Integrated Guidance Programme of
General Studies for IAS (Pre)
Subject - Economic and Social Development
Chapter - Fiscal System
What is Fiscal Policy
Fiscal policy involves use of taxation and government
spending to influence economy. In other words, fiscal policy relates to raising
and spending money in quantitative and qualitative terms.
Revenue Account Expenditure
Revenue account expenditure is essentially the non-plan
expenditure that does not create assets, that is - interest payments, subsidies
and public administration. It is synonymous with maintenance and consumption
expenditure as also welfare expenditure.
Capital Account Receipts
Capital account receipts are recoveries of loans and advances
made by the Union Government to States, UTs and PSUs; fresh borrowings from
inside the country and from abroad; disinvestment proceeds etc. As is clear from
above, some of them are debt and some are non-debt.
What is Revenue Deficits
Revenue deficit is the difference between the revenue
receipts on tax and non-tax sides and the revenue expenditure.
Revenue expenditure is synonymous with consumption and non
development, in general. But in the case of India, the social sector expenditure
flag ship schemes like NREGA is in the revenue expenditure, though as a part of
the Plan expenditure.
Fiscal deficit is the difference between what the government
earns and its total expenditure. That is, the difference between what is
received by the government on revenue account and all the non-debt creating
capital receipts like recovered loans and disinvestment proceeds; and the total
expenditure. It amounts to all borrowings of the government in a given period.
What is Budget Deficit
Budget deficit considers only the difference between the
total budgeted receipts and the expenditure. It was abolished in 1997.
Monetised deficit is the borrowings made from the RBI through
printing fresh currency. It is resorted to when the government can not borrow
from the market (banks and financial institutions like LIC etc) any longer due
to pressure on interest rates.
Primary deficit is the difference between the fiscal deficit
and the interest payments. The concept helps in assessing the progress of the
government in its fiscal control efforts.
FRBM Act 2003
Fiscal Responsibility and Budget Management (FRBM) Act 2003
was notified in 2004 with the following salient features
annual targets of reduction in deficits, government
borrowing and debt
Government to annually reduce the revenue deficit by 0.5 per
cent and the fiscal deficit by 0.3 per cent beginning fiscal 2004-05.
elimination of revenue deficit and reduction of fiscal
deficit to 3% of GDP by March 31, 2009.
a cap on the level of guarantees and total liabilities of the
prohibits Government to borrow from the RBI (primary
borrowing) after April 1, 2006. RBI can not print money to lend to the
on a quarterly basis, that Government shall place before both
the Houses of Parliament an assessment of trends in receipts and expenditure.
annually present the macro-economic framework statement,
medium term fiscal
policy statement and fiscal policy strategy statement. The
three statements would provide the macro-economic background and assessment
relating to the achievement of FRBM goals.
Under exceptional circumstances, Government may be compelled
to breach targets. In case of deviations, the Government would not only be
required to take corrective measures, but the Finance Minister shall also make a
statement in both the Houses of Parliament.
Fiscal consolidation means strengthening government finances. Fiscal
consolidation is critical as it provides macro economic stability; cuts
wasteful expenditure; can enable government to spend more on infrastructure
and social sectors. Tax reforms, disinvestment, better targeting of
subsidies and so on are the hallmarks of fiscal consolidation.
Rangarajan Panel on Public Expenditure
- 18-member high-level expert committee has been set up under the
Chairmanship of Dr C. Rangarajan to suggest measures for efficient
management of public expenditure.
- This committee will see whether the classification of expenditure
into Plan and Non-Plan is rational and can be continued
For Detail Description,
Analysis and More MCQs of the Chapter Buy this Study Notes:
Public debt includes internal debt comprising borrowings inside the country
like market loans; borrowing from the RBI on the basis of treasury bills; and
external debt comprising loans from foreign countries, international financial
institutions, NRI deposits etc
External Debt & its main component
External debt includes both the government and private debt. External debt
- Long-term external debt which is the bulk part
- NRJ deposits and multilateral loans
- Commercial borrowings
- Bilateral loans and
- Trade credit
Internal debt includes loans raised by the government in the open market through
treasury bills and government securities, special securities issued to the RBI
and most importantly, various bonds like the oil bonds, fertilizer bonds etc.
Fringe Benefit Tax
The benefits that are usually enjoyed collectively by the employees and cannot
be attributed to individual employees. They are the fringe benefits. They are
taxed in the hands of the employer. Examples are transport services for workers
and staff, gym, club, etc.
What is Fiscal Drag
A situation where inflation pushes income into higher tax brackets- bracket
creep. The result is increase in income taxes but no increase in real purchasing
power. This is a problem during periods of high inflation.
What is Merit &
- Merit goods are goods like education, health care etc that are important
for the society as a whole- that is, they have positive externalities
- Demerit Goods are those whose consumption should be discouraged. They
have negative externalities. Examples of Demerit Goods include: tobacco,
alcohol etc. Thirteenth Finance Commission calls them sin goods and wants
them to be harshly taxed.
They include goods whose demand goes up when the price increases. They are
the status markers and exclusivist in nature.
What is Twin Deficits
Budget deficit (fiscal deficit) and current account deficit-the two fuelling
each other - are known as twin deficits
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