UPSC Prelims 2015 Q98: Indian Economy – Fiscal Policy & Budget
There has been a persistent deficit budget year after year. Which of the following actions
can be taken by the government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Select the correct answer
using the code given below.
- (a) 1 and 3 only
- (b) 2 and 3 only
- (c) 1 only
- (d) 1, 2, 3 and 4
Answer: (a) 1 and 3 only
Explanation
Reducing a persistent budget deficit
Deficit = expenditure minus receipts.
The direct cures are to cut spending or raise revenue.
| Action | Reduces the deficit? | Reason |
|---|---|---|
| 1. Reducing revenue expenditure | Yes | Less spent on salaries, interest and subsidies |
| 2. Introducing new welfare schemes | No | It adds to spending |
| 3. Rationalizing subsidies | Yes | Better targeting cuts the subsidy bill |
| 4. Expanding industries | No | It needs more public spending first; any gain is slow and uncertain |
Fiscal rules in India:
| Law | Target |
|---|---|
| FRBM Act, 2003 | Fiscal deficit of 3 percent of GDP |
| N.K. Singh Committee (2017) | Debt to GDP ratio of 60 percent as the anchor |
Answer: (a) 1 and 3 only.
Why each option is right or wrong
- (a) CORRECT. Reducing revenue expenditure and rationalizing subsidies cut the deficit.
- (b) Incorrect. New welfare schemes increase the deficit.
- (c) Incorrect. Rationalizing subsidies also helps, so statement 3 must be included.
- (d) Incorrect. Welfare schemes and expanding industries raise spending.
Key point
To cut a budget deficit: reduce revenue expenditure and rationalize subsidies. New welfare schemes and public investment in industry add to it.
Remember
Cut spending, trim subsidies: deficit falls.
Common mistakes
- Thinking expanding industries quickly raises tax revenue.
- Believing welfare schemes reduce the deficit.
- Confusing the budget deficit with the trade deficit.
Exam tip
Only direct and immediate effects count. Long-run, indirect gains are not accepted.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 5 (Government Budget and the Economy)
- Fiscal Responsibility and Budget Management Act, 2003