Budget & Fiscal Policy — PPSC previous year questions

Fiscal policy is the government's use of its own budget — public spending and taxation — to shape aggregate demand, growth and employment. Interest rates and open market operations are tools of monetary policy, run by the central bank (RBI). Exchange-rate management is also a monetary and external-sector tool.

In the budget classification used until the Ninth Plan, development expenditure had three parts. It covered economic services (agriculture, industry, energy, transport). It covered social and community services (education, health, housing). It also covered the developmental grants given to states. Defence, interest payments, subsidies, pensions and general administration are non-development expenditure.

Deficit financing is the way a government covers the gap between its expenditure and receipts. In Indian usage it has meant borrowing from the RBI (which creates new money), issuing fresh currency, and drawing down the government's accumulated cash balances with the RBI. All three are forms of deficit financing.

An independent Fiscal Council, recommended by the 13th, 14th and 15th Finance Commissions and the FRBM Review Committee, would do all four things: check fiscal policy, help enforce fiscal rules, align targets between the Centre and states, and make governments more answerable to legislatures and the public.

A budget surplus arises when the government's receipts exceed its expenditure in a year; the reverse situation is a budget deficit. Options (b), (c) and (d) all describe a deficit position, where the government must borrow and its debt tends to rise.

All three are non-tax revenue receipts of the Union Government. RTI application fees are booked under fees for services rendered. Spectrum charges — spectrum usage charges and licence fees paid by telecom operators — come under 'other communication services'. The surplus transferred by the RBI is shown under 'dividends and profits'. In 2021-22 the RBI alone transferred about ₹99,000 crore. Non-tax revenue also covers interest receipts, dividends and profits from PSUs, fees and fines, external grants and receipts from economic and social services. Tax revenue is separate: income tax, corporation tax, GST, customs and excise.

The 14th Finance Commission (Y.V. Reddy, 2015-20) raised the states' share of central taxes from 32 per cent to 42 per cent, which falls in the 40-45 per cent range. The 15th Finance Commission kept it at 41 per cent after Jammu and Kashmir became a Union Territory.

A monetized fiscal deficit is filled by the central bank printing new money for the government, so it directly raises the money supply and prices. A deficit financed by borrowing from the market only moves existing money around, so it pushes prices up less.

Against deflation a government uses expansionary policy: lower interest rates and cuts in direct taxes leave people with more to spend (I), and higher government expenditure adds directly to demand (III). Stressing savings cuts consumption (II) and tapering the fiscal stimulus is contractionary (IV), so neither lifts demand.

Extra Budgetary Resources are 'fully serviced bonds' raised by public sector bodies such as FCI, NHAI and PFC on the government's behalf, with principal and interest repaid from the Union Budget (I correct). They sit outside the government's accounts and are not counted in the fiscal deficit (II correct), which is why the CAG criticised them. Statement III is wrong: EBRs were used from 2016-17 and discontinued only in the 2021-22 Budget, when the food subsidy dues were brought back on to the Budget.