Consider the following statements about Sinking Fund : 1. It is a method of repayment of public debt. 2. It is created by the government out of budgetary revenues every year. Which of the statements given above is/are correct ?

A Sinking Fund is a specialized method for the repayment of public debt, where a government sets aside a portion of its revenue to ensure the timely redemption of outstanding liabilities [t2][t5]. In the Indian context, State Governments maintain a Consolidated Sinking Fund (CSF) with the Reserve Bank of India as a buffer for debt amortization [c1]. This fund is created by the government out of its budgetary revenues, typically by setting apart a specific amount each year—often ranging from 1-3 per cent of outstanding market loans—to be credited to the fund [c1][t7]. The 12th Finance Commission specifically recommended that all states maintain such funds to manage debt sustainability and avoid defaults [c1][t6]. By making regular contributions from the annual budget, the government ensures that sufficient funds are available to retire debt upon maturity without causing sudden fiscal shocks [t3][t7].

Sources

1. [1] https://en.wikipedia.org/wiki/Sinking_fund
2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CONSOLIDATED SINKING FUND (CSF) > p. 172
3. [3] https://coa.delhi.gov.in/pao/reserve-funds
4. [4] https://fincomindia.nic.in/asset/doc/commission-reports/12th-FC/reports/eng/Chapter%2012.pdf
5. [5] https://cag.gov.in/uploads/download_audit_report/2023/05-Executive-Summary-SFAR-2021-22-GoUP-064d37d3c2d26e7.85604506.pdf