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Indian Economy for IAS Prelims Exam 2017: Public Finance in India III

Apr 17, 2017 19:32 IST

    Economy IAS QuestionsIndian Economy plays an important role in IAS Exam and there are always a large number of questions asked in this section in IAS Prelims Exam. An IAS aspirant must have well understanding of the various concepts of the Economy to score better marks in both the levels of IAS Exam. Here, we have provided Indian Economy quiz based on the topic Public Finance and various measures in managing the deficits in the Indian Economy.

    Indian Economy Quiz for IAS Prelims Exam 2017- Public Finance in India I

    1.In 1980s, it was for the first time in the fiscal history of India that we see a long-term perspective coming on the fiscal issue from the government. Consider the following statements regarding the fiscal history of India:
    I.In December 1985, the Government of India presented a discussion paper in the Parliament titled ‘Long-term Fiscal Policy’ which was second time after 1955 in the fiscal history of India that we see a long-term perspective coming on the fiscal issue from the government.
    II.The BoP crisis at the end of 1990 was generated partly by the alarmingly high fiscal deficit and due to a high level of external borrowings.
    III.With the process of economic reforms which started in 1991–92, the government also announced its commitment to reduce fiscal deficit to 3–4 per cent (of GDP) by the mid-1990s (from the level of about 8 per cent during 1987–90).

    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: c

    Explanation:

    In December 1985, the Government of India presented a discussion paper in the Parliament titled ‘Long-term Fiscal Policy’. It was for the first time in the fiscal history of India that we see a long-term perspective coming on the fiscal issue from the government. This also included the policy of government expenditure. The paper was bold enough to recognise the deterioration in India’s fiscal position and accepted it among the most important challenges of the eighties—the paper set specific targets and policies to set the things right.

    This paper was followed by a country-wide debate on the issue and it was in 1987 that the government came ahead with two bold steps in the direction—

    • a virtual freeze was announced on government expenditure, and

    • a ceiling on the budgetary deficit.

    The above steps had a positive impact on the situation but it was temporary as since mid-1988 the situation again started deteriorating. The BoP crisis at the end of 1990 was generated partly by the alarmingly high fiscal deficit30 and due to a high level of external borrowings. The IMF support to fight the crisis came in but with much macro-economic conditionality, checking the fiscal menace being a major one among them. With the process of economic reforms which started in 1991–92, the government also announced its commitment to reduce fiscal deficit to 3–4 per cent (of GDP) by the mid-1990s (from the level of about 8 per cent during 1987–90).

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    2.At the beginning of the fiscal reforms in 1991, the fiscal imbalance was identified as the root cause of the twin problems of inflation and the difficult balance of payments (BoPs) position. Since then the medium-term fiscal policy stance of the government has been on which of the following lines:
    I.reducing the deficits (revenue and fiscal)
    II.prioritising expenditure and ensuring that these resulted in intended outcomes
    III.augmenting resources by widening tax base and improving tax-compliance while maintaining moderate rates

    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 fiscal policy of an economy has been considered as the building block for enabling macro-environment by the economists, policymakers and the IMF, alike. It does not only provide stability and predictability to the policy regime but also ensures that national resources are allocated in terms of their defined priorities through the tax transfer mechanism.
    Unproductive government expenditures, tax distortions and high deficits are considered to have constrained the Indian economy from realising its full growth potential. At the beginning of the fiscal reforms in 1991, the fiscal imbalance was identified as the root cause of the twin problems of inflation and the difficult balance of payments (BoPs) position.

    Since then the medium-term fiscal policy stance of the government has been on the following lines:

    • reducing the deficits (revenue and fiscal);

    • prioritising expenditure and ensuring that these resulted in intended outcomes; and

    • augmenting resources by widening tax base and improving tax-compliance while maintaining moderate rates.

    The fiscal consolidation which followed in 1991 failed to give the desired results as there was no defined mandate for it. Neither was there any statutory obligation to do so.

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    3.In to provide the support of a strong institutional/statutory mechanism the Fiscal Reforms and Budget Management Act (FRBMA) was enacted on:
    a.August 26, 2003
    b.August 26, 2004
    c.September 26, 2005
    d.September 26, 2006

    Answer: a

    Explanation:

    The fiscal consolidation which followed in 1991 failed to give the desired results as there was no defined mandate for it. Neither was there any statutory obligation to do so. This is why the ‘Fiscal Reforms and Budget Management Act’ (FRBMA) was enacted on August 26, 2003 to provide the support of a strong institutional/statutory mechanism. Designed for the purpose of medium-term management of the fiscal deficit, the FRBMA came into effect on July 5, 2004.

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    4.The FRBM Bill, 2000 was passed by the Parliament with all political parties voting in favour, and is considered a watershed in the area of fiscal reforms in the country. Consider the following highlights of the FRBMA, 2003:
    I.Rules to be made under the Act to specify annual targets for the reduction of fiscal deficit (FD) and revenue deficit (RD) contingent liabilities and total liabilities.
    II.FD and RD may exceed the targets only on the grounds such as national security, calamity or on exceptional grounds.
    III.The Government of India to borrow from RBI only but not by the Ways and Means Advances (WMAs).

    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: b

    Explanation:

    The FRBM Bill, 2000 was passed by the Parliament with all political parties voting in favour, and is considered a watershed in the area of fiscal reforms in the country. Main highlights of the FRBMA, 2003 are as given below:

    •Rules to be made under the Act to specify annual targets for the reduction of fiscal deficit (FD) and revenue deficit (RD) contingent liabilities and total liabilities.

    •FD and RD may exceed the targets only on the grounds such as national security, calamity or on exceptional grounds.

    •Government of India not to borrow from RBI except by Ways and Means Advances (WMAs).

    •Steps to be taken to ensure greater transparency in fiscal operations.

    •Along with the Budget and Demands for Grants, the Government of India to lay the following three statements before the Parliament in each financial year:

    oFiscal Policy Strategy Statement (FPSS);
    oMedium Term Fiscal Policy Statement (MTFPS); and
    oMacroeconomic Framework Statement (MFS).

    •The Finance Minister to make quarterly review of trends in receipts and expenditure in relation to the Budget and place the review before the Parliament.

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    5.Which of the following first country to introduce a legal binding on the government’s powers of money creation?
    a.India
    b.New Zealand
    c.USA
    d.Germany

    Answer: b

    Explanation:

    It was New Zealand which first introduced such a legal binding on the government’s powers of money creation. Here the central bank is legally bound to ensure that money creation by the government does not increase the rate of inflation target—it means that the central bank has the overriding powers on the government there in the area of extra money creation.

    The second variant is putting some firm legal or constitutional limit on the size of government deficits or the power of the government to borrow. Germany and Chile had such an arrangement—today Germany is bound to the fiscal limits prescribed by the Maastricht Treaty. In the late 1990s, an upper limit on the government’s powers to create deficit was introduced.

    IAS Prelims 2017- GS Economy complete Study Material

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