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5.  Fiscal Policy:

A.  Fiscal Measures

Focus:

  • Fiscal policy, Finance Commission (14th FC and its important provisions)
  • Fiscal Responsibility and Budgetary Management (FRBM) Act, other actions taken by the Finance Ministry (Government), Disinvestment of Public Sector Units (PSU’s) to improve the financial health of the Economy
  • What is Financial Stability? Steps taken by Government in this regard
    • Financial Sector Reforms brought about by the government in these sectors -Banking, Insurance, Provident Fund (PF).

Example: In 2015, Raising of Foreign Direct Investment (FDI) limit in defence to 49%, In Railway infrastructure to 100% etc.

  • Financial Regulators – Reserve Bank of India(RBI), Securities and Exchange Board of India(SEBI), Insurance Regulatory and Development Authority (IRDA), Pension Fund Regulatory and Development Authority (PFRDA) – powers, functions, jurisdiction issues between the regulators
  • Financial Stability and Development Council – objective and functions
  • Economic Reforms– concepts related to privatization and globalization, SEZ’s etc.
  • Sources of financial resources for Government – Tax and Non-tax revenue (Foreign aid, Disinvestment from PSU’s etc), Disinvestment, Borrowings (internal and external), User Charges.

 

B.  Budget

Focus:

  • Components of Budget, Revenue and Capital receipts and expenditure
  • What constitutes Plan and Non plan expenditure? Difference between them.
  • Key Terms like pubic debt, External debt, Internal debt, Revenue Deficit, Primary Deficit, deficit financing, fiscal consolidation Zero-based Budgeting
    • Steps taken by the government to bring down the Fiscal Deficit

Example: FRBM Act

Example (2014 Prelims Questions Paper):

 

With reference to Union Budget, which of the following, is/are covered under Non-Plan Expenditure?

1.      Defense expenditure
2.      Interest payments
3.      Salaries and pensions
4.      Subsidies

Select the correct answer using the code given below.

A.      1 only

B.      2 and 3 only

C.      1, 2, 3 and 4

D.     None

Solution (c )

Example (2013 Prelims Questions Paper):

In India, deficit financing is used for raising resources for

(a) economic development
(b) redemption of public debt
(c) adjusting the balance of  payments
(d) reducing the foreign debt

Solution (a)

 

C.  Taxation

Focus:

  • Direct, Indirect tax and other Taxes like Pigovian tax, Ad Valorem tax, Tobin Tax, Difference between a Cess and a Surcharge
  • Direct Tax like Corporate Tax, Income Tax, Wealth Tax, Stock Market transactions
  • Indirect Tax like Excise Tax, Customs, VAT, Service tax
    • Taxation Reforms – Direct Tax Code (DTC), General Anti-Avoidance Rule (GAAR), Goods and Service Tax (GST).

Example: With regard to GST – Purpose; advantages and disadvatages of GST; issues with regard to implementation of GST;

  • Understand the basic concepts like what is Tax Base, Progressive taxation,Tax Expenditure, Tax avoidance, Tax evasion, Tax Havens, Tax elasticity, Tax Buoyancy, Laffer curve, Crowding-out.

Example (2014 Prelims Questions Paper):

The sales tax you pay while purchasing a toothpaste is a

a.      tax imposed by the Central Government.
b.      tax imposed by the Central Government but collected by the State Government
c.      tax imposed by the State Government but collected by the Central Government
d.      tax imposed and collected by the State Government

Solution (d)

2011 Prelims Questions Paper:

Which one of the following is not a feature of “Value Added Tax”?

(a.) It is a multi-point destination-based system of taxation
(b.) It is a tax levied on value addition at each stage of transaction in the production-distribution chain
(c.) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer
(d.) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation

Solution (c)

 

D.  Planning

Focus:

  • Institutions involved in Planning in India
    • A general idea on how planning has evolved over the years (since Independence)
    • How planning takes place at the State and National level
  • New institutionNiti Ayog
    • Its purpose
    • Why was Planning Commission dissolved?
  • Issues between Planning Commission and Finance Commission

Note: Make a note on the latest committees set-up with regard to Fiscal and Economic Reforms like Financial Sector Legislative Reforms Commission (FSLRC), Financial Action Task Force (FATF), Financial Stability and Development Council (FSDC), Nachiket mor committee etc.

Example (2014 Prelims Questions Paper):

The main objective of the 12th Five-Year Plan is

A.      inclusive growth and poverty reductions
B.      inclusive and sustainable growth
C.      sustainable and inclusive growth to reduce unemployment
D.     Faster, sustainable and more inclusive growth.

Solution (d)

 

6.  Market:

Focus:             

  • Money Market – Treasury Bills, Commercial paper, Certificate of Deposit, Call Money
  • Capital Market – Government Securities (G-Secs)
    • Difference between Money and Capital market
    • A general idea about Stock-exchanges in India – BSE, NSE; Nifty (Abroad); What is SENSEX- what does it indicate?
  • Regulatory Bodies – SEBI, IRDA , PFRDA – their power, functions in regulating Market, Mutual funds, Pension Fund etc.; reforms brought about by the Regulatory Bodies
  • Foreign Direct Investment (FDI’s) and Foreign Institutional Investors (FII’s)
    • On what basis are they classified as FDIs and FIIs?
    • Differences between them
    • Why are FII’s called ‘hot money’ or ‘Portfolio investment?
    • Which type of investment would be better for India?
  • Other investments such as Qualified Institutional Placement (QIPs) – Angel investors, Venture Capitals, Foreign institutional investors, Mutual Funds, Public Financial institutions
  • Have a Basic understanding of these terms– Primary market, Secondary market, Bull and Bear (what does it symbolize), Derivatives, Futures, Bonds, Debentures – partially and fully convertible , Participatory Notes, Hedge Funds, Blue chip shares, Market depth.
  • Mechanisms to raise money in the Capital Market in India by Foreign countries- Indian Depository Receipts (IDR’s); Similarly for an Indian company to raise money in the Foreign market –Global Depository Receipts (GDR’s) and in America it is known as American Depository Receipts (ADR’s)

Example (2014 Prelims Question)

What does venture capital mean?

A.      A short-term capital provided to industries
B.      A long-term start-up capital provided to new entrepreneurs
C.      Funds provided to industries at times of incurring losses
D.     Funds provided for replacement and renovation of industries

Solution (b)

 

2012 Prelims Question Paper

Which of the following would include Foreign Direct Investment in India?

1. Subsidiaries of companies in India
2. Majority foreign equity holding in Indian companies
3. Companies exclusively financed by foreign companies
4. Portfolio investment

Select the correct answer using the codes given below :

(a) 1, 2, 3 and 4
(b) 2 and 4 only
(c) 1 and 3 only
(d) 1, 2 and 3 only

Solution (d)

 

7.  Public Sector Public Sector Units (PSU’s)

Focus:

  • Organisational Structure of PSU’s – Departmental Undertakings, Statutory Corporations, Control Boards, Co-operative Societies, Companies registered under the Companies Act 1956
  • Purpose/Objectives of PSU’s
  • Reforms – post Liberalisation, Privatization, Globalisation (LPG) era- Disinvestment, Memorandum of Understanding (MOUs), Miniratnas, Navaratna, Maharatna, New Companies Act, 2013, Corporate Social Responsibility (CSR)
  • What is Corporate Governance? What are its Objectives?
  • Industry:
    • A general idea about Industrial Policies in India
    • Medium and Small-Scale Enterprises (MSME’s ), Small-Scale Industries (SSI), Village and Cottage Industries (VCI)- On what basis are they classified so
    • What measures are taken by Government to revive these industries?

Example: (2011 Prelims Question)

 

Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs)?

1. The Government intends to use the revenue earned-from the disinvestment mainly to pay back the external debt.
2. The Government no longer intends to retain the management control of the CPSEs.

Which of the statements given above is/are correct?

(a.) I only
(b.) 2 only
(c.) Both 1 and 2
(d.) Neither 1 nor 2

Solution (d)

 

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