Q1. A government has been running persistent deficit budgets year after year. Which of the following actions would help in reducing the deficit?
- Reducing revenue expenditure
- Introducing new welfare schemes
- Rationalising subsidies
- Expanding government-run industries
How many of the above will help in reducing the deficit?
(a) Only one
(b) Only two
(c) All four
(d) None
Q1. (b) Only two
Explanation
- Reducing revenue expenditure — Helps
Cuts recurring, consumption-type spending → lowers deficit. - Introducing new welfare schemes — Does NOT help
Adds fresh revenue commitments → deficit widens. - Rationalising subsidies — Helps
Targeting/leakage reduction → saves expenditure → deficit falls. - Expanding government-run industries — Does NOT help (in the short run)
Requires capital outlay + operational support → may increase deficit initially.
👉 Measures that reduce deficit = (1) and (3).
Q2. Consider the following
- Primary deficit is obtained by subtracting interest payments on past borrowings from the current year’s fiscal deficit.
- A declining primary deficit indicates improvement in fiscal health, as it reflects reduced borrowing for non-interest expenditure.
- A zero primary deficit implies that the government is borrowing only to service interest liabilities on earlier debt.
- Primary deficit is always negative in economies with a high debt-to-GDP ratio.
Which of the above statements are correct?
(a) 1, 2 and 3 only
(b) 2 and 4 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4
Q2. (a) 1, 2 and 3 only
Explanation
- 1 — Correct
Primary Deficit = Fiscal Deficit − Interest Payments. - 2 — Correct
Declining primary deficit → lower borrowing for non-interest spending → better fiscal discipline. - 3 — Correct
Zero primary deficit → borrowing only to pay interest on past debt (no fresh primary gap). - 4 — Incorrect
Primary deficit is not always negative, even in high-debt economies; depends on budget stance, not debt ratio.
👉 Statements 1, 2 and 3 are correct.
Q3. Consider the following
- External aid brings in foreign exchange, which can also help in managing the balance of payments, apart from supporting development expenditure.
- External aid does not create a crowding-out effect in domestic financial markets and is favourable for domestic borrowers.
Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) None
Q3. (c) Both 1 and 2
Explanation
- 1 — Correct
External aid brings foreign exchange inflows → supports development spending + BoP cushion. - 2 — Correct
Since funds come from abroad, they do not compete with domestic borrowers → no crowding-out in local credit markets.
👉 Both statements are correct.
Q4. Match the following types of deficits with the respective components included in their calculation:
| Type of Deficit | Component Included |
| 1. Fiscal Deficit | Includes all capital receipts of the Central Government |
| 2. Revenue Deficit | Includes profits of Central Public Sector Undertakings (CPSUs) |
| 3. Effective Revenue Deficit | Includes grants given by the Central Government to States for creation of capital assets |
How many of the above pairs are correctly matched?
(a) Only one pair
(b) Only two pairs
(c) All three pairs
(d) None of the above
Q4. (b) Only two pairs
(Standard meaning of deficit concepts — apply elimination logic)
Correct interpretation
- Fiscal Deficit → includes all capital receipts + borrowings ✔
- Revenue Deficit → does NOT include CPSU profits ✘ (those are non-tax revenue entries, not a defining component)
- Effective Revenue Deficit → excludes grant-based capital-asset creation transfers to states ✔
👉 Two pairs are correctly matched.
Q5. “Central Government Debt” includes which of the following?
- Outstanding liabilities under the Consolidated Fund of India
- Outstanding liabilities in the Public Account of India
- Off-budget liabilities
- Contingent liabilities arising from guarantees issued by the Central Government
- Borrowings by public sector enterprises undertaken on behalf of the government
- Short-term Treasury borrowings raised for liquidity management
Select the correct answer using the code below:
(a) 1, 2, 3, 4 and 6 only
(b) 2, 3, 4 and 5 only
(c) 1, 2, 3, 5 and 6 only
(d) 2, 3, 5 and 6 only
Q5. (c) 1, 2, 3, 5 and 6 only
Explanation
Included in Central Government Debt (broad measure):
- 1 — Liabilities under the Consolidated Fund ✔ (core sovereign debt)
- 2 — Liabilities in the Public Account ✔ (small savings, PF, etc.)
- 3 — Off-budget liabilities ✔ (food subsidy borrowing, etc.)
- 5 — PSU borrowings on behalf of Government ✔ (quasi-sovereign debt)
- 6 — Short-term treasury borrowings ✔ (cash-management)
Not included as debt stock
- 4 — Contingent liabilities (guarantees) ✘
These are potential obligations, recognised only if invoked → not counted as outstanding debt.
👉 Correct code: 1, 2, 3, 5, and 6 only.
