Union Budget & Fiscal Deficit — Set 7

Correct Answer: A. A. (Revenue Expenditure + Capital Expenditure) - (Revenue Receipts + Capital Receipts excluding borrowings)

Fiscal Deficit = Total Expenditure − Total Receipts (excluding borrowings) = (Revenue Expenditure + Capital Expenditure) − (Revenue Receipts + Capital Receipts excluding borrowings). This deficit represents the government's net borrowing requirement. It is financed by market borrowings, T-Bills, external borrowings, securities against small savings, and monetisation (in extreme cases).

Correct Answer: B. B. 5.9% of GDP

India's fiscal deficit target for 2023-24 was set at 5.9% of GDP in the Union Budget presented in February 2023. This was a reduction from the revised estimate of 6.4% for 2022-23. The government has been pursuing a gradual fiscal consolidation path, aiming to reach 4.5% of GDP by 2025-26. The COVID-19 pandemic had significantly expanded the fiscal deficit from the pre-pandemic level of ~3.5%.

Correct Answer: B. B. Interest payments, salaries, and pensions — mandatory spending

Committed Expenditure (or committed liabilities) refers to mandatory government spending that cannot be reduced in the short term — primarily interest payments on public debt, salaries and wages of government employees, and pensions. These three items form the core of revenue expenditure and collectively consume a very large share of the government's revenue receipts, leaving limited fiscal space.

Correct Answer: B. B. It is inflationary and unsustainable

Debt monetisation (where the RBI directly purchases government securities to finance the deficit, essentially creating new money) is inflationary as it expands money supply without corresponding increase in output. The FRBM Act restricts the RBI from subscribing to primary market government securities, except under exceptional circumstances. This prevents automatic monetisation of the deficit.

Correct Answer: B. B. When progressive taxation automatically reduces disposable income as nominal incomes rise with inflation

Fiscal drag occurs in progressive tax systems when inflation-driven nominal income increases push taxpayers into higher tax brackets without real income gains, automatically increasing the government's tax revenue and reducing private consumption. This is also called 'bracket creep.' It acts as an automatic contractionary fiscal force and reduces households' real purchasing power.

Correct Answer: B. B. Finance the fiscal deficit

Government Securities (G-Secs) issuance through RBI-managed auctions is the primary mechanism for financing the fiscal deficit. When the government borrows from the market by selling G-Secs, it is deficit financing through domestic debt. Market borrowings are the largest component of capital receipts in India's budget. The RBI manages the government's borrowing calendar (H1 and H2 of the year).

Correct Answer: B. B. Capital Receipts

External Commercial Borrowings (ECBs) — loans from foreign governments, multilateral institutions (World Bank, ADB), and international markets — are classified as Capital Receipts in the budget. They add to the government's debt and are repayable in foreign currency (creating exchange rate risk). For the Union Government, external borrowings are a small portion of total borrowings.

Correct Answer: B. B. Government should borrow only for capital (investment) expenditure, not current (revenue) expenditure

The 'Golden Rule' of fiscal policy states that government borrowing should be limited to financing capital expenditure (investment) and not used for current (revenue) expenditure. In other words, the revenue deficit should be zero — the government should fund day-to-day operations from its own revenues and only borrow for productive investments. This rule underpins the FRBM's emphasis on eliminating revenue deficit.

Correct Answer: C. C. Article 293

Article 293 of the Constitution permits state governments to borrow within the territory of India upon the security of the Consolidated Fund of the State. State borrowings require Central government consent if the state has outstanding loans from the Centre. States borrow primarily through State Development Loans (SDLs) auctioned by the RBI. State fiscal deficits have their own FRBM limits.

Correct Answer: A. A. Article 148

The Comptroller and Auditor General (CAG) of India is established under Article 148 of the Constitution. The CAG audits the accounts of the Union and States and certifies whether money has been spent as authorised by Parliament/Legislature. CAG reports are laid before Parliament and are examined by the Public Accounts Committee. CAG is the supreme audit institution of India.