Consolidated Sinking Fund UPSC Notes

The Consolidated Sinking Fund is one of the important topics for the UPSC exam.

Today we will cover the whole topic in detail, allowing you to attempt the questions in the IAS exam confidently.

The Indian Constitution mentions three major types of central government funds:

  • The Consolidated Fund of India (Article 266)
  • The Contingency Fund of India (Article 267)
  • The Public Accounts of India (Article 266)

The Reserve Bank of India (RBI) relaxed the regulations controlling withdrawals from the consolidated sinking fund to offer more resources to states due to the COVID-19 pandemic, which led to an estimated Rs 13,300 crore to them.

The purpose of this reserve is to provide a cushion for state governments in paying future reimbursement obligations. States that maintain these assets have varying involvement in their significant obligations.

There is worth in requiring State Governments to invest in CSF and establishing a basic cap on their significant liabilities.

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Consolidated Sinking Fund

  • The Consolidated Fund of India is one of the most crucial government accounts.
  • Direct and indirect taxes are used to finance this fund.
  • This fund covers all of the government’s expenses.
  • The government must get parliamentary consent before withdrawing any money from this fund.
  • Article 266(1) of the Indian Constitution contains provisions for this fund.
  • Each jurisdiction can establish its very own Consolidated Fund with identical features.
  • India’s Comptroller and Auditor General monitor the Consolidated Fund of India.

Consolidated Sinking Fund Background

The CSF is one of some important topics in the UPSC syllabus. It is likely to be asked in UPSC 2022.

  • The fund was established in 1999-2000, after a proposal by the Tenth Finance Commission to amortize open market credits used by the State Government.
  • Initially, 11 states- Andhra Pradesh, Arunachal Pradesh, Chhattisgarh, Assam, Goa, Meghalaya, Maharashtra, Tripura, Mizoram, West Bengal, and Uttaranchal – established the fund.
  • The 12th Finance Commission suggested that all states should maintain sinking funds.
  • This fund is one of the options available to state governments when it comes to rearranging their debts.
  • It is a backup that is used to protect some financial prudence.
  • The CSF fund should be kept separate from the States’ consolidated fund and the public account.

Objective

Here are some facts about the CSF objective to help you with your UPSC notes.

A long-term vision of this model is to help states wherein the government has issues managing their finances, most especially the debt, and facilitate financial restructuring in these states, particularly those with chronic revenue deficits.

With the creation of this body, it was established that they would consolidate all of their debts.

The major goal of establishing a government-backed sinking fund is to assist in achieving the underlying goals of constitutional changes by allowing local governments to act as true self-governing entities.

Key Features and Benefits of CSF

Due to the relevance in the UPSC, questions about the consolidated sinking fund are expected to be asked in a current affairs quiz section.

You can use this note of CSF to prepare for the UPSC prelims.

  • Since there are funds to ensure the development, there will be a lower risk of default on the target owing at development. As a result, if a consolidated sinking fund is built up, the amount owed upon development is substantially lower.
  • Since a consolidated sinking fund incorporates a security component and reduces default risk, bond financing costs are often lower.
  • Economically prudent state governments can take the initiative to get their government performance appraised by accredited rating firms, which might help them achieve higher rates in bond auctions.
  • Maintaining the consolidated sinking fund offers states and investors peace of mind that payments on State Development Loans will be made in any circumstances.

Conclusion

The outbreak of Covid-19 has cast a shadow of vulnerability. It is unclear how long it will take to restore order and improve the economy. The obvious primary facts are that the economy has been severely harmed and that recovery will be delayed; that government expenditure in saving lives, jobs, and recovering the economy would need extensive methods; and that funding it will be challenging.

Here is everything about CSF to help you with your UPSC and IAS Preparation.

Candidates can visit the linked article and get the detailed list of government schemes in India, important for general awareness and current affairs section of various competitive exams.

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Frequently Asked Questions on Consolidated Sinking Funds

Who set up the consolidated sinking fund?

The RBI established the consolidated sinking fund in 1999-2000 to cover the redemption of state market loans.

Which state invested the most in the consolidated sinking fund?

With a CSF corpus of 37,252 crores, Maharashtra invested the most in the consolidated sinking fund.

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