UPSC Prelims 2002 · General Studies

Question 87: Economy and Social Development

With reference to the Indian Public Finance consider the following statements:

1.External liabilities reported in Union Budget are based on historical exchange rates.
2.The continued high borrowing has kept the real interest rates high in the economy.
3.The upward trend in the ratio of Fiscal Deficit to GDP in recent years has an adverse effect to private investments.
4.Interest payments is the single largest component of the non-plan revenue expenditure of the Union Government.

Which of these statements are correct?

a1, 2 and 3

b1 and 4

c2, 3 and 4

d1, 2, 3 and 4

AnswerThe answer is (c).

Statements 2, 3 and 4 are accepted. Persistent high government borrowing keeps real interest rates high; a rising ratio of fiscal deficit to GDP crowds out private investment; and interest payments are the single largest item of the Union Government's non-plan revenue expenditure. The given answer excludes statement 1, the one about valuing external liabilities in the Budget at historical exchange rates.

1. Excluded by the given answer.
2. High government borrowing keeps real interest rates high.
3. A rising fiscal deficit to GDP ratio crowds out private investment.
4. Interest payments are the largest part of non-plan revenue expenditure.

How you could have got this

If you were sure statement 1 is not correct, (a), (b) and (d) go: each of them includes 1.
What you needed to know: Excluded by the given answer.

Only (c) is left. You didn’t need statements 2, 3 or 4.

This follows an unofficial answer: UPSC has not published its key for this year, and if that answer is wrong, so is this path.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong

(a) Includes statement 1 but leaves out statement 4, which is true.
(b) Statements 1 and 4 only; leaves out 2 and 3, which are also true.
(c) Right: statements 2, 3 and 4.
(d) Includes statement 1, which the given answer excludes.

Worth knowing: Budget documents have traditionally valued external liabilities at historical exchange rates, so statement 1 is contestable and (d) arguable.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2002, General Studies. UPSC's own paper isn't online; the words are from a published compilation. The paper on upsc.gov.in.