Question 1

Consider the following statements regarding fiscal policy cyclicality:

1. During a recession, a counter-cyclical fiscal policy involves increasing taxes and reducing government expenditure to create demand.
2. A pro-cyclical fiscal policy during an economic boom involves implementing contractionary measures like increasing taxes to prevent macroeconomic volatility.
3. An expansionary fiscal policy aims to decrease aggregate demand by increasing government spending, thereby controlling the general price level.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. A counter-cyclical policy acts against the business cycle. During a recession, it would be expansionary, which involves reducing taxes and increasing government expenditure to create demand and raise purchasing power.

Statement 2 is incorrect. A pro-cyclical policy supports the business cycle. During an economic boom, a pro-cyclical policy would be expansionary, not contractionary. It is a counter-cyclical policy that would use contractionary measures during a boom.

Statement 3 is incorrect. An expansionary fiscal policy aims to increase, not decrease, aggregate demand. This increase in demand typically leads to an increase in the general price level, not its control. Contractionary policy is used to reduce demand and control price levels.

Question 2

Consider the following statements regarding the funds of the Government of India:

1. Withdrawals from the Consolidated Fund of India (CFI) require post facto approval from the Parliament.
2. The Contingency Fund of India is held by the Finance Secretary on behalf of the President of India to meet unforeseen expenditures.
3. Funds in the Public Account of India, such as Provident Funds, belong to the government and their withdrawal does not require parliamentary approval.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. Money can be withdrawn from the Consolidated Fund of India (CFI) only after prior approval of the Parliament. It is the Contingency Fund that allows for withdrawals to meet urgent expenditure, with post facto approval from Parliament.

Statement 2 is correct. The Contingency Fund is at the disposal of the President to meet urgent or unforeseen emergencies and is held by the Finance Secretary (Department of Economic Affairs) on behalf of the President.

Statement 3 is incorrect. Funds in the Public Account of India, such as Provident Funds and small savings, do not belong to the Government. These are liabilities that must be returned to their rightful owners in the future.

Question 3

Consider the following two statements:

Statement-I: Disinvestments and recovery of loans are classified as Revenue Receipts for the government.

Statement-II: Revenue Receipts are those which are regular in nature, whereas Capital Receipts are generally received only once and either create a liability or reduce an asset.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is incorrect but Statement-II is correct. Statement-I is incorrect. Disinvestments and the recovery of loans are explicitly classified as Capital Receipts, not Revenue Receipts. These are typically one-time receipts for the government.

Statement-II is correct. It accurately defines the fundamental difference between Revenue and Capital receipts. Revenue receipts are recurring (e.g., taxes), while Capital receipts are non-recurring and involve changes in the government's assets or liabilities (e.g., borrowings, disinvestment).

Question 4

Consider the following statements regarding the receipts of the Central Government:
1. Repayment of the principal amount of a loan by a State Government to the Central Government is classified as a Revenue Receipt.
2. Grants-in-aid received from international monetary institutions are considered Capital Receipts.
3. Interest received by the Central Government on loans extended to Public Sector Enterprises is classified as a Non-Tax Revenue Receipt.

How many of the above statements are correct?

Accepted Answer

Only one. To determine the correct number of statements, we must analyze the classification of government receipts based on their impact on assets and liabilities.

1. **Statement 1 is incorrect.** Repayment of a loan principal received by the Central Government is a Capital Receipt. This is because it leads to a reduction in the financial assets of the government (the loan is an asset, and its repayment reduces that asset). Revenue receipts are those that neither create a liability nor reduce assets.

2. **Statement 2 is incorrect.** Grants-in-aid, regardless of the source, are classified as Revenue Receipts (specifically, Non-Tax Revenue). They do not create any repayment liability for the government, nor do they cause a reduction in its assets, which are the defining characteristics of a revenue receipt.

3. **Statement 3 is correct.** Interest received on loans given by the government is a form of regular income. Such receipts, which do not create a liability or reduce government assets, are correctly classified as Non-Tax Revenue Receipts.

Since only the third statement is correct, the correct option is 'Only one'.

Question 5

Consider the following statements:

Statement-I: High capital expenditure by the government can be an indicator of a lack of private investment in the economy.

Statement-II: Capital expenditures are non-recurring in nature and are incurred on building durable assets to improve the productive capacity of the economy.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct as the provided text explicitly states, 'high capital expenditure indicates a lack of private investment in the economy.' Statement-II is also correct, as the text defines capital expenditure as being 'non-recurring types of expenditures' that are 'incurred on building durable assets like highways, multipurpose dams, irrigation projects' and are 'expected to improve the productive capacity of the economy.' Statement-II provides the underlying reason for Statement-I: because capital expenditure involves creating large, long-term productive assets, the government often undertakes this role when the private sector is unwilling or unable to make such large-scale investments, thus explaining why high government capital spending can signal low private investment.

Question 6

Consider the following statements regarding disinvestment in India:
1. The sale of a substantial portion of government shareholding in a CPSE, along with the transfer of management control, is termed an Offer for Sale (OFS).
2. The Department of Investment and Public Asset Management (DIPAM), the nodal agency for disinvestment, operates under the Ministry of Finance.
3. Disinvestment through an Exchange Traded Fund (ETF) involves the sale of the government's stake in a single CPSE exclusively to institutional investors.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The sale of a substantial portion of government shareholding with the transfer of management control is the definition of 'Strategic Disinvestment'. An 'Offer for Sale (OFS)' is a different method that allows the auction of shares on a stock exchange platform.
Statement 2 is correct. The Department of Investment and Public Asset Management (DIPAM) is the nodal agency responsible for managing the disinvestment process in India, and it functions under the administrative control of the Ministry of Finance.
Statement 3 is incorrect. Disinvestment through an Exchange Traded Fund (ETF) allows the simultaneous sale of the government's stake in a basket of various undertakings across diverse sectors through a single offering, not a single CPSE. The method where only institutional investors can participate is the Institutional Placement Programme (IPP).
Therefore, only one statement is correct.

Question 7

Consider the following statements regarding concepts in public finance:

1. Fiscal Drag is a condition where a sudden downsizing of government spending and expiry of tax cuts reduces the cash available with the public.
2. Fiscal Slippage occurs when inflation or income growth moves taxpayers into higher tax brackets, leading to a deflationary pressure in the economy.
3. Liabilities arising from the issuance of interest-bearing bonds to Oil Marketing Enterprises to cover their losses are considered Off-budget liabilities and are not factored into deficit calculations.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The situation described, involving a sudden reduction in aggregate demand due to simultaneous government spending cuts and tax increases, is known as a Fiscal Cliff. Fiscal Drag is an economic phenomenon where inflation or income growth pushes taxpayers into higher tax brackets, thereby increasing tax revenue and potentially dampening economic activity.

Statement 2 is incorrect. The phenomenon described, where inflation moves taxpayers into higher tax brackets, is the definition of Fiscal Drag. Fiscal Slippage refers to a situation where the government's actual fiscal deficit for a year exceeds the budgeted estimate for that year.

Statement 3 is correct. Off-budget liabilities are government liabilities that are not included in the annual budget and do not form part of the formal deficit calculations. A key example is the issuance of special bonds to entities like Oil Marketing Companies to cover their losses, which represents a form of government expenditure not reflected in the fiscal deficit.

Therefore, only one of the statements is correct.

Question 8

Consider the following statements:

Statement-I: A surplus budget is recommended when there is a state of depression in an economy.

Statement-II: A surplus budget is formulated when budgeted receipts are greater than budgeted expenditure, which helps in reducing the aggregate demand.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is incorrect but Statement-II is correct.. Statement-I is incorrect. A deficit budget, where expenditure exceeds receipts, is recommended during a state of depression to increase aggregate demand. A surplus budget is recommended when there is an inflationary gap in the economy.
Statement-II is correct. A surplus budget occurs when budget receipts are greater than budget expenditure. This policy is used to reduce aggregate demand, which is a necessary measure to combat inflation.

Question 9

With reference to the Union Budget process in India, consider the following statements:

1. The nodal institution responsible for the preparation of the Union Budget is the Budget Division within the Department of Economic Affairs, Ministry of Finance.
2. The Rajya Sabha has the power to vote on the demands for grants presented in the budget.
3. The distinction between Plan and Non-Plan expenditure was eliminated following the recommendations of the Bibek Debroy Committee.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is correct. The text explicitly identifies the Budget Division of the Department of Economic Affairs (Ministry of Finance) as the nodal institution responsible for preparing the Union Budget.
Statement 2 is incorrect. The text clearly states that the Rajya Sabha does not have the power to vote on demands for grants. It can only discuss them and must return the bill within 14 days.
Statement 3 is incorrect. The text attributes the merger of the Railway Budget with the General Budget to the recommendation of the Bibek Debroy Committee. It mentions the elimination of the Plan and Non-Plan expenditure distinction as a separate reform, without linking it to this specific committee.

Question 10

Consider the following statements:

1. Crowding-out is said to occur when government expenditure on capital projects, such as infrastructure, has a multiplier effect on private investment and employment.
2. Excessive government borrowing to fund revenue expenditure can shrink market liquidity, raise interest rates, and consequently reduce private investment.
3. The practice of using tax cuts and increased government spending to stimulate an economy during a recession is known as Pump priming.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is incorrect. The phenomenon described, where government spending on capital expenditure like infrastructure stimulates private investment, is known as 'crowding-in', not 'crowding-out'. Crowding-out occurs when government borrowing displaces private investment, often due to spending on populist schemes.
Statement 2 is correct. The text explains that excessive government borrowing to manage fiscal deficits, especially for revenue expenditure, leads to a shrinkage of market liquidity, higher interest rates, and less availability of funds for the private sector, which is the mechanism of crowding-out.
Statement 3 is correct. The text defines Pump priming as the practice of using tax cuts, interest rate reductions, and government spending to stimulate an economy, usually during a recession.

Question 11

Consider the following statements regarding the implications of a high fiscal deficit:

1. It leads to a 'crowding in' effect by increasing the availability of funds for private investors.
2. Borrowings from the RBI to finance the deficit tend to reduce the money supply in the economy, causing deflation.
3. It can lead to a virtuous circle of high fiscal deficit and high GDP growth as more revenue is spent on interest payments.

How many of the above statements are correct?

Accepted Answer

None. All three statements are incorrect.

1. **Statement 1 is incorrect.** A high fiscal deficit leads to a 'crowding out' effect, not 'crowding in'. This occurs when large government borrowings from the financial market reduce the pool of available funds for private investors, potentially increasing interest rates and discouraging private investment.

2. **Statement 2 is incorrect.** When the government borrows from the RBI to finance its deficit (a process known as monetizing the deficit), the RBI effectively creates new money. This action increases the money supply in the economy, which can lead to a rise in the general price level (inflation), not a reduction in money supply or deflation.

3. **Statement 3 is incorrect.** A persistent high fiscal deficit can lead to a 'vicious circle' of high deficit and low GDP growth, not a virtuous one. This happens because a significant portion of government revenue must be used for interest payments on accumulated debt, leaving fewer funds for productive investments that fuel GDP growth.

Question 12

Consider the following statements about different types of deficits:

1. Fiscal Deficit indicates the borrowing requirement of the government excluding interest payments on past loans.
2. Primary Deficit indicates the total borrowing requirements of the government from all sources.
3. Effective Revenue Deficit is the difference between revenue deficit and grants-in-aid provided for the creation of capital assets.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. It describes the Primary Deficit, which is the fiscal deficit minus interest payments. The Fiscal Deficit shows the borrowing requirement inclusive of interest payments. Statement 2 is incorrect. It describes the Fiscal Deficit, which indicates the total borrowing requirements of the government from all sources. The Primary Deficit, by contrast, excludes interest payments. Statement 3 is correct. The Effective Revenue Deficit is defined as the difference between the revenue deficit and the grants provided for the creation of capital assets.

Question 13

Consider the following two statements:

Statement-I: Deficit financing is considered beneficial for a developing economy if the borrowings are primarily routed to create capital assets.

Statement-II: Financing capital expenditure through borrowings leads to increased production and higher GDP, which enhances the productive capacity of the economy.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I.. Statement-I is correct. In a developing economy, using borrowed funds (deficit financing) to create long-term capital assets like infrastructure is seen as a productive use of public debt. Statement-II is also correct. Investing in capital expenditure enhances the economy's productive capacity, leading to increased production and long-term GDP growth. The economic logic presented in Statement-II—that financing capital expenditure boosts production and GDP—is the precise reason why the policy in Statement-I is considered beneficial. Therefore, Statement-II is the correct explanation for Statement-I.

Question 14

Consider the following statements:

1. The use of 'Budget Deficit' as a major policy parameter was discontinued as it reflected the Government's total borrowings from all sources, including market borrowings.
2. 'Monetised Deficit' refers to borrowings made by the Central Government from the public by issuing new currency against special securities.
3. The concept of 'Effective Revenue Deficit' was introduced in the 1993-94 budget to better capture the consumption expenditure of the government.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The concept of Budget Deficit was discontinued because it reflected government borrowings *only from the RBI*, not from all sources. Statement 2 is incorrect. Monetised Deficit refers to borrowings made by the Central Government *from the RBI* through the printing of fresh currency, not from the public. Statement 3 is incorrect. The concept of Effective Revenue Deficit was introduced in the Union Budget 2012-13. The concept introduced in the 1993-94 budget was the Primary Deficit.

Question 15

Consider the following statements:

Statement-I: A primary objective of fiscal consolidation is to improve the fiscal health of the economy by reducing the fiscal deficit to a manageable level.

Statement-II: For achieving high-quality fiscal consolidation, a reduction in capital expenditure is considered more desirable and is prioritized over a reduction in revenue expenditure.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct; fiscal consolidation is a process to improve fiscal health by reducing the fiscal deficit. Statement-II is incorrect because it inverts the recommended policy. For better results from fiscal consolidation, a reduction in revenue expenditure should be targeted, not a reduction in capital expenditure. Cutting capital expenditure to reduce the deficit is generally considered poor-quality fiscal consolidation as it harms long-term growth potential.

Question 16

Consider the following statements regarding the recommendations of the N. K. Singh Committee on fiscal management:

1. The Committee recommended making government debt, rather than the fiscal deficit, the primary anchor for fiscal policy.
2. It suggested the establishment of an autonomous fiscal council to provide independent fiscal forecasts and recommend changes in fiscal strategy.
3. The Central Government has fully enacted the recommended Debt and Fiscal Responsibility Act, thereby repealing the original FRBM Act.

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct; the committee recommended considering debt as the new fiscal policy parameter instead of the fiscal deficit. Statement 2 is correct; the committee recommended establishing an autonomous fiscal council. Statement 3 is incorrect; while the committee did recommend enacting a new Debt and Fiscal Responsibility Act, the text only states that the Central Government has adopted 'some key recommendations' like the debt rule and fiscal glide path. It does not state that the FRBM Act was repealed and replaced entirely, which is a significant legislative action.

Question 17

With reference to the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and its subsequent developments, consider the following statements:

1. The original FRBM Act of 2003 introduced the concept of 'Effective Revenue Deficit' and set a target for its elimination.
2. The Act permits the Central Government to borrow from the RBI through Ways and Means Advances (WMAs) to manage temporary cash flow mismatches.
3. The Financial Stability and Development Council (FSDC) is chaired by the Governor of the RBI and is responsible for implementing the FRBM targets.

How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect; the concept of 'Effective Revenue Deficit' was introduced by the 2012 amendment to the FRBM Act, not the original 2003 Act, which targeted the 'Revenue Deficit'. Statement 2 is correct; the Act prohibits government borrowing from the RBI *except* for Ways and Means Advances (WMAs). Statement 3 is incorrect on two counts; the FSDC is chaired by the Union Finance Minister, not the RBI Governor, and its mandate is financial stability and inter-regulatory coordination, not the implementation of FRBM targets. Therefore, only one statement is correct.

Question 18

With reference to the revenue receipts of states in India, consider the following statements:

1. Transfers from the central government constitute a significant portion of the states' total revenue receipts.
2. GST compensation grants are classified under the State's Own Non-Tax Revenue (SONTR).
3. Revenue collected from stamp duty is a component of the State's Own Tax Revenue (SOTR).

How many of the above statements are correct?

Accepted Answer

Only two. Statement 1 is correct. State revenue receipts comprise own revenue and transfers from the central government. For FY 2023–24, central transfers were estimated at 43% of states' aggregate revenue receipts, which is a significant portion. Statement 2 is incorrect. GST compensation grants are a form of grant-in-aid provided by the Centre to the states. Therefore, they are part of 'Transfers from the central government', not the State's Own Non-Tax Revenue (SONTR), which includes revenue earned by states from their own non-tax sources. Statement 3 is correct. The State's Own Tax Revenue (SOTR) consists of taxes levied and collected by the state government. The text cites improving collection from stamp duty as a measure to strengthen a state's own revenue, confirming it falls under SOTR. Since two statements are correct, the correct option is (b).

Question 19

Consider the following two statements:

Statement-I: The Reserve Bank of India (RBI) has recommended that states adopt clear, time-bound targets for debt reduction and prevent subsidies from overshadowing critical investments.

Statement-II: The recommendations issued by the RBI on state finances are binding directives that state governments are legally obligated to implement to ensure fiscal stability.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct. The RBI has put forth several recommendations for state finances, including setting clear targets for debt reduction and optimising subsidies to ensure they do not crowd out essential investments. Statement-II is incorrect. The term 'recommendations' implies that these are advisory suggestions, not legally binding directives. While these recommendations are crucial for fiscal prudence, state governments are not under a legal obligation to implement them based solely on the RBI's advisory role in this context. Therefore, Statement-I is correct, but Statement-II is incorrect.

Question 20

With reference to the formula designed by the 15th Finance Commission for horizontal tax devolution, consider the following statements:

1. The highest weightage was assigned to the 'Population (2011)' criterion.
2. The combined weightage for 'Area' and 'Forest and Ecology' was equal to the weightage assigned to 'Demographic Performance'.
3. The 'Income Distance' criterion was introduced for the first time by the 15th Finance Commission to promote fiscal capacity equalization.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The 15th Finance Commission assigned a weight of 45% to 'Income Distance' and 15% to 'Population (2011)'. Therefore, 'Income Distance' received the highest weightage, not 'Population'. Statement 2 is incorrect. The combined weightage for 'Area' (15%) and 'Forest and Ecology' (10%) is 25%. The weightage for 'Demographic Performance' is 12.5%. These values are not equal. Statement 3 is incorrect. The 'Income Distance' criterion was introduced by the Ninth Finance Commission, not the Fifteenth.

Question 21

Consider the following statements regarding the composition and qualifications of the Finance Commission:

1. The qualifications for the Chairman and members of the Finance Commission are determined by the President of India.
2. The Chairman of the Finance Commission is required to be a person qualified to be appointed as a judge of a High Court.
3. All members of the Sixteenth Finance Commission, apart from the Chairman, have been appointed as full-time members.

How many of the above statements are correct?

Accepted Answer

None. Statement 1 is incorrect. The Parliament has specified the qualifications for the selection of the Chairman and members of the commission, not the President. Statement 2 is incorrect. The requirement to be a person having experience in public affairs applies to the Chairman. The qualification of being a judge of a high court or one qualified to be appointed as one applies to one of the four other members. Statement 3 is incorrect. In the Sixteenth Finance Commission, Dr. Soumya Kanti Ghosh has been appointed as a Part-time Member, while the other three members are full-time.

Question 22

Consider the following statements:

Statement-I: The 'income distance' criterion used by Finance Commissions is designed to allocate a greater share of central tax revenues to states with higher per capita income.

Statement-II: Over successive Finance Commissions, the weightage assigned to the income distance criterion has consistently increased, thereby enhancing its redistributive impact.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Both Statement-I and Statement-II are incorrect. Statement-I is incorrect. The 'income distance' criterion aims to promote fiscal capacity equalization by allocating more funds to poorer states, which are states with lower, not higher, per capita income. Statement-II is incorrect. The weight given to the income distance criterion has decreased over time, which has reduced, not enhanced, its redistributive impact.

Question 23

With reference to the transparency and accountability provisions under the fiscal responsibility framework in India, consider the following statements:
1. The framework mandates the Central Government to present specific macroeconomic policy statements in Parliament annually.
2. The mandated documents include the Macroeconomic Framework Statement and the Medium-Term Expenditure Framework Statement.
3. The framework prohibits the government from borrowing directly from the Reserve Bank of India, except through Ways and Means Advances.
Which of the statements given above is/are correct?

Accepted Answer

1 and 3 only. Statement 1 is correct. The FRBM Act enhances transparency by requiring the government to table key fiscal policy documents in Parliament. Statement 2 is incorrect. The three documents are the Macroeconomic Framework Statement, Medium-term Fiscal Policy Statement, and Fiscal Policy Strategy Statement. The Medium-Term Expenditure Framework is a separate document. Statement 3 is correct. A key objective of the Act is to end the automatic monetization of deficits by prohibiting direct borrowing from the RBI.

Question 24

Consider the following statements regarding the fiscal health of states in India:
1. The consolidated debt-to-GDP ratio of states has been continuously increasing over the past five years.
2. An increasing reliance on market borrowings is observed to finance the states' Gross Fiscal Deficit.
3. The interest payment burden as a percentage of GDP for states has seen a sharp and unmanageable rise recently.
How many of the above statements are correct?

Accepted Answer

Only one. Statement 1 is incorrect. The consolidated debt of states declined from its post-pandemic peak before being projected to rise again, indicating a non-continuous trend. Statement 2 is correct. Recent trends show that states are increasingly depending on market borrowings to finance a significant portion of their fiscal deficit. Statement 3 is incorrect. While debt levels are a concern, the interest payment to GDP ratio has remained relatively stable and manageable, partly due to concessional loans.

Question 25

With reference to the revenue receipts of state governments in India, consider the following statements:
1. State's Own Revenue, comprising both tax and non-tax sources, constitutes a smaller portion of their total revenue receipts compared to transfers from the Centre.
2. State Goods and Services Tax (SGST), stamp duties, and state excise duties together form the substantial majority of the State's Own Tax Revenue.
3. Grants-in-aid from the Centre are considered part of the State's Own Non-Tax Revenue.
Which of the statements given above is/are correct?

Accepted Answer

2 only. Statement 1 is incorrect. On aggregate, states' own revenue sources contribute more than half of their total revenue receipts, making it the larger component. Statement 2 is correct. A few key sources, including SGST, stamp duties, and excise duties, are highly concentrated and make up the bulk of states' own tax collections. Statement 3 is incorrect. Grants-in-aid are a form of central transfer to states and are not classified under the State's Own Non-Tax Revenue (SONTR).

Question 26

Statement-I: A recent rise in states' capital expenditure is observed, which is crucial for long-term growth.
Statement-II: States have been increasingly prioritizing capital expenditure over revenue expenditure by reducing committed expenditures like salaries, pensions, and interest payments.

Accepted Answer

Statement-I is correct but Statement-II is incorrect.. Statement-I is correct. Recent data indicates a steady firming up of capital expenditure by states, partly supported by central government schemes. Statement-II is incorrect. While capital expenditure is rising, it is not because of a reduction in committed revenue expenditure. Social sector spending, salaries, and pensions continue to form a major and often rigid part of state budgets.

Question 27

Consider the following statements regarding the implications of a high fiscal deficit in an economy:

Statement-I: A persistently high fiscal deficit often compels the government to increase its market borrowings, absorbing a larger share of the economy's available savings.
Statement-II: This increased government borrowing leads to a decrease in interest rates, thereby stimulating private investment, a phenomenon known as 'crowding-in'.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement-I is correct but Statement-II is incorrect. Statement-I is correct as a high fiscal deficit necessitates greater government borrowing from the market. Statement-II is incorrect because increased government borrowing raises the demand for loanable funds, which typically leads to higher interest rates. This increase in interest rates can discourage or 'crowd out' private investment, which is the opposite of the effect described.

Question 28

With reference to the Union Government's receipts, consider the following:

1. Recovery of loans and advances
2. Proceeds from disinvestment of Public Sector Undertakings
3. Interest receipts on loans advanced by the government

How many of the above are classified as non-debt creating capital receipts?

Accepted Answer

Only two. Recovery of loans and proceeds from disinvestment are both non-debt creating capital receipts as they reduce assets without creating new liabilities. Interest receipts on loans, however, are classified as non-tax revenue receipts, not capital receipts. Therefore, only two of the given items are non-debt creating capital receipts.

Question 29

In the context of public finance management in India, consider the following statements:

1. The Controller General of Accounts (CGA) is responsible for recommending the devolution of central taxes to the states.
2. Rising expenditure on non-merit subsidies can reduce a state's fiscal space for capital expenditure.
3. A state's own revenue primarily comprises its share in central taxes and grants-in-aid from the Centre.

Which of the statements given above is/are correct?

Accepted Answer

2 only. Statement 1 is incorrect; the Finance Commission, a constitutional body, recommends the devolution of taxes, not the CGA. Statement 2 is correct as increased spending on subsidies limits the funds available for productive asset creation. Statement 3 is incorrect; a state's 'own revenue' consists of its own tax and non-tax sources, while central transfers are separate.

Question 30

With reference to the financial health of the household sector in an economy, consider the following statements:

1. A consistent rise in household financial liabilities relative to financial assets enhances the household sector's capacity to absorb economic shocks.
2. A governmental focus on fiscal consolidation through increased capital expenditure may lead to a greater reliance on credit by households to sustain consumption.
3. A sustained increase in private consumption, without a corresponding rise in real incomes, often indicates a structural decline in the net financial savings rate of households.

How many of the statements given above are correct?

Accepted Answer

Only two. Statement 1 is incorrect. A rise in financial liabilities increases the debt servicing burden and reduces the net worth of households. This weakens, rather than enhances, their capacity to absorb income or employment shocks. Statement 2 is correct. Fiscal consolidation prioritizing capital expenditure can shrink the fiscal space for revenue spending like income support schemes. This can shift economic risk to households, who may resort to borrowing to maintain consumption. Statement 3 is correct. If consumption growth is not supported by real income growth, it is likely being financed by either drawing down past savings or taking on new debt. Both actions lead to a decline in the net financial savings of the household sector.

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