Fiscal Policy & Public Debt

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.

Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government. FRBM Act provides a legal institutional framework for fiscal consolidation. The Act also requires the government to lay before the parliament three policy statements in each financial year namely 1. Medium Term Fiscal Policy Statement 2. Fiscal Policy Strategy Statement 3. Macroeconomic Framework Policy Statement

Statement 1 is correct: Foreign currency earnings - The IT sector generates foreign exchange through exports of services. This increases the supply of foreign currency reserves, making it easier to defend the rupee's value in the foreign exchange market during times of stress. Statement 2 is incorrect: While government spending can stimulate economic growth, it can also lead to a higher budget deficit. If the deficit is financed by excessive borrowing, it can put pressure on the currency if investors lose confidence in the government's ability to repay its debts. Statement 3 is correct: Remittances from abroad - When Indians working abroad send money back home, it adds to the inflow of foreign currency. This strengthens the country's foreign exchange reserves and provides a buffer against external shocks. Therefore, the correct code is 1 and 3 only.

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)).

Opportunity cost: It refers to the potential benefit an individual or entity gives up when choosing one option over another. In simpler terms, it's what you miss out on by making a specific choice. Free commodity by the government: When the government provides a good or service for free, it doesn't eliminate the opportunity cost. The resources used to provide that free good could have been used for something else. Taxpayers bear the burden: The resources for "free" public goods come from somewhere, usually taxpayer money. So, the opportunity cost isn't eliminated, it's simply shifted. Taxpayers give up the potential use of those resources in exchange for a free good or service. In essence, while the individual consumer might not directly pay for the good, the cost is still there and borne by the tax-paying public.

The equalization levy on online advertisement services offered by non-resident entities is introduced as a separate tax under the Finance Act, not as a part of the Income Tax Act. Non-resident entities cannot claim a tax credit in their home country under the "Double Taxation Avoidance Agreements" because the equalization levy is not an income tax. It is a separate tax levied on specified services provided by non-residents to residents. Hence, option A is the correct answer. Note: The Indian government has abolished the 6% Equalization Levy on online advertisements, with effective from April 1, 2025.

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.

The UDAY scheme (Ujwal DISCOM Assurance Yojana), launched by the Government of India in 2015, has multiple objectives aimed at improving the financial health and operational efficiency of electricity distribution companies (DISCOMs) in India.

The term "Base Erosion and Profit Shifting (BEPS)" refers to tax planning strategies used by multinational companies to artificially shift profits from higher-tax jurisdictions to lower-tax jurisdictions, thereby reducing their overall tax liabilities. This practice often involves exploiting gaps and mismatches in tax rules between different countries. BEPS has been a major concern for governments worldwide as it can lead to significant revenue losses and erode the tax base of countries where economic activity occurs. Efforts to address BEPS involve cooperation among countries to develop common standards and guidelines to prevent tax avoidance by multinational corporations.

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)