Deficit Reduction: Government deficit can be reduced by an increase in taxes or reduction in expenditure. In India, government has been trying to increase tax revenue with greater reliance on direct taxes (indirect taxes are regressive in nature - they impact all income groups equally). There has also been an attempt to raise receipts through the sale of shares in PSUs. However, the major thrust has been towards reduction in government expenditure. This could be achieved through making government activities more efficient through better planning of programmes and better administration. A recent study by the Planning Commission has estimated that to transfer Rel to the poor, government spends ₹ 3.65 in the form of food subsidy, showing that cash transfers would lead to increase in welfare. The other way is to change the scope of the government by withdrawing from some of the areas where it operated before. Cutting back government programmes in vital areas like agriculture, education, health, poverty alleviation, etc. would adversely affect the economy. Governments in many countries run huge deficits forcing them to eventually put in place self-imposed constraints of not increasing expenditure over pre-determined level. These will have to be examined keeping in view the above factors. We must note that larger deficits do not always signify a more expansionary fiscal policy. The same fiscal measures can give rise to a large or small deficit, depending on the state of the economy. For example, if an economy experiences a recession and GDP falls, tax revenues fall because firms and households pay lower taxes when they earn less. This means that the deficit increases in a recession and falls in a boom, even with no change in fiscal policy.

Reducing expenditure on Vital sectors like Agriculture, education, healthcare, etc, to reduce the deficit may result in______.

Adverse effect on Economy

The correct option in this context would be: Option 3: Adverse effect on Economy

Reducing expenditure on vital sectors like agriculture, education, healthcare, and poverty alleviation can have adverse effects on the economy. These sectors play a crucial role in promoting economic development, human capital formation, and poverty reduction. Cutting back on government programs in these areas may lead to a decline in productivity, educational attainment, health outcomes, and overall well-being of the population. Additionally, it can negatively impact the long-term growth prospects of the economy.