UPSC Static Quiz – Economy : 28 May 2026

Solution: D

Underemployment is a situation where a person is employed but not in a full-time or adequate capacity, either in terms of hours worked (visible underemployment) or in terms of the utilization of their skills (invisible underemployment).

1. A farmer working only during the Kharif season: This is a form of underemployment (specifically, visible underemployment). The farmer is employed, but only for a part of the year. For the remaining period, his labour is unutilized. This is also a classic case of seasonal unemployment, which is a type of underemployment where the lack of full employment is tied to seasons. He is working fewer hours over the year than he is capable of and willing to work.
2. A postgraduate in Economics working as a clerical assistant: This is a clear example of underemployment (specifically, invisible or skill-based underemployment). The individual is employed full-time, but the job does not utilize their skills and qualifications to their full potential. Their productivity and potential income are lower than what they could achieve in a job commensurate with their education. This represents a significant wastage of human capital.
3. A construction worker getting work for only 15 days a month: This is another example of underemployment (visible underemployment). The worker is willing and able to work for the entire month but is unable to find work for all working days. He is working for fewer hours than is normal in his occupation, leading to lower income and productivity.

Solution: D

(a) This statement incorrectly applies the model of developed economies to India. Unemployment in developed countries is often cyclical, caused by a deficiency in aggregate demand during recessions. Keynesian policies (like increasing government spending) are designed to boost this demand. However, in India, the problem is not that there isn’t demand for goods, but that there isn’t enough capital (factories, machinery, infrastructure) to employ the vast labour force to produce those goods. Simply boosting demand without increasing production capacity would lead to inflation rather than higher employment. This makes the statement incorrect.

(b) The vast majority of unemployment and underemployment in India is involuntary. People are willing to work at the prevailing wage rate (or even lower) but cannot find adequate employment. The concept of a high reservation wage causing mass unemployment is not applicable to a labour-surplus economy like India, where poverty and lack of a social safety net compel people to seek work at very low wages.

(c) Structural and disguised unemployment are the dominant forms in India due to skill mismatches and an overcrowded agricultural sector. While frictional unemployment exists, it is not the dominant form. In developed countries with dynamic labour markets, frictional unemployment is a more significant component of the natural rate of unemployment.

(d) This statement correctly identifies the fundamental nature of India’s unemployment problem. It is primarily a supply-side constraint or a structural issue. The country has an abundance of labour but a relative scarcity of capital and means of production. This leads to a situation where the economy cannot generate enough jobs to absorb the growing workforce, resulting in widespread underemployment and disguised unemployment, particularly in the agricultural sector.

Solution: D

Capital Receipts are those government receipts that either create a liability or cause a reduction in the assets of the government. They are further classified into debt-creating and non-debt creating receipts.

(a) Borrowings from the World Bank are debt-creating capital receipts because they create a future repayment liability for the government.

(b) Proceeds from the sale of Treasury Bills are also debt-creating capital receipts, as they represent short-term borrowing by the government.

(c) Dividends received from Public Sector Undertakings (PSUs) are classified as Revenue Receipts, specifically non-tax revenue, as they are regular earnings and do not create any liability or reduce any asset.

(d) Money received from the sale of government stake in a PSU is known as disinvestment. This is a Non-Debt Capital Receipt because it leads to a reduction in the government’s financial assets (its ownership stake in the PSU) but does not create any new debt or repayment obligation.

Solution: B

• Statement 1 is incorrect. The system of budgeting that aims to link financial outlays to physical outputs is Performance Budgeting, which was introduced in India in 1968. Zero-Based Budgeting (ZBB), introduced in 1986, is a budgeting method that requires all expenses to be justified and approved for each new budget period. Unlike traditional budgeting, which often uses the previous year’s budget as a baseline and makes incremental adjustments, ZBB starts from a “zero base.” This means that every single expense, old or new, must be thoroughly analyzed and justified to be included in the new budget.
• Statement 2 is correct. Outcome Budgeting was introduced in the Union Budget of 2005-06. It represents a significant evolution from Performance Budgeting. While Performance Budgeting focused on ‘outputs’ (e.g., number of kilometers of road constructed), Outcome Budgeting focuses on ‘outcomes’ (e.g., improved connectivity and reduced travel time). It seeks to measure the developmental impact and effectiveness of government programs, thereby enhancing accountability.
• Statement 3 is correct. The practice of presenting a separate Railway Budget, which started in 1924 based on the Acworth Committee report, was ended in 2017. The merger of the Railway Budget with the General Budget was based on the recommendations of the committee headed by Bibek Debroy, which was appointed to suggest measures for mobilization of resources for major railway projects and restructuring of the Railway Ministry.

Solution: B

• Statement 1 is incorrect.

• Revenue Deficit (RD): It is the excess of revenue expenditure over revenue receipts. It shows that the government’s current income (mainly taxes and non-tax revenue) is insufficient to cover its current expenditure (like salaries, subsidies, interest payments).
• Fiscal Deficit (FD): It is the excess of total expenditure (both revenue and capital) over total receipts (excluding borrowings). It is a broader measure that includes revenue deficit but also capital expenditure.

• Revenue deficit is a component of fiscal deficit, but fiscal deficit also depends on capital expenditure.
• If revenue deficit increases while capital expenditure remains constant, fiscal deficit will rise.
• However, fiscal deficit may remain unchanged or even fall if the government simultaneously reduces capital expenditure or raises non-debt capital receipts (like disinvestment).
• Therefore, an increase in revenue deficit does not necessarily lead to an increase in fiscal deficit. It only increases the pressure on fiscal deficit, but the final outcome depends on how capital expenditure and non-debt receipts are managed.

• Statement 2 is correct. Primary Deficit is calculated as Fiscal Deficit minus Interest Payments. A primary surplus means that the Primary Deficit is negative, which occurs when interest payments are greater than the fiscal deficit. This means the government’s total receipts (revenue + non-debt capital) are more than sufficient to cover its non-interest expenditure, which is a sign of fiscal health for the current period.

• Statement 3 is incorrect. A fiscal deficit indicates the government’s total borrowing needs. This borrowing can be financed from various sources: market borrowings (from the public and commercial banks), small savings, and borrowing from the Reserve Bank of India (RBI). Only the portion of the deficit financed by borrowing from the RBI (often called deficit financing or monetized deficit) directly leads to the creation of new money and an increase in the money supply. Borrowing from the public or commercial banks merely transfers existing money to the government and does not increase the overall money supply.