Daily Quiz: UPSC Prelims Marathon – April 7, 2020

All expenditures incurred by the government are either of revenue kind or current kind or compulsive kind. The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a productive process or running a government. A broad category of things that fall under such expenditures in India are:

• Interest payment by the government on the internal and external loans;
• Salaries, Pension and Provident Fund paid by the government to government employees;
• Subsidies forwarded to all sectors by the government;
• Defense expenditures by the government;
• Postal Deficits of the government;
• Law and order expenditures (i.e., police & paramilitary);
• Expenditures on social services (includes all social sector expenditures as education, health care, social security, poverty alleviation, etc.) and general services (tax collection, etc.);
• Grants given by the government to Indian states and foreign countries.

India started the politically and socially painful process of fiscal reforms, a step towards fiscal consolidation. A number of steps were taken by the government at the Centre in this direction and there had been incessant attempts to do the same in the states’ public finances too. Major highlights in this direction can be summed up as given below:

Policy initiatives towards cutting revenue deficits:

• Cutting down the burden of salaries, pensions and the PFs (downsizing/ right-sizing of the government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension reforms-PFRDA, etc.);
• Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilizers, sugar, drugs to be rationalised, it was done with mixed successes);
• Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment of external debts, debt swaps, promoting external lending, minimal dependence on costlier external borrowings, etc.);
• General Services to be motivated towards profit with subsidized services to the needy only (railways, power, water, etc.);
• Postal deficits to be checked by involving the post offices in other areas of profit;
• Higher education declared as non-priority sector; fees of institutions of professional courses revised upward; etc.

More recent trilemmas in economics, the prima donna of all of them is Mundell’s ‘impossible trinity’. This old trilemma asserts that a country cannot maintain, simultaneously, all three policy goals of —

• free capital flows,
• a fixed exchange rate, and
• an independent monetary policy.

The impossible trinity has seen enough waters flowing down the time since it were articulated almost five decades ago which a strong theoretical foundation in the Mundell-Fleming Model has developed in the 1960s.

By early September 2014, the GoI constituted an Expenditure Management Commission (EMC) through a Resolution. The EMC will look into various aspects of expenditure reforms to be undertaken by the government and other issues concerning Public Expenditure Management. The Commission has one full time, one part time and one ex-officio members other than Chairman of (Cabinet rank). Dr. Bimal Jalan is its first Chairman.

When an increase in one form of net exports drives up a country’s exchange rate, it is called the Dutch Disease. Such instances make other exports noncompetitive in the world market and impair the ability of domestic products to compete with imports. The term originated from the supposed effect of natural gas discoveries on the Netherlands economy.