Indian and AP Economy — Mains Depth · Chapter 5

Resource mobilisation and financial markets

What to remember

Government raises money through tax revenue (direct and indirect), non-tax revenue and borrowing. The fiscal deficit is the gap financed by borrowing.
The capital market is for long-term funds (shares, bonds) and is regulated by SEBI. The money market is for short-term funds (up to one year) and is closely watched by the RBI.
Insurance is regulated by IRDAI and pensions by PFRDA. Development finance institutions give long-term credit to priority sectors.

Tax revenue

Under Article 265, no tax can be levied or collected except by authority of law.

Direct taxes: the burden falls on the person who pays them and cannot be shifted. Examples are income tax and corporation tax.
Indirect taxes: the burden can be passed on to the consumer. Examples are GST and customs duty.

Feature	Direct tax	Indirect tax
Burden	On the taxpayer	Shifted to the consumer
Nature	Usually progressive	Usually regressive
Examples	Income tax, corporation tax	GST, customs, excise on some goods
Evasion	Easier to hide income	Harder at the point of sale

Goods and Services Tax (GST). The 101st Constitutional Amendment (2016) inserted Article 246A (power to levy GST) and Article 279A (the GST Council). GST began on 1 July 2017. It has four main components:

Component	Levied by	On
CGST	Centre	Supplies within a state
SGST	State	Supplies within a state
IGST	Centre	Inter-state supplies and imports
UTGST	Union Territory	Supplies in a UT without a legislature

The GST Council is chaired by the Union Finance Minister and includes the Union Minister of State for Finance and the state finance ministers. The Centre has one third of the votes and the states two thirds together; a decision needs three fourths of the weighted vote. Some items, such as petroleum products and alcohol for human consumption, remain outside GST or are treated specially. AP shares in SGST and also receives a share of central taxes through the Finance Commission.

Centre-state sharing. The Finance Commission (Article 280), appointed every five years, recommends how the net proceeds of central taxes are shared with states. Each Commission fixes the states' share for its own period, so check the latest report for the figure. AP has its own Fiscal Responsibility and Budget Management Act (2005) to control its deficit.

Non-tax revenue

Non-tax revenue is income that does not come from taxes. Examples:

Interest and dividends from public sector enterprises and the RBI's surplus transfer.
Fees, fines and penalties.
Revenue from spectrum auctions and licences.
Grants and external assistance.
Receipts from government services, such as charges for registration, licences and public utilities.

States earn non-tax revenue from mining royalties, irrigation charges and forests. Mineral-rich states like AP get royalty from minerals such as limestone and barytes.

Why the mix matters. A tax system should be fair, certain and simple. Taxes on income depend on ability to pay, while taxes on consumption are easier to collect but weigh more on the poor. The tax-GDP ratio shows how much of national income the government collects as tax, and a low ratio limits spending on health, education and infrastructure. Widening the tax base through digital records, PAN and GST returns is a reform theme, as is reducing exemptions.

Public debt and deficits

Public debt is the total borrowing of the government.

Internal debt: from within the country, through market borrowings (government securities), treasury bills, small savings and bank deposits.
External debt: from other countries and international institutions.

Constitutional position: Article 292 lets the Centre borrow on the Consolidated Fund; Article 293 governs state borrowing, and a state needs the Centre's consent if it owes a loan to the Centre.

Deficit	Meaning
Revenue deficit	Revenue expenditure minus revenue receipts
Fiscal deficit	Total expenditure minus total receipts excluding borrowing; shows borrowing need
Primary deficit	Fiscal deficit minus interest payments
Effective revenue deficit	Revenue deficit minus grants for creating capital assets

The FRBM Act, 2003 set targets to cut the deficits, with a fiscal deficit target of 3 per cent of GDP. The N.K. Singh committee (2017) proposed a debt-to-GDP anchor and a fiscal council. Debt is a burden when interest takes a large share of revenue and when borrowing is used for consumption rather than for assets that earn returns.

Capital market

The capital market is where long-term funds are raised and traded. It has two segments:

Primary market: new securities are issued. Methods include Initial Public Offer (IPO), Follow-on Public Offer (FPO), rights issue and private placement.
Secondary market: existing securities are traded on stock exchanges.

Exchange or body	Key point
BSE (Bombay Stock Exchange)	Established in 1875; Asia's oldest; index is Sensex
NSE (National Stock Exchange)	Screen-based trading since the 1990s; index is Nifty 50
NSDL and CDSL	Depositories that hold shares in electronic form

SEBI (Securities and Exchange Board of India) was set up as an administrative body in 1988 and given statutory powers by the SEBI Act, 1992. Its headquarters is in Mumbai. Its three roles are to protect investors, to develop the market and to regulate intermediaries. It regulates stock exchanges, brokers, mutual funds, merchant bankers and foreign portfolio investors, and acts against insider trading.

Instruments: equity shares, debentures and bonds, derivatives (futures and options) and mutual fund units.

Money market

The money market deals in short-term funds, with maturity up to one year. Participants include banks, mutual funds, corporates and the RBI.

Instrument	Features
Treasury bills (T-bills)	Issued by the Government in 91, 182 and 364 day tenors; no interest, sold at a discount
Call money	Overnight to 14 days among banks
Commercial paper (CP)	Unsecured short-term note issued by companies
Certificate of deposit (CD)	Issued by banks and financial institutions
Repo and reverse repo	Short-term borrowing against securities; used by the RBI to manage liquidity
Commercial bills	Credit instruments between traders

The RBI is the main regulator and the Liquidity Adjustment Facility is its main tool. The money market keeps the banking system liquid, and the rates set there guide the cost of credit.

Development finance institutions (DFIs)

DFIs give long-term finance for industry, agriculture, housing and infrastructure, which commercial banks may not give.

Institution	Year (about)	Focus
IFCI	1948	Industrial finance
ICICI	1955	Private industry
IDBI	1964	Apex industrial bank, later a commercial bank
NABARD	1982	Agriculture and rural development
EXIM Bank	1982	Export and import finance
NHB	1988	Housing finance
SIDBI	1990	Small industries
NaBFID	2021	Infrastructure finance

State-level bodies, such as state financial corporations, support small units within a state.

Insurance and pensions

Insurance: LIC was formed in 1956 by nationalising life insurers, and general insurance was nationalised in 1972 (GIC). The Insurance Regulatory and Development Authority (IRDAI) regulates the sector and became a statutory body under the IRDA Act, 1999. The sector was opened to private and foreign firms, and the foreign investment limit has been raised in steps.
Pensions: The Pension Fund Regulatory and Development Authority (PFRDA) regulates the National Pension System (NPS), started in 2004 for new central government employees (other than armed forces) and later opened to all citizens. It was given statutory status by the PFRDA Act, 2013. The Atal Pension Yojana (2015) targets unorganised workers. The Employees' Provident Fund Organisation (EPFO) manages provident fund and pension for the organised sector.

Exam traps

Fiscal deficit excludes borrowing in the receipts; the primary deficit removes interest payments.
Direct taxes are generally progressive; indirect taxes are regressive.
IGST is levied on inter-state supply, not intra-state supply.
Article 246A and 279A deal with GST; 265 is a general rule on taxation.
The money market is for short-term funds; the capital market for long-term funds.
SEBI was set up in 1988 but got statutory power in 1992.
T-bills are sold at a discount and carry no coupon.
NABARD is for agriculture and rural areas; SIDBI is for small industries.
IRDAI regulates insurance; PFRDA regulates pensions.

One-liners

1. GST began on 1 July 2017.
2. The 101st Amendment introduced GST.
3. The GST Council is chaired by the Union Finance Minister.
4. Article 280 provides for the Finance Commission.
5. FRBM Act was passed in 2003.
6. Primary deficit = fiscal deficit minus interest payments.
7. BSE was founded in 1875.
8. SEBI Act is of 1992.
9. T-bills come in 91, 182 and 364 day maturities.
10. NABARD was set up in 1982.
11. LIC was formed in 1956.
12. NPS began in 2004.

Practice questions

Which of the following is a direct tax?
1. Entertainment tax on tickets
2. GST
3. Customs duty
4. Income tax
Answer
D. Income tax
The burden of income tax cannot be shifted.
A tax whose burden can be passed on to the consumer is
1. Direct tax
2. Wealth tax
3. Indirect tax
4. Corporation tax
Answer
C. Indirect tax
Indirect taxes are shifted forward.
Article 265 of the Constitution says that
1. Tax must be 10 per cent
2. States cannot tax
3. Parliament must raise all taxes
4. No tax can be levied without authority of law
Answer
D. No tax can be levied without authority of law
It sets the rule of law for taxation.
The article that empowers Parliament and states to levy GST is
1. Article 292
2. Article 280
3. Article 246A
4. Article 148
Answer
C. Article 246A
Article 246A was inserted by the 101st Amendment.
The GST Council is provided for in
1. Article 279A
2. Article 265
3. Article 293
4. Article 360
Answer
A. Article 279A
It was inserted by the 101st Amendment.
GST came into force on
1. 1 July 2017
2. 1 April 2016
3. 26 January 2017
4. 15 August 2015
Answer
A. 1 July 2017
GST rollout was on 1 July 2017.
Who chairs the GST Council?
1. Prime Minister
2. Chief Justice of India
3. Union Finance Minister
4. RBI Governor
Answer
C. Union Finance Minister
The Union Finance Minister is the chair.
Tax on inter-state supplies of goods and services under GST is
1. SGST
2. CGST
3. UTGST
4. IGST
Answer
D. IGST
IGST is collected by the Centre on inter-state supply.
Which body recommends the sharing of central taxes with states?
1. Finance Commission
2. NITI Aayog
3. GST Council
4. SEBI
Answer
A. Finance Commission
Article 280 provides for the Finance Commission.
Which of the following is a non-tax revenue of the Government?
1. Customs duty
2. Dividends from public sector firms
3. GST
4. Income tax
Answer
B. Dividends from public sector firms
Dividends and interest are non-tax receipts.
Spectrum auction receipts are classified as
1. Excise duty
2. Direct tax
3. Capital expenditure
4. Non-tax revenue
Answer
D. Non-tax revenue
They are fees for use of a public resource.
Fiscal deficit is
1. Revenue expenditure minus revenue receipts
2. Capital receipts minus capital expenditure
3. Total expenditure minus total receipts excluding borrowings
4. Fiscal deficit minus interest payments
Answer
C. Total expenditure minus total receipts excluding borrowings
It shows the borrowing requirement.
Primary deficit equals
1. Fiscal deficit minus interest payments
2. Total expenditure minus revenue
3. Revenue deficit minus grants
4. Fiscal deficit plus interest payments
Answer
A. Fiscal deficit minus interest payments
Primary deficit removes interest burden.
Revenue deficit is
1. Fiscal deficit minus revenue
2. Imports minus exports
3. Revenue expenditure minus revenue receipts
4. Capital expenditure minus capital receipts
Answer
C. Revenue expenditure minus revenue receipts
This is the definition of revenue deficit.
The FRBM Act was passed in
1. 1991
2. 2003
3. 2010
4. 2016
Answer
B. 2003
The Fiscal Responsibility and Budget Management Act is of 2003.
The FRBM Act sets a fiscal deficit target of about
1. 0.5 per cent of GDP
2. 12 per cent of GDP
3. 8 per cent of GDP
4. 3 per cent of GDP
Answer
D. 3 per cent of GDP
The headline target is 3 per cent.
The Centre's power to borrow on the Consolidated Fund is in
1. Article 292
2. Article 300
3. Article 293
4. Article 280
Answer
A. Article 292
Article 292 covers central borrowing.
Treasury bills are sold at a
1. Fixed coupon every month
2. Premium to face value
3. Discount to face value
4. Floating rate linked to inflation
Answer
C. Discount to face value
They carry no coupon and are redeemed at par.
Which is a T-bill maturity?
1. 5 years
2. 10 years
3. 30 years
4. 91 days
Answer
D. 91 days
T-bills come in 91, 182 and 364 days.
The money market deals in funds with maturity up to
1. Ten years
2. One year
3. Five years
4. Twenty years
Answer
B. One year
Money market is short-term.
Commercial paper is
1. A bank deposit for five years
2. An unsecured short-term note issued by companies
3. An equity share
4. A government bond
Answer
B. An unsecured short-term note issued by companies
CP raises short-term funds.
Which market issues new shares to the public?
1. Forward market
2. Secondary market
3. Primary market
4. Call market
Answer
C. Primary market
IPOs are issued in the primary market.
The oldest stock exchange in Asia is
1. NSE
2. MCX
3. NSDL
4. BSE
Answer
D. BSE
BSE was established in 1875.
The index of the National Stock Exchange is
1. Nifty 50
2. Dow Jones
3. Nikkei
4. Sensex
Answer
A. Nifty 50
NSE's index is Nifty.
Which institutions hold shares in electronic form?
1. BSE and NSE
2. NSDL and CDSL
3. NABARD and SIDBI
4. LIC and GIC
Answer
B. NSDL and CDSL
Depositories hold securities as electronic records.
SEBI got statutory status through a law of
1. 1992
2. 1988
3. 2013
4. 1956
Answer
A. 1992
The SEBI Act was passed in 1992.
SEBI's headquarters is at
1. Kolkata
2. New Delhi
3. Hyderabad
4. Mumbai
Answer
D. Mumbai
SEBI is headquartered in Mumbai.
Which institution is the apex bank for agriculture and rural development?
1. EXIM Bank
2. IDBI
3. NABARD
4. SIDBI
Answer
C. NABARD
NABARD was set up in 1982.
Which institution gives finance to small-scale industries?
1. NHB
2. IFCI
3. NABARD
4. SIDBI
Answer
D. SIDBI
SIDBI was set up in 1990.
The Insurance sector is regulated by
1. SEBI
2. PFRDA
3. IRDAI
4. RBI only
Answer
C. IRDAI
IRDAI regulates insurance.
The National Pension System is regulated by
1. SEBI
2. PFRDA
3. IRDAI
4. EPFO
Answer
B. PFRDA
PFRDA regulates NPS.
Life Insurance Corporation was formed in
1. 1956
2. 1972
3. 1999
4. 1991
Answer
A. 1956
Life insurers were nationalised in 1956.
If total receipts excluding borrowings are Rs 100 and expenditure is Rs 130, with interest payments of Rs 10, the primary deficit is
1. Rs 20
2. Rs 10
3. Rs 40
4. Rs 30
Answer
A. Rs 20
Fiscal deficit = 30; primary deficit = 30 - 10 = 20.
Consider the following statements: 1. Direct taxes are generally progressive. 2. Indirect taxes are generally progressive. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
Indirect taxes fall equally on rich and poor and are regressive.
Consider the following statements: 1. IGST is levied on intra-state supplies. 2. CGST and SGST are levied on intra-state supplies. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
IGST is for inter-state supply.
Consider the following statements: 1. The GST Council is chaired by the Union Finance Minister. 2. Decisions of the GST Council need three-fourths of the weighted votes. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
C. Both 1 and 2
Both statements are correct.
Consider the following statements: 1. The capital market deals in long-term funds. 2. The money market deals in funds above one year. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
The money market is for up to one year.
Consider the following statements: 1. SEBI regulates insurance companies. 2. SEBI was set up in 1988 and got statutory status in 1992. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
IRDAI regulates insurance.
Consider the following statements: 1. Treasury bills pay periodic interest coupons. 2. T-bills are issued by the Government. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
T-bills are zero-coupon and sold at a discount.
Consider the following statements: 1. IRDAI regulates NPS. 2. PFRDA regulates NPS. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
IRDAI regulates insurance.
Consider the following statements: 1. Article 280 provides for the Finance Commission. 2. The Finance Commission is appointed every ten years. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
It is appointed every five years.
Consider the following statements: 1. A secondary market trade gives funds to the issuing company. 2. An IPO is a way of raising funds in the primary market. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
Secondary market trades give no funds to the company.
Consider the following statements: 1. NABARD was set up in 1982. 2. SIDBI deals mainly in agriculture and rural credit. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
A. 1 only
SIDBI is for small industries.
Consider the following statements: 1. The FRBM Act was passed in 1991. 2. Spectrum fees are tax revenue. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
D. Neither 1 nor 2
FRBM is of 2003 and spectrum fees are non-tax revenue.
Consider the following statements: 1. The NSE began operating in 1875. 2. The BSE began operating in 1875. Which of the statements is/are correct?
1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2
Answer
B. 2 only
NSE is a much later exchange.

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1.Who headed the Committee of Ministers on the Augmentation of Financial Resources of Urban Local Bodies, formed in India in 1963? (RRB NTPC Tier I (09/04/2016) Shift 3)
2.The UDAN scheme was conceptualised under the National Civil Aviation Policy (NCAP) 2016, Govt. of India, with a ____________ vision, to connect Tier-2 and Tier-3 cities through a market-driven yet financially supported model.
3.Which of the following is the key function of mutual funds in the financial markets?
4.Which of the following role does the stock market play in the financial system?
5.Which of the following sentences is/are true? i. The projected growth rate of the Indian agriculture sector for FY 2022-23 was 5.5%. ii. During the Financial Year 2021-22, agricultural exports of India reached to about US$ 50.2 billion. iii. During Kharif Marketing Season 2021- 22, 581.7 lakh metric tons of rice was procured in India.
6.What is the long term financial market of an economy known? (RPF Constable 2018 (18/02/2019))
7.In the field of e-commerce and financial trading, which application of computers is essential for analyzing massive volumes of rapidly changing market data and detecting complex patterns to inform investment decisions?
8.Replace the underlined word with the correct option to make the sentence grammatically correct. Economists studying market trends and analyze data to forecast economic growth and recommend policies for financial stability.
9.Who has the power to declare a financial emergency in India?
10.The term 'Bull Market' refers to?

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