resource allocation and ensure minimum service levels across vulnerable population groups.