[DAY 33] 60 DAY RAPID REVISION (RaRe) SERIES for UPSC Prelims 2022 – ECONOMICS, CURRENT AFFAIRS & CSAT; Test Series, Videos & Notes!

Solution (a)

Basic Info:

Solution (a)

Basic Info:

Primary deficit indicates the amount of borrowing which the government needs excluding the interest component. Fiscal deficit, on the other hand, is the difference between the government’s total expenditure and total income.

Primary deficit can be calculated by deducting interest payments for the borrowings from the current year’s fiscal deficit. Fiscal deficit can be calculated by finding the difference between the total income and total expenditure of the government.

A reduction in primary deficit is reflective of government’s efforts at bridging the fiscal gap during a financial year.

Solution (b)

Basic Info:

The term ‘deficit financing’ is used to denote the direct addition to gross national expenditure through budget deficits, whether the deficits are on revenue or on capital account.

Deficit financing in India is said to occur when the Union Government’s current budget deficit is covered by the withdrawal of cash balances of the government and by borrowing money from the Reserve Bank of India.

Thus, in both cases, ‘new money’ comes into circulation. It is to be remembered here that
government borrowing from the public by selling bonds is not to be considered as deficit financing.

It is said that deficit financing is inherently inflationary. Since deficit financing raises aggregate
expenditure and, hence, increases aggregate demand, the danger of inflation looms large.

During inflation, private investors go on investing more and more with the hope of earning
additional profits. Seeing more profits, producers would be encouraged to reinvest their
savings and accumulated profits as well as increases the employment rate. Such investment
leads to an increase in income thereby setting the process of economic development rolling.

Solution (d)

Basic Info:

Revenue deficit is the gap between the consumption expenditure (revenue expenditure) of the Government (Union or the State Governments) and its current revenues (revenue receipts). It also indicates the extent to which the government has borrowed to finance the current expenditure.

The Effective Revenue Deficit does not include revenue expenditures made in the form of grants for capital asset creation.

A new strategy to capture the ‘effective revenue deficit’ was introduced in Budget 2011-12 which excludes those revenue expenditures (or transfers) in the form of grants for the creation of capital assets. Effective Revenue Deficit was established as a fiscal metric in 2012-13.

Effective Revenue Deficit = Revenue Deficit – Grants in aid for capital assets

Solution (a)

Basic Info:

Capital Budget

The Capital Budget covers non-recurring transactions through capital expenditures and incomes through the sale of assets. These refer to receipts that reduce assets for a government and increase financial liabilities.

Thus it is an account of assets as well as liabilities of the central government.

Capital Receipts: All those receipts of the government which either creates liability or reduces financial asset are capital receipts.

Examples:

• Market borrowings by the government from the public
• Borrowings from the RBI
• Borrowings from commercial banks or financial institutions through the sale of Treasury-bills
• Loans received from foreign governments or international financial institutions, post office savings, post office saving certificates, and PSU’s Disinvestment.

Capital Expenditure: All those expenditures of the government which either result in the creation of physical/financial assets or reduction in financial liabilities.

Examples:

• Purchase of land, machinery, building, and equipments
• Investment in shares
• Loans and advances by the central government to state governments and UTs.
• Interest paid on the loans taken by the Government is part of the revenue account of the Budget.

Solution (c)

Basic Info:

Responsibility and Budget Management Act, 2003 (FRBMA) mandates the Central Government to reduce the fiscal deficit as well as revenue deficit.

The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms, binding the government through an institutional framework to pursue a prudent fiscal policy.

The central government must ensure intergenerational equity and long-term macro-economic stability by achieving sufficient revenue surplus, removing fiscal obstacles to monetary policy and effective debt management by limiting deficits and borrowing. The rules under the Act were notified with effect from July 2004.

Solution (c)

Basic Info:

Tax revenue is charged on income earned by an individual or an entity (direct tax) and on the value of the transaction of goods and services (indirect tax). On the other hand, non-tax revenue is charged against services provided by the government. It also includes interest charged on loans advanced by the government for various purposes.

– Non-tax revenue includes:

Interest: It comprises of interest of loans given to states and union territories for reasons like non-plan schemes (e.g. flood control) and planned schemes with maturity period of 20 years such as modernization of police forces and also interest on loans advanced to Public Sector Enterprises (PSEs), Port Trusts and other statutory bodies, etc.

Dividends and profits: This includes dividends and profits from PSEs as well as the transfer of
surplus from Reserve Bank of India (RBI).Petroleum license: This includes fees to get the exclusive right for exploration in a particular region. Such fees may be in the form of royalty, share of the profit earned from contact areas during a specific period, Petroleum Exploration License (PEL) fee or Production Level Payment (PLP).

Power supply fees: This includes fees received by the Central Electricity Authority from the supply of power under the Electricity (Supply) Act.

Fees for Communication Services: This mainly includes the license fees from telecom operators on account of spectrum usage charges that licensed Telecom Service Providers to pay to the Department of Telecom (DoT).

Broadcasting fees: It includes license fees paid by DTH operators, commercial TV services,
commercial FM radio services, etc.

Road, Bridges usage fees: This includes receipts through toll plazas on account of the usage of national highways, permanent bridges, etc.

Examination fees: This includes fees paid by applicants of competitive examinations conducted by the Union Public Service Commission (UPSC) and Staff Selection Commission (SSC) to fill up vacancies in government offices.

Fee for police services: This includes fee received for supplying central police forces to state
governments and other parties like Central Industrial Police Force (CISF) to industries etc.

Sale of stationery, gazettes, etc: This includes receipts under ‘Stationery and Printing’ relating to the sale of stationery, gazettes, government publications, etc.

Fee for Administrative Services: This includes fees received for providing services like audit
services, issuance of passport, visa, etc.

Receipts relating to Defence Services: This relates to services provided through Canteen Stores Department (CSD).

Excise duty is a form of tax imposed on goods for their production, licensing and sale. It is a component of tax revenue.

Solution (d)

Basic Info:

Public debt is the total amount borrowed by the Government to finance its development activities. It includes:

• Dated government securities or G-secs.
• Treasury Bills or T-bills
• External Assistance
• Short term borrowings

Solution (a)

Basic Info:

The Financial Stability and Development Council (FSDC) was set up by the Government as the apex level forum in December 2010.

The objective of FSDC is to strengthen and institutionalize the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.

The Chairman of the Council is the Finance Minister. Its members include the heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA), Finance Secretary and/or Secretary, Department of Economic Affairs (DEA), Secretary, Department of Financial Services (DFS), and Chief Economic Adviser.

The Raghuram Rajan committee (2008) on financial sector reforms first proposed the creation of FSDC.

Solution (c)

Basic Info:

Fiscal drag happens when incomes rise due to wages following prices higher pushes or drags millions of taxpayers into the higher marginal tax rate brackets. Fiscal drag has the effect of raising government tax revenue without raising tax rates.

Fiscal drag is normally associated with progressive tax rates. Because of progressive taxes, the government will get more taxes when the economy is booming. This also helps slow the rate of increase in demand, reducing the pace of growth, making it less likely to result in higher inflation. Thus fiscal drag is an automatic stabilizer, as it acts naturally to keep demand stable.

Solution (c)

Basic Info:  Micro-insurance policies are a special category of insurance policies created to
promote insurance coverage among economically vulnerable sections of society.

These policies are regulated by the Insurance Regulatory Development Authority of India (IRDA).

Micro insurance can be either a general insurance policy (which can insure health, belongings, house, tools, personal accident contract, livestock etc) or life insurance policy with a sum assured of Rs 50,000 or less. They can be on an individual or group basis.

Insurers can offer composite covers or package products that include life and general insurance covers together.

Microinsurance business is done through the following intermediaries in India:

o Non-Government Organisations
o Self-Help Groups
o Micro-Finance Institutions

Solution (b)

Basic Info:

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period.

The process of zero-based budgeting starts from a “zero base,” and every scheme within the budget is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

The primary purpose of zero-based budgeting is the termination of activities which have become irrelevant.

– Outcome Budgeting: It is the practice of developing budgets based on the relationship between funding and expected results. It enhances visibility into how government policies translate into spending and focus on the outcomes of a funded activity i.e. the quality or effectiveness of services provided. It aims to align programs and services with prioritized government outcomes.

– Incremental Budgeting: An incremental budget is a budget prepared using a previous period’s budget or actual performance as a basis with incremental amounts added for the new budget period.

Solution (a)

Basic Info:

Fiscal slippage in simple terms is any deviation in expenditure from the expected. When the
Government’s expenditure surpasses the expected or estimated levels, the nation might face the threat of fiscal slippage. So Government actions that increase the expenditure will lead to the condition of fiscal slippage.

Examples include

• Income support schemes
• Farm loan waivers as such schemes lead to extra government expenditure.

Disinvestment proceeds increase the capital receipts of the Government. So, it will have the effect of the prevention of the situation of fiscal slippage.

Solution (a)

Basic Info:

Non-debt creating capital receipts are those money receipts which are received by the government from the sale of old assets. These receipts are not treated as liabilities of the government. Examples of non-debt creating capital receipts are recovery of loans, proceeds from sale of public enterprises, etc.

If the Govt. issues securities (treasury bills, dated securities or cash management bills) then it will be debt creating capital receipts. And money received in Public Account is also liability for Govt. of India and are considered as debt creating capital receipts

Solution (a)

Basic Info:

Revenue receipts are those that do not produce any liabilities and do not result in a claim against the government. 

These revenue receipts are non-redeemable and are divided into two groups: tax revenue and non-tax revenue.

Tax revenues are the most important components of revenue receipts, which have been divided into direct taxes, enterprises, and indirect taxes such as customs duties, excise taxes, and service taxes for the long period.

Non-tax revenues, on the other hand, are recurrent income generated by the government from sources other than taxes.

Solution (c)

Basic Info:

Tax buoyancy explains this relationship between the changes in the government’s tax revenue growth and the changes in GDP.

It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

Tax buoyancy depends largely on –

• The size of the tax base
• The friendliness of the tax administration
• The reasonableness and simplicity of the tax rates

Solution (c)

Basic Info:

Progressive tax is the one where the tax rate increases with the taxpayer’s income. The correct interpretation is that the tax liability for a taxpayer increases with his income in terms of proportion of income and in absolute amount.

In the case of regressive tax, the tax rate decreases with increase in income.  Here, the tax liability of the taxpayer decreases with increase in his income. Or in other words, the proportion of his income to be paid as tax decreases with increase in income.

The tax rates may be proportional as well. Here, tax rate is same for all slabs of income.

Solution (c)

Basic Info:  NITI Aayog is functionally divided into various Verticals that are responsible for examining sectoral issues and priorities for national development and economic growth.

NITI Aayog’s entire gamut of activities is divided into two main hubs: Team India and Knowledge and Innovation. The two hubs are at the core of NITI Aayog’s efficient functioning.

The Team India Hub carries out the mandate of fostering cooperative federalism and designing policy and programme frameworks. It provides requisite coordination and support in NITI Aayog’s engagement with States.

The Knowledge and Innovation Hub maintains a state-of-the-art resource centre, a repository of research on good governance and best practices, provides advice and encourages partnerships with key stakeholders, including colleges, universities, think tanks and non-governmental organizations at home and abroad.

Solution (a)

Basic Info:

Compensation Cess:

GST compensation is paid out of Compensation Cess every two months by the Centre to states.

It was specified by the GST (Compensation to States) Act, 2017.

States are guaranteed compensation for any revenue shortfall below 14% growth (base year 2015-16) for the first five years ending 2022.

Solution (c)

Basic Info:

Tax Terrorism essentially means the undue exercise of power by tax authorities to levy taxes using legal or extra-legal means.

Tax terrorism is an outcome of:

• Complex tax structure — Numerous taxes apply even on seemingly simple transactions. Such a web of taxes acts adversely to smooth flow of business.
• Ambiguity in laws — This bends the law in favour of those who implement it. Vague definitions have led to disputes over the applicability of Minimum Alternate Tax, Capital gains tax, etc. in cases like the Vodafone and Cairn Energy Plc.
• High imbalance — The IT Act allows CBDT to send notices just based on suspicion that one has under-reported his income or miscalculated taxes. Such discretion on the authorities, at times, is misused.

Solution (b)

Statement Analysis

Context – Cabinet extended the tenure of NCSK for three years.

Solution (c)

Statement Analysis:

 Context – ISFR 2021 was released

Solution (a)

The Border Security Force (BSF) launched “Operation Sard Hawa” on the western international border of Rajasthan. The Operations aims to check the instances of infiltration due to the dense fog cover in the region and increase security on the border areas in Jaisalmer.

Context – The week-long operation has been launched on 21 January 2021 and will continue till 27 January 2021, keeping in view Republic Day of India.

Solution (d)

Statement Analysis: 

 Context – Census and NPR were put off till September 2022

Solution (a)

Statement Analysis:

 Context – Line of Actual Control was in news.

Solution (b)

First alloy, ratios are 3: 4: 1 = 8

Second alloy, ratios are 5: 4: 3 = 12

Multiplying the first alloy by 1.5 to make it equal

First alloy, ratios are 4.5: 6: 1.5 = 12

Second alloy, ratios are 5: 4: 3 = 12

Adding both, Brass : Iron : Tin : Lead, 4.5 : 11 : 5.5 : 3 = 24

So, the ratio of Lead to the total = 3/24 = 1/8

Solution (a)

Using alligation method,

Quantity 1 gold              Quantity 2 gold

24                                      32

30

32-30= 2                             30-24 = 6

2: 6 = 1:3

Solution (d)

Let, Ostriches = x, Rabbit = y

As, Ostich has 2 legs and rabbit has 4 legs,

2x + 4y = 460 …1

Both have one head,

x + y = 160

2x + 2y =320 …. 2

Equation 1 – Equation 2

2y = 140

y = 70.

Solution (c)

Pure milk = 54 paise per litre

Mixture with 8 litre of water = 45 paise per litre

Applying the rule of alligation,

Water                    Pure milk

• 54

45

54-45=9                45-0=45

Therefore, Water : Milk = 9 : 45 = 1 : 5

Quantity of milk in mixture is 8 * 5 = 40 litre

Solution (a)

Statement 2 and Statement 3 strengthen the argument for renewable energy.

Statement 1 is correct. It weakens the argument as the whole point of increasing the share of renewable energy in the energy sector is to reduce environmental degradation in the long run.

Hence, option a is correct.