UPSC Prelims 2020 Q54: Indian Economy – Fiscal Policy & Budget
In the context of the Indian economy, non - financial debt includes which of the following?
1. Housing loans owed by households
2. Amounts outstanding on credit cards
3. Treasury bills
Select the correct answer using the code given below:
- (a) 1 only
- (b) 1 and 2 only
- (c) 3 only
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Explanation
What counts as non-financial debt?
Non-financial debt is the debt owed by the non-financial sectors: households, non-financial companies and government.
It leaves out debt that banks and other financial firms owe each other.
| Item | Who owes it | Non-financial debt? |
|---|---|---|
| 1. Housing loans | Households | Yes |
| 2. Credit card dues | Households | Yes |
| 3. Treasury bills | Government | Yes |
Sectors in BIS data:
| Sector | Included in non-financial debt? |
|---|---|
| Households | Yes |
| Non-financial corporations | Yes |
| General government | Yes |
| Financial corporations | No |
All three items are debts of non-financial borrowers.
Answer: (d) 1, 2 and 3.
Why each option is right or wrong
- (a) Incorrect. Credit card dues and Treasury bills are also owed by non-financial sectors.
- (b) Incorrect. Treasury bills are government debt, and the government is a non-financial sector.
- (c) Incorrect. Housing loans and credit card dues are household debt and count too.
- (d) CORRECT. Households (housing loans, card dues) and government (T-bills) are non-financial borrowers.
Key point
Non-financial debt = debt of households, non-financial companies and government (housing loans, card dues, T-bills); excludes debt of financial firms.
Remember
Households + firms + government debt = non-financial debt.
Common mistakes
- Thinking T-bills are 'financial' debt because they are traded in money markets; the borrower is the government.
- Classifying debt by the instrument rather than by who owes it.
- Forgetting that government is a non-financial sector in national accounts.
Exam tip
Classify debt by the borrower. If the borrower is not a bank or financial firm, it is non-financial debt.
Sources
- Bank for International Settlements — Credit to the non-financial sector statistics
- RBI — Handbook of Statistics on the Indian Economy