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Indian Economy Quiz for IAS Exam: Public Finance in India

Apr 25, 2017 10:57 IST

    Economy IAS QuestionsIndian economy is one of the crucial sections of UPSC IAS Exam syllabus. A large number of questions asked in IAS Prelims Exam every year. A good practice of the Indian economy quiz can be effective in terms scoring well and as well as for IAS Mains Exam.

    The Indian economy quizzes provided in this article are based on the topic Public Finance in India, which has an insight of the fiscal practices in the country. Such Indian economy questions with explanation will help IAS aspirants to understand the basic structure of the Indian economy and it will also help the IAS aspirant to develop a perspective of attempting Indian economy questions in the IAS Mains Exam.

    Question: The Constitution of India has a provision (Art. 112) for such a document called an Annual Financial Statement to be presented in the Parliament before the commencement of every new fiscal year. Consider the following statements regarding the composition of the Union Budget in India:
    I. The Union Budget has three sets of data for every concerned sector or sub-sector of the economy.
    II. Actual data of the preceding year (here preceding year means one year before the year in which the Budget is being presented.
    III. Budgetary estimates for the following year (here following year means one year after the year in which the Budget is being presented or the year for which the Budget is being presented, i.e., 2016–17. This is shown with the symbol ‘BE’ in brackets with the concerned data.).

    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 Constitution of India has a provision (Art. 112) for such a document called Annual Financial Statement to be presented in the Parliament before the commencement of every new fiscal year— popular as the Union Budget. The Same provision is there for the States too.

    Data in the Budget the Union Budget has three sets of data for every concerned sector or sub-sector of the economy:

    (i) Actual data of the preceding year (here preceding year means one year before the year in which the Budget is being presented. Suppose the Budget presented is for the year 2016–17, the Budget will give the final/actual data for the year 2016–17 because the Budget is presented in February end of the financial year 2007–08. After the data either we write ‘A’, means actual data/final data or write nothing (India writes nothing).

    (ii) Provisional data for the current year (since the Budget for 2016–17 is presented at the end of the fiscal 2016–17, it provides Provisional Estimates for this year (shown as ‘PE’ in brackets with the data).

    (iii) Budgetary estimates for the following year (here following year means one year after the year in which the Budget is being presented or the year for which the Budget is being presented, i.e., 2016–17. This is shown with the symbol ‘BE’ in brackets with the concerned data.).

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    Questions: Deficit financing was first used in the area of public finance in the early 1930s in the USA. Consider the following statements regarding the deficit financing:
    I. The act/process of financing/supporting a deficit budget by a government is deficit financing.
    II. In the process of deficit financing, the government knows well in advance that its total expenditures are going to turn out to be more than its total receipts and enacts/follows such financial policies so that it can sustain the burden of the deficits proposed by it.
    III. Till date, India has never tried its hand at deficit financing.

    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 act/process of financing/supporting a deficit budget by a government is deficit financing. In this process, the government knows well in advance that its total expenditures are going to turn out to be more than its total receipts and enacts/follows such financial policies so that it can sustain the burden of the deficits proposed by it.

    First used in the area of public finance in the early 1930s in the USA, today the term is being used by the corporate sector, too and such a financial management of a firm might be followed by it as part of its business strategy. Again, a sick firm might need to follow deficit financing route for many years to come as required by the firm to make it come out of the red (i.e., doing away with the losses).

    The need of Deficit Financing: It was in the late 1920s that the idea and need of deficit financing were felt. It is when the government needs to spend more money than it was expected to earn or generate in a particular period, to go for the desired level of growth and development. Had there been some means to go for more expenditure with less income and receipts, socio-political goals could have been realised as per the aspirations of the public policy! And once the growth had taken place the extra money spent above the income would have been reimbursed or repaid! This was a good public/government wish which was fulfilled by the evolution of the idea of deficit financing.

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    Questions: In the 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 the 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

    • aceiling 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 macroeconomic 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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