Directions: The following four (4) items consist of two statements, Statement I and Statement II. Examine these two statements carefully and select the correct answer using the code given below. Code: (a) Both the statements are individually true and Statement II is the correct explanation of Statement I (b) Both the statements are individually true but Statement II is not the correct explanation of Statement I (c) Statement I is true but Statement II is false (d) Statement I is false but Statement II is true
Statement I: The overall fiscal deficit of the States in India during 2017-2018 stayed above the FRBM threshold level of 3 percent for the third successive year Statement II:
d
Analyzing State Fiscal Deficits and FRBM in India
This question asks us to evaluate two statements regarding the fiscal deficit of States in India, specifically focusing on the period around 2017-2018 and the performance of Special Category States.
Let's break down each statement and examine its truthfulness based on available economic data for that period.
Statement I: Overall Fiscal Deficit of States vs. FRBM Threshold
Statement I claims that the overall fiscal deficit of the States in India during 2017-2018 stayed above the Fiscal Responsibility and Budget Management (FRBM) threshold level of 3 percent of GSDP (Gross State Domestic Product) for the third successive year.
- The FRBM Act for states typically mandates a fiscal deficit limit, often targeted at 3% of GSDP. This is a key indicator of fiscal health.
- To verify this statement, we need to look at the combined fiscal deficit data for all Indian states for the years leading up to and including 2017-2018.
- According to data from sources like the Reserve Bank of India (RBI) reports on state finances, the combined fiscal deficit of states as a percentage of GSDP was around 3.1% in 2016-2017.
- However, in 2017-2018, the combined fiscal deficit of states showed improvement and came down significantly, falling below the 3% threshold. Estimates place it around 2.5% to 2.7% of GSDP for 2017-2018.
- Since the overall fiscal deficit for 2017-2018 fell below 3%, the statement that it "stayed above the FRBM threshold level of 3 percent for the third successive year" ending in 2017-2018 is incorrect.
Therefore, Statement I is false.
Statement II: Fiscal Deficit of Special Category States
Statement II claims that Special Category States had run up a higher level of fiscal deficit in 2017-2018 compared to 2016-2017.
- Special Category Status is granted to states facing specific disadvantages, such as hilly terrain, strategic international borders, economic and infrastructural backwardness, and non-viable state finances. These states often rely heavily on central assistance.
- Fiscal deficit trends for Special Category States can differ from the overall trend for all states.
- Data for specific groups of states, like Special Category States, indicates that their fiscal situation can be more volatile. Reports and studies focusing on state finances around that period suggest that some of these states faced increasing fiscal pressures, potentially leading to a higher combined or average fiscal deficit level in 2017-2018 compared to the previous year.
Therefore, Statement II is true.
Conclusion
Based on the analysis:
- Statement I is false because the overall fiscal deficit of states came below 3% in 2017-2018, breaking the trend of being above 3%.
- Statement II is true, as Special Category States collectively or on average experienced a higher fiscal deficit in 2017-2018 compared to 2016-2017.
This combination corresponds to the option where Statement I is false but Statement II is true.
| Statement | Evaluation | Reasoning |
|---|---|---|
| Statement I: Overall fiscal deficit of States in India during 2017-2018 stayed above 3% FRBM threshold for the third successive year. | False | Combined state fiscal deficit fell below 3% in 2017-2018. |
| Statement II: Special Category States had run up a higher level of fiscal deficit in 2017-2018 compared to 2016-2017. | True | Data suggests fiscal deficit increased for this group in 2017-2018. |
The correct answer is the one indicating Statement I is false and Statement II is true.
The final answer is option (d).
Revision Table: Key Terms Explained
| Term | Explanation |
|---|---|
| Fiscal Deficit | The difference between a government's total expenditure and its total receipts (excluding borrowing). It indicates the total borrowing required by the government. |
| FRBM Act | Fiscal Responsibility and Budget Management Act. Legislations at the central and state levels aimed at ensuring fiscal discipline by setting targets for fiscal indicators like revenue deficit and fiscal deficit. |
| GSDP | Gross State Domestic Product. The total value of goods and services produced within the geographical boundaries of a state during a specified period. Used as a base to measure fiscal health indicators like fiscal deficit percentage. |
| Special Category States | States in India granted special status based on specific criteria (like difficult terrain, strategic location, economic backwardness) to receive preferential treatment, including higher central government grants and tax benefits. |
Additional Information: State Finances and Fiscal Management
Understanding state finances is crucial for comprehending India's fiscal architecture. States manage their budgets, revenues (like State GST, sales tax on petroleum, stamp duty), and expenditures (on health, education, infrastructure). The FRBM framework plays a vital role in maintaining fiscal stability across states.
- FRBM Compliance: While the target is often 3% of GSDP for fiscal deficit, states can sometimes get flexibility, especially in times of economic stress or for specific development expenditures, usually with permission from the central government or recommendations from the Finance Commission.
- Sources of State Revenue: States earn revenue through taxes (like State GST, VAT on petroleum, excise duty on liquor, stamp duty, motor vehicle tax) and non-tax sources (like interest receipts, dividends, fees). Grants from the Central Government, often based on Finance Commission recommendations, are also a significant source, particularly for Special Category States.
- Special Category Status Implications: States with Special Category Status often receive higher grants (e.g., 90% central assistance as grant, 10% as loan for Centrally Sponsored Schemes, compared to 60:40 or 50:50 ratio for general category states). This is intended to help them overcome structural disadvantages and manage their finances, though they may still face significant fiscal challenges.
- Fiscal Challenges: States often face pressure from committed expenditures (like salaries, pensions, interest payments) which can limit their ability to spend on capital projects. Managing debt levels and ensuring sustainable borrowing are key challenges.
Similar Questions
Which one of the following is not a function of money?
The excess of total expenditure of Government over its total receipts, excluding borrowings, is known as
The Wholesale Price Inflation has increased in India during 2021-2022 due to which of the following factors?
1. Sharp increase in international prices of crude oil
2. Decrease in economic activity post - Covid
3. Disruption of global supply chain
4. High freight cost
Select the correct answer using the code given. below:
What would be the impact on the economy if people start holding more currency in hand and less in deposits?
Which one of the following expenditures is subtracted from Fiscal Deficit to arrive at Primary Deficit?
Which of the following is / are the effects of devaluation or depreciation of currency?
1. It leads to increase in imports and decrease in exports.
2. It leads to increase in exports and decrease in imports.
3. It leads to increase in domestic inflation.
4. It leads to decrease in domestic inflation.
Select the correct answer using the code given below:Which one of the following statements about a borrower from a Microfinance Company is not correct?
Which one of the following factors is not considered in determining the Minimum Support Price (MSP) in India?
According to the latest Reserve Bank of India study on State finances, capital spending is maximum on ________.
With regard to the cabinet decision in July 2018, the percentage increase in Minimum Support Price (MSP) is maximum in which one of the following crops?
Important Questions from Money and Banking
Which one of the following is likely to be the most inflationary in its effects?
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
Consider the following statements :
The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic exports in the foreign markets
2. increase the foreign value of domestic currency
3. improves the trade balance
Which of the above statements is/are correct?
Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.
With reference to “Urban Cooperative Banks" in India, consider the following statements :
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966
Which of the statements given above is/are correct?
