Question 80 from UPSC CSE 2022 - Economics

Question

With reference to the Indian economy, consider the following statements:
1. A share of the household financial savings goes towards government borrowings.
2. Dated securities issued at market-related rates in auctions form a large component of internal debt.
Which of the above statements is/are correct?

Accepted Answer

Correct Option: C. Both 1 and 2

Strategy: - **Analyze Linkage:** Focus on the connection between household financial savings and government internal borrowing mechanisms.
- **Identify Instruments:** Recognize G-secs and small savings as key channels through which household savings are tapped by the government.
- **Confirm Debt Composition:** Validate that 'dated securities issued at market-related rates' represent the main instrument in the composition of internal government debt.
- **Assess Consistency:** Confirm both statements align with standard public finance practices in India, detecting no contradictions.
- **Conclusion:** Determine that both statements are correct based on the above analysis.

Key Info: *   **Household Financial Savings**
    Household financial savings encompass the portion of disposable income saved in instruments such as currency, deposits, government small savings schemes, mutual funds, insurance, pension/provident funds, and securities. In India, these savings are a primary source of financial resources, crucial for capital formation. A significant part is channeled into government borrowings via investments from banks, insurance companies, provident funds, and direct individual participation in government securities (G-secs) and small savings schemes (e.g., NSC, PPF).

*   **Government Internal Debt**
    The Government of India raises internal debt mainly through marketable and non-marketable securities. Marketable debt includes dated government securities (long-term G-secs) and Treasury Bills, issued via competitive auctions at market-determined rates. These dated securities constitute the largest component of internal public debt by volume and value, central to government debt management. Non-marketable securities involve instruments like special securities for public sector banks or specific funds. As of March 2021, dated securities made up over two-thirds of total public debt.

*   **Public Debt Definition and Management**
    Public debt is categorized into internal (rupee-denominated) and external (foreign currency) debt. Internal debt represents the government's liabilities to entities within the country. The Reserve Bank of India, through its Public Debt Office, manages internal debt effectively. All liabilities contracted against the Consolidated Fund of India are defined as 'public debt' under Article 292 of the Indian Constitution. The health and trends of household financial savings directly influence the financial sector's stability and the government's borrowing capacity.

Answer

Option A: 1 only

Answer

Option B: 2 only

Answer

Option D: Neither 1 nor 2

With reference to the Indian economy, consider the following statements: A share of the household financial savings goes towards government borrowings. Dated securities issued at market-related rates in auctions form a large component of internal debt. Which of the above statements is/are correct?