Fiscal Policy Frbm And Fiscal Federalism

A fiscal stimulus refers to a set of policy measures—specifically increased government spending or tax cuts—designed to "kickstart" a sluggish economy. - Why (B) is correct: It describes the government taking proactive ("affirmative") steps to increase the total demand in the economy, thereby boosting overall economic activity. - Why others are incorrect: (A) focuses only on the manufacturing sector, whereas stimulus is broad-based. - (C) describes a targeted credit policy or monetary intervention, not a broad fiscal one. - (D) refers to "Financial Inclusion" (bringing the unbanked into the formal system), which is a long-term structural goal, not a short-term stimulus.

**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)).

Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government. FRBM Act provides a legal institutional framework for fiscal consolidation. The Act also requires the government to lay before the parliament three policy statements in each financial year namely 1. Medium Term Fiscal Policy Statement 2. Fiscal Policy Strategy Statement 3. Macroeconomic Framework Policy Statement

Based on principles of need, equity and performance, overall devolution formula is as given in the chart: 

The **15th Finance Commission** made recommendations to promote better fiscal discipline, education, and agriculture reforms, while adjusting tax devolution among states. ✅ **Statement I: Correct** 4,800 crores were recommended (2022–23 to 2025–26) to **incentivize states for improving educational outcomes**. ❌ **Statement II: Incorrect** The Commission recommended **41%** of Union taxes to be shared with states, **not 45%**. ✅ **Statement III: Correct** It proposed a ₹45,000 crore performance-based incentive for states to implement agricultural reforms. ✅ **Statement IV: Correct** It **reintroduced the 'tax effort' criterion**, rewarding states that better **mobilize revenue** in relation to their GSDP.