What is Fiscal Policy in India?
Table of Contents
Fiscal policy in India: Fiscal policy is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly.
Fiscal policy in India: Fiscal policy in India is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly. In recent times, the importance of fiscal policy has been increasing to achieve economic growth swiftly, both in India and across the world. Attaining rapid economic growth is one of the key goals of fiscal policy formulated by the Government of India. Fiscal policy, along with monetary policy, plays a crucial role in managing a country’s economy.
What is meant by Fiscal Policy in India? Example of Fiscal Policy in India:
Through the fiscal policy, the government of a country controls the flow of tax revenues and public expenditure to navigate the economy. If the government receives more revenue than it spends, it runs a surplus, while if it spends more than the tax and non-tax receipts, it runs a deficit. To meet additional expenditures, the government needs to borrow domestically or from overseas. Alternatively, the government may also choose to draw upon its foreign exchange reserves or print additional money.
For example, during an economic downturn, the government may decide to open up its coffers to spend more on building projects, welfare schemes, providing business incentives, etc. The aim is to help make more of productive money available to the people, free up some cash with the people so that they can spend it elsewhere, and encourage businesses to make investments. At the same time, the government may also decide to tax businesses and people a little less, thereby earning lesser revenue itself.
Main objectives of Fiscal Policy in India:
- Economic growth: Fiscal policy helps maintain the economy’s growth rate so that certain economic goals can be achieved.
- Price stability: It controls the price level of the country so that when the inflation is too high, prices can be regulated.
- Full employment: It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.
What is the difference between fiscal policy and monetary policy?
The government uses both monetary and fiscal policy to meet the county’s economic objectives. The central bank of a country mainly administers monetary policy. In India, the Monetary Policy is under the Reserve Bank of India or RBI. Monetary policy majorly deals with money, currency, and interest rates. On the other hand, under the fiscal policy, the government deals with taxation and spending by the Centre.
Importance of Fiscal Policy in India:
- In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.
- Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its numerous projects.
- Fiscal policy also helps in providing stimulus to elevate the savings rate.
- The fiscal policy gives adequate incentives to the private sector to expand its activities.
- Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.
MCQ Question On Fiscal Policy Of India
Question 1 : Economic Survey in India is published by the
a) Reserve Bank of India
b) NITI Aayog
c) Ministry of Finance, Government of India
d) Ministry of Industries, Government of India
Answer : c
Question 2 : Fiscal policy in India is formulated by
a) Reserve Bank of India
b) Planning Commission
c) Finance Ministry
d) Securities and Exchange Board of India
Answer : c
Question 3 : If we deduct grants to states for the creation of capital assets from revenue deficit, we arrive at
a) Primary defecit
b) Net fiscal deficit
c) Budgetary deficit
d) Effective revenue deficit
Answer : d
Question 4 : Which one of the following is the largest item of expenditure of the Government of India on revenue account?
a) Defence
b) Subsidies
c) Pensions
d) Interest payments
Answer : d
Question 5 : Which one of the following is a capital receipt in government budget?
a) Interest receipts on loans given by the government to other parties
b) Dividends and profits from public sector undertakings
c) Borrowing of the government from public
d) Income tax receipts
Answer : c
Question 6 : Equality in a country can be best brought through
a) Progressive expenditure
b) Regressive taxation
c) Regressive expenditure
d) None of the above
Answer : c
Question 7 : Fiscal deficit in the union budget is equal to
a) Net increase in internal and external borrowings
b) The difference between current expenditure and current revenue
c) The sum of monetized deficit and budgetary deficit
d) Net increase in the union government’s borrowing from the Reserve Bank of India
Answer : a
Question 8 : Fiscal deficit implies:
a) Total expenditure – (Revenue receipts + Recovery of loans + Receipts from disinvestment)
b) Total expenditure – Total receipts from all sources ,including borrowings
c) Total expenditure – (Revenue receipts + Fresh loans)
d) Total expenditure – Disinvestment receipts
Answer : a
Question 9 : Fiscal Responsibility and Budget Management Act (FRBMA) was passed to keep check on
a) Fiscal deficit only
b) Revenue deficit only
c) Both fiscal deficit and revenue deficit
d) Neither fiscal deficit nor revenue deficit
Answer : c
Question 10 : According to the provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and FRBM Rules, 2004, the government is under obligation to present three statements before the Parliament along with the annual budget.
Which one of the following is not one of them?
a) Macroeconomic framework statement
b) Fiscal policy strategy statement
c) Medium-term fiscal policy statement
d) Short-term fiscal policy statement
Answer : d
Question 11 : Which of the following is not a component of revenue receipts of the union government?
a) Corporate tax receipts
b) Dividends and profits
c) Disinvestment receipts
d) Interest receipts
Answer : c
Question 12 : Every year the Economic Survey is compiled by :
a) Office of Economic Advisor
b) Central Statistical Office (CSO)
c) National Sample Survey Organisation (NSSO)
d) Department of Economic Affairs
Answer : d
Question 13 : Consider the following statements:
- India spends more than 1% of its GDP on Research and Development (R&D)
- The expenditure on R&D as proportion of GDP has increased in the past few years
- China incurs more than four times expenditure on R&D than that by India
Which of the statements given above is/are correct
a) 1, 2, and 3
b) 2 and 3 only
c) 1 and 2 only
d) 3 only
Answer : b
Question 14 : Which of the following is/are included in the capital budget of the Government of India?
- Expenditure on acquisition of fighter aircraft
- Financial assistance received from the World Bank
- Loans made to foreign governments
- Grants given to states and union territories every year
Select the correct answer using the codes given below:
a) 1 and 2 only
b) 2 and 3 only
c) 1, 3, and 4
d) 1, 2, and 3
Answer : d
Question 15 : Consider the following statements regarding plan and non-plan expenditure
- Plan expenditure is believed to be under the discretion of the central government, whereas non-plan expenditure is not part of discretion of the central government
- The distinction between plan and non-plan expenditures has been eliminated from Budget 2017-18 onwards.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Answer : c
Question 16 : Match List I with List II and select the correct answer using the codes given below the Lists
| List I (Term) | List II (Explanation) |
| 1. Fiscal deficit | (A) Excess of total expenditure over total receipts |
| 2. Budget deficit | (B) Excess of revenue expenditure over revenue receipts |
| 3. Revenue deficit | (C) Excess of total expenditure over total receipts less borrowings |
| 4. Primary deficit | (D) Excess of total expenditure over total receipts less borrowings and interest payments |
a) 1-C, 2-A, 3-B, 4-D
b) 1-D, 2-C, 3-B, 4-A
c) 1-A, 2-C, 3-B, 4-D
d) 1-C, 2-A, 3-D, 4-B
Answer : a
Question 17 : Which of the following is/are components of public debt?
- Public borrowing
- Treasury bills
- Securities issued by RBI
Select the correct answer using the codes given below:
a) 1 only
b) 1 and 2
c) 2 only
d) 1,2, and 3
Answer : d
Question 18 : Match List I with List II and select the correct answer using the codes given below the lists.
| Publisher | Publication |
| 1. Ministry of Commerce and Industry | (A) Report on Currency and Finance |
| 2. Central Statistical Organisation | (B) Economic Survey |
| 3. Reserve Bank of India | (C) Wholesale Price Index |
| 4. Department of Economic Affairs | (D) National Accounts Statistics |
a) 1-D, 2-C, 3-B, 4-A
b) 1-C, 2-D, 3-A, 4-B
c) 1-D, 2-C, 3-A, 4-B
d) 1-C, 2-D, 3-B, 4-A
Answer : b
Question 19 : With reference to revenue deficit, consider the following statements:
- It includes only those transactions that affect current income and expenditure of government.
- It considers the current borrowing by the government.
- As per the FRBM Act, the government is required to reduce the revenue deficit to 3% of the GDP
Which of the statements given above is/are correct?
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2, and 3
Answer : a
Question 20 : Budget deficit may lead to
- Rise in the interest rates
- Fall in value of currency
- Increase in currency circulation
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 1, 2, and 3
c) 1 and 3 only
d) 2 and 3 only
Answer : b
Question 21 : Which of the following items are included in revenue receipts?
- Tax revenue
- Non-tax revenue
- Recovery loans
- Borrowing and other liabilities
Select the correct answer using the codes given below:
a) 1 and 2 only
b) 1, 2 , and 3 only
c) 3 and 4 only
d) 1, 3, and 4 only
Answer : a
Question 22 : Which of the following is/are example of capital payment by the government?
- Loan repayment
- Interest payment on loan
- Purchase of defence technology
Select the correct answer using the codes given below:
a) 1 only
b) 1 and 3 only
c) 2 and 3 only
d) 1, 2 and 3
Answer : b
Question 23 : Which of the following developments can occur in an economy due to deficit financing?
- Rise in inflation
- Rise in government debt
- Increase in money supply
- Improvement in current account deficit
Select the correct answer using the codes given below:
a) 1 and 2 only
b) 1, 3 and 4
c) 2 and 4 only
d) 1, 2 and 3
Answer : d
