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Q100 (IAS/2022) Economy › Government Finance & Budget › Government debt management Official Key

With reference to the Indian economy, consider the following statements: 1. A share of the household financial savings goes towards government borrowings. 2. Dated securities issued at market-related rates in auctions form a large component of internal debt. Which of the above statements is/are correct?

Result
Your answer: —  ·  Correct: C
Explanation

The correct answer is Option 3 (Both 1 and 2).

Statement 1 is correct: Household financial savings are a primary source of funds for government borrowing. A significant portion of these savings is channeled through instruments like Public Provident Funds (PPF), National Savings Certificates, and life insurance premiums. These funds constitute "Small Savings," which are utilized by the government to finance the fiscal deficit. Additionally, banks use household deposits to purchase government securities to maintain their Statutory Liquidity Ratio (SLR).

Statement 2 is correct: Internal debt constitutes the bulk of India's public debt. Within internal debt, Marketable Securities (dated securities and treasury bills) issued through auctions at market-determined interest rates are the largest component. The government has transitioned from ad-hoc treasury bills to market-linked borrowings to ensure transparency and fiscal discipline.

Since both statements accurately describe the mechanisms of the Indian debt market and fiscal financing, Option 3 is the right choice.

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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. With reference to the Indian economy, consider the following statements: 1. A share of the household financial savings goes towards gove…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

This is a textbook 'Public Finance' question. It rewards conceptual clarity over current affairs rote learning. If you understand the flow of funds (Households → Banks/Post Office → Govt) and the composition of the Union Budget, this is a sitter. No obscure reports needed; just standard NCERT/Vivek Singh logic.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Do household financial savings in India flow into government borrowings through investments in government securities and similar instruments?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 1. Debt Creating Capital Receipts > p. 105
Presence: 5/5
“• Loan taken by the Central Government from foreign Governments (external debt), or public financial institutions, etc. are included under capital receipts.• Borrowings from the market by sale of Government securities (G-Secs) through RBI also results in capital receipts.• GOI under National Small Savings Fund (NSSF) raises money from the public through Ø small saving schemes like postal deposits, National Small Savings Certificate, Kisan Vikas Patra, etc.”
Why this source?
  • Explicitly notes GOI raises money from the public via National Small Savings Fund (NSSF) and small saving schemes (postal deposits, NSC, Kisan Vikas Patra).
  • States borrowings from the market by sale of Government securities (G‑Secs) through RBI result in capital receipts (i.e., funds raised).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
Presence: 5/5
“• 1. Internal Debt[it is basically what Govt. of India borrows by issuing Debt Securities like Treasury Bills and Dated Securities in the domestic market. It is also called Domestic Market Borrowings]• 2. External Debt [It is basically borrowing from other Governments (bilateral debt) and Multilateral Agencies like World Bank, ADB etc. and FPI purchasing G-Secs]• 3. Public Account Liability [It includes National Small Savings Schemes like Public Provident Fund, Kisan Vikas Patra etc.]• 4. Off budget liabilities [Such financial liabilities of any corporate or other entity owned/controlled by the Central Government, which the Govt. has to repay or service from the Annual Financial Statement.] Internal Debt and external debt combined together is also called Public Debt (of Govt. of India) and it is contracted (on the security of) against the Consolidated Fund of India. • Components of Central Govt.”
Why this source?
  • Defines Internal Debt as domestic borrowing via debt securities like Treasury Bills and Dated Securities.
  • Lists National Small Savings Schemes under Public Account Liability, linking household small savings instruments to government liabilities.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > NNP ≡ GNP – Depreciation > p. 26
Presence: 4/5
“On the other hand, the households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So, we have to deduct the net interests paid by the households to the firms and government. The households receive transfer payments from government and firms (pensions, scholarship, prizes, for example) which have to be added to calculate the Personal Income of the households. Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.”
Why this source?
  • States households receive interest payments from the government on past loans advanced by them, implying households lend to the government.
  • Frames household net interest flows with government as part of personal income accounting, indicating a lending–borrowing relationship.
Statement 2
Do dated government securities issued at market-related rates through auctions constitute a large component of India's internal debt?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
Presence: 4/5
“• 1. Internal Debt[it is basically what Govt. of India borrows by issuing Debt Securities like Treasury Bills and Dated Securities in the domestic market. It is also called Domestic Market Borrowings]• 2. External Debt [It is basically borrowing from other Governments (bilateral debt) and Multilateral Agencies like World Bank, ADB etc. and FPI purchasing G-Secs]• 3. Public Account Liability [It includes National Small Savings Schemes like Public Provident Fund, Kisan Vikas Patra etc.]• 4. Off budget liabilities [Such financial liabilities of any corporate or other entity owned/controlled by the Central Government, which the Govt. has to repay or service from the Annual Financial Statement.] Internal Debt and external debt combined together is also called Public Debt (of Govt. of India) and it is contracted (on the security of) against the Consolidated Fund of India. • Components of Central Govt.”
Why this source?
  • Defines Internal Debt as borrowing by issuing debt securities like Treasury Bills and Dated Securities in the domestic market.
  • Labels such domestic market borrowings as the core of Govt. of India internal debt composition.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
Presence: 4/5
“The scheme worked by impounding/taking the proceeds of auctions of Treasury bills and dated Government securities in a separate identifiable MSS cash account maintained and operated by the RBI. At the same time, interest payments have to be given to the institutions who buy the Market Stabilization Bonds (MSB) (the Treasury bills and dated securities of govt). Here, for the interest payment, the government allocates money from its budget to the RBI. This expenditure to service interest payment for MSBs is called carrying cost. The amounts credited into the MSS cash account by selling MSBs were appropriated only for the purpose of redemption/buy back of the Treasury Bills/dated securities issued under the MSS.”
Why this source?
  • Describes proceeds from auctions of Treasury bills and dated Government securities being managed under the MSS, showing these instruments are issued via auctions.
  • Explains operational treatment of auctioned dated securities (treatment of proceeds and servicing costs), implying significant use in government financing.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Govt. Securities Market: > p. 47
Presence: 3/5
“This market is regulated and managed by RBI. When Govt. (Central or State) wants money, RBI raises money for them by issuing securities/bonds in the Govt. Securities Market. First time the securities are issued in the Govt. Securities Market (basically primary market transaction) and then secondary market transactions happen. All the four types of Govt. securities i.e., "Cash Management Bills", "Treasury Bills", "Dated Securities" and "State Development Loans" are traded in the Govt. Securities Market. "Treasury Bills", "Dated Securities" and "State Development Loans" are also traded in Capital Market like BSE/NSE.”
Why this source?
  • Explains that when government wants money, RBI raises it by issuing securities in the Government Securities Market, including dated securities.
  • Shows dated securities are a primary instrument in the government securities market used for raising funds domestically.
Pattern takeaway: UPSC Economy is shifting from 'Data/Trends' to 'Structural Mechanics'. They want to know if you understand the plumbing of the economy—how money moves from a saver (household) to a borrower (government) and what instruments (G-Secs) facilitate this.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly covered in Vivek Singh (Ch 4) and Nitin Singhania (Ch 5). If you missed this, your static foundation on 'Public Debt' is shaky.
  2. [THE CONCEPTUAL TRIGGER]: Public Finance > Government Liabilities. Specifically, the distinction between Public Debt (Internal/External) and Public Account Liabilities, and the flow of savings in the economy.
  3. [THE HORIZONTAL EXPANSION]: Memorize the hierarchy of Internal Debt: Dated Securities (Long term, largest share) > T-Bills (Short term). Know the 'Holders' of this debt: Commercial Banks (largest) > Insurance Companies > RBI. Understand 'Small Savings' (NSSF) are part of Public Account, not Consolidated Fund, but still fund the fiscal deficit.
  4. [THE STRATEGIC METACOGNITION]: When reading about 'Deficits', do not just memorize the formula. Ask: 'Who is financing this deficit?' (Households via savings) and 'What paper is the Govt signing to get this money?' (Dated Securities). UPSC tests the *mechanism*, not just the math.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 National Small Savings Schemes & NSSF
💡 The insight

National Small Savings Schemes channel household savings into the National Small Savings Fund, which the government uses to raise funds.

High‑yield for public finance questions: explains a direct retail channel by which households finance government borrowings, links to fiscal liabilities and debt sustainability, and helps answer questions on government funding sources and household saving behaviour.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 1. Debt Creating Capital Receipts > p. 105
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
🔗 Anchor: "Do household financial savings in India flow into government borrowings through ..."
📌 Adjacent topic to master
S1
👉 Internal Debt: Government Securities (T‑Bills, Dated Securities)
💡 The insight

Internal debt consists of domestic market borrowings by issuing treasury bills and dated securities that attract household and institutional investors.

Essential for questions on fiscal operations and monetary transmission: clarifies what constitutes government domestic borrowing, connects to interest rates, market liquidity, and how household/investor demand affects borrowing costs.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > 1. Debt Creating Capital Receipts > p. 105
🔗 Anchor: "Do household financial savings in India flow into government borrowings through ..."
📌 Adjacent topic to master
S1
👉 Household Lending and Interest Receipts in National Accounts
💡 The insight

Households receive interest from the government on loans they advance, reflecting a lending role of household savings to the state.

Useful for macro and public finance parts of UPSC: links personal income accounting to public debt, aids analysis of fiscal burden on households and the flow of funds framework used in balance sheets and national accounts.

📚 Reading List :
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 2: National Income Accounting > NNP ≡ GNP – Depreciation > p. 26
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 20: Investment Models > RELATIONSHIP BETWEEN SAVINGS AND INVESTMENTS > p. 580
🔗 Anchor: "Do household financial savings in India flow into government borrowings through ..."
📌 Adjacent topic to master
S2
👉 Components of Internal Debt (T-bills, Dated Securities, SDLs)
💡 The insight

Internal debt is composed mainly of government-issued instruments such as Treasury bills and dated securities which are the primary domestic borrowing tools.

High-yield for UPSC: knowing the instruments that make up internal debt helps answer questions on fiscal operations, debt sustainability and public finance. It links to budgeting, debt management policy, and monetary interactions with RBI, enabling answers on borrowing patterns and fiscal risk.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 162
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.5 Government Securities > p. 46
🔗 Anchor: "Do dated government securities issued at market-related rates through auctions c..."
📌 Adjacent topic to master
S2
👉 Government Securities Market & Issuance Mechanism
💡 The insight

The RBI-managed government securities market (including auctions) is the channel through which dated securities are issued to raise government funds.

Crucial for answering questions on how the government financings are conducted, auction mechanisms, and market impacts on yields and liquidity. Connects to RBI operations, monetary policy tools, and investor participation issues.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Govt. Securities Market: > p. 47
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
🔗 Anchor: "Do dated government securities issued at market-related rates through auctions c..."
📌 Adjacent topic to master
S2
👉 Market Stabilisation Scheme (MSS) and Treatment of Auction Proceeds
💡 The insight

Auctions of Treasury bills and dated securities have been used under MSS arrangements, showing institutional mechanisms for managing proceeds and redemption.

Useful for questions on temporary liquidity management, RBI-fiscal interactions, and the treatment of special government bonds. It links fiscal policy to liquidity management and interest cost implications.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 64
🔗 Anchor: "Do dated government securities issued at market-related rates through auctions c..."
🌑 The Hidden Trap

Ownership of G-Secs: Since they asked about the *instrument* (Dated Securities), the next logical question is the *holder*. Commercial Banks hold the maximum share (~38%), followed by Insurance Companies (~25%) and RBI. Also, watch out for 'Sovereign Green Bonds' as a new subset of Dated Securities.

⚡ Elimination Cheat Code

Use 'Stability Logic' for Statement 2. If short-term instruments (T-Bills) were the 'large component' of debt, the Govt would face massive 'Rollover Risk' (constantly repaying debt every 91/364 days). For financial stability, the bulk of sovereign debt *must* be long-term (Dated Securities). Thus, Statement 2 is logically true.

🔗 Mains Connection

Mains GS-3 (Mobilization of Resources): Link Statement 1 to the 'Crowding Out' effect. If too much household saving goes to Govt borrowings (to fund Revenue Deficit), less is available for the private sector, driving up interest rates and hurting private CAPEX.

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SIMILAR QUESTIONS

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