Fiscal Policy & Price Stabilization
Indian Economy
- PYQs8
- Articles1
Background
Fiscal policy decisions, especially regarding subsidies and price controls in critical sectors like energy, have significant implications for government finances, inflation, social welfare, and the health of public sector undertakings. These are recurring themes in UPSC exams.
Fiscal policy refers to the government's use of spending and taxation to influence the economy. In the context of energy, it often involves direct or indirect subsidies, or price stabilization mechanisms, to protect consumers from global price volatility and manage inflation.
Facts & tables
- Absorption of Price Shocks
- State-run Oil Marketing Companies (OMCs) absorbed significant losses (₹74,781 crore) by not passing on the full increase in global crude prices to consumers.
- Inflation Control
- This policy helped contain domestic fuel and cooking gas inflation, keeping prices stable compared to many other economies.
- Household Protection
- The measure protected household budgets and maintained affordability of essential fuels like petrol, diesel, and LPG, including for Ujjwala beneficiaries.
- Cost to Public Sector
- While beneficial for consumers, this approach incurred substantial financial costs for public sector OMCs, impacting their profitability.
| Type | Reference |
|---|---|
| Conceptual area | Fiscal Policy & Public Debt |
| Conceptual area | Welfare Schemes & Social Policies |
| Conceptual area | Macroeconomic Trends & Inflation |
| Body | Role |
|---|---|
| Ministry of Finance | Formulates fiscal policy and manages public debt implications |
| Oil Marketing Companies (OMCs) | Implement price stabilization measures and absorb price shocks |
| Ministry of Petroleum and Natural Gas | Oversees the functioning of omcs and energy pricing policies |
Prelims angle
Prelims angle: Conceptual understanding
Prelims angle: Cause and effect relationships
- Government's role in absorbing global price shocks through OMCs.
- Impact on OMCs' financial health and public finances.
- Effect on domestic inflation and consumer welfare.
- Trade-off between price stability and fiscal burden.
- Comparison of India's fuel price stability with other nations.
| Year | Framing tags |
|---|---|
| 2026 | Conceptual understanding, Definition-based questions |
| 2022 | Statement-based questions, Conceptual understanding |
| 2021 | Conceptual understanding, Cause and effect relationships |
| 2021 | Conceptual understanding, Cause and effect relationships |
| 2018 | Multi-statement analysis, Factual recall |
| 2016 | Multi-statement analysis, Conceptual understanding |
| 2015 | Conceptual understanding, Policy measures |
| 2013 | Conceptual understanding, Cause and effect relationships |
Timeline
-
Fiscal Policy & Public Debt
Conceptual area
-
Welfare Schemes & Social Policies
Conceptual area
-
Macroeconomic Trends & Inflation
Conceptual area
-
Prelims 2013
Conceptual understanding, Cause and effect relationships
-
Prelims 2015
Conceptual understanding, Policy measures
-
Prelims 2016
Multi-statement analysis, Conceptual understanding
-
Prelims 2018
Multi-statement analysis, Factual recall
-
Prelims 2021
Conceptual understanding, Cause and effect relationships
-
Prelims 2021
Conceptual understanding, Cause and effect relationships
-
Prelims 2022
Statement-based questions, Conceptual understanding
-
Prelims 2026
Conceptual understanding, Definition-based questions
-
How India withstood the crisis in West Asia
The government's decision to absorb global energy price shocks through public sector undertakings (OMCs) is a fiscal policy measure aimed at stabilizing domestic prices, controlling inflation, and protecting consumer purchasing power, albeit at a cost to public finances and OMC profitability.
See also
No related topics linked yet.
Past papers
2013–2026 · 8 questions
In the news
How India withstood the crisis in West Asia
The government's decision to absorb global energy price shocks through public sector undertakings (OMCs) is a fiscal policy measure aimed at stabilizing domestic prices, controlling inflation, and protecting consumer purchasing power, albeit at a cost to public finances and OMC profitability.
Try these PYQs
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
A. Diversion to Real Estate: While this can happen, it still involves some economic activity and might generate taxes (though potentially not on the full value of the transaction if black money is used). B. Investment in Unproductive Activities: This can hurt the economy, but the government loses tax revenue regardless of the type of investment if it's funded by black money. C. Donations to Political Parties: This is a concern, but the lost tax revenue likely outweighs the impact of such donations. D. Loss of Revenue: Black money, by definition, avoids taxes. This directly reduces the government's income, limiting its ability to fund public services, infrastructure, and social welfare programs. Tax evasion through black money creation significantly hinders the government's ability to function effectively and meet the needs of its citizens. This is why it's a major concern.
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.
To reduce a persistent budget deficit, the government can take actions that decrease spending or increase revenue. 1. Reducing revenue expenditure (Correct): This involves cutting back on non-essential government spending. This can include areas like administrative costs, travel, or certain subsidies. 2. Introducing new welfare schemes (Incorrect): This would likely increase government spending and worsen the deficit. 3. Rationalizing subsidies (Correct): Subsidies can be a significant source of government expenditure. Reviewing and potentially reducing or reforming subsidies can help control spending. 4. Expanding industries (Depends): While industrial expansion can lead to increased tax revenue in the long run, it might not have an immediate impact on the budget deficit. In the short term, the government might need to invest in infrastructure to support expansion, potentially increasing expenditure. Therefore, the correct answer is 1 and 3 only (Reducing revenue expenditure and Rationalizing subsidies).
Which one of the following is likely to be the most inflationary in its effects?
Out of the given options, the most inflationary effect is likely caused by (D) Creation of new money to finance a budget deficit. Option A is incorrect: Repayment of public debt actually removes money from circulation, potentially leading to deflationary pressure. Option B and C are incorrect: Borrowing from the public (B) or banks (C) - While these options involve increasing government debt, they don't directly increase the money supply. The government essentially takes money that already exists in the economy. Option D is correct: Creation of new money is the most inflationary option. This can lead to an increase in the money supply, which can put upward pressure on prices (inflation) if not accompanied by a corresponding increase in goods and services. In essence, printing new money directly expands the money supply, potentially outpacing economic growth and leading to inflation.
Which one of the following is likely to be the most inflationary in its effect?
Creating new money to finance a budget deficit will be the most inflationary effect. Because it increases the money supply without any increase in the production of goods and services.
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.
Actions that can help reduce the deficit: 1. Reducing revenue expenditure (Correct): This involves cutting back on non-essential government spending. Examples include reducing administrative costs, curtailing travel expenses, or postponing discretionary infrastructure projects. 3. Rationalizing subsidies (Correct): This means making subsidies more targeted and efficient. The government can identify and eliminate wasteful subsidies or ensure they reach the intended beneficiaries. Actions that will likely increase the deficit: 2. Introducing new welfare schemes (Incorrect): This would increase government spending and contribute to the deficit. 4. Reducing import duty (Incorrect): Lower import duties can lead to a decrease in government revenue collected from customs duties. This can worsen the deficit. Therefore, the correct answer is 1 and 3 only (Reducing revenue expenditure and Rationalizing subsidies)
Show 3 more PYQs
Consider the following statements
1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2. The Central Government has domestic liabilities of 21% of GDP as compared to 49% of GDP of the State Governments.
3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
Statement 1 is correct. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report indeed recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, with 40% for the Central Government and 20% for the State Governments. This recommendation aimed to ensure fiscal discipline and sustainability. Statement 2 is not correct. The Central Government has domestic liabilities of 46.1% of GDP (2016-17) and as a percentage of GDP, States liabilities increased to 23.2 per cent at end-March 2016. Statement 3 is correct. The Constitution of India empowers State Governments to borrow only from domestic sources (Article 293(1)). Further, as long as a State has outstanding borrowings from the Central Government, it is required to obtain the Central Government's prior approval before incurring debt (Article 293 (3)).
With reference to the Indian economy, consider the following statements :
1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt;
Which of the above statements is/are correct ?
Statement 1 is correct: A portion of household financial savings in India does indeed go towards government borrowings. The government raises funds through various debt instruments like bonds and treasury bills. When households save money, they might invest it in these government debt instruments through banks or other financial institutions. This provides a source of funding for the government while offering a return to the investors (savers). Statement 2 is correct: Dated securities are a major component of India's internal debt. These are essentially government bonds issued at market-determined interest rates through auctions. Investors, including households, banks, and financial institutions, can participate in these auctions and purchase dated securities. Hence, both statements are correct.
Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy ?
The Crowding Out Effect is a prominent macroeconomic concept associated with expansionary fiscal policy and deficit financing. Option A is incorrect: A situation where private investment increases due to increased government spending is known as the Crowding In Effect. This typically happens during a deep recession when government spending boosts aggregate demand, improving business expectations and encouraging private investment despite potential interest rate changes. Option B is correct: The Crowding Out Effect occurs when the government runs a budget deficit and borrows heavily from the financial market to finance its increased spending. This massive borrowing increases the overall demand for a limited pool of loanable funds. The heightened competition for capital drives up the equilibrium interest rates. Higher interest rates make borrowing more expensive for private businesses and consumers, leading to a decline in private sector investment. Thus, the private sector is effectively "crowded out" of the credit market. Option C is incorrect: An increase in taxes generally reduces the disposable income of consumers and the retained earnings of businesses, which typically leads to a decrease, not an increase, in private sector investment and consumption. Option D is incorrect: Government spending directly adds to aggregate demand. The crowding out effect argues that the net impact on aggregate demand might be smaller than expected because the increase in government spending is partially offset by a decrease in private investment, but it does not mean government spending has zero impact. Therefore, Option B is the correct answer.