Fiscal Sustainability of State-Owned Enterprises
Indian Economy
- PYQs8
- Articles1
Background
UPSC examines the role, performance, challenges, and reforms of PSUs/SOEs in the Indian economy, including issues of governance, financial health, and their impact on state budgets and public debt.
State-Owned Enterprises (SOEs) are government-owned corporations established to provide goods and services, often in strategic sectors, but frequently face challenges related to efficiency, financial viability, and political interference, impacting state fiscal health.
Facts & tables
- KSRTC's financial woes
- Huge accumulated loss, delay in salary/pension payments.
- Debt trap
- Scheme exacerbates KSRTC's financial crisis, mounting unpaid fuel bills.
- Austerity measures
- Found inadequate to salvage the company.
- Impact
- Employees/pensioners resorting to legal action and extreme steps due to non-payment.
| Type | Reference |
|---|---|
| Conceptual area | Fiscal Policy & Public Debt |
| Conceptual area | Public Finance & Taxation |
| Body | Role |
|---|---|
| Kerala State Road Transport Corporation (KSRTC) | State-owned enterprise facing fiscal crisis |
| Kerala State Government | Owner and policy-maker for ksrtc |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Factual recall
- SOEs often struggle with financial viability and accumulated losses.
- Government welfare schemes can exacerbate SOE debt.
- Inadequate austerity measures fail to revive ailing SOEs.
- Fiscal distress impacts employee salaries and pensions.
- SOE financial health is critical for state fiscal sustainability.
| Year | Framing tags |
|---|---|
| 2024 | Statement-based questions, Conceptual understanding |
| 2022 | Statement-based questions, Conceptual understanding |
| 2020 | Conceptual understanding, Multi-statement analysis |
| 2018 | Statement-based questions, Conceptual understanding |
| 2018 | Multi-statement analysis, Factual recall |
| 2016 | Multi-statement analysis, Conceptual understanding |
| 2015 | Conceptual understanding, Multi-statement analysis |
| 2015 | Conceptual understanding, Policy measures |
Timeline
-
Fiscal Policy & Public Debt
Conceptual area
-
Public Finance & Taxation
Conceptual area
-
Prelims 2015
Conceptual understanding, Multi-statement analysis
-
Prelims 2015
Conceptual understanding, Policy measures
-
Prelims 2016
Multi-statement analysis, Conceptual understanding
-
Prelims 2018
Statement-based questions, Conceptual understanding
-
Prelims 2018
Multi-statement analysis, Factual recall
-
Prelims 2020
Conceptual understanding, Multi-statement analysis
-
Prelims 2022
Statement-based questions, Conceptual understanding
-
Prelims 2024
Statement-based questions, Conceptual understanding
-
A crisis on wheels in Kerala
The case of KSRTC illustrates the severe fiscal sustainability challenges faced by many State-Owned Enterprises, particularly when burdened by accumulated losses, operational inefficiencies, and the financial implications of government welfare schemes, leading to a debt trap and impacting employee welfare.
See also
No related topics linked yet.
Past papers
2015–2024 · 8 questions
In the news
A crisis on wheels in Kerala
The case of KSRTC illustrates the severe fiscal sustainability challenges faced by many State-Owned Enterprises, particularly when burdened by accumulated losses, operational inefficiencies, and the financial implications of government welfare schemes, leading to a debt trap and impacting employee welfare.
Try these PYQs
Consider the following statements
1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
2. The Central Government has domestic liabilities of 21% of GDP as compared to 49% of GDP of the State Governments.
3. As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
Statement 1 is correct. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report indeed recommended a debt-to-GDP ratio of 60% for the general (combined) government by 2023, with 40% for the Central Government and 20% for the State Governments. This recommendation aimed to ensure fiscal discipline and sustainability. Statement 2 is not correct. The Central Government has domestic liabilities of 46.1% of GDP (2016-17) and as a percentage of GDP, States liabilities increased to 23.2 per cent at end-March 2016. Statement 3 is correct. The Constitution of India empowers State Governments to borrow only from domestic sources (Article 293(1)). Further, as long as a State has outstanding borrowings from the Central Government, it is required to obtain the Central Government's prior approval before incurring debt (Article 293 (3)).
With reference to the Indian economy, consider the following statements :
1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt;
Which of the above statements is/are correct ?
Statement 1 is correct: A portion of household financial savings in India does indeed go towards government borrowings. The government raises funds through various debt instruments like bonds and treasury bills. When households save money, they might invest it in these government debt instruments through banks or other financial institutions. This provides a source of funding for the government while offering a return to the investors (savers). Statement 2 is correct: Dated securities are a major component of India's internal debt. These are essentially government bonds issued at market-determined interest rates through auctions. Investors, including households, banks, and financial institutions, can participate in these auctions and purchase dated securities. Hence, both statements are correct.
There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Reducing import duty
Select the correct answer using the code given below.
Actions that can help reduce the deficit: 1. Reducing revenue expenditure (Correct): This involves cutting back on non-essential government spending. Examples include reducing administrative costs, curtailing travel expenses, or postponing discretionary infrastructure projects. 3. Rationalizing subsidies (Correct): This means making subsidies more targeted and efficient. The government can identify and eliminate wasteful subsidies or ensure they reach the intended beneficiaries. Actions that will likely increase the deficit: 2. Introducing new welfare schemes (Incorrect): This would increase government spending and contribute to the deficit. 4. Reducing import duty (Incorrect): Lower import duties can lead to a decrease in government revenue collected from customs duties. This can worsen the deficit. Therefore, the correct answer is 1 and 3 only (Reducing revenue expenditure and Rationalizing subsidies)
Consider the following statements:
Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement-II : The USA Government debt is not backed by any hard assets, but only by the faith of the Government.
Which one of the following is correct in respect of the above statements?
* Statement-I: This statement is correct. If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds would not be able to exercise their claims to receive payment. This statement is correct because, in the event of a default, the government would not be able to fulfil its debt obligations, meaning bondholders would not receive the payments they are due. * Statement-II: This statement is correct. The US government debt is not backed by any hard assets, but only by the faith of the Government. This statement is also correct. US Government debt, such as Treasury Bonds, is backed by the full faith and credit of the US Government rather than any specific physical assets. * Statement II explains Statement I because the faith and credit of the US Government are the guarantees behind its debt. If this faith is shaken or if the government defaults, bondholders cannot claim any specific assets to recover their investment, hence they would not receive their payments.
There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit?
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Select the correct answer using the code given below.
To reduce a persistent budget deficit, the government can take actions that decrease spending or increase revenue. 1. Reducing revenue expenditure (Correct): This involves cutting back on non-essential government spending. This can include areas like administrative costs, travel, or certain subsidies. 2. Introducing new welfare schemes (Incorrect): This would likely increase government spending and worsen the deficit. 3. Rationalizing subsidies (Correct): Subsidies can be a significant source of government expenditure. Reviewing and potentially reducing or reforming subsidies can help control spending. 4. Expanding industries (Depends): While industrial expansion can lead to increased tax revenue in the long run, it might not have an immediate impact on the budget deficit. In the short term, the government might need to invest in infrastructure to support expansion, potentially increasing expenditure. Therefore, the correct answer is 1 and 3 only (Reducing revenue expenditure and Rationalizing subsidies).
Show 3 more PYQs
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:
In an economy, there are two main sectors: financial and non-financial. The financial sector consists of institutions like banks, insurance companies, and investment firms. The non-financial sector encompasses everything else, including households, businesses (except financial institutions), and the government. Non-financial debt refers to the total amount of money owed by the non-financial sector. This includes loans, credit card balances, and other outstanding liabilities. It's a way to measure the overall indebtedness of households, businesses, and the government. Understanding Non-Financial Debt Components
- Household Debt: This includes various loans and credit obligations incurred by individual households.
- Corporate Debt: This refers to the money owed by businesses (excluding financial institutions) to various creditors.
- Government Debt: This represents the total amount of money borrowed by the government to finance its expenditures. Therefore, all three options (1, 2, and 3) are considered non-financial debt in the Indian economy.
Consider the following statements:
1. The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
2. Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
3. Treasury bills offer are issued at a discount from the par value.
Which of the statements given above is/are correct?
Statement 1 is incorrect:
The Reserve Bank of India (RBI) manages and services both Central (Government of India) and State Government securities. RBI acts as a debt manager for both levels of government under agreements with the states. Statement 2 is correct:
Treasury Bills (T-bills) are issued only by the Government of India, not by the State Governments. States instead issue State Development Loans (SDLs) for their borrowing needs. Statement 3 is correct:
Treasury Bills are zero-coupon instruments — they are issued at a discount to the par (face) value and redeemed at par on maturity. The difference represents the interest earned.
With reference to Indian economy, consider the following :
1. Bank rate
2. Open market operations
3. Public debt
4. Public revenue
Which of the above is/are component/components of Monetary Policy?
Both the bank rate and open market operations are components of monetary policy in the Indian economy. Bank rate: The bank rate is the rate at which the central bank (Reserve Bank of India in the case of India) lends money to commercial banks. It is one of the key tools used by the central bank to control the money supply and credit conditions in the economy. Open market operations: Open market operations refer to the buying and selling of government securities (bonds) by the central bank in the open market. Through open market operations, the central bank can inject or withdraw liquidity from the banking system, thereby influencing the level of reserves held by banks and the overall money supply in the economy. Public debt and public revenue are not typically considered components of monetary policy. Public debt refers to the total amount of money owed by the government through borrowing, while public revenue refers to the income generated by the government through taxes and other sources. These factors are more closely related to fiscal policy, which involves government spending and taxation decisions to achieve specific economic objectives.