2D

Question 1

Budget - Capital - Receipts => division?

Answer 1

Sub-classified into two parts:

1- Capital Debt Receipts (~8 lakh cr⏫)
~₹ 7.40 lakh cr from Internal Borrowing⏫
- From RBI,
- From market (Banks, NBFCs)
- From small savings (Post-Office Savings Accounts, Kisan Vikas Patra, etc),
- From Provident Funds (EPFO, PPF)

~₹ 57,000 cr External borrow ⏫: from foreign countries & international institutions like IMF World Bank, BRICS bank etc.

Bigger portion of Capital Receipts come from this side

2- Capital Non-Debt Receipts: (~2.25 lakh cr⏫)
~₹ 15,000 cr Loan Principal recovered⏬ (i.e. Union government would have given loans to state governments, foreign countries, public sector companies etc.) so when they return Principal amount back that is counted here.

₹ 2.10 lakh cr⏫ cr Disinvestment i.e. Union selling its shares from Public Sector Undertakings (PSUs) / Central Public Sector Enterprises (CPSEs).

Smaller portion

Question 2

❓MCQ. Which of following is not a component of ‘Capital Receipts’? (IEnggS-2018)

(a) Market borrowings including special bonds
(b) External loans raised by the Central Government from abroad
(c) Receipts from taxes on property and capital transactions
(d) Provident Funds (State Provident Funds and Public Provident Fund)

Answer 2

C

Question 3

Full Budget-2019 about Foreign Borrowing in Foreign Currency

Answer 3

Introduction (Origin): In the General Budget-2019, FM Nirmala S. announced, “India’s sovereign external debt to GDP is among the lowest (~5%). The Govt would start raising a part of its borrowing programme in external markets in external currencies.”

Arguments in favor:

1. In domestic market, the ‘crowding out of private corporate borrowers’ will decline.
2. Corporates will be able to mobilize more funds from local market → factory expansion, jobs, GDP growth.
3. In the advanced economies such as USA, EU: the loan interest rates are very low, so our Indian govt may be able to get cheaper loans.
4. If we borrow a little more from external sources it won’t harm.

Against:

1. Exchange Rate Risk : If rupee weakens against the dollar during the bond’s tenure, the government would have to return more rupees to pay back the same amount of dollars. Then the loan may turn out to be ‘more expensive’ than originally anticipated.
2. It’s true that presently Indian Government’s external borrowing is very low, but once this ‘door’ is opened, subsequent governments may get tempted to borrow more and more from the foreign sources to finance their (populist) welfare schemes, ultimately it can result into crisis when exchange rates turn volatile.
3. Better to increase the foreigners’ investment limit in G-Sec (in ₹ currency) and attract them to come to India, rather than we going ‘abroad’ to get their money in $ currency.

Considering above points, sovereign borrowing from
external markets in foreign currency may not be a bad idea, provided that it’s done in a judicious and prudential manner.

Question 4

What are the types of undertakings owned by the govt?

Answer 4

There are THREE types of Commercial or industrial undertaking owned by the govt:
1- Departmental Undertakings -
- Directly part of a ministry e.g. Postal, Railways, Ordnance Factories. They can be created easily because, no laws required, no Companies Act registration required.
- High level of ministerial interference
- CAG will audit directly
- Their earning will go directly in Public Account / CFI
- All three types of org are Answerable under the Right to Information Act, 2005
- Their employees are considered government employee- subjected to service and discipline rules framed by the government.

2- Statutory Corporations-

• Created by an act of Parliament or state legislature. E.g. RBI Act, SBI Act, LIC Act, FCI Act, EPFO Act. etc, SIDBI, NABARD, NHB, EXIM..
• Middle of both sides
• Some of these Acts provide for internal audit & exclude CAG from auditing the Corporation. E.g. RBI, LIC.
• Their earning → profit → dividend goes to shareholders.
• All three types of org are Answerable under the Right to Information Act, 2005
• Not considered govt employees. Their service / discipline conditions are governed by the respective organizations’ internal manuals.

3- Govt. Companies

• Registered under the Companies Act, Govt’s shareholding is 51% or more.Coal India ltd, GAIL, SAIL, NTPC, IOCL, BHEL & various Public Sector Banks and NBFCs which are not statutory corporations.
• More operational flexibility, less interference by Ministers
• Companies Act requires them to produce audited reports. CAG will empanel the (private) auditors for them.
• Their earning → profit → dividend goes to shareholders.
• All three types of org are Answerable under the Right to Information Act, 2005
• Not considered govt employees. Their service / discipline conditions are governed by the respective organizations’ internal manuals.

Question 5

Objectives and challenges of undertakings owned by govt

Answer 5

 Objective: Public interest & welfare through affordable services, Development of infrastructure, regional balance, prevent concentration of economic power in the hands of Corporates /MNCs.

 Challenges? Political interference, lack of innovation & consumer responsiveness, employee unions, loss making business.

Question 6

What are Central Public Sector Enterprises (CPSEs)?

Answer 6

Registered in Companies act & Union Government has 51%/> shareholding.
Commonly known as ‘Govt companies’.
The word CPSE is mainly used to denote “govt companies other than Public Sector Banks, Public Sector Insurance Companies and Public Sector NBFCs”.

Question 7

What is Public sector Undertaking (PSU)?

Answer 7

= collective term for all the govt companies owned by Union/State/Local Bodies.

Question 8

What are Ratna Companies?

Answer 8

Ratna Companies = freedom to govt companies based on performing

 Ministry of Heavy Industries & Public Enterprises decides the norms for giving “Ratna status” to Central Public Sector Enterprises (CPSEs) like ONGC, SAIL etc.
 This is NOT for private owned companies like Tata, Infosys or Adani.
 Govt Companies with “Ratna” status are given more flexibility in their operations
e.g. hiring more professionals, acquisition of other companies etc. without requiring government approval for every small decision.

Question 9

Condition and examples for Miniratna Cat-I and Cat-II?

Answer 9

✓ made profits in the last 3 years continuously, further subdivision in Category-I & Category-II depending on how much profit is generated.

✓ Examples: National Film Development Corporation ltd, Mazagaon Dock ltd, Airports Authority of India, Mishra Dhatu Nigam ltd, NHPC ltd, WAPCOS ltd, ONGC Videsh ltd, Rail Vikas Nigam ltd,

Question 10

Condition and examples for Navratna?

Answer 10

✓ A Mini Ratna company fulfilling “x” conditions OR

✓ Non-Mini Ratna Govt companies fulfilling “y” conditions such as Manpower cost to total cost of production etc.

✓ Examples: Power Grid Corporation of India ltd, Rashtriya Ispat Nigam ltd, Rural Electrification Corporation ltd, Shipping Corporation of India ltd, Oil India ltd, National Aluminium Company ltd, Neyveli Lignite Corporation ltd, Mahanagar Telephone Nigam ltd, Hindustan Aeronautics ltd, Container Corporation of India ltd, Bharat Electronics ltd,

Question 11

Condition and examples for Maharatna?

Answer 11

✓ Already a Navratna Company, and fulfilling “z” conditions such as min. ₹ 5000 crore profit per year in last 3 years, listed at a Stock exchange, significant global presence etc.

✓ Very few here: 1)Bharat Heavy Electricals, 2)Bharat Petroleum Corporation, 3)Coal India , 4)GAIL (India) , 5)Hindustan Petroleum , 6)Indian Oil, 7)NTPC , 8)Oil & Natural Gas Corporation (ONGC), 9)Power Grid Corporation, 10) Steel Authority of India (SAIL)

Question 12

Headquarters of BSNL and MTNL

Answer 12

Bharat Sanchar Nigam Ltd (BSNL, 2000, HQ Delhi)

Mahanagar Telephone Nigam Ltd (MTNL, 1986, HQ Delhi)

Question 13

Explain BSNL MTNL Merger?

Answer 13

 Bharat Sanchar Nigam Ltd (BSNL, 2000, HQ Delhi)

 Mahanagar Telephone Nigam Ltd (MTNL, 1986, HQ Delhi) to provide services in Delhi, Mumbai; later also providing services in Mauritius.

 But both of them suffering from heavy losses, unable to compete against the private telecom sector.

 2019: Telecom Ministry decided to merge MTNL with BSNL. Existing employees are offered voluntary retirement scheme to reduce the staff cost.

Question 14

What is disinvestment and what is Privatization / Divestment / Strategic Disinvestment?
What is govt’s policy towards them?

Answer 14

 Disinvestment: ⏬ govt shareholding in a Government company but govt keeps atleast 51% shareholding with itself.

 Privatization / Divestment / Strategic Disinvestment: Reducing the government shareholding below 50%

 Arguments in favour: ⏬govt shareholding → Private investors will enter in the board of directors → ⏫ efficiency, innovation and autonomy.
 Disinvestment proceeds can be used for welfare schemes, and ⏬ fiscal deficit.

 Argument Against: MNC monopolies, exploitation of worker, job loss.

Question 15

Year wise Disinvestment Policy

Answer 15

1991’s Industrial Policy - Reduce shareholding in all Govt Companies

1998- In strategic sector (Railways, Defense, Atomic Energy)- no disinvestment
- In Non-strategic sector = disinvestment in a phased manner

(2004-09) - Due to pressure from Leftist/Marxist coalition parties = No Disinvestment from any government companies.
If a government company is sick, we will try to revive it.

(2009-14) - ✓ All Govt Companies can be disinvested upto 49% = Govt will keep 51% minimum and sell remaining shares.
✓ ₹₹ will goto National Investment Fund (NIF, in Public Account) → used for Bank recapitalization, metro rail, nuke energy, EXIM- NABARD-RRB etc.
✓ Also launched CPSE-Exchange Traded funds (ETF)

Question 16

Disinvestment & Privatization between 2014-19

Answer 16

✓ Various methods of Disinvestment, depending on the Company:

1. Converting Private Limited Company to public limited company and issuing Initial Public Offers (IPOs) e.g. Indian Railway Catering and Tourism Corporation (IRCTC) and Rail Vikas Nigam Ltd (RVNL)
2. Exchange Traded Funds (ETFs): CPSE-ETF, Bharat-22-ETF
3. Institutional placement Programme (IPP): offer shares only to non-retail investors.
4. Offer for sale (OFS): offer shares to both retail and non-retail investors
5. Share Buyback i.e. Government company itself buys the shares owned by Government, thereby decreasing Government’s shareholding portion viz a viz private sector’s shareholding.

✓ The govt shut down many sick Govt companies such as HMT watches, Hindustan Photo Film etc.

✓ Budget-2016 renamed FinMin’s Dept of Disinvestment into Dept. of Investment & Public Asset Management (DIPAM)

Question 17

Strategic Disinvestment during 2014-19

Answer 17

✓ Strategic Disinvestment: it means selling a substantial portion of Government shareholding in a CPSEs along with transfer of management control to a private party.
✓ Practically, it means 51% or higher shareholding with private players and 49% or lower with Government.
✓ For this action, NITI Aayog prefers to use the term ‘strategic disinvestment’, ‘strategic sale’ instead of ‘privatization’
✓ Sometimes, press statement also uses the word “Divestment” for it.

✓ NITI Aayog has identified Air India, Pawan Hans, Dredging Corporation, Scooters India,
Bharat Pumps Compressors, Hindustan Fluorocarbon, Hindustan Newsprint, Cement Corporation of India etc. for strategic disinvestment →

✓ NITI Aayog makes the list → approval by cabinet committee on economic affairs headed by PM (CCEA)

✓ 2019: PM Modi setup a Ministerial panel called Alternative Mechanism (AM) headed by Finance Minister – to clear the NITI list in a faster manner. So, only very important cases/files will be referred to CCEA.

✓ 2018: (1) Tried to sell-off 74% shareholding from Air India but no investors found. (2) IDBI sold to LIC.

✓ 2019-July: (Full) Budget-2019, Nirmala S. announced:
❖ We will again try for strategic disinvestment of Air India & other selected CPSEs.
❖ We’ll relax foreign investment limits in the CPSEs. → 2020-July: even simplified FDI rules to encourage NRIs to buy Air India
❖ We’ll monetize the unused land assets of CPSEs (e.g. selling / renting). → Government Land Information System (GLIS) portal launched to keep track of all such land assets.

✓ 2019-Nov: Government announced plans for strategic disinvestment of five public sector units (PSUs) namely,
❖ 1) Bharat Petroleum Corp Ltd (BPCL). Big international oil companies including Saudi Aramco are keen to buy BPCL, given its strong presence in fuel retail outlets.
❖ 2) Shipping Corporation of India.
❖ 3) Container Corporation of India (Concor)
❖ Separately, 4) Tehri Hydro Development Corp of India and 5) North Eastern Electric Power Corporation (Neepco) → both will be sold to National Thermal Power Corporation (NTPC, a public sector company).

Question 18

STRATEGIC DISINVESTMENT OF CPSE IN ATMANIRBHAR

Answer 18

2020-May: Govt notified a list of strategic sectors, then:

In Strategic sectors:

• We’ll allow private players + We’ll keep running at least one CPSE
• If >1 CPSE already running for a given strategic sector then we will privatize / merge them into a single CPSE.

In Non-Strategic sectors:
-  All CPSE will be privatized (=Strategic disinvestment)

✓ 2020-Jul: NITI Aayog recommended govt privatize 3 public sector banks – 1) Punjab & Sind Bank, 2) UCO Bank and 3) Bank of Maharashtra.

Question 19

❓MCQ. Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSEs)? (Asked in UPSC-Pre-2011)
1. The Government intends to use the revenue earned from the disinvestment mainly to pay back the external debt.
2. The Government no longer intends to retain the management control of the CPSEs.
Ans Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

Answer 19

d

Question 20

Privatisation and wealth creation is done by which ministry and dept?

Answer 20

FiinMin - Dept of Investment and Public Asset Management (DIPAM)

Question 21

ES20 VOL1 CH9 - Privatisation and wealth creation

Answer 21

1- Strategic Disinvestment (=privatisation) to increases profitability

 In 1980s, UK PM Mrs. Margaret Thatcher started privatization of the Govt companies such as British Telecom, British Airways, water and electricity companies etc. which increased profitability & wealth creation for those companies.

 📔📔ES20 analysed 11 Indian Govt companies that were privatized during (1998-2004) such as Hindustan Zinc, Bharat Aluminum Company Ltd. (BALCO), Maruti Suzuki, Indian Petrochemicals Corporation Ltd. (IPCL), Modern Food India Ltd. (MFIL) etc.
 After strategic disinvestment these Indian companies’ sales, profitability etc. greatly ⏫ because of:
o Technology Up-gradation
o Efficient management practices by Private professionals.

 ✅Thus, privatized PSUs help in economic growth & employment generation.

2- Strategic Disinvestment (=Privatisation) by Adopting Singapore Model

1974: Singapore Govt set up a holding company “Temasek Holdings Company” (THC). Then the Government transferred its shares of PSUs to THC → THC sold them in market → privatization complete.

 Government of India has 264 CPSEs under 38 different Ministries/Departments.
 📔📔ES20 suggested, we should also create a Holding Company just like Singapore, for our strategic disinvestment drive.

 Benefits of Singapore Model? Professionalism and autonomy to the disinvestment programme. Because If an individual ministry tried individual company’s privatization then
o Ministry’s (IAS) officers may not have network/ experience for selling the shares @highest price.
o Internal resistance by employee unions.

 So, better let a separate holding company look after this process.

Question 22

Budget - Capital - expenditure - Its notable components in decreasing order are?

Answer 22

ts notable components in decreasing order are:
1. Capital assets for various schemes, ministries, departments (Building, vehicles..)

2. Giving debt/equity finance to PSUs & foreign institutes, giving loans to State Govt & Foreign Govt.
   a. Sidenote: FinMin: Dept of Economic Affairs (DEA)’s Indian Development and Economic Assistance Scheme (IDEAS) gives such ₹₹ to foreign nations.
3. Union repaying loan principal for Internal Debts
4. Union repaying loan principal for External Debts

Question 23

What is surplus budget, balanced budget and deficit budget?

Answer 23

• If government’s income&raquo_space; its expenditure it will have a surplus budget
• If government’s expenditure == its income, it will be a balanced budget
• If government’s expenditure&raquo_space; its income, it’ll be a deficit budget

Question 24

What is Revenue Deficit, Effective Revenue Deficit, Budget Deficit, Fiscal Deficit, Primary Deficit

Answer 24

Revenue expenditure – Revenue receipts

Revenue Deficit minus Grants for creation of capital assets

Budget expenditure minus Budget receipt

Budget Deficit plus Borrowing

Fiscal Deficit minus interest to be paid on previous loans

Question 25

❓MCQ. Find Correct Statement(s) (Asked in UPSC-Pre-2017)
1. Tax revenue as a percent of GDP of India has steadily increased in the last decade.
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade.
Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

Answer 25

d

Question 26

Fiscal deficit implemented as per which committee report?

Answer 26

• 1997-98: it was implemented as per Sukhmoy Chakravarti Committee report.

Question 27

What are the negative consequences on the economy for financing the deficit?

Answer 27

Deficit can be financed by either Taxation, Borrowing Or Printing Money.
 Taxes can’t be ⏫ beyond a point because it may force people to evade taxes / discourage their motivation to work. (recall Laffer Curve).

 ⏫ deficit → Government borrows ⏫ money → @Maturity (also called ‘Redemption’) of G-Sec, Government will have to return the principal and interest to the lenders. At that time, Govt may greatly increase taxes on people to arrange that amount. So, Economist David Ricardo argued that during high deficits, people save more, because they become precautious about future hike in taxes. It’s called “Ricardian equivalence [& if people begin to spend less and save more, then companies will face unsold inventories = new problems for economy]

 If government borrows ⏫ money from households & financial intermediaries (LIC, EPFO, Banks via SLR), then that much less money will be available for loans to private corporate borrowers. = “ Crowding Out Effect” on the private borrowers= harms factory expansion and job creation.

 If Govt forces SBI, LIC, EPFO to buy its G-sec using public deposits → depriving households of the optimal return (Had the same money been invested in the corporate sector) = “ Financial Repression of the households.”

 Govt (forced) NABARD to buy its ₹ 15,000 crore Swachh Bharat Mission (Gramin) Bonds with maturity period of 10 years. Govt (forcing) RBI and others to pay higher dividend. → operational freedom of those organization is affected.

 High level of fiscal deficit → International Credit Rating Agencies will ⏬ the sovereign rating for India → investors will demand ⏫ interest from government for buying new G-Sec→ G-sec remains unsold → RBI forced to buy it (and print more money to give to Govt) → it’s called “ Monetizing the Deficit”. It can result in hyperinflation and ⏬ the purchasing power of currency (if there is not sufficient increase in the supply of onion, tomatoes & goods in the market. e.g. Germany, after Treaty of Versailles in 1919).

Question 28

What are the implications if India’s sovereign ratings further decrease from Baa3?

Answer 28

So, now if India’s sovereign rating⏬ any step further= junk status= Implications?

• Government will have to offer more interest to investors to lure them into buying g-sec
• Flight of Foreign Capital from India:
  o Foreign investors may fear Indian govt will default in payment of previous G-Sec o So they’ll dump it to other investors and run away from India.
  o =Flight of capital from India = $ strengthen, rupee weakens.

Question 29

What are Extra-Budgetary Resources?

Answer 29

Extra Budgetary Resources (EBR) are loans taken by public sector undertakings and Government organizations. For example,

• Govt not releasing food subsidy to Food Corporation of India (FCI) & (thereby forcing) FCI to borrow money from National Small Savings Fund (NSSF) for its food schemes.
• Ministry of Housing and Urban Affairs → (Autonomous body) Building Materials and Technology Promotion Council → they borrowed ₹ 60,000 crores in next 4 years to finance the PM Awas Yojana
• Here repayment of the entire principal and interest is done from the Central Government Budget eventually
• EBR measures are announced after passing of budget so, they may escape the same general level of media-reporting, parliament debate or audit = bad for financial transparency & accountability.
• 15th FC has termed “EBR” as ‘off-budget borrowings through para-statal entities’ and asked Government to avoid it.
• 📔📔ES20 noted:
• From Budget 2016 to 2019, govt raised >₹1.45 lakh cr through EBR
• These EBRs are not taken into account while calculating the Fiscal Deficit but they’re counted while calculating Government debt or public debt

Question 30

Under deficit financing- what is :
Redemption
Sinking Fund
Conversion / restructuring
Evergreening
Repudiation

Answer 30

These are the methods for repaying debt.

Redemption: Repay the loan principal and interest at regular interval. Also known as Terminal Annuity

Sinking Fund: Government creates a special fund & keeps depositing money in it regularly. So at the time of G-sec maturity, it has enough ‘buffer’ money to honor the loan repayment. First introduced in England

Conversion / restructuring: Converting old loan into new loan with modifications in interest / tenure.

Evergreening: Taking new loan to repay the old loan

Repudiation: Government does not recognize its obligation to repay the loan. E.g. After Russian Revolution (1917) Lenin’s Government refused to pay the loans taken by the previous Czar regime from Britain & France.

Question 31

What is 💼📤🤺 Fiscal consolidation/prudence?

Answer 31

It involves reduction in government expenditure to control its Fiscal Deficit. Such as:

1. ⏬ the leakages by targeted delivery of schemes and subsidies through direct benefit transfer (DBT) through JanDhan- Aadhar- Mobile (JAM) trinity.
2. ⏬ the quantum of subsidies: e.g.
   a. Deregulation of Petrol prices (2010), Diesel (2013)
   b. 2016: Oil Ministry began to block LPG-Pahal subsidies to persons with annual taxable income of ₹ 10 lakh />
   c. 2017: Oil Ministry asked oil companies to keep raising prices of subsidised kerosene by 25 paise every fortnight until the subsidy is eliminated.
3. Shutting down loss making PSU. E.g. Hindustan Photo Films, HMT Bearings, HMT Chinar Watches, Tungbhadra Steel, Hindustan Cable & HMT Watches (2014).
4. Privatization of loss making PSU/PSBs e.g. 2018- IDBI2LIC, 2018- Tried to sell off Air India, but unable to find any buyer.
5. 2014-16: Government setup an Expenditure Management Commission under Bimal Jalan to suggest ways to reduce its Expenditure.
6. Austerity Measures e.g.
   a. 2018- W.Bengal govt issued directives to its departments banning flower bouquets and mementoes in public functions, banning officials meetings at private hotels, frequent installation of AC, car purchases, office renovations etc. & restricting the number of foreign tours by Ministers / IAS etc., More use of video-conferencing instead of physical travel.
   b. 2019: PM’s Cabinet Committee on Investment and Growth (CCIG) ordered all Union ministries to reduce wasteful expenditure on travel, food and conferences by 20%
7. 2021 - ending subsidies on canteen food served at the Parliament

Question 32

❓MCQ. There has been a persistent deficit budget year after year. What can be done by by the government to reduce the deficit? (Asked in UPSC-Pre-2015)
1) Reducing revenue expenditure 3) Rationalizing subsidies
Answer Codes: (a) 1 and 3 only
2) Introducing new welfare schemes
4) Expanding industries
(b) 2 and 3 only (c) 1 only (d) 1, 2, 3 and 4

Answer 32

a

Question 33

❓MCQ. In India, the price of petroleum products has been deregulated mainly to (UPSC-CDS-2013-II)

(a) reduce the burden of subsidies given to the oil companies
(b) discourage the exploration of oil reserves in the country
(c) discourage the demand for private vehicles (d) curb the use of black money in the economy

Answer 33

a

Question 34

What is Fiscal Stimulus?

Answer 34

When government decreases taxes and/or increases public procurement to boost the demand & growth in economy, it’s called “Fiscal Stimulus”.

Question 35

Fiscal Stimulus (2008)

Answer 35

Post-subprime crisis in USA, the govt announced Fiscal Stimulus (2008) such as

• (1) Cut in the Excise duty & Custom Duty on exports
• (2) Businessman were given additional depreciation benefits in Income Tax & Corporation Tax, if they purchased new commercial vehicles.
• (3) Hiked the Minimum Support Prices (MSP) for farmers.

However, the economic surveys observed that such Fiscal Stimulus create new set of problems by increasing the fiscal deficit in the subsequent years.

Question 36

Fiscal Stimulus (2019)

Answer 36

2019-Aug: Car sales and GDP growth sharply ⏬, Foreign investors exiting on large scale from India. So, Finance Minister Nirmala.S announced in 2019-September:

1) Reduced tax burden on companies.
2) Reduced tax harassment
3) Fixing the PSBs
4) Encouraging car sales & other consumption

Plus many other fragmented reforms to ⏬ taxes, or to ⏫ Government spending on highway projects etc. are done every now and then.

Question 37

Atma-Nirbhar Bharat Economic Stimulus Package (2020)

Answer 37

(Origin) 2020-March: Government of India initiated nationwide lockdown to prevent the spread of Corona/COVID-19 pandemic.

• This lockdown affected the income and livelihood of everyone from corporate companies to common citizens of India.
• Therefore, to revive the economy, Prime Minister of India launched Atma Nirbhar Bharat stimulus package in 2020-May to revive the Indian economy.
• It’s centred on five pillars of – Economy, Infrastructure, System, Demand and Vibrant Demography

Data table in HD

Question 38

❓MCQ. Which one of the following statements appropriately describes the “fiscal stimulus”? (Asked in UPSC-Pre-2011)
1) It is a massive investment by the Government in manufacturing sector to ensure the
supply of goods to meet the demand surge caused by rapid economic growth
2) It is an intense affirmative action of the Government to boost economic activity in the
country
3) It is Government’s intensive action on financial institutions to ensure disbursement of
loans to agriculture and allied sectors to promote greater food production and contain
food inflation
4) It is an extreme affirmative action by the Government to pursue its policy of financial
inclusion

Answer 38

2

Question 39

Full form and year of FRBM act

Answer 39

Fiscal Responsibility and Budget Management Act, 2003

Question 40

What is FRBM act, 2003?

Answer 40

Originally it required Union and States to control their deficits with following targets:

• By 2008: ⏬ Fiscal Deficit
• For Union: 3% of GDP (GROSS DOMESTIC PRODUCT)
• For States: 3% of GSDP (GROSS STATE DOMESTIC PRODUCT)
• By 2008: Eliminate Revenue deficit (=make it 0%) of their respective GDP or GSDP.

While some of the state governments achieved them, but successive union governments were unable to meet these targets so the act was amended to extend the deadlines and targets several times.
E.g. Amendment 2012: No need to have 0% Revenue deficit. Instead it required 0% Effective Revenue Deficit by 2015. These deadlines were extended even further in subsequent Finance Bills.

Question 41

FRBM Review Panel under N.K.Singh (2016-17)

Answer 41

• Budget-2016: Finance Minister Jaitley felt FRBM Act targets were too rigid and did not allow any room for the government to address any crisis.
  e. g. farm loan waivers during drought period or unemployment allowance during global financial crisis are not possible if government strictly wants to control fiscal deficit at 3% of GDP.

So, Finance Minister constituted a panel under NK Singh (former IAS, 15th FC chairman) to review the FRBM act.

Question 42

What are some of the notable recommendations of FRBM NK Singh panel ?

Answer 42

• Replace the existing FRBM act with a new act, with an Escape clause i.e. During a war, drought or economic crisis, the government should be temporarily allowed to
  cross breach targets. → Government amended FRBM act for this.
• Set up an independent Fiscal Council for monitoring.
• Adopt a fiscal road map for the union from 2017 to 2023 gradually reduce Union Debt to GDP, Fiscal Deficit and Revenue Deficit

So, citing NK Singh report, Budget 2018 amended the FRBM targets →
Fiscal Deficit- 
2018-19 (Actual) = 3.4%
2019-20(Target) = 3.3% 
2020-21 (Target)= 3.0% 
2024-25 (Target) = 3.0%

Primary Deficit- 
2018-19 (Actual) = 0.2%
2019-20(Target) = 0.2% 
2020-21 (Target)= 0.0% 
2024-25 (Target) = 0.0%

Revenue Deficit and ERB
Abandoned in the FRBM target

Union Debt: GDP reduce it gradually
2017: ~46.5%
2018: 48.4%
2019: 48.0%
2024-25 (Target) = 40% 

General (=Union+State) Debt to GDP:
Gradually reduce to → 2024-25 (Target) = 60%

Question 43

Conditions under which escape clause is valid under FRBM act?

What are the implications of the escape clause?

Answer 43

FRBM: Trigger Mechanism for Escape (Deficit control) Clause, FRBM Act, Section 4(2): provides for a trigger mechanism to escape the deficit control related clauses in the act i.e. Government can overcross the targets in following situations:

1. National Security / Act of War
2. National Calamity
3. If agriculture output and farm incomes collapse
4. Fall in real output/ GDP growth rate beyond x%
5. Structural reforms in the economy with unanticipated fiscal implications

During above ‘trigger conditions’
- FRBM Act Section 4(2): Govt may overcross/deviate the fiscal deficit target by upto 0.5% of GDP, as recommended by NK Singh’s FRBM review Committee.

• Individual State Governments may also do similar (e.g. overcross by 0.5% of GSDP), but they’ve to amend their state FRBM Act accordingly with this provision.
• Budget-2020: FM cited trigger#5 (structural reforms.) to escape the FRBM targets for 2019-20 and 2020-21.

Fiscal deficit → 2019-20 - Original target: 3.3% - Overcrossed After Trigger Mechanism - 3.8%

Fiscal deficit → 2020-21 - Original target: 3% - Overcrossed After Trigger Mechanism - 3.5%

• Primary deficit target 0% (2020-21): shifted to 2022-23.
• ES19 had suggested Government to reduce deficit through fiscal prudence. BUT
• ES20 (Vol2Ch2) identified following challenges in 2020-21 in reducing deficit:
• India and global growth⏬, trade protectionism⏫, geopolitical situations in West Asia, Oil price = tax collection will be affected.
• To revive growth in the Indian economy, the Government should relax fiscal deficit targets → in other words, give fiscal stimulus → economic growth.
• 2020-Corona crisis: Govt’s income ⏬ and expenses ⏫: so, SBI research paper estimates fiscal deficit likely to be in 7.9% for 2020-21.

Question 44

What is Fiscal Slippage, Fiscal Glide and Fiscal Profligacy under FRBM act?

Answer 44

When government has targeted to keep the fiscal deficit within 3.3% percent of GDP, but crosses that limit, it’s called ‘Fiscal Slippage’

in 2018, instead of immediately reducing the Fiscal deficit to 3.0% FM promised to reduce it to 3% in 2020-21 like a glider gradually descending on its landing target. Hence subsequent Finance Ministers keep reiterating that we’ll continue on that ‘Fiscal Glide’

Fiscal Profligacy: This phrase is used to denote reckless extravagance/wasteful expenditure of public money.

Question 45

FRBM Act: Documents required to be submitted along with the budget?

Answer 45

FRBM Act requires the Union Govt to present following documents along with the budget:
1) Medium Term Fiscal Policy Statement
2) Fiscal Policy Strategy Statement: To explain how Govt.
is controlling the deficits, and whether there is going to be any deviation from the target.
3) Medium-term Expenditure Framework
4) Macroeconomic Framework Statement: growth rate, import-exports, and government’s receipts, expenditure etc.

Question 46

❓MCQ. According FRBM Act, the Government is under obligation to present three statements before the parliament along with the Annual Budget. Which one of the following is not one of them? [UPSC-CDS-2008-I]

(a) Macroeconomic Framework Statement
(b) Fiscal Policy Strategy Statement
(c) Medium-term Fiscal Policy Statement
(d) Statement showing Short term Fiscal Policy

Answer 46

D

Question 47

Fiscal federalism - Reforms in AB to help states?

Answer 47

👻🧔🕉👨‍🦲FISCAL FEDERALISM: HELPING THE STATES IN ATMANIRBHAR

Helping States → Tax devolution and grants

Corona = Union’s tax income greatly decreased but still Union has given the Tax Devolution and grants to the states, as per the figures announced in the Budget and Finance Commission report.

Helping States → increasing States’ Fiscal deficit limits

Constitution Article 239: States require union govt permission before borrowing money.

• Before: Union had kept states net borrowing ceiling @3% of Gross State Domestic Product (GSDP)
• After ATMANI: 3% limit → raised to 5% for 2020-21.

But this relaxation will be linked to State Govt doing reforms in the areas of:
o One Nation One Ration card scheme
o Ease of Doing Business
o Power distribution
o Urban Local Bodies

Question 48

Bodies under fiscal responsibility

Answer 48

• Expenditure Management Commission (2014)
• FinMin setup under Dr. Bimal Jalan.
• Gave suggestions on how to ⏬ fiscal deficit, how to ⏬ subsidy bill etc.
• Public Debt Management Agency (PDMA):
• RBI decides on the repo rate and also undertakes open market operation for buying and selling of G-sec.
• Most of the G-sec are purchased by public sector banks, insurance and pension funds.
• As Banking-regulator, the Reserve Bank can prescribe Statutory Liquidity Ratio (SLR) → which requires banks to keep a portion of their deposits in liquid assets like cash, gold, G-sec and other securities approved by RBI.
• So, this creates a ‘conflict of interest’ for RBI in its role as 1) Banking regulator vs 2) Public Debt manager.
• Budget-2015 proposed creating an independence Public Debt Management Agency (PDMA) to takeover these functions of RBI but RBI objected
• 2019: NITI Aayog Vice Chairman Rajiv Kumar again reiterated the need to setup PDMA.

Question 49

Discuss the need for setting up an independent fiscal council in india?

Answer 49

The Fiscal Council is an independent authority, usually setup by a law, to supervises the fiscal policy in the country.
e.g. Sweden, Hungary, & some other western countries. Its functions include:
✓ Monitoring Government’s receipt, expenditure, annual budget.
✓ Ensure that Government’s borrowing remains within the legally permitted limits.
✓ Recommend fiscal stimulus and fiscal prudence measures depending on the economic situation of the country.

Why do we need it in India?
Budgeting process in India suffers from following lacunas.
- Overestimation of tax receipts, Creative accounting and data dressing in the budget.
- If not revenue targets not achieved then
o Extra Budgetary Resources
o Fiscal repression of the households via LIC.
o Frequent changes in the FRBM goalposts.
- Engaging in Practices against the spirit of cooperative federalism:
o Imposition of cess/surcharge on Union taxes, to avoid FC devolution.
o Union irregularly releasing GST & Finance Commission Devolution/grants to State governments.
- India’s sovereign credit rating also ⏬ because of such mismanagement.

Therefore, NK Singh’s FRBM Review Panel (2017) and successive Finance Commissions have recommended setting up such an Independent Fiscal Council in India. because:

Existing Mechanism

• Parliamentary Committees such as Public Accounts, Estimates Committee etc. are made up of Members of Parliament, who may not have the technical expertise over economics and public finance.
• Comptroller and Auditor General (CAG) will audit the government Expenditure after the spending has taken place.
• Finance commission: Constituted every 5 yrs, stops functioning after submitting report. Until new body setup.

Whereas Fiscal Council

• technical experts
• continuously strive to keep the fiscal deficit under control.
• will function continuously round the year.

Conclusion
Considering the aforementioned issues, need of the hour is to set up an independent fiscal council,
- To make the Public Finance Management in India more prudent, transparent, accountable and efficient.
- To achieve UN SDG Goal #16: Develop effective, accountable and transparent institutions at all levels of governance.

Question 50

Under types of budget: What is revenue vs capital budget

Answer 50

Revenue budget:

• It is associated with the income and expenditure that are temporary in nature (1 year or less), and/or do not result into creation of permanent / capital / physical / financial assets.
• Taxation, revenue from selling goods and services, interest payment on previous loans, salaries, pension, subsidies and other non- developmental expenditure

Capital Budget

• associated with the income and expenditure that are of long term nature and/or results into creation of permanent / capital /financial assets, such as land, buildings, machinery, equipment, shares, bonds, G- sec.
• Borrowings, disinvestment, and expenditure on assets creation.

Question 51

❓MCQ. Which of the following is/are included in the capital budget of the Government of India? (Asked in UPSC-Pre-2016)
1. Expenditure on acquisition of assets like roads, buildings, machinery, etc,
2. Loans received from foreign governments
3. Loans and advances granted to the States and Union Territories
Ans Codes: (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

Answer 51

D

Question 52

Under types of budget: What is General budget vs railway budget?

Answer 52

• 1920-21: Acworth Committee recommends separate Railway Budget. This practice continued even after Independence, first the railway minister would present the Railway budget in parliament, and after a few days finance minister will present General Budget.
• NITI Aayog’s Bibek Debroy committee recommends its abolition because
• 1) No constitutional requirement
• 2) During coalition governments, Rail budget was used for populism, cheap fares which eroded the profitability of Railways.
• 3) during the British time, railway revenue used to be quite large compared to other sources of revenue, but after independence, Railway revenue is quite small compared to overall General budget- So it does not deserve a special presentation.

Therefore, the govt merged Railway budget with General budget from 2017

Question 53

Under types of budget: What is General budget vs railway budget?

Answer 53

is a method of classifying the expenditure side:

Plan (expenditure) budget:

• Central Plans (the Five-Year Plans)
• Central assistance for State Five Year Plans.
• It is further subdivided into
  1) revenue expenditure (e.g. teachers salary under Sarva Shiksha Abhiyan)
  2) capital expenditure (e.g. new school buildings to be constructed under Sarva Shiksha Abhiyan)

Non-Plan (Expenditure) Budget

• Expenditure related to general, economic and social services of the government; Interest payments, defence services, subsidies, salaries and pensions.
• It is also further subdivided into revenue expenditure (e.g. soldier salaries) and capital expenditure (e.g. Building new aircraft carrier).

Since Budget-2017, the govt stopped the practice of displaying the plan and non plan expenditure separately because (1) No such constitutional requirement (2) Government had dissolved the planning commission in 2014-15 (3) 12th Five Year Plan (FYP:2012-17) was ending in 2017 anyways.

Question 54

What is Budgeting and what are its types?

Answer 54

It is the process / strategy with which the budget is created.

Types
Traditional / Line-item Budgeting
Performance budgeting
Zero based budgeting
Sunset Budgeting
Gender budgeting

Question 55

What are Traditional / Line-item Budgeting
Performance budgeting
Zero based budgeting
Sunset Budgeting
Gender budgeting ?

Answer 55

They are types of budgeting.

Traditional / Line-item Budgeting
Simply calculating the income and expenditure without measuring the underlying benefit or performance
- Allot ₹ 10,000/- to buy a new bed in government hospital
- Allot ₹ 50,000 to buy a new computer in government department

Performance budgeting
calculating the income and expenditure tied with underlying benefit or performance
- Allot ₹ 50,000 to buy a new computer with target that it should result in 30% the faster clearance of RTI-applications compared to pen and paper based office system.
- Such budgeting helps measuring cost:benefit and efficiency.

Zero based budgeting
in Zero Based Budgeting the budget is viewed as a fresh exercise from zero base. So, each department has to justify its budget demands to finance ministry. E.g. if last year ₹ 50,000 crores given to education schemes but still 60% of class 5 kids cannot read class 2 books, then we’ll delete / modify that scheme.

Sunset Budgeting
In Sunset Budgeting, scheme are announced with deadline. e.g. MEITY to give MDR subsidy for a period of two years starting from 1/1/2018. Thus, this scheme will self destruct after deadline just like the sun will set after the sunset time.

Gender budgeting
This system was started from Budget-2005.
It is not a separate budget but rather within the general budget, FinMin will put a separate expenditure document showing women specific schemes, targets, and commitments- in two parts:
✓ 👩Part A = Women Specific Schemes, i.e. which have 100% allocation meant for women. E.g. Minority Affairs Ministry’s “Nai Roshni” scheme for Leadership Dev. in Minority Women. (💼Budget20: 28kcr. ⏬)
✓ 👩👦Part B = Pro Women Schemes, i.e. atleast 30% allocation meant for women. E.g. HRD Ministry → Samagra Shiksha for pre-nursey to Class12 both boys & girls covered.(💼Budget-2020: 1.1 Lcr⏫)

Question 56

What are TRIBAL SUB PLAN & SCSP under types of budget?

Answer 56

From 70s, Govt required individual ministries to earmark funds for SC/ST within their overall funds, under the titles:
A. “Scheduled Castes Sub-Plan (SCSP)” → Social Justice Ministry monitors via e-utthaan.gov.in

B. “Tribal Sub plan (TSP)” → Tribal Affairs Ministry monitors

Sidenote: Although not required by the Constitution, but Government also tables separate documents showing 1) allocation for children 2) allocation for NORTH EASTERN AREAs.

Question 57

What is output outcomes framework for schemes?

Answer 57

Started from Budget-2017 onwards, the FinMin uploads a document showing outlay output and outcomes for each ministry and department.

These are monitored by NITI Aayog. e.g.

Ministry & Scheme -MEITY → Pradhan Mantri Gramin Digital Saksharta Abhiyan (PMGDISHA)
Outlay- ₹ 400 crores
Output (Deliverables) - Give computer training to 5 crore persons in rural area
Outcome - Increased number of digitally literate persons in rural areas

Question 58

What is Lapsable funds and march rush?

Answer 58

Appropriation act allows the government to spend funds from consolidated fund of India for a period of one year (ending in 31st March).
- If any allotted funds remain unutilised, then by the ‘ rule of lapse ’, they must be returned (& government will have to again seek Parliament approval for the next
financial year using next appropriation bill).
- So, in March, there is a rush among the Govt organisations to spend money lest they’ve to return it back.

• 2017-18: Finance ministry issued directive that in “In the fourth quarter (Jan to March) and in the March-Month, Govt organizations shall not spend more than “x%” & “y%” of funds”. This helps controlling the March Rush.

Question 59

What is Non- Lapsable funds and no rush?

Answer 59

The money in such fund will not lapse on 31st March, so it can be used in future without getting another approval from parliament.

e. g. Department of economic affairs → Nirbhaya fund → women safety related projects.
- Criticism? because the fund is non lapsable, Departments become very lax in utilising it. Budget 2013 started Nirbhaya fund in the aftermath of Dec-2012 Gangrape @Delhi.

The successive budgets kept adding ₹ into it. By 2018: ~3000 crore but not even 50% utilized for any women safety activities.

• 2018: Defence ministry demands “ non lapsable defence modernization fund”, but Finance ministry rejected for similar same reason. ( money will remain unspent.)

Question 60

What are the types of schemes?

Answer 60

Previously hundreds of centrally sponsored schemes (CSS) with overlapping objectives and duplication of efforts.

2015-16, NITI Aayog forms Shivraj Singh Chouhan Panel for rationalization of CSS

Central Sector Schemes - ⏬(₹8.3 lakh cr)

• 100% funded by Union
• Examples: Urea Subsidy, MDR Subsidy, Jan Aushadhi Scheme, BharatNET, Pradhan Mantri Gramin Digital Saksharta Abhiyan (PMGDISHA) etc.
• In the union budgets, collectively more ₹₹ allotted for these type of schemes.

Centrally Sponsored Schemes - ⏫(₹3.4 lakh cr)

• States may have to bear some cost.
• Further subtypes:

1. Core of the Core
   a. Only 6 schemes: MGNREGA, NSoAP, Umbrella schemes for SC,ST,Minorities & other vulnerable groups. For these schemes, previous funding pattern will continue. NSoAP:100%
   b. Those schemes deal with social protection and social inclusion are given first priority in the funding for National Development Agenda
2. Core Scheme: e.g. PM Gram Sadak, PM Awas, Swachh Bharat, AMRUT & Smart cities etc.
   Here funding pattern could be 50:50, 60:40, 70:30, 75:25, 80:20 or 90:10 depending on a particular scheme and depending on whether it’s a general / special cat. state.

For any union territory without legislature: 100% funding by Union for any scheme in any category.

• To disburse scheme money & monitor it in effective manner, FinMin →Dept of Expenditure - Controller General of Accounts (CGA) → Public Financial Management System (PFMS) web portal.