14.Fiscal Policy (Part 2)

Question 1

What is Revenue Deficit?

Answer 1

Revenue Deficit is the amount of money borrowed by the Central Government for day-to-day expenditure in a financial year to meet their expenses.

Question 2

How is Revenue Deficit calculated?

Answer 2

Revenue Deficit is calculated by subtracting Revenue Receipts from Revenue Expenditure.

Question 3

What does Revenue Deficit indicate?

Answer 3

Revenue Deficit indicates the extent to which the government relies on borrowing to meet its day-to-day expenses.

Question 4

What happens to the borrowed money allocated to state governments?

Answer 4

A portion of the borrowed money is given by the central government to state governments as grants for the creation of capital assets like roads, dams, buildings, etc.

Question 5

What is the concept of Effective Revenue Deficit?

Answer 5

Effective Revenue Deficit refers to the portion of the borrowing that is effectively used by the central government for its own day-to-day expenses after deducting the amount given to state governments for development purposes. It provides a clearer picture of the central government’s borrowing for its own operations.

Question 6

What is fiscal deficit?

Answer 6

It is the total amount of money borrowed by the Central Government in a year for any purpose.

Question 7

How is fiscal deficit calculated?

Answer 7

Fiscal Deficit = Total Expenditure - ((Revenue Receipts) + (non-debt creating capital receipts.))

Question 8

What is effective revenue deficit?

Answer 8

It is the amount of money borrowed by the Central Government for its own purposes.

Question 9

How is effective revenue deficit calculated?

Answer 9

Effective Revenue Deficit = Revenue Deficit - (Grants given by the Central Government to the State Government.)

Question 10

What is primary deficit?

Answer 10

It shows how much of the total borrowed money by the government in one financial year is used for interest payments.

Question 11

How is primary deficit calculated?

Answer 11

Primary Deficit = Fiscal Deficit - Interest Payment.

Question 12

What is deficit financing or monetized deficit?

Answer 12

Deficit financing or monetized deficit refers to the amount of money borrowed by the government in a financial year from the Reserve Bank of India (RBI) by printing new currency.

Question 13

How does a government usually borrow money?

Answer 13

A government borrows money through its market borrowing program, which involves borrowing from banks and financial institutions.

Question 14

What happens when the government borrows from the Reserve Bank of India (RBI)?

Answer 14

When the government borrows from the RBI, it leads to the creation of fresh currency by the RBI, which is known as monetization of the economy. This process is also referred to as monetized deficit or deficit financing.

Question 15

Is monetized deficit allowed in India?

Answer 15

No, monetized deficit is not allowed in India.

Question 16

What is the tax structure in India?

Answer 16

India’s tax structure is federal in nature, with powers of taxation divided between the Centre (Union) and the States.

Question 17

How are the powers of taxation classified in India?

Answer 17

The powers of taxation in India are classified into three lists: the State List, the Union List, and the Concurrent List, as stated in Article 246 of the Indian Constitution.

Question 18

What is the significance of Schedule Seven in the Indian Constitution?

Answer 18

Schedule Seven of the Indian Constitution specifies the allocation of powers and functions between the Union and the States. It contains three lists: the Union list, the State list, and the Concurrent list.

Question 19

What taxes can the Union government levy?

Answer 19

In the Union list, the Union government can levy taxes such as income tax, corporation tax, etc. (provided under Entry list 82 to 92C and 96).

Question 20

What taxes can the State government levy?

Answer 20

In the State list, the State government can levy taxes on areas such as agriculture, income, animals, boats, etc.

Question 21

Why are State governments often dependent on the Centre for finance?

Answer 21

Although State governments have more taxes allocated to them, their earnings from these taxes are generally low, which makes them dependent on the Centre for financial support.

Question 22

What is the Concurrent list in the Indian tax structure?

Answer 22

The Concurrent list includes three taxes that can be imposed by both the Central and State governments.

Question 23

Which articles should be referred to understand the Indian tax structure?

Answer 23

Important articles to read for understanding the Indian tax structure are 268, 269, 270, 271, and 272.