UPSC Prelims 2016 Q3: Indian Economy – Fiscal Policy & Budget
There has been a persistent deficit budget year after year. Which action/actions of the
following can be taken by the Government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Reducing import duty
Select the correct answer
using the code given below.
- (a) 1 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2, 3 and 4
Answer: (c) 1 and 3 only
Explanation
How can the Government reduce a persistent budget deficit?
Deficit = expenditure minus receipts.
To reduce it, cut spending or raise revenue.
| Action | Reduces the deficit? | Reason |
|---|---|---|
| 1. Reducing revenue expenditure | Yes | Lower spending on salaries, interest and subsidies |
| 2. Introducing new welfare schemes | No | It adds to expenditure |
| 3. Rationalizing subsidies | Yes | Better targeting cuts the subsidy bill |
| 4. Reducing import duty | No | It lowers customs revenue |
Kinds of deficit:
| Deficit | Formula |
|---|---|
| Revenue deficit | Revenue expenditure minus revenue receipts |
| Fiscal deficit | Total expenditure minus total receipts other than borrowings |
| Primary deficit | Fiscal deficit minus interest payments |
The bank earlier stored corrupted options; they are now the original UPSC options.
Answer: (c) 1 and 3 only.
Why each option is right or wrong
- (a) Incorrect. Rationalizing subsidies also reduces the deficit, so statement 3 counts too.
- (b) Incorrect. New welfare schemes raise spending and widen the deficit.
- (c) CORRECT. Reducing revenue expenditure and rationalizing subsidies both cut the deficit.
- (d) Incorrect. New welfare schemes and reducing import duty make the deficit worse.
Key point
To reduce a budget deficit: cut revenue expenditure and rationalize subsidies; new welfare schemes and lower import duty increase it.
Remember
Deficit falls when spending falls or revenue rises.
Common mistakes
- Thinking welfare schemes pay for themselves in the same budget.
- Assuming lower import duty raises revenue through higher trade.
- Confusing the fiscal deficit with the trade deficit.
Exam tip
Ask of each action: does it cut spending or raise revenue? If neither, it cannot reduce the deficit.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 5 (Government Budget and the Economy)
- Ministry of Finance — Budget at a Glance