[Mission 2022] QUIZ – 2022: INSIGHTS STATIC QUIZ, 21 March 2022 – Economy

Solution: d)

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts

Revenue deficit = Revenue expenditure – Revenue receipts

The revenue deficit includes only such transactions that affect the current income and expenditure of the government. When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure. This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build-up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure. Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.

Solution: a)

Fiscal Deficit is the difference between the Revenue Receipts plus Non-Debt Capital Receipts (NDCR) and the total expenditure. 

FD is reflective of the total borrowing requirement of Government. Revenue Deficit refers to the excess of revenue expenditure over revenue receipts. Effective Revenue Deficit is the difference between Revenue Deficit and Grants for Creation of Capital Assets. Primary Deficit is measured as Fiscal Deficit less interest payments.

Solution: d)

(i) External Aids are the best money as a means to fulfil a government’s deficit requirements even if it is coming with soft interest. If they are coming without interest nothing could be better.

(ii) External Borrowings are the next best way to manage fiscal deficit with the condition that the external loans are comparatively cheaper and long-term.

(iii) Internal Borrowings come as the third preferred route of fiscal deficit management. But going for it in a huge way hampers the investment prospects of the public and the corporate sector. It has the same impact on the expenditure pattern in the economy.

(iv) Printing Currency is the last resort for the government in managing its deficit. But it has the biggest handicap that with it the government cannot go for the expenditures which are to be made in the foreign currency.

Now, it remains a matter of choice and availability of the above-given means, and which means a government adopts and in what proportion, for fulfilling its deficit requirements.

The primary deficit during the period April to November 2021 turned up at nearly half of the level it had reached during April to November 2019. This implies that the Government has the fiscal capacity to maintain the support, and ramp up capital expenditure when required.

Solution: a)