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Subject: “Budget, Fiscal Policy”

  • Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets.

    Under Article 112, the Budget comprises the Revenue Budget, which covers routine government income and expenditure, and the Capital Budget, which deals with asset creation and long-term liabilities.

    Difference Between Revenue Budget and Capital Budget

    Components of the Revenue Budget

    Revenue Receipts

    Tax Revenue – Income tax, corporate tax, GST, customs, excise, etc.

    Non-Tax Revenue – Dividends & profits from PSUs/RBI, fees, fines, interest receipts.

    Grants-in-Aid – External grants from other countries/institutions.

    Revenue Expenditure

    Salaries, Pensions & Administrative Costs

    Subsidies – food, fertiliser, petroleum.

    Interest Payments on past borrowings.

    Grants to States & UTs, grants for social services.

    Expenditure on Routine Government Operations – police, defence services (revenue), judiciary.

    Components of the Capital Budget

    Capital Receipts

    Borrowings – Market loans, external loans, treasury bills.

    Disinvestment Proceeds – Sale of government equity in PSUs.

    Recovery of Loans – Repayment from states, PSUs, and others.

    Small Savings & Provident Fund Collections

    Capital Expenditure

    Creation of Assets – Roads, railways, bridges, irrigation, defence capital.

    Loans and Advances – To states, UTs, PSUs, and financial institutions.

    Investment in PSUs and Infrastructure Projects

    A healthy fiscal structure requires containing revenue expenditure and prioritising capital expenditure to strengthen productivity and economic growth.

  • Explain how the Fiscal Health Index (FHI) can be used as a tool for assessing the fiscal performance of states in India. In what way would it encourage the states to adopt prudent and sustainable fiscal policies?

    The Fiscal Health Index (FHI) initiative by NITI Aayog evaluates the fiscal health of eighteen major states through a composite index using data from the CAG, covering the Financial Year 2022-23.

    FHI as a tool to assess fiscal performance of states

    FHI uses uniform metrics-Tax Buoyancy, Debt-to-GSDP, Fiscal Deficit, Capex Share-allowing objective comparison across states.

    Multi-dimensional Evaluation – Covers five pillars and reveal structural strengths and weakness

    Measures states’ ability to mobilise resources through Own Tax Revenue (OTR) and Own Non-tax Revenue (ONTR). Eg – Higher OTR-to-GSDP ratio reflects stronger fiscal autonomy.

    Measures Quality of Expenditure – FHI differentiates between capital expenditure and revenue expenditure. Eg – States like Gujarat and Karnataka show higher capex ratios.

    Tracks Debt Sustainability – Assesses Debt-GSDP ratio, interest payment burden, and future liabilities. Eg – FHI flags high-debt states such as Punjab, Kerala, Rajasthan, and West Bengal.

    Monitors Fiscal Deficit and Compliance with FRBM Limits – Shows whether states adhere to 3% fiscal deficit glide path.

    Identifies Risk from Off-Budget Borrowings – Captures liabilities from power sector guarantees, state PSUs, and special purpose vehicles.

    Highlights Best Practices – Eg- Top states-Odisha (67.8 score), Chhattisgarh, Goa-show strong non-tax revenue, low fiscal deficits, and high capital outlays

    Role of FHI in Encouraging prudent and sustainable fiscal policies

    Promotes Fiscal Discipline – Poor rankings push states to reduce deficits and unsustainable borrowing.

    Incentivises Capital Spending – Encourages a shift from populist revenue expenditure towards productive capital outlay.

    Supports Long-Term Planning – Aligns state finances with sustainable development goals and resilience-building.

    Revenue Reforms-Stimulates states to improve tax buoyancy, and non-tax revenue mobilisation

    Drives Structural Reforms like subsidy rationalization, reduction in revenue leakages etc.

    Transparency & Accountability – Public scrutiny builds pressure on governments for fiscal prudence

    Encourages Inter-State Competition – Rankings foster a competitive spirit to achieve stronger fiscal performance.

    Strengthens Cooperative Federalism – Helps in Centre-State dialogue on shared fiscal risks and sustainability.

    Boosts Investor Confidence – Strong fiscal performance signals creditworthiness, attracting investment.

    Promotes Sustainable Borrowing Practices and enhances creditworthiness as better FHI improves a state’s credit rating.

    Challenges

    Data Gaps – CAG data of Financial Year 2022-23 used

    Off-budget borrowings not fully captured in FHI.

    Miss qualitative aspects such as governance quality, efficiency of welfare delivery etc.

    Inter-State Structural Variations are not fully captured – Eg- Resource-rich states (Odisha, Chhattisgarh) naturally perform better in non-tax revenues

    Competitive Populism reduces focus on fiscal discipline. Eg- farm loan waivers

    Weak Enforcement – FHI rankings have no binding effect on policy behaviour.

    By encouraging disciplined, sustainable, and quality spending, FHI can help realise the vision of Viksit Bharat@2047

    Industrial Policy

  • Consider the following statements

    Consider the following statements:

    1.The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
    2.The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.
    3.As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.

    Which of the statements given above is/are correct?

  • Consider the following statements

    Consider the following statements:
    1. Most of India’s external debt is owed by governmental entities.
    2. All of India’s external debt is denominated in US dollars.
    Which of the statements given above is / are correct?

  • Consider the following statements

    Consider the following statements :
    1. Tight monetary policy of US Federal Reserve could lead to capital flight.
    2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
    3. Devaluation of domestic currency decreases the currency risk associated with ECBs.
    Which of the statements given above are correct ?

  • Consider the following statements

    Consider the following statements:
    I. Capital receipts create a liability or cause a reduction in the assets of the Government.
    II. Borrowings and disinvestment are capital receipts.
    III. Interest received on loans creates a liability of the Government.

    Which of the statements given above are correct?

  • Consider the following actions by the Government

    Consider the following actions by the Government:
    1. Cutting the tax rates
    2. Increasing the government spending
    3. Abolishing the subsidies
    In the context of economic recession, which of the above actions can be considered a part of the ‘fiscal stimulus’ package?

  • Which one of the following is responsible for the preparation and presentation of Union Budget of the Parliament

    Which one of the following is responsible for the preparation and presentation of Union Budget of the Parliament?

  • In the Context of governance, consider the following

    In the Context of governance, consider the following:
    1. Encouraging Foreign Direct Investment inflows
    2. Privatization of higher educational Institutions
    3. Down-sizing of bureaucracy
    4. Selling/offloading the shares of Public Sector Undertakings
    Which of the above can be used as measures to control the fiscal deficit in India?

  • Which one of the following was not stipulated in the Fiscal Responsibility and Budget Management Act, 2003

    Which one of the following was not stipulated in the Fiscal Responsibility and Budget Management Act, 2003 ?