With reference to the Indian Public Finance, consider the following statements: 1. External liabilities reported in the Union Budget are based on historical exchange rates 2. The continued high borrowing has kept the real interest rates high in the economy 3. The upward trend in the ratio of Fiscal Deficit of GDP a recent years has an adverse effect on private investment 4. Interest payments is the single largest component of the non- plan revenue expenditure of the Union Government Which of these statements are correct?

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YESPYQ · Accepted Answer

Correct answer: 1, 2, 3 and 4. As per the Economic Survey 2001–02, the fiscal deficit and interest payments remain key challenges in public finance management. Indian Economy 305 Statement 1 is correct : The Union Budget reports external debt at historical exchange rates, meaning the exchange rates prevailing at the time the debt was incurred. This method reflects the original cost of the debt in domestic curren- cy terms. Statement 2 is correct : Persistent high government borrow- ing can lead to an increase in real interest rates. This occurs because substantial borrowing may crowd out private invest- ment, leading to higher demand for available funds and elevated interest rates. Statement 3 is correct : An increasing Fiscal Deficit to GDP ratio indicates that the government is borrowing more relative to the size of the economy. This can crowd out private investment by reducing the funds available for private entities and potentially increasing interest rates, making borrowing more expensive for businesses. Statement 4 is correct : Non-plan revenue expen-diture in- cludes obligator

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