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Q3 (IAS/2016) Economy › Government Finance & Budget › Fiscal deficit concepts Official Key

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.

Result
Your answer: —  ·  Correct: C
Explanation

The correct answer is option C (1 and 3 only).

Government deficit can be reduced by an increase in taxes or reduction in expenditure.[1] Statement 1 is correct because reduction in the revenue expenditure should be targeted to achieve better results of fiscal consolidation.[2] Statement 3 is also correct as rationalisation of subsidies[3] is explicitly mentioned as a measure to reduce public expenditure and check fiscal deficit.

Statement 2 is incorrect because introducing new welfare schemes would increase government expenditure, thereby widening the deficit rather than reducing it. Statement 4 is incorrect because reducing import duty would decrease government revenue from customs duties, which would worsen the fiscal deficit. In India, the government has been trying to increase tax revenue[1] to address deficits, not reduce it. Therefore, only reducing revenue expenditure and rationalizing subsidies are effective actions to reduce a persistent budget 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 > FISCAL CONSOLIDATION > p. 114
  3. [3] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Measures to Check Fiscal Deficit > p. 111
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Q. There has been a persistent deficit budget year after year. Which action/actions of the following can-be taken by the Government to reduc…
At a glance
Origin: Books + Current Affairs Fairness: Moderate fairness Books / CA: 5/10 · 5/10
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This is a classic 'First Principles' question. It requires no current affairs memorization, only the basic arithmetic of the Fiscal Deficit formula (Expenditure minus Receipts). If you understand that Deficit = Gap, you simply look for options that either cut spending or boost income.

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
Can reducing government revenue expenditure reduce the government's budget (fiscal) deficit?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > 4.5 Government Deficits > p. 153
Presence: 5/5
“It can be seen from above that revenue deficit is a part of fiscal deficit. A large share of revenue deficit in the fiscal deficit indicates that a large part of borrowing is being used to meet its consumption expenditure needs rather than investment. 3. Primary Deficit: A large part of the government's fiscal deficit is because it needs to pay interest on its previous accumulated debt. If we want to measure the government's deficit excluding the interest payment on the previous debt then it is called the primary deficit. The goal of measuring the primary deficit is to focus on present fiscal imbalances.”
Why this source?
  • Explicitly states that revenue deficit is a part of fiscal deficit, linking changes in revenue expenditure to the fiscal deficit magnitude.
  • Implies that reducing revenue expenditure (which reduces revenue deficit) will lower the portion of fiscal deficit arising from consumption expenditure.
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?
  • Lists reduction in revenue expenditure (e.g., rationalisation of subsidies, cutting avoidable revenue outlays) as a direct measure to check fiscal deficit.
  • Provides concrete examples of revenue-side cuts that governments can use to lower the deficit.
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 generally that government deficit can be reduced by an increase in taxes or reduction in expenditure, establishing the basic fiscal arithmetic.
  • Notes that government has pursued expenditure reduction as a main thrust of deficit reduction policy.
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Statement analysis

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Statement analysis

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