UPSC Prelims 2010 · General Studies

Question 67: Economy and Social Development

In the context of governance, consider the following :

1.Encouraging Foreign Direct Investment inflows
2.Privatization of higher educational Institutions
3.Down-sizing of bureaucracy
4.Selling/offloading the shares of Public Sector Undertakings

Which of the above can be used as measures to control the fiscal deficit in India ?

a1, 2 and 3

b2, 3 and 4

c1, 2 and 4

d3 and 4 only

AnswerThe answer is (b).

The fiscal deficit is the government's total borrowing need, so it falls when government spending falls or non-debt receipts rise. Privatising higher education institutions and downsizing the bureaucracy cut government spending; selling shares of public sector undertakings (disinvestment) brings in non-debt capital receipts. FDI inflows bring foreign capital to firms but are not government revenue, so they do not directly reduce the fiscal deficit. Remember: fiscal deficit control = cut expenditure or raise non-debt receipts.

1. FDI brings private foreign capital; it is not government revenue or a cut in spending.
2. Privatising institutions reduces the government's spending on them.
3. A smaller bureaucracy lowers the wage and pension bill.
4. Disinvestment raises non-debt capital receipts, reducing borrowing.

How you could have got this

If you were sure statement 1 is not correct, (a) and (c) go: each of them includes 1.
What you needed to know: FDI brings private foreign capital; it is not government revenue or a cut in spending.
Then, if you were sure statement 2 is correct, (d) goes: it leaves 2 out.
What you needed to know: Privatising institutions reduces the government's spending on them.

Only (b) is left. You didn’t need statements 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) FDI inflows do not directly reduce the fiscal deficit.
(b) Right: privatisation, downsizing and disinvestment cut spending or raise receipts.
(c) FDI inflows are not a fiscal measure, so this is wrong.
(d) Privatisation of higher education also cuts government spending, so this leaves out a valid measure.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2010, General Studies, Series A. The paper on upsc.gov.in.