Question 70 from UPSC CSE 2016 - Economy

Question

There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Reducing import duty
Select the correct answer using the code given below.

Accepted Answer

Correct Option: C. 1 and 3 only

Strategy: Identify and select actions that either increase government revenue or decrease government expenditure to reduce the budget deficit. Evaluate each proposed action against this core principle.

Key Info: - **Budget Deficit:** Occurs when a government's total expenditures exceed its total revenues over a fiscal period. Reducing it requires either increasing revenue or decreasing expenditure.
- **Government Budget Components:**
    - **Revenue Receipts:** Tax revenue (income tax, corporate tax, GST, customs, excise) and non-tax revenue (interest receipts, dividends, external grants, escheats).
    - **Capital Receipts:** Recoveries of loans, disinvestment proceeds, market borrowings, external assistance.
    - **Revenue Expenditure:** Spending that does not create assets, such as salaries, pensions, interest payments, subsidies, and grants to states.
    - **Capital Expenditure:** Spending that creates assets or reduces liabilities, such as infrastructure development, investments in public sector undertakings, and repayment of loans.
- **Statement 1: Reducing revenue expenditure:** Direct reduction in government spending (e.g., cutting administrative costs, reducing non-essential grants) directly contributes to lowering the overall deficit.
- **Statement 2: Introducing new welfare schemes:** Welfare schemes typically involve significant government spending (revenue expenditure in the form of transfers and subsidies or capital expenditure if creating assets like housing projects), which would increase expenditure and hence likely increase the deficit.
- **Statement 3: Rationalizing subsidies:** Subsidies are a significant part of revenue expenditure. Rationalizing them (e.g., better targeting, reducing the amount) means reducing this expenditure, thereby helping to lower the deficit.
- **Statement 4: Reducing import duty:** Import duties (customs duties) are a source of tax revenue for the government. Reducing them would decrease the government's revenue, which, all else being equal, would *increase* the budget deficit.

Answer

Option A: 1 only

Answer

Option B: 2 and 3 only

Answer

Option D: 1, 2, 3, and 4