Test: Fiscal Policy - UPSC MCQ

Ministry of finance is the nodal agency for formulation of the fiscal policy

FDI and external lending and borrowing come the capital account as they are long term. Current account transactions are calculated on a yearly basis.

Interest paid by the government on loans is called revenue expenditure. Borrowing by the government comes under capital account

N.k singh committee report recommended to reduce the fiscal deficit from 3.5 percent in 2017 to 2.5 percent by 2023.

Effective revenue deficit = revenue deficit minus(-) grants for creation of capital assents. It is the standard formula for ERD.

Capital Account includes FDI, borrowing, quota to imf, external bonds issued gifts and donations come under current account.

Primary deficit = fiscal deficit - interest payments. Standard formula

To determine which items are included in the current account in relation to the Balance of Payments (BoP), let's categorize each item:

Included in the Current Account:

1. Trade in goods: Yes, this is included in the current account.
2. Invisible trade: Yes, this refers to trade in services, incomes, and transfers.
3. Gifts: Yes, these are unilateral transfers and are included in the current account.
4. Remittances: Yes, these are personal transfers and are included in the current account.
5. Trade in services: Yes, this is a part of the current account.
6. Transfer payments: Yes, these are included in the current account.

Not Included in the Current Account (Included in the Capital/Financial Account):

1. FDI (Foreign Direct Investment): No, this is part of the capital account.
2. Loans by World Bank and IMF: No, these are part of the capital account.
3. FII (Foreign Institutional Investment): No, this is part of the capital account.

Given this breakdown, the correct combination that includes items part of the current account is:

2. 1, 2, 5, 6, 7 and 9

Non debt receipts are those which does not create debt on the government. Provident funds are liabilities of government and it has to return those money back.

Fiscal policy relates to government spending and taxation. Repo rate does come under fiscal measures. It is a monetary policy tool

Market borrowing create debt on government and government has to repay the borrowed money

The correct answer is 4. 1, 2 and 4 only.

Here's why:

• Internal Debt (1): This refers to the money borrowed by the government from within the country, through instruments like government bonds and treasury bills. This is a component of the fiscal deficit.
• Government's External Debt (2): This refers to the money borrowed by the government from foreign countries or institutions. Similar to internal debt, it contributes to the fiscal deficit.
• Securities issued to food corporation of India (3): This is not part of the fiscal deficit. While the government might have financial transactions with FCI, these are not borrowings used to finance expenditure exceeding revenue.
• Liability to RBI (4): This refers to the government's borrowings from the Reserve Bank of India (RBI), the central bank of India. This is considered part of the fiscal deficit.
• Liability of Central Government to states (5): This refers to the money owed by the central government to state governments. While this might be a financial obligation, it's not directly considered part of the fiscal deficit. It doesn't represent borrowings to cover spending exceeding revenue.

Therefore, only internal debt (1), government's external debt (2), and liability to RBI (4) are components of the fiscal deficit. These represent borrowings by the government to bridge the gap between its expenditure and revenue.

Fiscal deficit is the best representation of government deficit condition as it shows the revenue and expenditure of government in a broader sense amd estimate

Recovery of loans forms the part of capital account receipts

Effective revenue deficit = Revenue deficit - grants given to states for capital formation