Ans: A

Exp:

Capital Budget is that part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent.

The Capital Budget consists of capital receipts (like 

• disinvestment proceeds, 

• borrowing by the government, 

• loans from public or foreign governments, Reserve Bank of India, etc.

and capital expenditure (like expenditure on development of machinery, health facilities, etc.)

Revenue Budget: Profits and dividends which the government gets from its public sector undertakings(PSUs) and Interests received by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). These both are part of the Revenue Budget of the Government and form part of Non-Tax Revenue Receipts.

Ans: A

Exp:

Fiscal Deficit: When the balance of the government’s total receipts (i.e., revenue + capital receipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit, a concept being used since fiscal 1997–98 in India.

Statement 1 is correct: The situation of fiscal deficit indicates that the government is spending beyond its means of income, to be more simple, we may say that the government is spending more than its income (though in practice, all receipts of the government are not income. Basically, receipts are all forms of money accruing to the government, be it income or borrowings).

Statement 2 is incorrect: In the Union Budget, the government aimed to bring down the fiscal deficit during the current financial year 2023-24 to 5.9 per cent of the gross domestic product (GDP) from the 6.4 per cent in the last financial year.

Ans: D

Exp:

Fiscal Reforms and Budget Management Act (FRBMA) was enacted on 2003 to provide the support of a strong institutional/statutory mechanism.

Main highlights of the FRBMA, 2003 are as given below:

• GoI to take measures to reduce fiscal and revenue deficit so as to eliminate revenue deficit by 31 March 2008 (which was revised by the UPA Government to March 31, 2009) and thereafter build up adequate revenue surplus.
• FD and RD may exceed the targets only on grounds such as national security, calamity or on exceptional grounds.
• GoI not to borrow from RBI except by Ways and Means Advances (WMAs).
• RBI not to subscribe to the primary issue of the GoI securities from 2006–07 (it meansthat these government bonds/papers will become a market- based instrument to raise long-term funds by the government).
• Steps to be taken to ensure greater transparency in fiscal operations.

Along with the Budget and Demands for Grants, the GoI to lay the following three statements before the Parliament in each financial year:

• Fiscal Policy Strategy Statement (FPSS);
• Medium Term Fiscal Policy Statement (MTFPS); and
• Macroeconomic Framework Statement (MFS).

The Finance Minister to make the quarterly review of trends in receipts and expenditure in relation to the Budget and place the review before the Parliament.

Ans: C

Exp:

Fiscal policy is the means by which the government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is a sister strategy to monetary policy.

Statement 1 is correct: In the case of expansionary fiscal policy, the government increases spending and reduces tax levels to increase the aggregate demand in the economy. For example, suppose an economy has slowed down, unemployment levels are up, consumer spending is down, and businesses are not making substantial profits.

Statement 2 is correct: In the case of contractionary fiscal policy, the government reduces the spending and increases tax levels to suck the money out of the economy and hence reduces the aggregate demand.

When the inflation in the economy is high, the economy may need a slowdown. In such a situation, the government can use its contractionary fiscal policy to decrease public spending and increase taxes to suck money out of the economy i.e., decrease the money circulation.

Statement 3 is correct: A counter-cyclical fiscal policy refers to a strategy by the government to counter boom or recession through fiscal measures. Counter cyclical fiscal policy tends to cool down the economy when there is a boom and stimulate the economy when there is a slowdown.

The main objectives of the government’s fiscal policy are:

• Economic Growth (Stabilization of business cycles)
• Maintain high level of employment
• Control inflation

Ans: C

Explanation:

Option (a) is correct: External Borrowings are one of the best way to manage fiscal deficit with the condition that the external loans are comparatively cheaper and long-term.    

Option (b) is correct: External borrowing brings in foreign currency/hard currency, which gives an extra edge to the government spending as by this, the government may fulfil its developmental requirements inside the country as well as from outside the country.

Option (c) is incorrect: External borrowing is preferred over internal borrowings due to the ‘crowding out effect’. External Borrowings do not lead to crowding out effects. If the government itself goes on internal borrowing (like from the banks of the country), then there is crowding out or a shortage of funds for the private sector to borrow from the internal market.

Option (d) is correct: External loans are considered an erosion in the nation’s sovereign decision-making process. Too much dependence on external debt exposes the nation to Nominal exchange rate volatility and foreign country policy changes. Ex: The sub-prime crisis of 2008 had a huge recessionary effect on countries around the world.