Part A

1.Define Public Debt?

Public debt is distinguished from private debt, which consists of the obligations of individuals,
business firms, and nongovernmental organizations.

2.What is private debt?

Private debt refers to loans to companies which are not provided by banks or public markets,
and instead are provided by private investors and private markets.

3.What are the kinds of public debt?

• Productive and Unproductive Debt

• Compulsory and Voluntary Debt
• Redeemable and Irredeemable Debts
• Funded and Unfunded Debt.

4.What is public debt redemption?

Redemption of debt refers to the repayment of a public loan. Although public debt should be
paid, debt redemption is desirable too.

5.What is Fiscal Federalism?

Fiscal federalism deals with the division of governmental functions and financial relations
among levels of government.

6.Give any 4 objectives of Finance commission of India ?

• To determine the basis of fund allocation collected from the taxes, which are divided
between the centre and state
• To formulate the principle regarding the grant to the state from the centre.

• To continue the agreement made between the government of India and the states or to
recommend changes in them.
• To consider any other financial matter in the interest of the country on being notified by
the president to do so.
7.What is meant by co-operative Federalism?

Cooperative federalism, also known as marble-cake federalism, is defined as a flexible

relationship between the federal and state governments in which both work together on a variety of
issues and programs.
8.What is sinking fund?

A company that issues debt will need to pay that debt off in the future, and the sinking fund
helps to soften the hardship of a large outlay of revenue.

9.What is meant by ‘Surplus Budget’ ?

A budget surplus is when income exceeds expenditures. The term "budget surplus" is used in
reference to a government's financial state.

10.Define deficit Financing ?

The budgetary process, deficit spending is the amount by which spending exceeds revenue
over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget
surplus.

11.What are the benefits of deficit financing?

It increases the financial strength of the government. It leads to inflation which can prove to be
beneficial under certain circumstances .

12.What is voluntary Debt?

Voluntary debt is a debt which is taken from the people by the government on voluntary basis.
These loans are voluntarily and willingly subscribed by the people to government loans.

Part B
1.What are the objectives of public debt ?
The main objective of public debt management is to ensure that the government's financing
needs and its payment obligations are met at the lowest possible cost over the medium to long run,
consistent with a prudent degree of risk.

Public debt is an important source of resources for a government to finance public spending and
fill holes in the budget. Public debt as a percentage of GDP is usually used as an indicator of the
ability of a government to meet its future obligations.

2.Explain the methods of repayment of public debt ?

The repayment method will affect the interest expenses during the loan period. There are
three different methods for repaying a housing loan: equal payments, equal instalments and fixed
equal payments.
The choice of the repayment method depends on many things, such as whether you want to pay
the same amount every month or whether you prefer to pay off the loan within a specific time period.

3.Give a short note on fiscal federalism ?

fiscal federalism, financial relations between units of governments in a federal government
system. Fiscal federalism is part of broader public finance discipline. The term was introduced by the
German-born American economist Richard Musgrave in 1959. Fiscal federalism deals with the
division of governmental functions and financial relations among levels of government.

The theory of fiscal federalism assumes that a federal system of government can be efficient
and effective at solving problems governments face today, such as just distribution of income,
efficient and effective allocation of resources, and economic stability.
4.Explain the causes of public debt ?
Government can borrow because it can possible that local income was not enough for their expenditure
due to incidental expenditure government could have to borrow because it is not possible to increase the tax
income at that point. Government can borrow finance arrangement of capital expenditure because current
revenue will not be enough to fulfil the target. At the time of depression, when private demand is not enough
then government borrow, the extra savings of people which is not in use and spends it to increase the effective
demand and by this gives birth to the extra income and employment in the society. These extra amounts from
government taxes are supplementary to each other.

5.Explain the major recommendations of 15th finance commission ?

15 Finance Commission has given its first report pertaining to Financial Year 2020-21. In the
spirit of co-operative federalism, I am pleased to announce that we have, in substantial measure,
accepted the recommendations of the Commission. The commission would submit its final report to
the President during the latter part of the year, for five years beginning 2021-22.

6.Briefly explain the impact of deficit financing?

Deficit financing:
• Deficit financing means generating funds to finance the deficit which results from an
excess of expenditure over revenue.
• The gap is covered by borrowing from the public by the sale of bonds or by printing new
money.

• Often both the tax and non-tax revenues fail to mobilize enough resources just
through taxes.
• Deficit financing affects investment adversely.
• When there is inflation in the economy employees demand higher wages to survive.

7.Explain the functions of finance commission ?

• Distribution of 'net proceeds' of taxes between Centre and the States, to be divided as
per their respective contributions to the taxes.
• Determine factors governing Grants-in-Aid to the states and the magnitude of the same.
• The state on the basis of the recommendations made by the finance commission of the
state.
• Any other matter related to it by the president in the interest of sound finance.
• A finance commission is an autonomous body which is governed by the government of India.

Part C
1.Describe classification of public debt?
• Internal and External:
Internal debt is raised from within the country and external debt is owed to foreigners or
foreign governments or institutions.
• Productive and Unproductive:
The productive debt is expected to create assets which will yield income sufficient to pay the principal
and interest on the loan. In other words, they are expected to pay their way; they are self-liquidat-ing.
On the other hand, loans raised for war do not create any asset; they are a deadweight and are
regarded as unproductive.
• Short-term and Long-term:
 Short-term loans are repayable after short interval of time, e.g. Treasury Bills payable after three
months, ways and means advances from the Central Bank. They are intended to bridge the gap
temporarily between current revenue and current expenditure. It is called floating debt. Long-term
loans are payable after a long time covering several years. They are also called funded debt.

2.Explain the Finance Commission of India?

The Finance Commission is a Constitutionally mandated body that is at the centre of fiscal
federalism. Set up under Article 280 of the Constitution, its core responsibility is to evaluate the
state of finances of the Union and State Governments, recommend the sharing of taxes between
them, lay down the principles determining the distribution of these taxes among States. Its
working is characterised by extensive and intensive consultations with all levels of
governments, thus strengthening the principle of cooperative federalism. Its recommendations
are also geared towards improving the quality of public spending and promoting fiscal stability.
The first Finance Commission was set up in 1951 and there have been fifteen so far. Each of
them has faced its own unique set of challenges.

The Fifteenth Finance Commission was constituted on 27 November 2017 against the
backdrop of the abolition of Planning Commission (as also of the distinction between Plan and non-
Plan expenditure) and the introduction of the goods and services tax (GST), which has fundamentally
redefined federal fiscal relations.

3.Describe the role of NITI Aayog in India?

NITI Aayog has the twin mandate to oversee the adoption and monitoring of the
SDGs in the country and promote competitive and cooperative federalism among States
and UTs.

The task at hand for NITI Aayog is not just to periodically collect data on SDGs
but to proactively realise the goals and targets. The Ministry of Statistics and
Programme Implementation (MoSPI) has already undertaken a parallel exercise of
interaction with the Ministries to evolve indicators reflecting the SDG goals and
targets.

NITI Aayog in consultation with MoSPI has prepared a draft mapping of the
goals and targets as an initial step. Further, the centrally sponsored schemes,
including the ‘core of the core’, ‘core’ and ‘optional’ schemes implemented by the
States, and some of the recent initiatives undertaken by the Central Government
have been mapped. Moreover, Ministries and States are implementing central sector
schemes and state schemes, respectively, aligned with one or more SDGs. This
mapping can be accessed here.

4.Analyse the Deficit financing?

deficit financing, practice in which a government spends more money than it receives as revenue,
the difference being made up by borrowing or minting new funds. Although budget deficits may occur
for numerous reasons, the term usually refers to a conscious attempt to stimulate the economy by
lowering tax rates or increasing government expenditures.

The influence of government deficits upon a national economy may be very great. It is widely believed
that a budget balanced over the span of a business cycle should replace the old ideal of an annually
balanced budget. Some economists have abandoned the balanced budget concept entirely, considering
it inadequate as a criterion of public policy.
 Deficit financing, however, may also result from government inefficiency, reflecting widespread tax
evasion or wasteful spending rather than the operation of a planned countercyclical policy.

Where capital markets are undeveloped, deficit financing may place the government in debt to
foreign creditors. In addition, in many less-developed countries, budget surpluses may be desirable in
themselves as a way of encouraging private saving.

5.Describe the effects of public debt?

Effects of Public Borrowing:

Public borrowing involves transfer of purchasing power from individual to government and a
subsequent retransfer of the same to the individuals from the government.
Thus, public debt, in one sense, has the ‘revenue effect’, and, in another sense, has
the ‘expenditure effect’. This means that public borrowing produces different effects on the
economy. However, the exact effects of borrowing will greatly depend on the sources of borrowed
amounts.

• Effect on National Income and Distribution:

It is said that the net effect of government borrowing is expansionary. If loans are raised for
productive purposes, scarce resources may be distributed rationally. In other words, resource
allocation will take place to sub-serve national interests. Consequently, national income will rise.

Often government imposes taxes to finance its loan repayment programme. High rate of taxes
discourages people to work more. Although public borrowing involves transfer of resources (from
taxpayers to the lenders), the negative effect of taxes (i.e., desire to work less when taxes are
increased) produce an unfavourable effect on income.

Because of debt, present generation obtains less capital. Thus public borrowing is not necessarily
expansionary. A lower volume of capital reduces production and productivity of an economy.

• Effect on Price Level:

Whether public borrowing is anti-deflationary or anti- inflationary depends on how the debt
affects the money supply and how it affects economic activity. Loans from banks (say purchase of
government bonds by commercial banks) lead to an increase in money supply. This will put a great
pressure on the price level. In this sense, ‘borrowing is inflationary’.

However, public debt is not necessarily inflationary in character. If public debt is used to raise
income, employment and output, the inflationary effect will then be greatly minimized. But inflation,
under the circumstance, is unavoidable.

Further, if government borrows money from individuals, rather than banks, then the individual
borrowers will be forced to curtail their consumption spending. This will then serve as a good anti-
inflationary measure.