Logical (Critical) Reasoning Questions for CLAT | QB Set 87

The Budget was presented against an extraordinary global backdrop. A rules-based (albeit imperfect) global order is rapidly unravelling. This has near-term uncertainties and medium-term concerns. Near-term uncertainties because as the rules of the game are suddenly, and arbitrarily, rewritten, markets are getting whiplashed almost every day. Which country will be the victim of the next set of tariffs? Is there any risk-free asset left in the world? Will muscular industrial policy in developed economies successfully jawbone global capital back?

Medium-term concerns because the political and economic balkanisation that this will inevitably engender is inimical to specialisation and exchange that underpinned the last 80 years of prosperity, notwithstanding the accompanying warts of heightened inequality and unsustainable imbalances. Generating growth in a splintered and cleavaged world will be hard.

So how should economies respond to these impulses? Heightened near-term uncertainty would argue for hunkering down: To build buffers and be fiscally and monetarily conservative. But a more bleak medium-term global growth outlook would argue for the opposite — be more adventurous and expansive to avoid getting dragged down into mediocrity. This is especially so because economic heft is the key to geopolitical leverage in this brave new world.

This, then, was the tension confronting this year’s budget. To be conservative and aggressive at the same time. One way to achieve this division of labour was to be conservative on the fiscal math but more expansive and adventurous on policy reforms.

The first task was achieved. Despite direct and indirect tax cuts, and a lower-than-expected nominal GD, policymakers met this year’s fiscal deficit target of 4.4 per cent of GDP and signaled a modest consolidation towards 4.3 per cent of GDP next year. Furthermore, the fiscal assumptions going forward are relatively conservative such that consolidation does not seem in any threat.

The first box was checked, but medium-term fiscal sustainability involves many more moving parts: It depends crucially on how growth pans out and whether state finances can be reined in. If nominal GDP growth averages 10 per cent over the next five years, the Centre will have to reduce its deficit further to about 3.6 per cent of GDP over four years to meet its debt target of 50 per cent of GDP by FY31. But unless state deficits are reined in, debt will continue to grow. Combined public debt – which is what matters for the economy – will barely move from 82 per cent to 79 per cent of GDP by 2031.

Things get more hairy if nominal GDP growth slips to 9 per cent, eminently possible in a world with growing Chinese excess capacity creating disinflationary pressures across Asia. The Centre will have to reduce its deficit to 3 per cent of GDP by FY31, and this is keeping in mind that the Eighth Pay Commission is expected to kick in from FY28. Furthermore, if state deficits remain at current levels, public debt to GDP will barely move in the next five years.

So, despite the progress made in recent years, the economy has its fiscal work cut out. This will inevitably curb the quantum of support the fiscal can keep providing to the economy.

First signs of this are already visible. Public capex was a key driver of the post-pandemic recovery, with central capex growing 30 per cent annually (in nominal terms) for the first four years. Things have inevitably slowed. Central capex slowed to 11 per cent in FY25, and if the revised estimates for FY26 are met, central capex growth would have slowed to 4.2 per cent this year. To be sure, authorities budget an 11.5 per cent growth in FY27 but, over a two-year period, this would still suggest a compound annual growth rate (CAGR) of less than 8 per cent (nominal) growth.

Meanwhile, central PSU capex growth has also averaged 8 per cent over the last three years, undershooting nominal GDP growth. Finally, state capex growth between April-December 2025 — the latest data available — has grown at a compound annual growth rate of 6 per cent (nominally) over the last two years.

So public sector capex — as a driver of growth — is inevitably slowing, as both fiscal space and absorptive capacity become constraints. The implication: The capex baton will have to progressively – and rapidly – pass to the private sector.

This is where aggressive and expansive policy reform intent becomes crucial to jump-starting animal spirits among domestic and foreign investors. On its part, the Budget identified seven strategic sectors – biopharma, the semiconductor mission, electronic components, rare earths, chemical parks, capital goods and textiles – and proposed several measures for each.

It also provided a tax holiday for the next two decades to any foreign company that provides cloud services to customers globally by using data center services from India. Separately, it created a safe harbour for the IT sector to protect it from tax uncertainty, and signalled setting up a high-level banking committee to review the sector.

These are all encouraging steps, but reforms are an ongoing process, and the structural ask is long. Policymakers will, therefore, need to be consumed with key questions in the coming months.

How does India jumpstart FDI to shore up capital flows and safely finance India’s current account deficit? How does India balance investments in strategic sectors – which tend to be much more capital intensive – with energising labour-intensive sectors which are key to generating employment and harnessing India’s large, and aspirational labour endowment?

How does India ensure the raft of the recently-signed Free Trade Agreements – for which policymakers must be commended – move the needle on exports? The budget made a slew of announcements on customs duties, but will a more overarching simplification and rationalisation of import duties eventually be needed to attract FDI and boost exports in a world of global value chains?

What will it take for India’s private sector to undertake a broad-based capex cycle in a world floating with Chinese excess capacity?

India is currently witnessing a smart cyclical upswing on the back of a raft of supports over the last year (income and GST cuts, monetary and regulatory easing, strong monsoon and low inflation). But these supports will eventually fade, and we need to plan for the morning after. At that point, it’s crucial that cyclical supports are replaced with structurally underpinnings.

Sustained policy reform translating into consistently strong growth will be India’s best insulation mechanism in the current global storm.

(Source: Indian Express)

Question 1

Which of the following best captures the central tension highlighted by the author while analysing the Union Budget?

A. The need to balance fiscal conservatism with ambitious policy reforms in a changing global order
B. The conflict between domestic welfare spending and defence expenditure
C. The trade-off between reducing taxes and increasing public sector employment
D. The challenge of managing inflation while expanding monetary policy

Correct Answer: A

Question 2

The author’s discussion of global “political and economic balkanisation” primarily serves to highlight that:

A. Globalisation has completely failed to deliver equitable growth
B. Developing economies will benefit more than developed economies
C. Long-term global growth prospects are threatened due to reduced specialisation and exchange
D. Protectionist trade policies will inevitably lead to short-term economic stability

Correct Answer: C

Question 3

Which of the following, if true, would most seriously undermine the author’s optimism regarding medium-term fiscal sustainability?

A. A steady increase in foreign portfolio investment over the next five years
B. A sharp reduction in global commodity prices
C. Faster-than-expected growth in labour-intensive manufacturing sectors
D. Continued high state-level fiscal deficits despite central fiscal consolidation

Correct Answer: D

Question 4

The author’s emphasis on slowing public sector capital expenditure most strongly supports which of the following conclusions?

A. Public sector enterprises are inefficient drivers of growth
B. Fiscal consolidation has already been completed
C. Private sector investment must increasingly take the lead in sustaining economic growth
D. State governments have completely withdrawn from infrastructure spending

Correct Answer: C

Question 5

Which of the following assumptions underlies the author’s argument that aggressive policy reforms are necessary to revive private sector investment?

A. Global demand conditions will remain permanently weak
B. Private investors respond positively to stable and reform-oriented policy environments
C. Public sector capital expenditure will increase again in the short term
D. India’s export performance is unaffected by global value chains

Correct Answer: B