Public Economics Questions and Answers

Answer: A

Both statements are correct, and the reason is taken as the explanation. In 2011-12 the Central Government was not likely to raise the target of Rs. 40,000 crore through disinvestment, since market conditions were poor. A policy of more public borrowing to bridge the fiscal gap then follows as the way to fill the shortfall.

Option A is the keyed one. Option B denies the link, option C calls the reason incorrect, and option D calls the assertion incorrect, which is not in line with the facts for that year.

Answer: A

The keyed order is IV, III, II, I: the Taxation Enquiry Commission (1953-54), the Indian Tax Reform report of a survey (Kaldor, 1956), then the report on the rationalisation and simplification of the tax structure, and the Direct Taxes Enquiry Committee final report. This is option A.

The Direct Taxes Enquiry Committee's final report is usually dated 1971, which would put it before the reports of the 1990s and later, so the keyed order is open to doubt on that point, but option A is the key and the other orders start with later reports.

Answer: B

The most important characteristic of a federation, in the keyed view, is the non-correspondence between the functions and the resources of the Centre and the State governments: States have wide functions but their own resources fall short, which gives a vertical fiscal imbalance and the need for transfers.

The supremacy of the Centre is a feature of a unitary or strongly centralised system, a perfect match between functions and resources would make transfers unnecessary, and 'none of the above' is not right since option B is the answer.

Answer: A

The fiscal reform measures in India included an increase in the tax-GDP ratio (I), expenditure management (II) and the control of the revenue deficit and fiscal deficit (III). So option A is right.

Increasing liquidity in the economy (IV) is a matter of monetary policy and is not a fiscal reform measure, so options B, C and D, which include it, are wrong.

Answer: C

In calculating the buoyancy of a tax we consider both automatic changes and discretionary changes. Buoyancy is the ratio of the percentage change in tax revenue to the percentage change in national income, and it counts every change in revenue, whether it comes from the automatic response of the tax base to income or from deliberate changes in rates and coverage. The elasticity of a tax, by contrast, covers only the automatic changes. So options A, B and D are wrong and the keyed answer is both, option C.

Answer: D

Fiscal policy relates to all of the government decisions listed: taxation, government spending, government borrowing and public debt. It is the use of the budget, that is of receipts, expenditure and the way a deficit is financed, to influence the level of output, employment and prices. Since each of I, II, III and IV is a part of fiscal policy, the keyed answer is that all the above are correct, option D. Options A, B and C leave out at least one of the items.

Answer: A

Both statements are correct and the reason explains the assertion. In the period 2004-05 to 2007-08 India went through a process of fiscal consolidation, with the fiscal and revenue deficits falling as a share of GDP, under the Fiscal Responsibility and Budget Management Act. The buoyancy in tax revenue during these years, with tax receipts growing faster than GDP, is what made the reduction in deficits possible. So option A is right. Option B says R is not the explanation, and options C and D call one of them incorrect.

Answer: A

The sequence of the taxes is land revenue, sales tax, MODVAT and service tax, which is I, II, III, IV, option A. Land revenue is the oldest tax in India. Sales tax was levied by the provinces in the 1930s and 1940s. MODVAT, the modified value added tax on inputs, was brought in on the central excise in 1986, and service tax was introduced in 1994. Options B, C and D put service tax or MODVAT before sales tax or land revenue, so they are wrong.

Answer: A

The gross fiscal deficit, revenue deficit and primary deficit of the Central Government as a percentage of GDP were all highest in 2008-09 among the years offered. In that year the government gave stimulus packages after the global financial crisis, cut taxes and raised expenditure on subsidies and loan waivers, while revenue fell, so all three deficit measures jumped. The years 2005-06, 2006-07 and 2007-08 were years of fiscal consolidation under the FRBM Act, with falling deficits. The keyed answer is 2008-09, option A.

Answer: C

Interest payments were likely to be the most significant single item of expenditure of the Central Government in 2011-12. They are the cost of servicing the accumulated public debt and take a large share of the revenue expenditure. Subsidies, defence and the States' share in central taxes were each smaller in the Budget, though the share of States is large as a transfer. The keyed answer is interest, option C.