Union Budget & Fiscal Deficit — Set 5

Correct Answer: B. B. FRBM Act and its rules

The fiscal deficit-to-GDP targets are set under the Fiscal Responsibility and Budget Management (FRBM) Act 2003 and its associated rules (FRBM Rules 2004). Currently, the medium-term fiscal deficit target for the Central government is 3% of GDP, with further reduction envisaged as per the revised FRBM framework. States also have their own FRBM Acts.

Correct Answer: D. D. Fiscal Deficit = Primary Deficit + Interest Payments

The correct relationship is: Fiscal Deficit = Primary Deficit + Interest Payments. This means Fiscal Deficit has two components — the primary deficit (fresh borrowing for current operations) and interest payments on existing debt. If the primary deficit is zero, the government is only borrowing to service past debt. A country with high accumulated debt has large interest payments embedded in its fiscal deficit.

Correct Answer: B. B. Total receipts (excluding borrowings) exceed total expenditure

A fiscal surplus occurs when the government's total receipts excluding borrowings exceed its total expenditure. This means the government does not need to borrow and can actually repay existing debt. India has rarely achieved a fiscal surplus at the central level. A fiscal surplus is often seen as a sign of strong fiscal management and reduces the debt burden.

Correct Answer: B. B. Reducing the fiscal deficit through revenue increase or expenditure control

Fiscal consolidation refers to policies aimed at reducing government borrowings (fiscal deficit) through either increasing revenues (higher taxes, better compliance) or reducing expenditure (spending cuts, subsidy reforms). India has pursued fiscal consolidation through the FRBM framework since 2003. Premature fiscal consolidation during downturns can hurt growth (austerity paradox).

Correct Answer: B. B. Increasing government spending or cutting taxes to stimulate the economy

Fiscal stimulus refers to expansionary fiscal policy — the government increases spending (on infrastructure, social programmes) or reduces taxes to boost aggregate demand and stimulate economic growth. During recessions or crises, fiscal stimulus is used as a countercyclical tool. India implemented a significant fiscal stimulus package in 2008-09 following the global financial crisis, temporarily breaching FRBM targets.

Correct Answer: B. B. 8-12%

India's Tax-GDP ratio (combined Centre and States) is approximately 17-18% of GDP, while the Central government's gross tax revenue is around 10-11% of GDP. This is relatively low compared to OECD countries (25-35%). A low tax-GDP ratio limits the government's capacity for public investment and social expenditure. Improving the tax-GDP ratio is a key fiscal policy goal.

Correct Answer: B. B. Central Board of Direct Taxes (CBDT)

Direct Taxes (Income Tax, Corporation Tax) in India are administered by the Central Board of Direct Taxes (CBDT) under the Department of Revenue, Ministry of Finance. CBDT frames policy for direct taxation and supervises the Income Tax Department. The Income Tax Act 1961 governs personal income tax and the finance bills make annual amendments.

Correct Answer: C. C. Central Board of Indirect Taxes and Customs (CBIC)

Indirect Taxes including GST, Customs Duty, and Central Excise (on petroleum products, tobacco) are administered by the Central Board of Indirect Taxes and Customs (CBIC) under the Department of Revenue, Ministry of Finance. CBIC formulates policy for indirect taxation, and its field formations (Customs and GST Commissionerates) implement and collect these taxes.

Correct Answer: B. B. Profits earned by companies

Corporation Tax (also called Corporate Income Tax) is levied on the net profits of companies registered under the Companies Act. It is a direct tax collected by the Central government. Corporation Tax is the largest single direct tax component in India's tax revenue, often exceeding personal income tax collections. The base corporate tax rate was reduced to 22% in 2019 to boost investment.

Correct Answer: B. B. It creates productive assets and enhances future growth capacity

Capital expenditure (on roads, railways, ports, bridges, schools, hospitals) is important because it creates productive assets that enhance future economic growth capacity. Unlike revenue expenditure (which is consumed), capex creates a lasting infrastructure base. The government has been emphasising capital expenditure as a growth driver, especially in the post-pandemic period.