UPSC Prelims 2022 Q10: Household Savings & Govt Dated Securities
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?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Answer: (c) Both 1 and 2
Statement-wise explanation
- 1: correct — Household financial savings reach the government through several channels. Money put into small savings schemes such as PPF, NSC and Sukanya Samriddhi goes to the National Small Savings Fund (NSSF), which invests in special government securities. Insurance companies and provident funds invest a large part of household premiums and contributions in government securities. Insurers alone held 24.18% of Central Government securities at end-September 2021. Banks must also hold government securities against household deposits to meet their Statutory Liquidity Ratio (SLR) requirement.
- 2: correct — The Status Paper on Government Debt divides internal debt into marketable and non-marketable debt. Marketable debt is dated securities plus Treasury Bills, issued through auctions. It was 84.4% of internal debt at end-March 2019, and dated securities make up most of it. Since the auction system began in 1992, the coupon or yield on dated securities is set in RBI auctions at market-related rates, not fixed by the government.
- 3: incorrect — This question has only two statements. Statement 3 does not exist.
How to eliminate
Statement 1 can be judged from basic logic. Households keep their savings in banks, insurance, provident funds and post-office schemes, and each of these is a major buyer of government bonds. The phrase 'a share' is modest, not absolute. If any household saving at all ends up lending to the government, the statement holds, and that is hard to deny. Statement 2 needs one fact: India's government borrows mainly from the domestic market through dated G-secs auctioned by RBI, and these are the largest part of internal debt. If you know that the Centre's yearly 'market borrowing programme' (₹ lakh crore figures in every Budget) is almost entirely dated securities, Statement 2 follows. Neither statement uses words like 'only', 'all' or 'never'. When both statements are cautious, plain descriptions of how the system works, 'Both' is usually the safer choice.
Know more
Internal debt of the Centre: what it is made of
Public debt is the Centre's debt that is repaid out of the Consolidated Fund. It has two parts: internal debt (raised in India, in rupees) and external debt (from foreign lenders). Internal debt is by far the larger part.
| Component | Type | Key feature |
|---|---|---|
| Dated securities (G-secs) | Marketable | Long-term bonds with a fixed redemption date; auctioned by RBI at market-related yields; the biggest source of fiscal-deficit financing |
| Treasury Bills (91/182/364-day) | Marketable | Zero-coupon; issued at a discount; cover short-term cash gaps |
| Cash Management Bills | Marketable | Very short-term, for temporary mismatches |
| Securities issued to NSSF | Non-marketable | Absorb small savings collections (PPF, NSC, etc.) |
| Securities issued to international financial institutions | Non-marketable | Issued to bodies such as the IMF |
How household savings reach the government
- Directly: households can buy G-secs through RBI Retail Direct (since November 2021). They also lend through small savings schemes routed via the NSSF.
- Indirectly: banks hold G-secs for SLR, and insurers and provident funds hold them as long-term, safe assets. Commercial banks held 37.82% and insurers 24.18% of Central G-secs at end-September 2021.
Why it matters When the government takes a large share of the economy's savings, less is left for private firms. This is crowding out. It also explains why yields on G-secs act as the benchmark for other interest rates. State governments borrow in the same way through State Development Loans (SDLs), which are also auctioned by RBI.
In the news
In November 2021 the Prime Minister launched the RBI Retail Direct Scheme, which lets individuals buy government securities directly from RBI. That put the link between household savings and government borrowing in the news a few months before the 2022 exam.
NCERT Concepts to Revise
- Dated securities: Statement 2 is about dated securities and their place within the government's internal debt.
- Public debt: You need to know what public debt includes, and how internal and external debt differ, to judge Statement 2.
- Crowding out: Crowding out describes what happens when government borrowing draws on household and other savings, the theme of Statement 1.
- State Development Loans: SDLs show that state governments borrow through the same RBI-auctioned dated securities.
- Budget deficit: Government borrowing exists to finance the deficit, which is why it draws on the economy's savings.