Previous Year Question

Fiscal Deficit is the difference between the Government’s total expenditure and its total non-debt receipts:

Fiscal Deficit = Total Expenditure - Revenue Receipts - Non-debt Capital Receipts

It can therefore be controlled principally by:

• Reducing or rationalising Government expenditure; or

• Increasing Revenue or Non-debt Capital Receipts.

Statement 1 is incorrect

FDI is an equity investment made by a foreign company or investor in an Indian enterprise or project.

FDI inflows may:

• Increase investment and productive capacity.

• Promote employment and technology transfer.

• Produce a Financial Account inflow in the Balance of Payments.

• Increase future Tax Revenue.

However, an ordinary FDI inflow is not a direct Budget Receipt of the Central Government. Merely encouraging FDI is therefore not a direct measure for controlling the Fiscal Deficit.

A foreign investor’s purchase of Government equity in a CPSE may generate disinvestment proceeds, but that is different from an ordinary private-sector FDI inflow.

Therefore, Statement 1 is incorrect.

Statement 2 is correct

Greater private participation or privatisation in higher education can reduce the Government’s financial responsibility for establishing and operating additional institutions.

It may reduce Government:

• Capital Expenditure;

• Revenue Expenditure on salaries;

• Operational and maintenance expenses; and

• Grants.

It can therefore be used as a possible expenditure-reduction measure for controlling the Fiscal Deficit.

The question concerns only the fiscal effect. It does not imply that complete privatisation of higher education is necessarily desirable from a social or educational perspective. Affordability, access and equity remain separate policy concerns.

Statement 3 is correct

Downsizing the bureaucracy can reduce recurring expenditure on:

• Salaries and allowances

• Office expenses

• Administrative overhead

• Future pension liabilities

• Redundant departments and posts

If implemented by eliminating duplication and improving administrative efficiency, it can reduce Revenue Expenditure and pressure on the Fiscal Deficit.

Therefore, Statement 3 is correct.

Statement 4 is correct

Money received by the Government from selling equity in a PSU or CPSE is treated as a Disinvestment Receipt. It is classified as a Non-debt Capital Receipt.

Disinvestment:

• Provides funds without creating a fresh repayment liability;

• Increases Non-debt Capital Receipts; and

• Can reduce borrowing requirements and the Fiscal Deficit for a given level of expenditure.

However, repeatedly selling assets to finance Revenue Expenditure does not constitute sustainable fiscal correction. Long-term consolidation also requires better expenditure quality, tax buoyancy and debt sustainability.