2nd October 2020, Static Quiz on Indian Economy

Solution: b)
Justification: These are the regular accruals to the government based on the revenue that does not come from tax. In India they are:
Profits and dividends which the government gets from its public sector undertakings (PSUs) Interest, received by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). It means this income might be in both domestic and foreign currencies. Pascal services also generate incomes for the government. i.e., currency printing, stamp printing, coinage, medals, minting, etc. General Services also earn money for the government as the power distribution, irrigation, banking, insurance, community services, etc. Fees, Penalties and Fines received by the government. Grants which the governments receives— it is always external in the case of the Central Government and internal in the case of state governments.

Solution: b)
Justification: Option B: It forms part of the revenue receipt. The main items of capital receipts are loans raised by the government from the public which are called market borrowings, borrowing by the government from the Reserve Bank and commercial banks and other financial institutions through the sale of treasury bills, loans received from foreign governments and international organizations, and recoveries of loans granted by the central government. Other items include small savings (Post-Office Savings Accounts, National Savings Certificates, etc.), provident funds and net receipts obtained from the sale of shares in Public Sector Undertakings (PSUs).

Solution: c)
Justification: Statement 1: These are receipts of the government which are non-redeemable, that is, they cannot be reclaimed from the government. They are divided into tax and non-tax revenues. Statement 2: Both tax and non-tax revenue occur annually to the government, i.e. they are a continuous source of income for the government. If there is a source of income that does not recur annually, it is usually classified as capital receipt, because it is generally a one-time receipt.

Solution: c)
Justification: The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a productive process or running a government. A broad category of things that fall under such expenditures in India are: Interest payment by the government on the internal and external loans; Salaries, Pension and Provident Fund paid by the government to government employees; Subsidies forwarded to all sectors by the government; Defense expenditures by the government; Postal Deficits of the government; Law and order expenditures (i.e. police & paramilitary); Expenditures on social services (includes all social sector expenditures as education, health care, social security, poverty alleviation, etc.) and general services (tax collection, etc.) Grants given by the government to Indian states and foreign countries.

Solution: c)
Justification: This is expenditure incurred for purposes other than the creation of physical or financial assets of the central government. It relates to those expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties (even though some of the grants may be meant for creation of assets). Apart from providing implicit subsidies through underpricing of public goods and services like education and health, the government also extends subsidies explicitly on items such as exports, interest on loans, food and fertilizers.

Solution: b)
Justification: India’s external debt stock stood at US$ 471.9 billion at end-March 2017, decreasing by US$ 13.1

billion (2.7 per cent) over the level at end-March 2016. The decline in external debt was due to the decrease in long-
term debt particularly NRI deposits and commercial borrowings. The dominance of non-government debt in totalexternal debt is evident from the fact that such debt accounted for 65.6 per cent of total debt during the 2000s decade, against 45.3 per cent in the 1990s. Non-government debt accounted for over 70 per cent of total debt in the last five years and stood at 80.6 per cent at end-September 2014.

Solution: a)
Justification: Statement 1: In India, revenue deficit is one of the major reasons for a large fiscal deficit. This means that the government cannot finance its revenue operations by the resources it generates. Statement 2: This is done because the internal resources of the government are not adequate to undertake development expenditure. It must borrow money from the market or abroad.
Statement 3: CAD is financed by external flows. If government borrows from outside it would increase our external capital deficit, but not affect the short-term CAD.

Solution: b)
Justification: Option A: The government can still borrow leading to further expansion of the fiscal deficit. This has been the GOI’s budget position since decades. Option B: This is because the government is spending more than it is earning. It is not maintainable in the long-run, the extra spending will somehow has to be financed else it will lead to a debt spiral.
Option C: It is not necessary because even a better managed economy in terms of taxation can have poor revenue yield if the revenue resources are not significant. But, if tax evasion is rampant, it will surely deplete the revenue resources and add to the revenue deficit.Option D: This is only a possibility and that too when the revenue deficit is very high and the government ignores creation of supply chain and production capacity in the economy. This is because due to high revenue expenditure, demand will increase but supply will not increase in the same proportion.

Solution: a)
Justification: The total balance of payments consists of current account (includes trade, invisibles, remittances etc.) as well as capital account.
Option A: Capital inflows like FDI, FII help bridge the trade deficit and neutralize BoP.
Option B: High consumption expenditure will further inflate the import bill and cause trade deficit.
Option C: And, so will monetary expansion – pushes up demand and thus imports in the short-term aggravating the BoP.

Solution: d)
Justification: Statement 1 and 2: These both are external situations, for e.g. in case of higher GDP than GNP, more income is being generated abroad by Indian nationals than being generated domestically by foreigners working or (investing) in India. Moreover, a fiscal deficit situation may not require external borrowing to bridge the deficit at all, so statement 2 is also incorrect. What this indicates is that the government is spending beyond its means. Basically, receipts are all forms of money accruing to the government, be it income or borrowings). Fiscal deficit may be shown in the quantitative form (i.e., the total currency value of the deficit) or in the percentage form of the GDP for that particular year (percentage of GDP). India has been a country of not only regular but higher fiscal deficits.
Moreover, the composition of its fiscal deficit has been more prone to criticism because it always contains a revenue deficit component.