Fiscal Policy and Revenue (Economic Development) Part-III

Total Questions: 50

1. If interest payments are subtracted from gross fiscal deficit, the remainder will be: [U.P.P.C.S. (Mains) 2008, U.P.P.C.S. (Spl.) (Mains) 2004]

Correct Answer: (a) Gross primary deficit
Solution:The borrowing requirement of the government includes interest obligations on accumulated debt. The goal of measuring primary deficit is to focus on present fiscal imbalances. To obtain an estimate of borrowing on account of current expenditure exceeding revenues, we need to determine what has been called the primary deficit.

Primary deficit =Fiscal deficit-Interest payments or,

Primary deficit= Fiscal deficit-Net interest liabilities

Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

2. If interest payment is added to primary deficit, it is equivalent to: [U.P.P.C.S (Mains) 2008, U.P.P.C.S. (Spl.) (Mains) 2004]

Correct Answer: (b) Fiscal deficit
Solution:The borrowing requirement of the government includes interest obligations on accumulated debt. The goal of measuring primary deficit is to focus on present fiscal imbalances. To obtain an estimate of borrowing on account of current expenditure exceeding revenues, we need to determine what has been called the primary deficit.

Primary deficit =Fiscal deficit-Interest payments or,

Primary deficit= Fiscal deficit-Net interest liabilities

Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

3. If interest payment is added to primary deficit, it is equivalent to: [U.P.P.C.S. (Pre) 2010]

Correct Answer: (b) Fiscal deficit
Solution:The borrowing requirement of the government includes interest obligations on accumulated debt. The goal of measuring primary deficit is to focus on present fiscal imbalances. To obtain an estimate of borrowing on account of current expenditure exceeding revenues, we need to determine what has been called the primary deficit.

Primary deficit =Fiscal deficit-Interest payments or,

Primary deficit= Fiscal deficit-Net interest liabilities

Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

4. If primary deficit is zero, then the amount of borrowing will be: [Uttarakhand P.C.S. (Pre) 2021]

Correct Answer: (c) None of these
Solution:If the primary deficit is zero, the fiscal deficit becomes equivalent to the interest liabilities. This implies that the government has resorted to borrowings just to pay off the interest payments and the amount of borrowing will be just equal to the interest payments.

A primary deficit is the difference between what a government earns (not counting interest payments) and what it spends on non-interest items. It shows how well a government is managing its finances, indicating how much it borrows to pay for daily operations instead of using its own money.

A primary deficit can point to poor financial practices, as it means the government is using debt for everyday costs instead of focusing on long-term growth or paying off existing debts.
Keeping an eye on the primary deficit is crucial for financial stability and ensuring that spending matches income. Ignoring a primary deficit can lead to more debt, increased interest costs, and a potential financial crisis. By taking steps like raising taxes, cutting spending, or boosting economic growth, governments can aim to eliminate their primary deficits and achieve better financial health.

A revenue deficit arises when a government's total income is insufficient to meet its total expenditures, excluding any borrowing or debt repayments. This situation signifies the government's failure to finance its daily operational costs through its own revenue streams. It highlights a discrepancy between the government's income and its spending, resulting in a budgetary imbalance.

The presence of a revenue deficit is a matter of considerable concern, as it suggests that the government is increasingly dependent on borrowing to fulfill its regular financial obligations, which may lead to an unsustainable fiscal condition over time.

This scenario indicates a fundamental weakness in the government's financial management practices and can adversely affect the broader economy by displacing private investment, raising interest rates, and potentially instigating inflation.

5. Primary deficit in the Union Budget for 2010-11 is estimated at: [U.P.P.C.S. (Mains) 2009*]

Correct Answer: (a) below 2.0 percent of the GDP
Solution:As per the question period, option (a) was the correct answer. In the Interim Union Budget 2024-25, the target for primary deficit (which is fiscal deficit excluding interest payments) is 1.5% of GDP. Primary deficit was targeted at 2.3% of GDP in the Union Budget 2023-24, which is at the same level in the revised estimates of 2023-24.

6. Revenue deficit in India implies that: [B.P.S.C. (Pre) 2020]

Correct Answer: (b) the Indian Government needs to borrow in order to finance its expenses which do not create capital assets
Solution:Revenue deficit arises when the government's revenue expenditure exceeds the total revenue receipts. This represents that the government's own earnings are not sufficient to meet the day-to-day operations of its departments. Revenue deficit in India implies that the Indian Government needs to borrow in order to finance its expenses which do not create capital assets.

A fiscal deficit is defined as the discrepancy between a government's revenue and its expenditures over a designated timeframe, usually a fiscal year. When a government experiences a fiscal deficit, it signifies that its spending outstrips its income.

This condition emerges when the total expenditures of the government exceed the revenue collected from taxes and other financial sources. It serves as a vital measure of a nation's economic stability and highlights the disparity between governmental income and outlays.

A fiscal deficit necessitates that a government borrows funds to fulfill its financial commitments, typically sourced from both domestic and international lenders. The presence of a fiscal deficit can have profound effects on the overall economy.

7. After deducting grants for the creation of capital assets from revenue deficit, we arrive at: [U.P.P.C.S. (Mains) 2015]

Correct Answer: (d) Effective Revenue Deficit
Solution:Effective revenue deficit is defined as the difference between revenue deficit and grants for creation of capital assets. Effective revenue deficit signifies that amount of capital receipts that are being used for actual consumption expenditure of the Government. The concept of effective revenue deficit has been initiated from Union Budget for the financial year 2011-12.

The main objective to introduce this type of deficit concept is to denote constructive imbalances of revenue account. It included in the Fiscal Responsibility and an amendment in Budget Management Act, 2003 through 2012. In Interim Budget Estimates 2024-25, the effective Revenue deficit is estimated at 0.8 percent of GDP whereas in revised estimates of 2023-24 it was at 1.8 percent of GDP.

8. Effective Revenue deficit was introduced in the Union Budget of: [B.P.S.C. (Pre) 2015]

Correct Answer: (b) 2011-12
Solution:Effective revenue deficit is defined as the difference between revenue deficit and grants for creation of capital assets. Effective revenue deficit signifies that amount of capital receipts that are being used for actual consumption expenditure of the Government. The concept of effective revenue deficit has been initiated from Union Budget for the financial year 2011-12.

The main objective to introduce this type of deficit concept is to denote constructive imbalances of revenue account. It included in the Fiscal Responsibility and an amendment in Budget Management Act, 2003 through 2012. In Interim Budget Estimates 2024-25, the effective Revenue deficit is estimated at 0.8 percent of GDP whereas in revised estimates of 2023-24 it was at 1.8 percent of GDP.

9. With reference to the Indian economy, consider the following statements: [I.A.S. (Pre) 2022]

1. A share of the household financial savings goes towards government borrowings.

2. Dated securities issued at market-related rates in auctions form a large component of internal debt.

Which of the above statements is/are correct?

Correct Answer: (c) Both 1 and 2
Solution:The Government raises funds primarily from the domestic market using market-based and fixed-rate instruments to finance its fiscal deficit. The Central Government Debt includes all liabilities of Central Government contracted against the Consolidated Fund of India (defined as Public Debt), and liabilities in the Public Account, called Other Liabilities.

Public debt is further classified into internal and external debt. Internal debt consists of marketable debt and non- marketable debt. Marketable debt comprises of Government dated securities and Treasury Bills, issued through auctions. Marketable Debt as percentage of Central Government Gross Liabilities was at 64.5% in 2020-21 and 63.6% in 2021-22.

Non-marketable debt comprises of intermediate Treasury Bills (14 days ITBs) issued to State Governments /UTs as well as select Central Banks, special securities is- sued against small savings, special securities issued to public sector banks/EXIM Bank, securities issued to international financial institutions, and compensation and other bonds.

Other liabilities include liabilities on account of State Provident Funds, Reserve Funds and Deposits, Other Accounts, etc. Financial saving of the household sector includes currency, bank deposits, debt securities, mutual funds, provident and pension funds, insurance, and invest- ments in small savings schemes etc. A part of this financial saving goes toward government borrowings. Hence, both of the given statements are correct.

10. A larger part of the fiscal deficit in Union Government Budget is filled by: [U.P.P.C.S. (Spl.) (Mains) 2005]

Correct Answer: (b) Domestic borrowings
Solution:The larger part of the fiscal deficit in Union Government Budget is filled by domestic borrowings. About 98-99% of the deficit financed by the domestic resources in recent years. Sources of financing Fiscal Deficit are as follows: 1. Market Borrowings (G-sec), 2. Short term Borrowings (T-Bill etc.), 3.Securities issued against Small Savings, 4. Other Receipts (Internal Debts and Public Account), 5. External Debt, 6. State Provident Funds, 7. Draw Down of Cash Balance.

                                                 Sources of Financing Fiscal Deficit

Sources2023-24 (B.E.)2023-24 (R.E.)2024-25 (B.E.)
A. Debt Receipts (Net)179860417614241681944
1. Market Borrowings (G-Sec)118091111804561175182
2. Short-term Borrowings (T-Bill etc.)50000132350000
3. Securities against Small Savings471317471317466201
4. State Provident Funds2000052005200
5. Other Receipts (Internal Debts and Public Account)5425878296(-30591)
6. External Debt221182483215952
B. Draw Down of Cash Balance(-11787)(-26652)3549
Grand Total (Fiscal Deficit)178681617347731685494