Budget Basics — Set 7

Correct Answer: D. Indira Gandhi

• **Token Demand** = a demand for a grant of ₹1 included in Supplementary Demands for Grants to draw Parliament's attention to a new policy direction or service for which no actual funds are required immediately. • **Symbolic in nature** — it signals parliamentary notice and intent rather than actual fund flow; it opens the door for future appropriation. • 💡 Wrong-option analysis: [Option A] Supplementary Grant: a real additional allocation for shortfalls; [Option B] Vote on Account: grants for a few months before budget; [Option D] Excess Grant: for spending already made beyond approved limits.

Correct Answer: B. Article 267

• **Fiscal Consolidation** = the process of reducing government budget deficits and stabilising the debt-to-GDP ratio through expenditure cuts or revenue increases. • **FRBM framework** — India's fiscal consolidation roadmap under FRBM targets a fiscal deficit of 3% of GDP; the process was disrupted by COVID-19 in 2020–21 when the deficit rose to 9.2%. • 💡 Wrong-option analysis: [Option A] Monetary Tightening: the central bank raising interest rates to reduce inflation, not the same as reducing government deficit; [Option B] Structural Adjustment: broader economic reform including privatisation and trade liberalisation; [Option D] Austerity: colloquial term for deep spending cuts, not a precise policy framework.

Correct Answer: B. GST

• **Effective Revenue Deficit** = Revenue Deficit minus grants given by the Centre to states for capital asset creation; it reflects the true consumption component of the deficit. • **Introduced in 2011–12** — it was added to the budget documents to give a more accurate picture of the deficit that does not result in asset creation. • 💡 Wrong-option analysis: [Option A] Revenue Deficit: includes grants for capital assets, hence overstates consumption deficit; [Option B] Primary Deficit: fiscal deficit minus interest payments, not a revenue-side concept; [Option D] Fiscal Deficit: total borrowing requirement including capital spending.

Correct Answer: A. To eliminate wasteful expenditure

• **Fiscal Deficit Formula** = Total Expenditure − (Revenue Receipts + Non-debt Capital Receipts); it equals the net borrowing requirement of the government. • **Non-debt receipts excluded** — recovery of loans and disinvestment are non-debt capital receipts and are subtracted; borrowings themselves are not subtracted because they are what we are measuring. • 💡 Wrong-option analysis: [Option A] Revenue Deficit = Revenue Expenditure − Revenue Receipts; different formula; [Option B] Primary Deficit = Fiscal Deficit − Interest Payments; derived from fiscal deficit; [Option D] Budget Deficit = Total Expenditure − Total Receipts including borrowings; an older and less precise measure.

Correct Answer: A. Himachal Pradesh

• **Proportional Tax** = a tax system where the rate remains constant regardless of the base (income or value), so the tax amount increases proportionately with income. • **GST is near-proportional** — since everyone pays the same rate on goods, higher-income earners pay more in absolute terms; contrasted with progressive income tax where rate increases with income. • 💡 Wrong-option analysis: [Option A] Progressive Tax: rate increases as income rises; [Option B] Regressive Tax: effective rate falls as income rises; [Option D] Flat Tax: a specific form of proportional tax on income, usually referring to a single income tax rate for all.

Correct Answer: A. Reducing fiscal deficit and debt

• **Regressive Tax** = a tax where the effective rate falls as the taxable amount increases, so lower-income groups pay a higher proportion of their income as tax. • **Indirect taxes tend to be regressive** — a poor family and a rich family pay the same GST on a packet of biscuits, but it represents a higher share of the poor family's income. • 💡 Wrong-option analysis: [Option A] Progressive Tax: rate rises with income, opposite of regressive; [Option B] Proportional Tax: constant rate for all; [Option D] Corrective Tax: a Pigouvian tax on negative externalities (like tobacco tax), different from regressive taxation.

Correct Answer: C. 3 years

• **Pigouvian Tax** = a tax imposed on activities that generate negative externalities (social costs not borne by the producer), such as carbon tax or tobacco tax, to align private costs with social costs. • **Named after Arthur Pigou** — the British economist proposed this in his 1920 work 'The Economics of Welfare'; India's Green Tax on older vehicles and cess on coal are examples. • 💡 Wrong-option analysis: [Option A] Tobin Tax: a small tax on foreign exchange transactions to reduce currency speculation; [Option B] Laffer Tax: relates to the Laffer Curve showing revenue peaks at an optimal rate; [Option D] Ad Valorem Tax: a tax based on the assessed value of the item, not on externalities.

Correct Answer: C. Comptroller and Auditor General (CAG)

• **Ad Valorem Tax** = a tax calculated as a percentage of the value of a good or transaction, as opposed to a specific (per unit) tax. • **GST is ad valorem** — it is calculated as a percentage of the transaction value; stamp duty, customs duty, and VAT are also largely ad valorem. • 💡 Wrong-option analysis: [Option A] Specific Tax: a fixed amount per unit regardless of price (e.g., ₹10 per litre of petrol); [Option B] Excise Duty: can be either specific or ad valorem; [Option D] Proportional Tax: describes rate structure (constant rate), while ad valorem describes the base (value of goods).

Correct Answer: B. Consolidated Fund

• **Laffer Curve** = a graphical representation of the relationship between tax rates and tax revenue, showing that both a 0% and 100% rate yield zero revenue, with a revenue-maximising optimal rate in between. • **Named after Arthur Laffer** — popularised in the US during the Reagan administration to argue for tax cuts; the concept implies that excessively high tax rates reduce compliance and economic activity. • 💡 Wrong-option analysis: [Option A] Phillips Curve: shows the inverse relationship between inflation and unemployment; [Option B] Kuznets Curve: shows relationship between income inequality and economic development; [Option D] Lorenz Curve: shows income distribution and is used to calculate the Gini Coefficient.

Correct Answer: C. Economic Survey

• **Fiscal Space** = the room available in a government's budget to provide resources for a desired purpose without jeopardising the sustainability of its financial position or stability. • **Expanded by reducing deficits** — governments create fiscal space by increasing tax revenues, cutting wasteful expenditure, or growing the economy to increase the GDP denominator. • 💡 Wrong-option analysis: [Option A] Monetary Space: the room for the central bank to cut rates, a different concept; [Option B] Fiscal Cliff: a situation of simultaneous tax hikes and spending cuts causing economic shock; [Option D] Fiscal Drag: the phenomenon where inflation pushes taxpayers into higher brackets without a real income rise.