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Prelims-IAS –ECONOMICS MCQ Ans-15

1..Which of the following expenditures by the central government is/are part of revenue expenditure?

  1. Pension to the judges of high courts.
  2. Loan given to a PSU.
  3. Expenditure on building a warship.
  4. Assistance given to state governments to meet their plan expenditure.

Select the correct answer from the code given below.
(a) 1, 2 and 3 only
(b) 1, 3 and 4 only
(c) 1 and 4 only
(d) None of the above

  • ANS-B
  • Revenue expenditure is the expenditure incurred for purposes other than the creation of physical or financial assets of the central government.
  • It generally refers to the day to day expenditure incurred by the government.
  • Pensions to the judges of the high courts -part of Non-Plan Revenue Expenditure.
  • Expenditure incurred on building a warship- part of Non-Plan Revenue Expenditure( Defence Expenditure).
  • Assistance given to state governments to meet their plan expenditure falls in both the capital & revenue expenditure.
  • Loan given to PSUs is included in the capital expenditure

2..Consider the following statements:

  1. A low primary deficit along with high fiscal deficit indicates that the interest liabilities of the government are low.
  2. A low effective revenue deficit is a clear indicator that the government is spending more on creation and maintenance of capital assets.

Which of the statement(s) given above is/are incorrect?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

  • ANS-C
  • Primary deficit = Fiscal Deficit – Net Interest Liabilities. Thus, if the primary deficit is low in spite of high fiscal deficit, it means that the interest liabilities are high.
  • Effective revenue deficit = Revenue deficit – expenditure on creation and maintenance of assets out of revenue account.
  • Effective revenue deficit can be low due to high spending on capital assets out of the revenue account as well as low revenue deficit itself. Hence, only low effective revenue deficit is not a complete indicator unless revenue deficit is known. 

3..Which one of the following statements is correct?

Fiscal Responsibility and Budget Management Act (FRBMA) concerns?
(a) fiscal deficit only
(b) revenue deficit only
(c) both fiscal and revenue deficit
(d) neither fiscal deficit nor revenue deficit
  • ANS-C
  • Fiscal Responsibility and Budget Management Act (FRBMA), 2003 concerns both fiscal and revenue deficit. Under this Act, the Government should annually reduce the revenue deficit by atleast 0.5 percent and fiscal deficit by 0.3 percent beginning with fiscal year 2004-05 to reach targets of 0 percent and 3.5 percent of Revenue and Fiscal deficits respectively by 2008-09.


4..With reference to ‘Effective Revenue Deficit’, consider the following statements:

  1. It was introduced on the recommendation of 13th Finance Commission.
  2. It includes all the revenue expenditure done in the form of grants for creation of capital assets.
  3. Grants given under MNREGA to build capital assets like roads and ponds forms part of it.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 and 3 only
(c) 3 only
(d) None

  • ANS-D
  • The definition of the revenue expenditure is that it must not create any productive asset.
  • However, this creates a problem in accounts.
  • There are several grants which the Union Government gives to the state / UTs and some of which do create some assets, which are not owned by union government but by state government.
  • For example, under the MGNREGA programme, some capital assets such as roads, ponds etc. are created, thus the grants for such expenditure will not strictly fall in the revenue expenditure.
  • So, to do away with such anomaly, the government introduced the Effective Revenue Deficit concept from Union Budget 2011-12. From 2012-13 onwards the Effective Revenue Deficit is being brought in as a fiscal parameter.
  • Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets.
  • In other words, the Effective Revenue Deficit excludes those revenue expenditures which were done in the form of grants for creation of capital assets aka GoCA. Such grants include the grants given under: Pradhan Mantri Gram Sadak Yojana Accelerated Irrigation Benefit Programme Jawaharlal Nehru National Urban Renewal Mission MGNREGA etc.
  • The logic is clear; these expenses despite being shown in the accounts as Revenue Expenditures, are involved with asset creation and cannot be considered completely ‘unproductive’.

5..Identify the correct option which indicates the correct match between two columns for the following table.

List 1
List 2
A. Fiscal deficit
1. Excess of total Expenditure over Total Receipts
B. Budget deficit
2. Excess of Revenue Expenditure over Revenue Receipts
C. Revenue : deficit
3. Excess of Total Expenditure over Total Receipts less borrowings
D. Primary deficit
4. Excess of Total Expenditure over Total Receipts less borrowings and and Interest Payment
(a) A-3 B-1 C-2 D-4            (b) A-4 B-3 C-2 D-1              (c) A-1 B-3 C-2 D-4               (d) A-3 B-1 C-4 D-2
  • ANS-A
  • Fiscal deficit – Excess of Total Expenditure over total Receipts less borrowings.
  • Budget deficit – Excess of Total Expenditure over Total Receipts.
  • Revenue deficit – Excess of Revenue Expenditure over Revenue Receipts.
  • Primary deficit – Excess of Total Expenditure over Total Receipts less borrowings Receipts less borrowings and Internet Payments.

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