Ramesh Singh Test: Public Finance - UPSC MCQ

Statement-I correctly highlights the borrowing mandates for the Union Government and the States as per the Constitution of India. However, Statement-II is incorrect as Public Debt of India includes not just Internal and External liabilities of the Central Government but also Public Account Liabilities, making this statement partially incorrect.

1. Revenue Receipts: Correctly matched. Revenue Receipts include collections from both tax (e.g., income tax, GST) and non-tax sources (e.g., profits from PSUs, fees).
2. Capital Receipts: Incorrectly matched. Capital Receipts do not include interest payments on loans. Instead, they involve non-revenue receipts such as loan recoveries, borrowings, and long-term accruals.
3. Revenue Expenditures: Correctly matched. Revenue Expenditures consist of consumptive expenditures that do not lead to asset creation, such as salaries, subsidies, and interest payments.
4. Capital Expenditures: Correctly matched. Capital Expenditures include allocations for planned development, infrastructure, and other long-term investments like defense equipment and general services.
Thus, pairs 1, 3, and 4 are correctly matched.

Statement 1: Deficit financing involves financial policies enacted by the government to sustain deficits. This is correct. Deficit financing is indeed the process and policies by which a government finances its deficit, ensuring that expenditures exceed receipts.

Statement 2: External borrowings are the most preferred means of deficit financing. This is incorrect. While external aids and grants are preferable, external borrowings are not the most preferred means. They are favorable if loans are cheap and long-term, but the best option mentioned is external aids.

Statement 3: Printing currency as a means of deficit financing can lead to inflation and increased government expenditures. This is correct. Printing currency is considered a last resort for governments and is known to create a vicious cycle of inflation and increased government expenditures.

Thus, the correct answer is Option B: 1 and 3 Only.

1. PM-Kisan - Ensures food security: Incorrect. PM-Kisan scheme provides direct income support to farmers, not specifically aimed at ensuring food security. Food security schemes are more closely aligned with initiatives like PM Garib Kalyan Yojana.
2. JAM trinity - Direct benefit transfers: Correct. The JAM (Jan-Dhan, Aadhaar, and Mobile) trinity is designed to facilitate direct benefit transfers, ensuring that subsidies and benefits reach the intended beneficiaries directly.
3. MGNREGS - Urban employment opportunities: Incorrect. MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme) is aimed at providing employment opportunities in rural areas, not urban areas.
4. National Green Hydrogen Mission - Aims for energy independence by 2047: Correct. The National Green Hydrogen Mission is aimed at achieving energy independence by 2047 through the development and promotion of green hydrogen.
Thus, pairs 2 and 4 are correctly matched.

1. Plan expenditures are primarily asset-creating and productive. This statement is correct. Plan expenditures are designed to create assets and are considered productive investments. They are intended to support the long-term economic growth of the country by funding projects like new infrastructure, educational programs, and technological advancements.

2. The classification of expenditures as Plan and Non-Plan was replaced by Revenue and Capital from the fiscal year 2017-18. This statement is also correct. The Indian government transitioned from the classification of Plan and Non-Plan expenditures to the more comprehensive categories of Revenue and Capital expenditures starting in the fiscal year 2017-18. This change aimed to simplify and improve the management of public finances.

3. Non-Plan expenditures include investments in new factories and infrastructure projects. This statement is incorrect. Non-Plan expenditures are typically consumptive and non-productive, covering items such as salaries, pensions, interest payments, subsidies, and defense expenses. Investments in new factories and infrastructure projects are categorized under Plan expenditures, not Non-Plan expenditures.

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

1. Article 292 of the Indian Constitution mandates that the Union Government can borrow both inside and outside the country, as specified by the Parliament. This statement is correct. Article 292 provides the Union Government the power to borrow funds as specified by the Parliament.

2. The Public Debt of India includes Internal Liabilities, External Liabilities, and Public Account Liabilities of the Central Government. This statement is incorrect. The Public Debt of India includes only Internal and External liabilities incurred by the Central Government, not the Public Account Liabilities.

3. The concept of adjusted debt factors in the impact of external debt at the current exchange rate of the rupee and nets out liabilities not used for financing the deficit of the Central Government. This statement is correct. Adjusted debt considers the current exchange rate for external debt and excludes certain liabilities like those from the Market Stabilization Scheme and NSSF that are not used to finance the deficit.

Therefore, the correct answer is Option C.

The transition from using developmental and non-developmental expenditure terms to plan and non-plan expenditures in India was primarily driven by the recommendations put forth by the Sukhamoy Chakraborty Committee. This shift aimed to bring about more clarity and efficiency in categorizing government expenditures, aligning them with the changing economic landscape and the evolving needs of public expenditure management in the country.

Statement-I correctly defines a deficit budget as one where expenditures exceed receipts, indicating spending beyond means, which aligns with the provided information on deficit budgets. However, Statement-II incorrectly defines a surplus budget as one where expenditures are less than receipts, indicating a lower concern towards development. This is inaccurate as a surplus budget symbolizes financial health and the ability to allocate resources to development, not a lack of concern.

The primary aim of the high-level committee set up by the Government in July 2016 was to recommend a suitable financial year along with the necessary changes. This included examining the genesis of the current financial year, assessing its impact on various sectors, and suggesting the appropriate timing and adjustments required for the transition. Such a recommendation would involve considerations beyond just taxation laws or the analysis of public debt, focusing more on the holistic restructuring of the financial year for optimal efficiency.

The term "Revenue Budget" primarily encompasses Revenue Receipts and Expenditures in the context of the Union Budget of India. This budget focuses on the revenue side of the government's finances, including all revenue received and expenditures incurred, which do not involve the creation of productive assets. It covers items such as tax revenue, non-tax revenue, interest payments, salaries, subsidies, defense expenses, and expenditures on social services. Understanding the Revenue Budget is crucial in analyzing the financial health and priorities of the government.

Statement-I correctly states that the FRBM Act of 2003 aimed to provide a statutory mechanism for managing the fiscal deficit over the medium term, and it did come into effect on July 5, 2004. However, Statement-II incorrectly represents the recommendations related to the Debt Rule and the Fiscal Glide Path. The Debt Rule aimed at reducing the Central Government's Debt to GDP ratio to 40%, not 20%, as stated in Statement-II. Additionally, the Fiscal Glide Path provides flexibility of 0.25%, not 0.5%, in targeting the fiscal deficit. Therefore, Statement-I is accurate, but Statement-II contains inaccuracies, making Option C the correct choice.

- Statement 1 is correct. Revenue Receipts indeed include all revenue generated from direct and indirect taxes as well as non-tax revenue such as profits from public sector undertakings (PSUs), interests on loans, fees, penalties, fines, and grants.

- Statement 2 is incorrect. Capital Receipts include not only borrowings by the government but also loan recoveries and other receipts like long-term accruals through schemes such as Provident Fund (PF), Postal Deposits, and government bonds.

- Statement 3 is incorrect. Fiscal Deficit arises when the total government expenditures exceed the total receipts, including all forms of government income, not excluding interest payments. Excluding interest payments would define the Primary Deficit, not the Fiscal Deficit.

Thus, the correct answer is Option A: 1 Only.

All three statements provided are accurate based on the given text:

1. Statement 1 is correct: The FRBMA was indeed enacted on 26 August 2003 to provide a strong institutional/statutory mechanism for the medium-term management of the fiscal deficit, coming into effect on 5 July 2004.

2. Statement 2 is correct: The Review Committee's recommendations, accepted in the Union Budget 2018-19, included the Debt Rule, which suggested reducing the Central Government's Debt to GDP ratio to 40 percent.

3. Statement 3 is correct: The Output-Outcome Framework, developed by the Government of India by 2019-20, represents a shift from measuring simply physical and financial progress to a governance model based on outcomes, focusing on enhancing development impact and improving accountability and transparency.

Thus, the correct answer is Option D.

1. Fiscal Glide Path - Provides flexibility in targeting fiscal deficit: Correct. The Fiscal Glide Path allows the government a flexibility of 0.5% in targeting the fiscal deficit, which aligns with the fiscal management strategies.

2. Zero-Based Budgeting - Allocates resources based on past expenditure levels: Incorrect. Zero-Based Budgeting (ZBB) is an approach where resources are allocated based on periodic re-evaluation of all programs, starting from a hypothetical zero base, rather than past expenditure levels.

3. Output-Outcome Framework - Enhances development impact and accountability: Correct. The Output-Outcome Framework (OOF) is designed to enhance the development impact and improve accountability and transparency of government programs by monitoring against measurable indicators.

4. Debt Rule - Suggests reduction in government's deficit financing: Incorrect. The Debt Rule suggested by the Review Committee recommends reducing the Debt to GDP ratio for the central government to 40% and for states to 20%, not directly focusing on reducing deficit financing.

So, only pairs 1 and 3 are correctly matched. Hence, the correct answer is Option B: Only two pairs.

The Fiscal Reforms and Budget Management Act (FRBMA) enacted in 2003 aimed to provide support through a strong institutional/statutory mechanism for the purpose of medium-term management of the fiscal deficit. This act was designed to bring stability, predictability, and defined priorities to the fiscal policy regime, ensuring that national resources are allocated effectively. By implementing the FRBMA, the government sought to address issues like unproductive expenditures, tax distortions, and high deficits that were hindering the realization of India's full growth potential.

1. Deficit Budget: Proposed when expenditures exceed receipts, indicating spending beyond means. - Correct. This is the accurate definition of a deficit budget.

2. Surplus Budget: Proposed when expenditures are less than receipts, symbolizing a lower concern towards development. - Correct. This is the correct explanation of a surplus budget.

3. External Borrowings: Most preferred means of deficit financing. - Incorrect. The most preferred means is External Aids, not External Borrowings.

4. Fiscal Policy: Policy that handles public expenditure and tax to direct and stimulate the level of economic activity. - Correct. This is a correct definition of fiscal policy.

Pairs 1, 2, and 4 are correctly matched, while pair 3 is incorrectly matched. Thus, only two pairs are correctly matched.

Statement-I correctly describes the classification of the Union Budget into Revenue Budget and Capital Budget, detailing their components. Statement-II accurately explains the focus of the Capital Budget on managing capital receipts and expenditures without directly explaining the content of Statement-I. Both statements are factually correct but do not have a direct explanatory relationship. Thus, option (b) is the correct answer.

1. Article 292: Union Government borrows inside and outside the country - Correct. Article 292 mandates that the Union Government of India can borrow amounts specified by the Parliament both inside and outside the country.
2. Article 293: States borrow only inside the country - Correct. Article 293 stipulates that States are mandated to borrow only within the country.
3. Adjusted Debt: Debt amount after factoring in the impact of internal debt - Incorrect. Adjusted Debt indicates the debt amount after factoring in the impact of external debt (at the current exchange rate of rupee) and netting out Market Stabilization Scheme and NSSF liabilities not used for financing the deficit of the Central Government.
4. Public Debt Management Agency (PDMA): Proposed in Union Budget 2015-16 - Correct. The idea for a Public Debt Management Agency (PDMA) was indeed proposed in the Union Budget 2015-16.

Pairs 1, 2, and 4 are correctly matched, while pair 3 is incorrectly matched.

1. Retail Inflation Rate: The statement is correct. India's retail inflation rate indeed peaked at 7.8% in April 2022, which was above the Reserve Bank of India's upper tolerance limit of 6%. This information highlights the inflationary pressures faced by the Indian economy during that period.

2. Gross Non-Performing Assets Ratio: This statement is also correct. The gross non-performing assets (NPA) ratio of scheduled commercial banks reached a seven-year low of 5%. This indicates an improvement in the banking sector's asset quality and a reduction in the burden of bad loans.

3. E-commerce Market Growth: The statement regarding India's e-commerce market is correct. The market is projected to grow at an annual rate of 18% through 2025. This reflects the rapid expansion and increasing penetration of online retail in India.

All three statements are accurate and align with the provided data. Therefore, the correct answer is Option D.

The Economic Survey 2022-23 projects a real GDP expansion of 7% for India in the fiscal year 2022-23. This growth estimate is based on various global economic and political factors influencing the Indian economy's trajectory. Economic surveys play a critical role in assessing and forecasting a country's economic performance, providing valuable insights for policymakers and analysts.