Under the FRBMA, the fiscal deficit is to be reduced by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per cent of GDP each year. A government has a fiscal deficit of 4.5 per cent of GDP and a revenue deficit of 2 per cent of GDP. Following these yearly cuts, after how many years will the revenue deficit be eliminated, and after how many years will the fiscal deficit reach the 3 per cent target?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 4 years and 5 years
Given:
Revenue deficit = 2 per cent of GDP, cut by 0.5 each year
Fiscal deficit = 4.5 per cent of GDP, cut by 0.3 each year; target 3 per cent
Years needed = the gap to close ÷ the yearly cut.
Revenue deficit: 2 ÷ 0.5 = 4 years (it must fall to zero)
Fiscal deficit: (4.5 − 3) ÷ 0.3 = 1.5 ÷ 0.3 = 5 years
The fiscal deficit only has to come down to 3 per cent, so the gap is 1.5.
Option (3) 4 years and 15 years — 15 comes from dividing the whole 4.5 by 0.3.
NCERT (2026-27): “Main Features 1. The Act mandates the central government to take appropriate measures to reduce fiscal deficit to not more than 3 percent of GDP and to eliminate the revenue deficit …” “2. It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the revenue deficit by 0.5 per cent. If this is not achieved …” |