If Mr. Ram buys a National Small Savings Certificate, which of the following is likely to happen?

Question

Accepted Answer

The correct option is 1: Increase in the other liabilities of the government.

National Small Savings Certificates (NSC), along with other instruments like Public Provident Fund (PPF) and Senior Citizens Savings Scheme (SCSS), are crucial sources of non-market financing for the Government of India. When Mr. Ram buys an NSC, he is essentially lending money to the government. Since the government promises to repay this principal amount with interest at a later date, this transaction creates a liability for the government. In official budget classification, these small savings instruments are classified under "Other Liabilities" or "Internal Debt" (specifically, non-marketable debt), distinct from revenue or market borrowings. Therefore, an increase in the purchase of these instruments directly leads to an increase in the government's total liabilities owed to the public.

The incorrect option is 2: Increase in the government market borrowings.
Market borrowings refer to the government raising funds from the open market, usually by issuing Treasury Bills (T-Bills) and Government Securities (G-Secs). Small Savings Schemes like NSCs are explicitly non-marketable and are separate from the government's market borrowing program handled by the Reserve Bank of India.

The incorrect option is 3: Increase in government revenue.
Government revenue primarily consists of taxes (like income tax and GST) and non-tax sources (like fees and dividends). Funds raised through Small Savings Certificates are considered capital receipts (borrowings) and not revenue, as they create a repayment liability for the government.

The incorrect option is 4: Increase in forex reserves.
Foreign exchange (forex) reserves are held by the central bank (RBI) and increase mainly through foreign direct investment (FDI), foreign institutional investment (FII), and export earnings. NSC purchases are domestic transactions and have no direct impact on the country's foreign exchange reserves.