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UPSC Exam  >  UPSC Questions  >  Consider the following statements. If the fis... Start Learning for Free
Consider the following statements.
  1. If the fiscal deficit ratio is too high it leads to higher rates of interest for the borrowings of private entrepreneurs and businesses.
  2. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 suggests bringing the fiscal deficit down to about 3% plus or minus 2% of the GDP.
Which of the above statements is/are correct?
  • a)
    1 only 
  • b)
    2 only 
  • c)
    Both 1 and 2 
  • d)
    Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Most Upvoted Answer
Consider the following statements. If the fiscal deficit ratio is too ...
The correct answer is option 'A', i.e., statement 1 only is correct.

Explanation:
1. If the fiscal deficit ratio is too high, it leads to higher rates of interest for the borrowings of private entrepreneurs and businesses.
- Fiscal deficit refers to the excess of government expenditure over its total revenue. When the fiscal deficit ratio is too high, it indicates that the government is spending more than it is earning. To bridge this gap, the government borrows money from various sources, such as individuals, banks, and foreign investors. However, when the fiscal deficit is high, it creates a higher demand for borrowing, which leads to a higher demand for loans in the market.
- Increased borrowing by the government can crowd out private borrowing. This means that when the government borrows a significant amount of money from the market, it reduces the availability of funds for private entrepreneurs and businesses. As a result, the interest rates for private borrowings increase. This is because the limited pool of funds available for borrowing leads to higher competition among borrowers, driving up the interest rates.
- Therefore, statement 1 is correct as a high fiscal deficit ratio leads to higher rates of interest for the borrowings of private entrepreneurs and businesses.

2. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 suggests bringing the fiscal deficit down to about 3% plus or minus 2% of the GDP.
- The FRBM Act, 2003 is an Indian legislation that aims to ensure fiscal discipline and reduce the fiscal deficit to a sustainable level. As per the Act, the target for the fiscal deficit is set at 3% of the Gross Domestic Product (GDP).
- The Act also allows for a tolerance limit of plus or minus 2% of the GDP. This means that the fiscal deficit can range from 1% to 5% of the GDP.
- The objective of setting a target for the fiscal deficit is to maintain macroeconomic stability, control inflation, and prevent excessive government borrowing, which can lead to higher interest rates and crowding out of private investment.
- Therefore, statement 2 is incorrect as the FRBM Act, 2003 suggests bringing the fiscal deficit down to about 3% plus or minus 2% of the GDP, not specifically to 3%.

In conclusion, statement 1 is correct, while statement 2 is incorrect.
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Community Answer
Consider the following statements. If the fiscal deficit ratio is too ...
  • If the fiscal deficit ratio is too high, it implies that there is a lesser amount of money left in the market for private entrepreneurs and businesses to borrow.
  • Lesser amount of this money, in turn, leads to higher rates of interest charged on such lending.
  • A high fiscal deficit and higher interest rates would also mean that the efforts of the Reserve Bank of India to reduce interest rates are undone.
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, intends to bring transparency and accountability in the conduct of the fiscal and monetary actions of the government.
The rules set targets for the phased reduction of the fiscal deficit to acceptable levels. It requires the government to limit the fiscal deficit to 3% of the GDP by 31 March 2021 and the debt of the central government to 40% of the GDP by 2024-25, among others.
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Read the following passage carefully and answer the questions given below it.Corporate social responsibility (CSR) is increasingly being practised in recent times as business organisations are taking a keen interest in human rights.Globalization, spurred on by technological innovations in the past, has led to an increase in the movement of labour, knowledge and technology among countries. And, companies have been setting up factories in countries with cheap labour and very poor Human Rights laws to enable them to cut production costs drastically. Governments of these poor countries have been forced to dance to the tune of large businesses. Although the growth and development of businesses worldwide has brought about an increase in the standard of living, on the other hand, it has resulted in the abuse of workers in many parts of the world.But a section of humanitarians have criticized businesses for their inhumane practices and have steadily raised concern over the use of child labour, low wages, female discrimination and abuse in factories. Also, the media is keeping a constant watch on corporate organisations that abuse humanity in any way or refuse to uphold their social responsibilities. Hence, the trend of incorporating ethics and values into business practices is on the rise, of late.As a result, organisations now pay more attention to business ethic, education and training in order to meet this ever-growing ethical responsibility. Corporate social responsibility has entered a new phase in which the social responsibility of business has to be clearly defined. According to Andrew Chapman and Scott Jerbi there are growing expectations that corporations should do everything within their powers to promote universal human rights even in conflict situations where governance structure has broken down.What is the full form of CSR?

Read the following passage carefully and answer the questions given below it.Corporate social responsibility (CSR) is increasingly being practised in recent times as business organisations are taking a keen interest in human rights.Globalization, spurred on by technological innovations in the past, has led to an increase in the movement of labour, knowledge and technology among countries. And, companies have been setting up factories in countries with cheap labour and very poor Human Rights laws to enable them to cut production costs drastically. Governments of these poor countries have been forced to dance to the tune of large businesses. Although the growth and development of businesses worldwide has brought about an increase in the standard of living, on the other hand, it has resulted in the abuse of workers in many parts of the world.But a section of humanitarians have criticized businesses for their inhumane practices and have steadily raised concern over the use of child labour, low wages, female discrimination and abuse in factories. Also, the media is keeping a constant watch on corporate organisations that abuse humanity in any way or refuse to uphold their social responsibilities. Hence, the trend of incorporating ethics and values into business practices is on the rise, of late.As a result, organisations now pay more attention to business ethic, education and training in order to meet this ever-growing ethical responsibility. Corporate social responsibility has entered a new phase in which the social responsibility of business has to be clearly defined. According to Andrew Chapman and Scott Jerbi there are growing expectations that corporates should do everything within their powers to promote universal human rights even in conflict situations where governance structure has broken down. Globalization was spurred on by what factors?The media is watchful of what trends that it raises its voice against?

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Consider the following statements. If the fiscal deficit ratio is too high it leads to higher rates of interest for the borrowings of private entrepreneurs and businesses. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 suggests bringing the fiscal deficit down to about 3% plus or minus 2% of the GDP.Which of the above statements is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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