Daily Quiz: UPSC Prelims Marathon (Economy) – April 14, 2020

The (“SPI”), compiled by the Social Progress Imperative, a US-based non-profit, ranks 149 countries’ social performance over six years (2014-2019). It uses 51 indicators including: nutrition, shelter, safety, education, health, personal rights and inclusiveness. The Social Progress Index is the first holistic measure of a country’s social performance that is independent of economic factors. The index is based on a range of social and environmental indicators that capture three dimensions of social progress: Basic Human Needs, Foundations of Wellbeing, and Opportunity. The 2019 Social Progress Index includes data from 149 countries on 51 indicators. The index captures outcomes related to all 17 Sustainable Development Goals and is a comprehensive snapshot of a country’s overall progress towards the achievement of the goals.

Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure. It is aimed to deduct the money used out of borrowing to finance capital expenditure. The concept has been introduced to ascertain the actual deficit in the revenue account after adjusting for expenditure of capital nature. Focusing on this will help in reducing the consumptive component of revenue deficit and create space for increased capital spending. Though the Budget documents have given targets for revenue deficit, the amendments to the Fiscal Responsibility and Budget Management Act 2003 has proposed to substitute the definitions of “effective revenue deficit” and “revenue deficit” with those of “Central government debt” and “general government debt” respectively.

The FRBM Review Committee headed by former Revenue Secretary, NK Singh was appointed by the government to review the implementation of FRBM. In its report submitted in January 2017, titled, ‘The Committee in its Responsible Growth: A Debt and Fiscal Framework for 21st Century India’, the Committee suggested that a rule based fiscal policy by limiting government debt, fiscal deficit and revenue deficits to certain targets is good for fiscal consolidation in India. Following are the main recommendations of the NK Singh Committee.

1. Public debt to GDP ratio should be considered as a medium-term anchor for fiscal policy in India. The combined debt-to-GDP ratio of the centre and states should be brought down to 60 per cent by 2023 (comprising of 40 per cent for the Centre and 20% for states) as against the existing 49.4 per cent, and 21per cent respectively.
2. Fiscal deficit as the operating target: The Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the centre should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.
3. Revenue deficit target: The Committee also recommends that the central government should reduce its revenue deficit steadily by 0.25 percentage (of GDP) points each year, to reach 0.8% by 2023, from a projected value of 2.3% in 2017.
4. Formation of Fiscal Council to advice the government: The Committee advocated formation of institutions to ensure fiscal prudence in accordance with the FRBM spirit. It recommended setting up an independent Fiscal Council. The Council will provide several advisory functions.
5. Escape Clause to accommodate counter cyclical issues.

A liquidity trap is an economic situation where people hoard financial capital instead of investing or spending it. As a result, the nation’s central bank can’t use expansionary monetary policy to boost economic growth. It often occurs when short-term interest rates are zero.

The RBI has started publishing a set of new monetary aggregates following the recommendations of the Working Group on Money Supply: Analytics and Methodology of Compilation (Chairman: Dr. Y.V. Reddy) which submitted its report in June 1998.  The Working Group recommended compilation of four monetary aggregates on the basis of the balance sheet of the banking sector in conformity with the norms of progressive liquidity: M0 (monetary base), M1 (narrow money), M2 and M3 (broad money). In addition to the monetary aggregates, the Working Group had recommended compilation of three liquidity aggregates namely, L1, L2 and L3, which include select items of financial liabilities of non-depository financial corporations such as development financial institutions and non-banking financial companies accepting deposits from the public, apart from post office savings banks.

Weekly Compilation: M0= Currency in Circulation + Bankers’ Deposits with RBI  + ‘Other’ Deposits with RBI*.