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Economic Survey 2016-17 for IAS Prelims: Fiscal Rules

Feb 2, 2017 15:42 IST

    Economy Survey 2016-17

    The Economic Survey based questions can easily be found in the last few years’ question papers of IAS Prelims Exam. So, it is very important to study Economic Survey 2016-17 for IAS Exam but it will be a difficult task to understand the whole things given in the Economic Survey. Here, for the convenience of IAS aspirants, we have created multiple choice questions completely based on the Economic Survey 2016-17.

    Union Budget 2017 Questions for IAS Exam Part-3

    1. India like several other countries, embarked in the mid-2000s on an ambitious project of fiscal consolidation, adopting fiscal rules aimed at curbing fiscal deficits. Consider the following statements regarding fiscal management in India:
    I. As per the Economic Survey 2016-17, India’s fiscal experience has underscored the fundamental validity of the fiscal policy principles enshrined in the Fiscal Responsibility and Budget Management Act (FRBM) Act 2003.
    II. After the Global Financial Crisis (GFC) of 2008-09, India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction.

    Which of the following statement(s) is/are correct?
    a. Only I
    b. Only II
    c. Both I and II
    d. Neither I nor II

    Answer: c

    Explanation:

    The problem of fiscal management is the lure of eternal procrastination. To advance rather than defer the desirable goal of fiscal prudence, India like several other countries, embarked in the mid-2000s on an ambitious project of fiscal consolidation, adopting fiscal rules aimed at curbing fiscal deficits. The most well-known and best-studied part of this project was the Fiscal Responsibility and Budget Management (FRBM) Act, adopted by the central government in 2003. This Act was mirrored by Fiscal Responsibility Legislation (FRL) adopted in the states, laws that were no less important than the FRBM, since states account for roughly half the general government deficit. Other work has shown that states’ fiscal position improved after 2005 and that some of this improvement can be attributed to the FRL.

    Since the Global Financial Crisis (GFC) of 2008-09, internationally fiscal policy has seen a paradigm shift from the emphasis on debts to deficits, arguing for greater activism in flows (deficits) and minimizing concerns about sustainability of the stocks (debt). But India’s experience has reaffirmed the need for rules to contain fiscal deficits, because of the proclivity to spend during booms and undertake stimulus during downturns. India’s experience has also highlighted the danger of relying on rapid growth rather than steady and gradual fiscal and primary balance adjustment to do the “heavy lifting” on debt reduction. In, short it has underscored the fundamental validity of the fiscal policy principles set out in the FRBM.

    Union Budget 2017 Questions for IAS Exam Part-2

    2. Most states in India achieved and maintained the target fiscal deficit level (3 percent of GSDP) and eliminated the revenue deficit soon after the introduction of their Fiscal Responsibility Legislation (FRL). Consider the following aim of the FRL to impose  fiscal discipline through a number of mechanisms:
    I. The fiscal targets were established and all the states were been directed that the overall deficit will not be allowed to exceed 3 percent of GSDP at any point, while the revenue deficit was to be eliminated by 2008-09.
    II. The 12th Finance Commission allowed states to borrow directly from the market, in the hope that investors would also exercise some discipline, by pushing up interest rates on states whose fiscal position had not improved.
    III. The broad public discipline was enhanced by introducing new reporting requirements. States were required to publish annual Medium-Term Fiscal Policy reports, which would project deficits over the next three to four years, accounting for growth in big ticket expenditure items like pension liabilities.

    Which of the following statement(s) is/are correct?
    a. Only I
    b. I and II
    c. II and III
    d. All of the above

    Answer: d

    Explanation:

    The FRL aimed to impose fiscal discipline through a number of mechanisms:

    (i) The fiscal targets were established and all the states were been directed that the overall deficit will not be allowed to exceed 3 percent of GSDP at any point, while the revenue deficit was to be eliminated by 2008-09 (later extended to 2009/10).

    (ii) The 12th Finance Commission allowed states to borrow directly from the market, in the hope that investors would also exercise some discipline, by pushing up interest rates on states whose fiscal position had not improved.

    (iii) Finally, the broad public discipline was enhanced by introducing new reporting requirements. States were required to publish annual Medium-Term Fiscal Policy reports, which would project deficits over the next three to four years, accounting for growth in big ticket expenditure items like pension liabilities.

    Union Budget 2017 Questions for IAS Exam Part-1

    3. Which of the following Indian states have adopted the Fiscal Responsibility Legislation (FRL) before the central government?
    a. Karnataka
    b. Kerala
    c. Uttar Pradesh
    d. All of the above

    Answer: d

    Explanation:

    One reason why figures on fiscal progress since 2005 give a misleading impression of the impact of the FRL is that not all states adopted FRL in that year. For example, five early adopters – Karnataka, Kerala, Uttar Pradesh, Punjab and Tamil Nadu -- enacted their legislation even before the central government did so in 2003. Many others adopted FRLs in 2005-06, while in a few states legislation did not fall into place until 2010. During this period, many other developments occurred that had a profound impact on fiscal positions. States adopted value added taxes (VAT), the 6th Pay Commission wage awards were granted, the 12th and 13th Finance Commissions made substantive changes to central government transfers to states. This was also a period of high nominal GDP growth, which averaged 15.8 percent between 2005 and 2010. So a second challenge is to distinguish the impact of the FRL in imposing fiscal discipline from the impact of these concurrent policy changes and macro-economic trends.

    Current Affairs for IAS Prelims Exam 2017: February 2017 Questions II

    4. The Fiscal Responsibility and Budget Management (FRBM) Act was adopted by the central government in 2003 and the mirror of that Act Fiscal Responsibility Legislation (FRL) was adopted in the states. Consider the following statements regarding the FRBM Act, 2003:
    I. The FRBM Act, 2003 is an Act of the Indian parliament to institutionalize the financial discipline, reduce fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budgeting system.
    II. The Act is to introduce a more equitable and manageable distribution of the country’s debts over the years.

    Which of the following statement(s) is/are correct?
    a. Only I
    b. Only II
    c. Both I and II
    d. Neither I nor II

    Answer: c

    Explanation:

    The FRBM Act, 2003 is an Act of the Indian parliament to institutionalize financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds by moving towards a balanced budget. The Act was enacted with a view to provide a legislative framework for reduction of deficit, and thereby debt, of the Government to sustainable levels over a medium term so as to ensure inter-generational equity in fiscal management and long term macro-economic stability.

    Objectives
    • to introduce transparent fiscal management systems in the country
    • to introduce a more equitable and manageable distribution of the country’s debts over the years
    • to aim for fiscal stability for India in the long run

    Current Affairs for IAS Prelims Exam 2017: February 2017 Questions I

    5. After adoption FRLs from which of the following states of India largest reductions in fiscal deficits came from?
    a. Maharashtra
    b. Odisha
    c. Punjab
    d. All of the above

    Answer: d

    Explanation:

    The states essentially achieved the fiscal targets right away, years in advance of the target year of FY 2008 (extended to 2009/10 due to the financial crisis). Within the first two years, states on average lowered their deficits to target levels -- 3 percent for fiscal deficit and 0 for revenue deficits – while the primary balance shifted into surplus. The reductions in deficits mask considerable variation across states. The largest reductions in fiscal deficits came from states like Orissa, Punjab, Madhya Pradesh and Maharashtra which lowered their deficit by more than 3 percentage points. These states also showed some of the largest reductions in revenue deficit.

    Current Affairs Quizzes for IAS Prelims 2017- January 2017

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