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Difficulty: MediumEconomic Developments, Union & State Budgets, and Economic Surveys

Consider the following statements regarding the fiscal policy documents mandated under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, presented along with the Union Budget:

1. The Medium-Term Fiscal Policy Statement sets three-year rolling targets for key fiscal indicators, including Fiscal Deficit and Revenue Deficit.
2. The Macroeconomic Framework Statement provides an overview of the economy, including growth prospects and external sector stability.
3. Grants-in-aid given by the Union Government to States for the creation of capital assets are formally classified as Capital Expenditure in the Union Budget accounting layout.

Which of the statements given above is/are correct?

  1. 1 and 2 onlyAnswer
  2. B
    1 and 3 only
  3. C
    2 and 3 only
  4. D
    1, 2, and 3

Answer

Statements 1 and 2 are correct, while Statement 3 is incorrect.
The FRBM Act, 2003, mandates the submission of the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and Macroeconomic Framework Statement alongside the Union Budget. Therefore, statements regarding the three-year rolling targets and macroeconomic overview are accurate. Grants-in-aid released to State Governments are classified as Revenue Expenditure of the Central Government because they do not directly create assets owned by the Centre.

Step-by-Step Solution

1
Evaluate Statement 1 regarding the Medium-Term Fiscal Policy Statement.
Statement 1 is correct. The FRBM Act mandates presenting a Medium-Term Fiscal Policy Statement detailing three-year rolling targets for revenue deficit, fiscal deficit, tax revenue, and total outstanding debt.
It fulfills statutory reporting under the FRBM framework to ensure medium-term fiscal discipline.
2
Evaluate Statement 2 regarding the Macroeconomic Framework Statement.
Statement 2 is correct. The Macroeconomic Framework Statement evaluates GDP growth rates, fiscal balance, external balance, and monetary trends.
It sets the macroeconomic context for the fiscal projections presented in the Union Budget.
3
Evaluate Statement 3 regarding the budgetary accounting classification of Grants-in-aid.
Statement 3 is incorrect. Grants-in-aid given by the Union to States—even when intended for capital asset creation—are accounted as Revenue Expenditure because they do not lead to direct asset ownership by the Central Government.
Although these funds contribute to capital formation (tracked conceptually as Effective Revenue Deficit), accounting conventions strictly classify all grants to third parties under Revenue Expenditure.

Key Concept

FRBM Act Mandated Documents and Capital vs Revenue Expenditure Classification in Union Budget
Estimated Time:1m 30s
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Topics

Economic Developments, Union & State Budgets, and Economic Surveys

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