[Mission 2023] STATIC QUIZ, 07 October 2022 – Economy

Solution: a)

Fresh loans given by Government forms the part of Capital expenditure.

Capital Receipts: The government also receives money by way of loans or from the sale of its assets. Loans will have to be returned to the agencies from which they have been borrowed. Thus they create liability. Sale of government assets, like sale of shares in Public Sector Undertakings (PSUs) which is referred to as PSU disinvestment, reduce the total amount of financial assets of the government. All those receipts of the government which create liability or reduce financial assets are termed as capital receipts. When government takes fresh loans it will mean that in future these loans will have to be returned and interest will have to be paid on these loans. Similarly, when government sells an asset, then it means that in future its earnings from that asset, will disappear. Thus, these receipts can be debt creating or non-debt creating.

Capital Receipts (a+b+c) 

(a) Recovery of loans

(b) Other receipts (mainly PSU disinvestment)

(c) Borrowings and other liabilities

Solution: d)

Capital is the produced means of production or it is called produced wealth by which more wealth is possible in the economy directly and indirectly.

Capital formation means creation of physical assets and non- physical capital consisting of public health efficiency, visible and no visible capital.

Gross domestic capital formation is the addition to the capital stock within the domestic territory of a country during a year.

Gross domestic capital formation includes all expenses made by household, business people and Govt, adding new durable goods to the fixed capital stock of a country.

These assets are in the form of infrastructure such as buildings, roads canals, bridges, means of transport, machinery and other equipments.

Solution: c)

In simple words, fiscal prudence is Spending within budget.

For any economy to mature, fiscal prudence is critical. If the government continues to spend way more than its revenues, it will either have to print more currency or borrow from the market to meet the shortfall. Printing currency will fuel inflation and, at times, hyper-inflation.

In a bid to avoid these scenarios and mandate fiscal prudence, the Government of India passed the Fiscal Responsibility and Budget Management (FRBM) Act in 2003. Its objective was to institutionalise fiscal prudence and reduce the country’s fiscal deficit in such a manner that it gradually moves towards balancing the Budget.

Solution: a)

Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution which borrows on the directions of the central government. Such borrowings are used to fulfil the government’s expenditure needs.

But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.

Comptroller and Auditor General report of 2019 points out, this route of financing puts major sources of funds outside the control of Parliament. “Such off-budget financing is not part of the calculation of the fiscal indicators despite fiscal implications,” said the report.

In the Budget presentation for 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund.

Public sector banks are also used to fund off-budget expenses. For example, loans from PSU banks were used to make up for the shortfall in the release of fertiliser subsidy.

Solution: d)

Importance of Fiscal Policy in India:

• In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.
• Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its numerous projects.
• Fiscal policy also helps in providing stimulus to elevate the savings rate.
• The fiscal policy gives adequate incentives to the private sector to expand its activities.
• Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.