UPSC Prelims 2002 Q87: Indian Economy – Fiscal Policy & Budget

UPSC Prelims 2002, General Studies Paper I · Indian Economy

With reference to the Indian Public Finance consider the following statements: 1. External liabilities reported in Union Budget are based on historical exchange rates. 2. The continued high borrowing has kept the real interest rates high in the economy. 3. The upward trend in the ratio of Fiscal Deficit to GDP in recent years has an adverse effect to private investments. 4. Interest payments is the single largest component of the non - plan revenue expenditure of the Union Government. Which of these statements are correct?

(a) 1, 2 and 3
(b) 1 and 4
(c) 2, 3 and 4
(d) 1, 2, 3 and 4

Answer: (d) 1, 2, 3 and 4

Explanation

Indian public finance: borrowing, deficit and interest payments

Statement	Verdict
1. External liabilities in the Union Budget are at historical exchange rates	True — the stock is reckoned at the rates when the liability was first booked
2. Continued high borrowing has kept real interest rates high	True — crowding-out effect
3. Rising fiscal deficit to GDP hurts private investment	True — crowding out
4. Interest payments are the largest item of non-plan revenue expenditure	True — about one-third of the Centre's revenue expenditure

Each statement is standard. The Receipts Budget states that the outstanding external liabilities are reckoned at historical exchange rates, high borrowing raises real interest rates, a growing fiscal deficit crowds out private investment, and interest payments are the largest non-plan revenue item. On the facts the answer is 1, 2, 3 and 4. The stored key (c) leaves out statement 1; I could not find the official key online, so please treat this item as flagged.

Answer: (d) 1, 2, 3 and 4.

Why each option is right or wrong

(a) Incorrect. It leaves out statement 4, which is true.
(b) Incorrect. It leaves out statements 2 and 3, which are true.
(c) Incorrect. It leaves out statement 1; the stored key may differ from the facts.
(d) CORRECT. All four statements are true on the Budget documents.

Key point

Interest payments are the biggest non-plan revenue item; external debt in the Budget is at historical rates, not market rates.

Remember

Interest payments top the non-plan revenue expenditure of the Union.

Common mistakes

Dropping statement 1 as too technical.
Thinking only the Centre's plan items matter.
Ignoring crowding-out of private investment.

Exam tip

Check whether any statement is false; here none is.

Sources

Union Budget 2001-02 — Receipts Budget (external debt)
Economic Survey 2001-02

← Q86All UPSC Prelims 2002 questionsQ88 →

Practise UPSC Prelims PYQs Take a timed mock