BPSC 70th CCE Re-exam Prelims General Studies · Question 140 of 142

Correct — D, Taxes. Fiscal policy is what the government does with its own budget: what it raises in revenue and what it spends. Its instruments are therefore taxation, public expenditure, subsidies and transfer payments, and public borrowing — everything that appears in the Annual Financial Statement laid before Parliament under Article 112 and that the Finance Bill gives effect to. Taxes are the central instrument on the revenue side, and the government uses them for far more than collection: rates are cut to stimulate demand, raised to cool it, and differentiated to steer behaviour, which is why an excise duty on tobacco, a customs duty on an import and a corporate tax cut are all fiscal policy in action. The other three options are all monetary policy, and monetary policy belongs to a different institution. The bank rate is defined by the Reserve Bank as the rate at which it is ready to buy or rediscount bills of exchange or other commercial paper; it is published under Section 49 of the Reserve Bank of India Act, 1934, acts as the penal rate for shortfalls in reserve requirements, and is aligned with the Marginal Standing Facility rate. The cash reserve ratio is the average daily balance a bank must keep with the Reserve Bank as a percentage of its net demand and time liabilities, notified by the Reserve Bank in the Official Gazette. A credit ceiling is a limit the central bank places on how much credit banks may extend, one of the selective credit controls it operates alongside margin requirements and moral suasion. Every one of those three is set by the Reserve Bank, not voted by Parliament, and none of them appears in a budget. The single test that answers this question and every question like it: ask who pulls the lever. If it is the Ministry of Finance through the Budget, it is fiscal; if it is the Reserve Bank through its Monetary Policy Committee or its regulatory powers, it is monetary.

• (a)Credit Ceiling — A selective, or qualitative, credit control — the central bank capping the credit that banks may extend, often to particular sectors, to restrain a specific kind of lending rather than the money supply as a whole. It is a Reserve Bank instrument. The word 'ceiling' can suggest a budget limit, which is where its plausibility comes from.
• (b)Bank Rate — The rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial paper, published under Section 49 of the RBI Act, 1934 and aligned with the Marginal Standing Facility rate. It is a classic quantitative monetary instrument — raising it signals a tight-money policy — and UPSC has repeatedly listed it as one to test exactly this fiscal-versus-monetary boundary.
• (c)Cash Reserve Ratio — The share of a bank's net demand and time liabilities that it must hold as a cash balance with the Reserve Bank, notified in the Official Gazette. Raising it leaves commercial banks with less money to lend and contracts credit; lowering it does the reverse. The lever sits entirely with the central bank, so the instrument is monetary.

The two arms of macroeconomic management differ by who operates them and what they act on. Fiscal policy is the government's — the Union Ministry of Finance for the Centre, and each state's finance department for the states — and it works through taxation, expenditure, subsidies and borrowing. Its statutory frame in India includes Article 112's Annual Financial Statement, the Finance Act each year, and the Fiscal Responsibility and Budget Management Act, 2003, which sets deficit discipline. Monetary policy is the Reserve Bank's and works on the price and quantity of money. Since the RBI Act was amended in May 2016, that policy runs on a statutory flexible inflation-targeting framework: under Section 45ZA the Central Government, in consultation with the Reserve Bank, notifies a Consumer Price Index inflation target once every five years — 4 per cent with a tolerance band of 2 to 6 per cent, first notified in August 2016 and retained at each review — and under Section 45ZB a six-member Monetary Policy Committee decides the policy rate needed to hit it. The instruments divide the same way: quantitative ones such as the repo rate, bank rate, CRR, SLR and open market operations, and qualitative ones such as margin requirements, credit ceilings and moral suasion.

This is a classification question, and it is answered by sorting rather than by recall. Run each option through one question — who decides it? Bank rate: the Reserve Bank, announced with the monetary policy statement. Cash reserve ratio: the Reserve Bank, notified in the Gazette. Credit ceiling: the Reserve Bank, as a selective control on lending. Taxes: Parliament, on the Finance Minister's proposal, in the Budget. Only the last is a decision of the government's fiscal machinery, so only the last is fiscal policy. Two extra pieces of vocabulary make the sorting reliable. The word 'rate' in an economics option is almost always monetary — repo, reverse repo, bank rate, marginal standing facility — because rates are the price of money. The words 'deficit', 'duty', 'cess', 'subsidy', 'expenditure' and 'disinvestment' are almost always fiscal, because they belong to the budget. The one genuine overlap worth knowing is public debt: the government borrows, which is fiscal, but the Reserve Bank manages that debt as the government's banker, which is why UPSC has set public debt as a deliberate trap in a list of monetary instruments.

• Fiscal policy instruments are taxation, public expenditure, subsidies and transfer payments, and public borrowing — all operated through the Union Budget presented under Article 112
• The bank rate is the rate at which the Reserve Bank buys or rediscounts bills of exchange or other commercial paper; it is published under Section 49 of the RBI Act, 1934 and is aligned with the Marginal Standing Facility rate
• The cash reserve ratio is the average daily balance a bank must maintain with the Reserve Bank as a percentage of its net demand and time liabilities, notified in the Official Gazette
• A credit ceiling is a selective or qualitative credit control operated by the central bank, alongside margin requirements and moral suasion
• The RBI Act was amended in May 2016 to give statutory basis to flexible inflation targeting: Section 45ZA for the inflation target, notified once every five years at 4 per cent CPI with a 2 to 6 per cent tolerance band, and Section 45ZB for the six-member Monetary Policy Committee
• The Fiscal Responsibility and Budget Management Act, 2003 is the statutory frame for fiscal discipline, as the amended RBI Act is for monetary policy

• Assuming anything to do with money and banks is fiscal policy; banks are regulated by the central bank, and its instruments are monetary
• Missing public debt as the overlap case — borrowing is fiscal, but the Reserve Bank manages the debt as the government's banker
• Treating a credit ceiling as a budget ceiling; it is a limit on bank lending, imposed by the central bank as a selective credit control

BPSC asks the classification in its bluntest form — one fiscal instrument among three monetary ones — so the mark goes to whoever can name who operates each lever. UPSC asks the same distinction as a statement list and deliberately includes an item that straddles the line, most famously putting public debt among bank rate and open market operations, which forces a more careful answer than sorting by institution alone.

• practice — not a real PYQ

  Which one of the following is not an instrument of monetary policy in India ?

  • (a)Statutory Liquidity Ratio
  • (b)Open Market Operations
  • (c)Public expenditure
  • (d)Repo rate

  Answer(c) Public expenditure — a fiscal instrument decided in the Budget; the other three are operated by the Reserve Bank.

• practice — not a real PYQ

  Under which section of the Reserve Bank of India Act is the Monetary Policy Committee constituted ?

  • (a)Section 42
  • (b)Section 45ZA
  • (c)Section 45ZB
  • (d)Section 49

  Answer(c) Section 45ZB — Section 45ZA covers the notification of the inflation target and Section 49 the publication of the bank rate.