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Macro Economics
Previous Year Question Paper with Solution
B.Com. LL.B. (Five Years) · Sem 2
2026 Jan (100 marks) Examination
munotes.in
Mumbai
B.Com. LL.B. (Five Years) Sem 2 Macro Economics 2026 Jan (100 marks) Question Paper with Solutions
First published on munotes.in on 21 October 2026.
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Contents
The questions below are the paper as Karnataka State Law University set it at the 2026 Jan (100 marks) examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2026 Jan (100 marks) examination, reproduced as Karnataka State Law University set them, in the order it set them. Long reading passages are shortened to their first and last lines and our summary; the original paper prints them in full. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 13 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
Q1What is Public Debt ? Explain the different methods adopted for the redemption of public debt.[16]
Answer
For full marks, cover: the meaning of repayment (redemption) of public debt; why debt should be repaid and how fast, with Dalton's distinction between internal and external debt; each method in turn, with how it works, an example where useful, and its limits: budget surplus, sinking fund, terminable annuities, conversion, refunding and funding, purchase or buyback in the market, the capital levy, growth of national income, and an export surplus for external debt; repudiation and inflation as improper ways out; a comparison table; India's practice; and a conclusion.
A. Meaning
Repayment or redemption of public debt means paying back the principal of loans the State has raised. The debt and its interest then come to an end. Hugh Dalton opened his chapter on the subject with a plain remark. "An obvious way of escape from the burden of public debts is to repay them."
A government can also lighten the burden without full repayment, for example by cutting the rate of interest. So the methods below range from true repayment to ways of managing the debt.
B. Why repay, and how fast?
Reasons for repayment. Interest on debt is paid from taxes every year. In the Union Budget 2026-27, interest is 14,03,972 crore rupees. A smaller debt frees money for development, lowers taxes and restores the State's power to borrow in an emergency.
The pace of repayment. Dalton separated two cases.
- External debt is like a private person's debt. Repayment takes wealth out of the country. So the right pace depends on how rich the country is compared with the size of the debt. The richer the country and the smaller the debt, the faster it should pay.
- Internal debt is different. Repaying it only moves wealth from taxpayers to bondholders within the same community. Dalton saw a strong case for paying it off quickly, through short-lived special taxes. He compared the taxpayer's choice to having an aching tooth taken out at once or "letting it continue to ache". Slow repayment means a long burden of interest and sinking fund payments together.
Against rapid repayment it was argued that heavy taxes, even for a short time, could cause panic and harm business.
C. Methods of repayment
1. Repayment out of a budget surplus. The State collects more revenue than it spends and uses the surplus to retire debt. Surpluses may come from higher taxes, lower spending or profits of public enterprises. This is the cleanest method, but modern governments rarely run surpluses.
2. Sinking fund. A fixed sum is set aside each year in a separate fund, which is invested and earns interest. When the loan falls due, the fund repays it.
Example. A loan of 500 crore rupees falls due in 10 years. If the fund earns 8 per cent, a yearly payment of about 35 crore will build up to 500 crore by the due date.
Two kinds are distinguished. A fixed sinking fund receives a set amount every year. A variable one receives whatever the budget can spare. Dalton gave a warning: a fund fed by new borrowing "is not a true sinking fund at all". It only moves debt from one account to another.
3. Terminable annuities. The State pays the lender an equal sum every year for a fixed number of years. Each payment includes interest and a slice of the principal. At the end, nothing is owed.
Example. A debt of 1,000 crore at 8 per cent can be ended in 10 years by paying about 149 crore a year.
Dalton noted that terminable annuities were "a device much favoured by Gladstone for reducing debt". The burden is heavy at first, because the payments are larger than interest alone. But the debt disappears by itself with the passage of time.
4. Conversion. When market rates fall, the State offers holders of old high-interest bonds new bonds at a lower rate. The interest burden falls, but the principal remains. Dalton was clear that "Conversion is not repayment; it is only the exchange of new debts for old". Conversion is usually voluntary. Where it is forced, as in some countries during the Great Depression, Dalton called it "a partial repudiation".
5. Refunding and funding. Refunding means raising a new loan to repay a maturing one. Funding means turning short-term floating debt, such as treasury bills, into long-term bonds. Neither reduces the debt. Both spread repayment over time and avoid a crush of loans falling due together.
6. Purchase in the market (buyback) and switching. When government bonds sell below face value, the State can buy them back cheaply and cancel them. It can also switch bonds due soon for bonds due later, smoothing the repayment burden. India uses both. The Union bought back 88,164 crore rupees of securities in 2024-25. For 2026-27 it plans switches of 2,50,000 crore.
7. Capital levy. A one-time tax on wealth above a limit can wipe out a large part of the debt at once. It may be paid in cash or in government bonds. Ricardo supported such a levy after the Napoleonic Wars, though he feared there was "neither wisdom enough, nor virtue enough, to adopt it". After the First World War the idea became a leading issue in Britain's general elections of 1922 and 1923. Its merit is speed. Its problems are valuing wealth, the risk of capital flight and political resistance.
8. Growth of national income. Debt can shrink relative to income without any repayment. If national income grows faster than the debt, the burden per head falls. Dalton noted that in Britain the real burden per head of the debt "was greatly reduced during the next hundred years" by the growth of wealth and population. He added that such good fortune could not be counted on. India's plan is of this kind. The Union's debt is 55.6 per cent of GDP in 2026-27. It aims to bring this down to 50 plus or minus 1 per cent by 2030-31.
9. Export surplus, for external debt. Foreign debt must be repaid in foreign currency. The country must therefore sell abroad more than it buys, or draw on its foreign exchange reserves. Repayment of external debt is a real transfer of goods to the creditor country.
D. Improper ways out
Repudiation means refusing to pay. It ends the debt at once but destroys the State's credit, and with external debt it invites retaliation. Dalton observed that it is often given softer names, such as "default", "suspension of payments" or "transfer moratorium". Inflation reduces the real value of debt fixed in money. But, as Dalton noted, "All with fixed money incomes are hit equally hard". Neither is a fair method of redemption.
E. The methods compared
| Method | Debt reduced? | Who bears the cost | Main limit |
|---|---|---|---|
| Budget surplus | Yes | Taxpayers | Surpluses are rare |
| Sinking fund | Yes, gradually | Taxpayers, each year | Fails if fed by borrowing |
| Terminable annuity | Yes, by the end date | Taxpayers, evenly | Heavy early payments |
| Method | Debt reduced? | Who bears the cost | Main limit |
|---|---|---|---|
| Conversion | No, interest only | Bondholders, by lower interest | Needs falling market rates |
| Refunding and funding | No, postponed | Future taxpayers | Lenders must be willing |
| Buyback and switching | Partly | The budget | Needs bonds below par or willing holders |
| Capital levy | Yes, quickly | Owners of wealth | Valuation and resistance |
| Growth | Ratio falls | No one directly | Growth cannot be assured |
F. India's practice
India repays its maturing market loans mainly by refunding. In 2026-27 the Union plans gross market borrowing of 19,70,000 crore rupees, which includes 2,50,000 crore of switches. The Budget speech gives Rs 17.2 lakh crore, the figure without switches. Of the 19,70,000 crore, 7,96,790 crore goes to repay or switch older loans, and only the rest adds to the debt. Buybacks and switches spread out the years in which loans fall due. The FRBM path then aims to bring the debt ratio down through lower deficits and growth.
Conclusion. Public debt can be redeemed through budget surpluses, sinking funds, terminable annuities, buybacks and a capital levy. Conversion, refunding and switching manage the burden without ending it. Growth reduces the burden relative to income, and an export surplus is needed for foreign debt. Dalton favoured quick repayment of internal debt, while repudiation and inflation are unfair ways out. India relies on refunding, buybacks and growth to bring its debt down to about half of GDP by 2030-31.
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