Which among the following is a tool of Fiscal Policy ?

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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.

Why the other options are wrong — (a) 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) 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) 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.

Concept: 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.

State PCS 2025 Q140 — Economy PYQ with Answer

State PCS 2025 Q140 — Economy PYQ with Answer