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Difficulty: MediumEconomic Developments, Union & State Budgets, and Economic Surveys

Consider the following statements regarding the Union Budget provisions for capital expenditure and fiscal assistance to states for infrastructure development:

1. Under the Scheme for Special Assistance to States for Capital Investment, the Central Government provides 50-year interest-free loans to State Governments.
2. Loans allocated under the Scheme for Special Assistance to States for Capital Investment are deducted from the State's normal Net Borrowing Ceiling (NBC) allowed under FRBM rules.
3. Capital expenditure by the government generally possesses a significantly higher fiscal multiplier effect on economic growth than revenue expenditure.

Which of the statements given above are correct?

  1. A
    1 and 2 only
  2. 1 and 3 onlyAnswer
  3. C
    2 and 3 only
  4. D
    1, 2 and 3

Answer

Statements 1 and 3 are correct, while statement 2 is incorrect.
The combination of statements 1 and 3 is correct. The Scheme for Special Assistance to States for Capital Investment provides 50-year interest-free loans outside the normal state Net Borrowing Ceiling, making statement 2 false and statement 1 true. Capital expenditure is recognized in Economic Surveys for having a much stronger output multiplier than revenue spending, validating statement 3.

Step-by-Step Solution

1
Evaluate Statement 1 regarding 50-year interest-free loans.
Statement 1 is correct.
The Central Government introduced and extended 50-year interest-free loans to state governments under the 'Scheme for Special Assistance to States for Capital Investment' to boost public capital investment across states.
2
Evaluate Statement 2 regarding Net Borrowing Ceiling (NBC) constraints.
Statement 2 is incorrect.
Financial assistance provided under this special capital loan scheme is kept over and above the normal Net Borrowing Ceiling (NBC) fixed for the states, ensuring it provides additional fiscal headroom for infrastructure creation.
3
Evaluate Statement 3 regarding the fiscal multiplier of capital expenditure.
Statement 3 is correct.
Empirical studies by the Reserve Bank of India and National Institute of Public Finance and Policy (NIPFP) highlight that capital expenditure has a higher multiplier (around 2.45 to 3.14) compared to revenue expenditure (around 0.9 to 0.99), as capex creates productive assets and generates crowding-in effects for private investment.

Key Concept

Capital Expenditure Multiplier and State Capital Assistance
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Topics

Economic Developments, Union & State Budgets, and Economic Surveys

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