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Q98 (IAS/2015) Economy › Government Finance & Budget › Fiscal deficit concepts Official Key

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

Result
Your answer: —  ·  Correct: A
Explanation

Government deficit can be reduced by an increase in taxes or reduction in expenditure.[1] Examining each action:

**Statement 1 (Reducing revenue expenditure):** Reduction in revenue expenditure in terms of bonus, LTC, leaves encashment, etc. to Government employees and curtailing other avoidable revenue expenditure[2] is explicitly mentioned as a measure to check fiscal deficit. ✓

**Statement 2 (Introducing new welfare schemes):** Introducing new welfare schemes would increase government expenditure, not reduce it. This contradicts the goal of deficit reduction. ✗

**Statement 3 (Rationalizing subsidies):** Rationalisation of subsidies[2] is specifically listed as a method to reduce public expenditure and check fiscal deficit. Abolition of export subsidies in 1991-92 and the partial restructuring of fertilizer subsidy in 1992-93[3] were concrete steps taken to reduce fiscal deficit during India's 1991 reforms. ✓

**Statement 4 (Expanding industries):** While this may boost revenue in the long term, it requires immediate capital expenditure and doesn't directly reduce deficit. ✗

Therefore, only statements 1 and 3 are correct measures to reduce deficit.

Sources
  1. [1] Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 80
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Measures to Check Fiscal Deficit > p. 111
  3. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 6: Indian Economy [1947 – 2014] > Following lists down the details of the major reforms carried out in June-July 1991: > p. 215
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Q. There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the d…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10
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This is a fundamental 'Fiscal Consolidation 101' question derived directly from the definition of Fiscal Deficit (Expenditure - Revenue). The strategy is purely mathematical: identify which options lower the 'Expenditure' variable. It rewards clarity on basic NCERT Macroeconomics concepts over complex current affairs.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Does reducing revenue expenditure help a government reduce a persistent budget deficit?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Measures to Check Fiscal Deficit > p. 111
Presence: 5/5
“• By reducing public expenditure through: 1. • (a) Rationalisation of subsidies.• (b) Reduction in revenue expenditure in terms of bonus, LTC, leaves encashment, etc. to Government employees.• Curtailing other avoidable revenue expenditure. (c)• 2.By increasing revenue through: • (a) Increasing the tax base in the economy.• Checking tax evasion”
Why this source?
  • Explicitly lists reduction in revenue expenditure (e.g., bonuses, LTC, leave encashment) as a measure to check fiscal deficit.
  • Positions curtailing avoidable revenue spending as a policy lever to reduce deficits.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 5: Government Budget and the Economy > Debt > p. 80
Presence: 4/5
“Deficit Reduction: Government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, the government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature – they impact all income groups equally). There has also been an attempt to raise receipts through the sale of shares in PSUs. However, the major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration. A recent study7 by the Planning Commission has estimated that to transfer Re1 to the poor, government spends Rs 3.65 in the form of food subsidy, showing that cash transfers would lead to increase in welfare.”
Why this source?
  • States deficit reduction can be achieved by reducing expenditure and identifies reduction of government expenditure as a major thrust.
  • Mentions improving efficiency of government spending as a way to lower outlays and hence deficits.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Fiscal Policy can be either expansionary or contractionary. > p. 155
Presence: 3/5
“Fiscal Policy Expenditure | Expenditure | Deepens recessions and • increases | decreases | amplifies expansions, thereby • Tax decreases | Tax increases | increasing fluctuations in the business cycles Expenditure | Expenditure | Softens the recession and • decreases | increases | moderates the expansions, Cyclical | Tax increases | Tax decreases | thereby decreasing fluctuations in the business cycle Fiscal Consolidation policy: It is an effort by the Government to bring down fiscal deficit. It is an effort to reduce public debt, raise revenues and bring down wasteful expenses.”
Why this source?
  • Defines fiscal consolidation as reducing public debt, raising revenues and bringing down wasteful expenses — implying cutting wasteful (including revenue) expenditure helps reduce deficits.
  • Frames expenditure reduction as a standard instrument of contractionary fiscal policy aimed at containing deficits.
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Statement analysis

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Statement analysis

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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.

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