Daily Quiz – 03rd Apr 2024

Statement 1 is correct: Off Budget Borrowings are the loans taken by government owned entities like Central Public Sector Enterprises (CPSEs) on the directions of the government in order to supplement the expenditure made by the government.

Statement 2 is incorrect: Even though these borrowings have implications on government finances and macroeconomic stability, they are not included in the Fiscal Deficit. This is the reason they are called Off Budget or Extra-Budgetary Borrowings.

Statement 3 is correct: The interest as well as the principal amount incurred through such borrowings is the liability of the Central Government and has to be paid from government resources/ budget itself (Consolidated Fund of India). This is why off budget borrowings have implications for public finances and macroeconomic stability.

Statement 4 is correct: The Parliament controls the Executive, that is the Government by restricting their appropriation of public funds collected via taxes, fees, etc from the citizens, from the Consolidated Fund of India. However if the Executive uses alternative routes like directing CPSEs to take loans, which are not a part of deficits or budget calculations, the legislature will not thus be able to question or control government expenditure or its quality (productive or wasteful), thus reducing their accountability to citizens.

Statement a is correct: The fiscal deficit is the difference between the government's overall expenditure and its total receipts, without considering borrowing. It is a critical indicator of a government's financial health, showing how much, it needs to borrow to cover the shortfall. A high fiscal deficit may indicate financial instability, while a lower one implies better fiscal management.

Fiscal deficit = Total expenditure - Total receipts (excluding borrowings)

Statement b is incorrect: The Effective Revenue Deficit (not the Fiscal Deficit) is calculated by subtracting the grants for capital asset creation from the revenue deficit. It provides a more accurate reflection of the government's revenue spending, excluding expenditures related to capital investments. This concept is particularly important when analyzing the quality of government spending, as it focuses on recurring revenue expenses rather than capital investments, which can vary significantly from year to year. The government of India has stopped calculating the Effective Revenue Deficit in the Budget statement.

Statement c is incorrect: Monetized deficit (not the Fiscal Deficit) refers to the portion of the fiscal deficit that is financed by borrowing from the Reserve Bank of India (RBI). It represents the monetary support provided by the RBI to the government, involving the purchase of government bonds to cover the government's spending requirements.

Statement d is incorrect: The formula for Fiscal Deficit, as correctly stated, is:

Fiscal Deficit = Revenue Deficit + Capital Expenditure - Non-debt creating capital receipts

Non-debt creating capital receipts are sources of income for the government that do not result in the accumulation of debt. Examples include the recovery of loans and the proceeds from the sale of Public Sector Undertakings (PSUs). These receipts do not contribute to the government's overall debt burden, making them different from borrowings, which do increase the debt.

Formulae for calculating fiscal deficit:

• Fiscal deficit = Total expenditure - Total receipts (excluding borrowings).
• Fiscal deficit = (Revenue expenditure + Capital expenditure) - (Revenue receipts + Capital receipts excluding borrowings).
• Fiscal deficit = (Revenue expenditure - Revenue receipts) + (Capital expenditure - Capital receipts excluding borrowings).
• Fiscal deficit = Revenue deficit + (Capital expenditure - Capital receipts excluding borrowings).

Pair 1 is correctly matched: The Macro-economic framework statement, presented during the annual Union Budget, is a requirement of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 (Section 3(5)). It assesses the economy's growth prospects based on specific assumptions, providing an overview of the economy. This includes an evaluation of GDP growth, central government fiscal balance, and the external sector balance.

Pair 2 is incorrectly matched: The Medium-term Fiscal Policy Statement, as per Section 3(2) of the Fiscal Responsibility and Budget Management Act, 2003, is submitted to Parliament. It provides a

broader overview of fiscal sustainability and the balance between revenue and expenditure. The statement outlines three-year rolling targets for five fiscal indicators in relation to GDP at market prices: (i) Revenue Deficit, (ii) Fiscal Deficit, (iii) Effective Revenue Deficit, (iv) Tax to GDP ratio, and (v)

Total outstanding Central Government Debt at year-end.

Pair 3 is incorrectly matched: Fiscal Policy Strategy Statement outlines the government's fiscal priorities for the upcoming financial year. It covers aspects like taxation, expenditure, lending, investments, administered pricing, borrowings, and guarantees. The statement also justifies significant deviations from fiscal measures, ensuring alignment with sound fiscal management principles.

Statement 1 is incorrect: As per the Union Budget 2023, allocation is maximum for Interest Payments with share of approximately 20 percent of total allocation followed by “States‟s share of taxes and duties” (approximately 18 percent) and “Central Sector schemes” (approximately 17 percent).

The expenditure on subsidies accounts for approximately 7 percent. The total division of Expenditure proposals under Union Budget 2023-24 is shown in the figure given below.

Statement 2 is incorrect: The food subsidy for 2023-24 is estimated at Rs. 1.97 lakh crore, while the total subsidy expenditure, including food, fertilizer, and petroleum, is approximately Rs. 3.75 lakh crore. Therefore, the food subsidy accounts for around half (53%) of the total subsidy expenditure, not two-thirds (66.67%).

Indirect transfers refer to situations where foreign entities own shares or assets in India, when the shares of such foreign entities are transferred and if such shares or interest derive a substantial value from assets located in India. Then such transfer is commonly referred to as Indirect transfers. The amendments made in the ITA in 2012 clarified that if a company is registered or incorporated outside India, its shares will be deemed to be or have always been situated in India if they derive their value substantially from the assets located in India. As a result, the persons who sold such shares of foreign companies before the enactment of the Act (i.e., May 28, 2012) also became liable to pay tax on the income earned from such sale.