UPSC Prelims 2010 Q79: Indian Economy – Fiscal Policy & Budget
Consider the following actions by the Government:
1. Cutting the tax rates
2. Increasing the government spending
3. Abolishing the subsidies
In the context of economic recession,
which of the above actions can be considered a part of the "fiscal stimulus" package?
- (a) 1 and 2 only
- (b) 2 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (a) 1 and 2 only
Explanation
Which actions count as "fiscal stimulus" in a recession
A fiscal stimulus package aims to boost aggregate demand during an economic downturn, through specific government actions.
| Action | Verdict | Reason |
|---|---|---|
| 1. Cutting tax rates | Correct | Lower taxes leave more money in people's/businesses' hands, boosting spending — a classic fiscal stimulus tool |
| 2. Increasing government spending | Correct | Direct government spending increases inject demand into the economy, a core fiscal stimulus measure |
| 3. Abolishing subsidies | Incorrect | Abolishing subsidies typically reduces disposable income/support for recipients, which is contractionary, not stimulative |
Fiscal stimulus basics:
| Point | Detail |
|---|---|
| Goal | Boost aggregate demand during a recession |
| Tools | Tax cuts, increased government spending |
| Not a stimulus tool | Abolishing subsidies — this withdraws support, a contractionary move |
Answer: (a) 1 and 2 only.
Why each option is right or wrong
- (a) CORRECT. Tax cuts and increased government spending are the classic fiscal stimulus tools; abolishing subsidies is contractionary, not stimulative.
- (b) Incorrect. Action 1 (tax cuts) is also a stimulus tool, so '2 only' is incomplete.
- (c) Incorrect. Action 3 (abolishing subsidies) is contractionary, not part of a stimulus package, so '1 and 3' is wrong.
- (d) Incorrect. Action 3's inclusion makes 'all three' incorrect, since abolishing subsidies works against stimulus.
Key point
A fiscal stimulus package during a recession includes CUTTING TAX RATES and INCREASING GOVERNMENT SPENDING — not abolishing subsidies, which withdraws support and is contractionary.
Remember
Fiscal stimulus package: cutting tax rates and increasing government spending — NOT abolishing subsidies, which is contractionary.
Common mistakes
- Confusing subsidy abolition (a contractionary, revenue-saving move) with a demand-boosting stimulus measure.
- Missing that both tax cuts and spending increases work together as classic stimulus tools.
- Not understanding the basic expansionary vs contractionary distinction in fiscal policy.
Exam tip
Fiscal stimulus = tax cuts + more government spending (both put money INTO the economy). Abolishing subsidies takes money AWAY — contractionary, not stimulative.
Sources
- Ministry of Finance, Government of India — Economic Survey 2009–10 (fiscal stimulus measures)
- NCERT Class XII Economics — Introductory Macroeconomics — Government Budget and the Economy