Contents

1. Introduction and Definition 80

2. Instruments of Fiscal Policy 80

2.1. Government or Public Expenditure 80

2.1.1. Capital and Revenue Expenditure 81

2.1.2. Development and Non-Development Expenditure 81

2.1.3. Direct Expenditure and Transfer Expenditure 81

2.1.4. Productive and Unproductive Expenditure 81

2.2. Government or Public Revenue 82

2.2.1. Revenue Receipts 82

2.2.2. Capital Receipts 88

3. Cascading Effects of Taxation: MODVAT and CENVAT 88

4. Budgetary Deficits 89

4.1. Revenue Deficit 89

4.2. Fiscal Deficit 89

4.3. Primary Deficit 90

4.4. Deficit Financing 90

4.4.1. Whether Government Debt is Good or Bad? 90

4.4.2. Ricardian Equivalence 90

4.4.3. Debt vs Inflation 91

4.5. Deficit Reduction 91

4.5.1. Fiscal Responsibility and Budget Management Act, 2003 (FRBMA) 92

5. Fiscal Policy in Action 94

5.1. Expansionary and Contractionary Fiscal Policy 94

5.2. Classical and Keynesian views of Fiscal Policy 94

5.3. Discretionary and Automatic Fiscal Policy 95

5.4. Fiscal or Economic Stimulus 95

5.5. Effects of Fiscal Policy on Macro Economy 95

5.6. Effects of Fiscal Policy on Consumer Spending 96

6. Drawbacks and Limitations of Fiscal Policy 96

7. Fiscal Federalism and Centre State Transfers 96

7.1. The Finance Commission 97

7.2. Changes in Indian Taxation System 97

8. Recent Developments in Taxation System 98

8.1. Goods and Services Tax (GST) 98

8.2. The Direct Taxes Code Bill, 2010 101

9. Miscellaneous 102

9.1. Tax Terrorism 102

9.2. Tax Evasion and Tax Avoidance 102

9.3. Tax Havens 103

10. GS Mains Test Series Questions 103

11. Previous Years UPSC Mains questions 108