Ramesh Singh Test : Public Finance In India - UPSC MCQ

1. Plan Expenditure: Asset-creating and productive - Correct - Plan expenditures are indeed asset-creating and productive. They are usually associated with investments in infrastructure, development projects, and other productive activities.

2. Non-Plan Expenditure: Consumptive and non-productive - Correct - Non-Plan expenditures are typically consumptive and non-productive, including items like salaries, pensions, interest payments, subsidies, and defense expenses.

3. Revenue Receipts: Money raised via borrowings - Incorrect - Revenue receipts are the earnings of the government from various sources such as taxes, duties, fees, and other incomes, not borrowings. Borrowings are classified under capital receipts, which increase financial liabilities.

4. Quick Estimate (QE): Interim data providing the latest situation - Correct - Quick Estimates provide the latest available data, serving as interim figures useful for future projections and reflecting the current situation.

Thus, only pairs 1, 2, and 4 are correctly matched, making the correct option: Option B: Only two pairs.

Deficit financing primarily aims to achieve desired levels of growth and development by allowing governments to spend more money than their expected earnings. This strategy is employed to realize socio-political goals by enabling more expenditure with less income and receipts, with the expectation that the extra money spent above income will be reimbursed once growth occurs.

Budgeting is the process of preparing a financial statement that details a government's income and expenditure for a specific period, typically one year. This practice is crucial for effective financial management and resource allocation within the public sector.

Zero-based budgeting (ZBB) involves agencies re-evaluating all programs they are responsible for, justifying each program's continuation or termination. This approach requires a thorough review from a hypothetical zero base, emphasizing the need for agencies to justify all their programs periodically, rather than relying on previous spending patterns.

1. Statement 1: This is correct. The term 'budget' does indeed originate from a British parliamentary practice dating back to the mid-18th century. The word is derived from the French word "bouger," meaning a leather bag from which financial documents were presented.

2. Statement 2: This statement is also correct. Article 112 of the Indian Constitution mandates that the Union Budget, known as the Annual Financial Statement, must be presented before Parliament at the start of each fiscal year.

3. Statement 3: This statement is incorrect. The classification of expenditures into developmental and non-developmental is no longer used in Indian public finance. It has been replaced by the distinction between plan and non-plan expenditure, and more recently, by capital and revenue expenditure as suggested by the Rangarajan Committee.

Therefore, the correct answer is Option B: 1 and 2 Only.

Statement-I correctly highlights the two main components of the Union Budget, which are the Revenue Budget and the Capital Budget. Statement-II accurately describes the contents of these budgets, where the Revenue Budget involves Revenue Receipts and Expenditures, while the Capital Budget deals with Capital Receipts and Expenditures. Therefore, both statements are correct, and Statement-II logically explains Statement-I, making option (a) the correct answer.

Statement-I correctly describes the scope of public finance, which indeed covers areas like treasury management, revenue sources, accounts, and audits. However, Statement-II is incorrect in defining non-revenue sources. Non-revenue sources in public finance typically refer to sources of income other than taxation, such as borrowings, grants, and asset sales. Taxation and other government earnings fall under revenue sources in public finance, not non-revenue sources. Hence, while Statement-I is accurate, Statement-II is inaccurate in the context of public finance terminology.

1. Zero-Based Budgeting - Allocation of resources based on periodic re-evaluation: This pair is correctly matched. Zero-Based Budgeting involves allocating resources to agencies based on periodic re-evaluation by those agencies of the need for all the programs for which they are responsible.

2. Output-Outcome Framework - Measures only financial progress: This pair is incorrectly matched. The Output-Outcome Framework is a paradigm shift from measuring simply 'physical and financial' progress to a governance model based on outcomes, enhancing development impact and improving accountability and transparency.

3. Golden Rule - Government should borrow only to invest: This pair is correctly matched. The Golden Rule of public finance states that a government should borrow only to invest (i.e., capital expenditure) and not to finance current spending (i.e., revenue expenditure).

4. Direct Benefit Transfer - Money transferred directly to beneficiaries' accounts: This pair is correctly matched. Direct Benefit Transfer involves transferring money directly into the beneficiaries' bank or post-office accounts linked to their Aadhaar number to ensure targeted disbursement of government subsidies and financial assistance.

Thus, three pairs are correctly matched.

1. Printing Currency : Last resort for governments - Correct. Printing currency is indeed considered a last resort for deficit financing as it leads to inflation and other economic issues.

2. External Borrowings : Least preferred method for deficit financing - Incorrect. External borrowings are considered favorable if the loans are cheap and long-term, as they bring in foreign currency beneficial for developmental requirements.

3. Internal Borrowings : Impacts investment prospects - Correct. Internal borrowings are the third preferred route but can impact investment prospects and expenditure patterns, potentially leading to economic stagnation or slowdown if extensively utilized.

4. External Grants : Often comes with conditions - Correct. External grants are preferable but are often not extensively utilized due to the conditions attached to them.

Hence, three pairs are correctly matched.

The concept of "Revenue Budget" in the Indian financial framework involves the classification of financial activities into Revenue Receipts and Revenue Expenditures. Revenue Receipts encompass all revenue received by the government, including tax and non-tax sources, while Revenue Expenditures cover all consumptive expenditures that do not result in the creation of productive assets. This bifurcation is crucial for understanding how the government manages its finances and allocates resources for various expenses.

1. Revenue Receipts: Tax Revenue Receipts and Non-Tax Revenue Receipts
This pair is correctly matched. Revenue Receipts are divided into Tax Revenue Receipts (like income tax, GST) and Non-Tax Revenue Receipts (like profits from PSUs, fees, fines, and grants).

2. Capital Receipts: Borrowings and Other Receipts by the Government
This pair is correctly matched. Capital Receipts include Borrowings (long-term loans) and Other Receipts by the Government (long-term accruals from schemes like PF, and Postal Deposits).

3. Fiscal Deficit: Total government expenditures exceed total receipts
This pair is correctly matched. Fiscal Deficit occurs when the government's total expenditures surpass its total receipts, indicating excess spending over income.

4. Primary Deficit: Fiscal Deficit excluding interest liabilities for a year
This pair is correctly matched. Primary Deficit is calculated by subtracting interest payments from the Fiscal Deficit, providing insight into the government’s expenditure patterns excluding interest liabilities.

All pairs provided are correctly matched, making Option D the correct answer.

Statement-I correctly defines deficit financing as a government strategy to sustain deficits and achieve growth objectives. Statement-II accurately defines fiscal policy as the government's policy concerning purchases, transfers, and taxes. While both statements are individually correct, they address different concepts and do not directly explain each other, hence option B is the correct choice.

- Statement 1: External borrowings can indeed be favorable if they are cheap and long-term. They bring in foreign currency, which is beneficial for fulfilling developmental requirements. This statement is correct.

- Statement 2: Printing currency as a means of deficit financing is actually a last resort because it increases inflation and government expenditures, creating a vicious cycle of currency printing and inflation. Thus, this statement is incorrect.

- Statement 3: An optimal composition of fiscal deficit involves higher capital expenditures and lower revenue expenditures, which is considered ideal for deficit financing. This statement is correct.

Therefore, the correct answer is Option C: 1 and 3 Only.

Answer Explanation:

• Statement 1: Revenue Expenditures include expenditures that result in the creation of productive assets.
  This statement is incorrect. Revenue expenditures are consumptive in nature and do not result in the creation of productive assets. These include interest payments, salaries, subsidies, etc.
• Statement 2: Effective Revenue Deficit excludes revenue expenditures used for asset creation.
  This statement is correct. Effective Revenue Deficit is defined as the Revenue Deficit excluding revenue expenditures that are used for asset creation. These are typically grants provided to States and Union Territories for centrally sponsored schemes that result in asset creation.
• Statement 3: Capital Receipts include collections from direct and indirect taxes like income tax and GST.
  This statement is incorrect. Capital Receipts are non-revenue receipts directed towards investments and planned development. These do not include tax collections such as income tax and GST, which are part of Revenue Receipts.

Hence, the correct answer is Option C: 2 Only.

All three statements about Zero-Based Budgeting (ZBB) are correct:
1. Peter Phyrr's Proposal: Peter Phyrr, a US financial expert, indeed first proposed the concept of ZBB for government budgeting. This foundational idea set the stage for its future implementation in the public sector.
2. Jimmy Carter's Introduction: Jimmy Carter, who was the Governor of Georgia, USA, before becoming the US President, was the first elected executive to introduce ZBB to the public sector. He implemented it when he presented the US Budget in 1979.
3. Reassessment from Zero Base: Zero-Based Budgeting requires agencies to periodically reassess their activities starting from a hypothetical zero base and justify the continuance or termination of each program. This ensures that resources are allocated based on current needs and priorities, rather than historical expenditures.
Thus, all the statements provided above are correct. Therefore, the correct answer is Option D.