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 ?
Detailed Explanation:
Answer: Option 3 — Both 1 and 2
Both statements accurately describe the relationship between household savings and government borrowing, and the mechanism of government debt issuance in India. Household financial savings are channeled to government borrowings through various instruments, while dated securities issued through market auctions constitute the largest component of internal debt.
✅ Statement 1 – Correct: A significant portion of household financial savings flows to the government through purchase of government securities, either directly or indirectly through banks and financial institutions that invest in government debt instruments.
✅ Statement 2 – Correct: Dated government securities (G-Secs), issued at market-determined rates through auctions conducted by RBI, form the largest component of India's internal debt, accounting for over 80% of total internal liabilities.
📝 Short Notes: Government Borrowings and Internal Debt
| Component | Description |
|---|---|
| Internal Debt Sources | Market loans (dated securities), Treasury Bills, Securities against Small Savings, State Provident Funds, Reserve Funds, and Deposits |
| Dated Securities | Long-term government bonds with fixed maturity dates (ranging from 5 to 40 years); issued through auctions by RBI; tradeable in secondary market; largest component of internal debt |
| Household Savings Flow | Households → Bank deposits → Banks invest in G-Secs; or Households → Direct purchase of G-Secs, NSC, PPF, etc. |
| Treasury Bills | Short-term instruments (91-day, 182-day, 364-day); issued at discount to face value; used for short-term government financing |
| Market Borrowing Process | RBI conducts auctions on behalf of government; primary dealers and banks participate; interest rates determined by market demand-supply |
Question 4 of 10 Fiscal Deficit, Revenue Deficit and Public Debt
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