Fiscal Policy & Revenue

Fiscal Policy & Revenue is part of Economic Development. Below are notes on 13 sub-topics, followed by practice MCQs from State PSC and UPSC papers.

Disinvestment and Privatization as Fiscal Tools

• Disinvestment: Reduction of government equity/stake in Public Sector Undertakings (PSUs); can be partial or complete.
• Privatization: The transfer of ownership, property, or business from the public sector (government) to the private sector.
• Disinvestment proceeds are classified as capital receipts.
• Department of Disinvestment: Created in December 1999; renamed Department of Investment and Public Asset Management (DIPAM) in 2016.
• Uses of Disinvestment Proceeds (via National Investment Fund - NIF, post-2013):
• Financing social sector schemes (e.g., education, healthcare).
• Public debt repayment/pre-payment.
• Meeting capital expenditure requirements of PSUs.
• Infusing funds into sick/turnaround PSUs and PSBs.
• National Investment Fund (NIF): Created in 2005; holds disinvestment proceeds.
• National Investment and Infrastructure Fund (NIIF):
• Announced in Union Budget 2015-16.
• Purpose: Enhance infrastructure facilities.
• Structure: A fund of funds, can manage multiple Alternative Investment Funds (AIFs).
• Initial planned corpus: ₹40,000 crore (GoI contributing 49%).
• Not an organ of NITI Aayog.
• Distinct from NIF.
• National Monetization Pipeline (NMP):
• Launched to unlock value in existing brownfield infrastructure assets.
• Focuses on transferring operational rights to private entities for a specified
• The Mineral and Metal Trading Corporation (MMTC) is one of the largest trading Government Companies of India.

period (ownership remains with the government).

• Instruments: Public-Private Partnership (PPP) concessions, Infrastructure Investment Trusts (InvITs), Real Estate Investment Trusts (ReITs).
• Top 3 estimated sectors for 2022-25: Roads, Railways, Oil & Gas Pipelines.
• Differs from disinvestment as it involves temporary transfer of operational rights, not permanent sale of equity/ ownership.
• Bharat 22 ETF:
• An Exchange Traded Fund (ETF).
• Launched to speed up the government's disinvestment program.
• ETFs are marketable securities.
• Union Budget 2020-21 Disinvestment Target:
• Total: ₹2.10 lakh crore.
• Breakdown: ₹1.20 lakh crore from CPSEs; ₹90,000 crore from PSBs & Financial Institutions.
• Key Definitions:
• Conglomerate: A company that acquired/merged with others, gaining stakes in various industries.
• Golden Handshake: A redundancy agreement offering a severance package to employees.
• Blue Chip: Stocks of nationally reputed companies known for profitability, quality, and reliability.
• Laissez Faire: An economic system with minimal government intervention in private transactions.

Fiscal Deficits: Concepts, measures, and financing of deficits

• Fiscal Deficit (FD):
• Definition: Total Expenditure – (Revenue Receipts + Non-debt Capital Receipts). Represents the government's total borrowing requirement for the financial year.
• Formula: FD = Primary Deficit + Interest Payments.
• Financing Methods: Net borrowing at home + Borrowing from Reserve Bank of India (RBI) + Borrowing from abroad.
• Relation: Always higher than or equal to Revenue Deficit. Fiscal Deficit is generally greater than Budgetary Deficit.
• Impact: High FD can lead to crowding out private investment, higher interest rates, and (if monetized) inflation.
• Revenue Deficit (RD):
• Definition: Revenue Expenditure – Revenue Receipts.
• Implication: Government is borrowing to finance expenses that do not create capital assets.
• Financing: Through borrowings (from public, RBI), disinvestment, or cutting revenue expenditure.
• Effective Revenue Deficit (ERD):
• Definition: Revenue Deficit – Grants for Creation of Capital Assets.
• Purpose: Accounts for revenue grants given for capital formation, which are productive.
• Primary Deficit (PD):
• Definition: Fiscal Deficit – Interest Payments.
• Significance: Reflects the current year's fiscal imbalance, excluding the interest burden on past loans.
• If Primary Deficit is zero, then Fiscal Deficit is exactly equal to Interest Payments.
• Budgetary Deficit (BD):
• Definition (older concept): Total Expenditure – Total Receipts (Revenue + Capital).
• Historically financed by ad-hoc Treasury Bills from RBI.
• Does not account for Balance of Payments deficit.
• Deficit Financing:
• Meaning: Government financing its deficit by borrowing, primarily from the central bank (RBI) or printing new currency.
• Methods: Borrowing from RBI (monetization of deficit), market borrowings (internal), external borrowings (e.g., World Bank), disinvestment.
• Impact: Increases money supply, leading to inflation. Strongly inflationary when borrowing from RBI.
• Purpose in India: Primarily used for economic development.
• Crowding Out: Contraction of private investment spending due to government deficit spending (high borrowing by government) leading to higher interest rates.
• Twin Deficit: Co-existence of a large Fiscal Deficit and a large Current Account Deficit.
• Measures to Reduce Deficits: Reducing revenue expenditure, rationalizing subsidies, increasing tax revenue, disinvestment.
• Modern Monetary Theory (MMT):
• Core Tenet: Sovereign currency-issuing nations (with floating exchange rates) cannot run out of money and can always finance spending.
• Fiscal Policy Stance: Advocate for government spending to achieve full employment without primary concern for fiscal deficit when there is unemployment.
• Inflation Control: At full employment, MMT prescribes taxes and government borrowing to manage aggregate demand and counter inflation.
• Key Fiscal Deficit Targets & Estimates (Union Budget, % of GDP):
• FY 2016-17 Target: 3.5%.
• FY 2018-19 Target: 3.3%.
• FY 2020-21 (Pandemic Revised Estimate): 9.2%.
• FY 2021-22 (Budget Estimate): 6.8% (Revenue Deficit: 4.1%, Primary Deficit: 3.1%).
• FY 2023-24 (Revised Estimate): 5.8% (States allowed 3.5% of GSDP).
• FY 2024-25 (Interim Budget Estimate): 5.1%.
• FY 2025-26 (Interim Budget Target): 4.5% (Fiscal consolidation roadmap aims below 4.5% by FY26).
• Additional Points:
• External liabilities reported in Union Budget are based on historical exchange rates.
• Interest payments are the single largest component of the Union Government's non-plan revenue (now often called committed) expenditure.
• Structural Adjustment Programme in India aimed for very low fiscal deficit.

Fiscal Federalism: Centre-state financial relations and Finance Commissions

• Finance Commission (FC): Constitutional body (Art. 280), appointed quinquennially, recommends on Centre-state financial relations including:
• Distribution of net proceeds of Union taxes (vertical devolution).
• Principles governing grants-in-aid to States.
• Measures for augmenting State Consolidated Funds for Panchayats & Municipalities.
• Main agency to recommend resource allocation between Centre and States.
• Supreme Court (Art. 131) is the main agency to resolve legal fiscal disputes between Centre and States.
• Does not primarily focus on urbanrural population disparity.
• Gadgil Formula: Introduced in 1969-70 for devolution of tax revenue from Centre to States.
• Finance Commission Chairmen & Periods:
• 9th FC: N.P.K. Salve
• 10th FC: K.C. Pant (Recommended 29% share for States from divisible pool).
• 11th FC: A.M. Khusro
• 12th FC (2005-10): C. Rangarajan
• 13th FC (2010-15): Vijay Kelkar
• Recommended 32.0% share of Central taxes for States.
• Highest weightage for devolution formula: Fiscal Capacity Distance.
• Recommended grant-in-aid to states: Rs. 3,18,581 crore.
• 14th FC (2015-20): Y. V. Reddy
• Recommended 42% share of net proceeds of Union taxes for States (significant increase from 32%).
• Highest weight for states' share: Income Distance.
• Criteria for tax sharing: Forest cover (7.5% weight).
• First to introduce 2011 Population data (for demographic change criterion) in the tax devolution formula.
• Recommended grant-in-aid to Panchayats: ₹ 200,292.20 Cr.
• 15th FC (2021-26): N.K. Singh
• Recommendation period: 2021-22 to 2025-26.
• Used 2011 Population data for the main 'Population' criterion.
• Allowed states a fiscal deficit of

to Power sector reform.

• Recommended grants-in-aid to States (2021-26): Rs. 2,33,233 crore.
• 16th FC: Arvind Panagariya (appointed Chairman).
• States' Revenue Sharing: States receive a share of revenue from Income Tax and Union Excise Tax. (Surcharges and Cesses on Income Tax are generally not shareable).
• GSDP Contribution (2023-24): Increasing order (typical scenario): Grants from Centre < Non-tax revenue < Share of Central taxes < State taxes.
• RBI Working Paper (Jan 2023) on States' Fiscal Performance:
• Telangana's average debt to GSDP (2014-19): 16.1%.
• States' percentage of Own Revenue Generation in Total Receipts is deteriorating.

Fiscal Responsibility and Budget Management (FRBM) Act

• Enacted in 2003 to institutionalize fiscal discipline.
• Primary objectives:
• Ensure inter-generational equity in fiscal management.
• Achieve long-term macroeconomic stability.
• Enhance transparency in fiscal operations.
• Key original targets (to be achieved by 2007-08, known as 'Golden Year of Fiscal Discipline'):
• Reduce revenue deficit to zero.
• Reduce fiscal deficit to 3% of GDP.
• Mandatory statements to be presented with the Union Budget annually:
• Medium-Term Fiscal Policy Statement.
• Macroeconomic Framework Statement.
• Fiscal Policy Strategy Statement.
• The Act includes 'escape clauses' allowing targets to be exceeded under specific circumstances: national security, national calamity, collapse of agricultural output, or structural reforms with adverse fiscal implications.
• The Central FRBM Act applies to the Central Government; States have enacted their own State FRBM Acts.
• The Act does not include penal provisions for non-achievement of targets.
• Twelfth Finance Commission (2005-10) recommended reducing the revenue deficit of both Centre and States to zero by 2009-10, leading to amendments in FRBM targets.
• N. K. Singh Committee (FRBM Review Committee) was constituted in 2016 to review the Act.
• N. K. Singh Committee recommendations include:
• Target a debt-to-GDP ratio of 60% for the general (combined) government by 2023.
• This 60% comprises 40% for the Central Government and 20% for the State Governments.
• Recommended the creation of a Fiscal Council.
• Article 293(3) of the Constitution mandates that a State must obtain the Central Government's consent for raising any loan if it owes outstanding liabilities to the Centre.
• FRBM Act is a fiscal reform and is not associated with financial sector reforms initiated after 1991.
• Public Sector Borrowing Requirement (PSBR) is a more comprehensive measure of fiscal deficit, including borrowings by Central, State Governments, and Public Sector Undertakings (PSUs). The FRBM Act does not explicitly require reporting PSBR.

Government Budgeting: Structure, types, and implications

• Economic Survey of India: Published by Ministry of Finance. Presented a day before Union Budget.
• Budget: Instrument of fiscal policy.
• Budget preparation: Handled by Department of Economic Affairs (DEA), Ministry of Finance.
• Budget core team: Includes Finance Minister, Finance Secretary, DEA Secretary, Revenue Secretary, Expenditure Secretary, Chief Economic Advisor. Chairman of CBDT is not part of core budget preparation team.
• Revenue estimates: Prepared by Ministry of Finance.
• Financial Management: Includes budget preparation, budget audit, and accounts of public expenditure.
• Budget preparation data: Uses previous FY actuals, current FY revised estimates, and next FY budget estimates. Not current FY actual expenditure.
• Financial Year in India: April 1 to March 31.
• Shankar Acharya Committee: Recommended shifting to January-December financial year.
• Railway Budget merger: Merged with Union Budget in Budget 2017-18.
• Budget structure: Consists of Revenue Budget and Capital Budget.
• Revenue Budget: Transactions with implications up to 1 year. Comprises Revenue Receipts & Revenue Expenditure.
• Revenue Receipts: Tax Receipts (e.g., income tax, corporate tax, GST) and Non-Tax Receipts (e.g., interest receipts, profits/ dividends from PSUs, grants). Small Savings are not revenue receipts.
• Revenue Expenditure: Does not create assets; includes salaries, pensions, subsidies, interest payments, grants.
• Capital Budget: Transactions with implications over 1 year. Comprises Capital Receipts & Capital Expenditure.
• Capital Receipts: Create liabilities or reduce assets. Examples: Market loans, external borrowings, disinvestment receipts, loan recoveries, small savings (e.g., Provident Fund deposits), net market borrowing. Grants are generally not capital receipts.
• Capital Expenditure: Creates assets or reduces liabilities. Examples: Expenditure on assets (roads, buildings, machinery), loans & advances to States/UTs.
• Typical Budget magnitudes (highest to lowest for India): Revenue Expenditure > Revenue Receipts > Capital Expenditure > Capital Receipts.
• Zero-Base Budgeting (ZBB): Introduced in India (e.g., 1987-88). Technique requiring justification of entire budget from scratch, critically reviewing every scheme.
• Non-Plan Expenditure (pre-2017 reform): Included defence, interest payments, salaries, pensions, subsidies.
• Highest Ministry allocation (e.g., 2021-22, 2023-24): Ministry of Defence.
• Railway Budget 2015 innovation council: 'Kayakalp'.
• Union Budget 2015-16: Proposed India Financial Code, Student Financial Aid Authority. No change in personal income tax. Defence allocation was not kept unchanged at 5% of GDP.
• Union Budget 2017-18 main themes: Farmers, rural population, youth, poor, infrastructure, financial sector, digital economy, public services, prudent fiscal management. Export performance was not a main theme.
• Union Budget 2022-23: Estimated total expenditure ₹39.45 Lakh Crore. PM Awas Yojana allocation ₹48,000 crores.
• Union Budget 2023-24: Adopted Seven Priorities ('Saptrishi') for 'Amrit Kaal'.
• Union Budget 2023-24 Outlay (Rupee Goes To): Interest Payment (20%), State Share of Taxes (18%), Defence (8%), Subsidies (7%). (Subsidies were 7%, not 9%).
• Union Budget 2023-24 Allocations: Ministry of Health (₹89,155 Crore) for overall budget, Dept. of Health & Family Welfare (~₹80,000 Crore), Dept. of Health Research (~₹9,155 Crore), PM Jan Arogya Yojana (~₹7,200 Crore).
• Union Budget includes: Railways, Posts and Telegraphs. Does not include Municipalities or Panchayats (local bodies).
• Auditing purpose: To certify the financial position and authenticate true and fair view of accounts.

Impact of Fiscal Policy on Income Distribution, Inflation, and Employment

• Impact on Income Distribution:
• Income redistribution is best achieved through progressive taxation (higher tax rates on higher incomes) combined with progressive expenditure (expenditure that disproportionately benefits lower-income groups).
• The "Robinhood effect" refers to income redistribution, typically from richer to poorer.
• Regressive expenditures (expenditure that disproportionately benefits higher-income groups or harms lower-income groups) increase economic inequality.
• Rationalizing subsidies can either increase or decrease inequality depending on whether the subsidies primarily benefited the poor or the rich, and how rationalization is implemented.
• To bridge economic inequality, governments would adopt progressive tax policies but not regressive expenditures.
• During crises (e.g., COVID-19), putting more money directly into the hands of the poor (e.g., direct cash transfers, free food grains) is often advocated to boost demand and provide relief.
• Loan waivers to farmers can impact private consumption (via increased net wealth), public sector finances (via changes in government expenditure/taxes), lead to crowding-out (higher borrowing by state governments), and potentially crowding-in (improved bank balance sheets, more credit availability as NPAs fall).
• Impact on Inflation:
• High fiscal deficits, especially when financed by creating new money (monetization of deficit), are highly inflationary as they directly increase money supply and aggregate demand.
• Borrowing from the public to finance a budget deficit is less inflationary than creating new money but can lead to crowding out of private investment.
• Repayment of public debt generally has a deflationary or neutral effect if financed through taxes.
• Factors making the Indian Government responsible for inflationary tendencies include: rising administered prices (govt-set prices), and increased indirect taxation (cost-push inflation).
• Rising oil prices are largely global, but domestic taxes on fuel contribute to retail price inflation.
• Deficit financing (increasing money supply) is not always inflationary; it raises production and helps employ unutilized resources if supply conditions are elastic (economy has slack). It becomes inflationary when the economy is near full capacity.
• Inflation Measurement:
• Headline inflation measures total inflation, including volatile components like food and energy prices, making it more volatile than core inflation.
• Core inflation excludes volatile components (food and energy prices) to indicate underlying inflationary trends.
• The Consumer Price Index Number for Industrial Workers (CPI-IW) is published by The Labour Bureau.
• Impact on Employment:
• Government spending (fiscal stimulus) directly increases aggregate demand, stimulating production and employment, especially when there are unutilized resources.
• An additional spending by the government (direct injection) generally has a larger multiplier effect on income (multiplier = 1/ (1-MPC)) than an additional transfer of the same amount to households (multiplier = MPC/(1-MPC)).
• Fiscal stimulus is more effective if accompanied by an expansion in money supply. Without it, rising interest rates (crowding out) can dampen the impact on income and employment.
• Automatic Stabilizers:
• Personal income tax acts as an automatic fiscal stabilizer: during economic booms, tax collections automatically rise (slowing growth), and during recessions, tax collections automatically fall (cushioning the downturn), without explicit policy changes.
• Recent Fiscal Policy Examples (Economic Survey 2022-23, COVID-19):
• In response to global supply disruptions, the Government of India reduced taxes on fuel and certain imported products. It also increased food and fertilizer subsidies to cushion consumer/farmer impact.
• Measures like extension of Atmanirbhar Bharat Rozgar Yojana, Credit Guarantee Scheme for Micro Finance Institutions, and free food grains under PMGKY are examples of COVID-19 economic stimulus/relief packages.
• "Non-Release of climate resilient special traits varieties" is not an economic stimulus package for COVID-19 relief.

Objectives and Components of Fiscal Policy

• Fiscal Policy (FP): Government's use of public expenditure, taxation, and public debt to influence the economy.
• FP Formulation (India): Ministry of Finance.
• Instruments/Tools of FP: Public expenditure, taxation, public debt, deficit financing, budget.
• Not Instruments of FP: Interest rate, credit availability (monetary policy); production policy, foreign policy, trade policy.
• Objectives of FP:
• Price Stability (control price level).
• Full Employment (or near full employment).
• Economic Growth (maintain growth rate).
• Capital Formation.
• Equitable Distribution of Income & Wealth.
• Regional Balance.
• Boost economic activity (financial stimulus).
• Not Objectives of FP: Unemployment (it's a problem, not an objective), regulation of inter-state trade.
• Expansionary FP: Involves increasing government spending or decreasing taxes (e.g., a Rs. 10 billion increase in government spending).
• Financial Stimulus: Intense government action to boost economic activity.
• Supply-side economics: Emphasizes the producer's perspective.
• Union Budget 2017-18 Objectives/Themes: Transform India, Clean India, Energize India. "Educate India" was NOT an objective/ theme.
• Budget Themes: Specific to each financial year (e.g., 'Atmanirbhar Bharat' has been a significant national theme in recent years).

Public Debt: Sources, types, debt sustainability, and management

• Public Debt: Funds borrowed by the government to finance expenditure exceeding revenue.
• Maximum resources for India's public expenditure under plans are mobilised from borrowings.
• Sources of Public Debt:
• Internal Debt: Loans from commercial banks, financial institutions (LIC, GIC), Provident Funds, Small Savings (KVP, NSC, PPF), Reserve Bank of India, household financial savings (via G-Secs, small savings).
• External Debt: Loans from International Financial Institutions (IMF, World Bank), foreign governments, foreign commercial banks.
• IMF is a source of external public debt.
• Types of Public Debt & Instruments:
• Gilt-edged Securities: Securities issued by the Government; considered very safe due to sovereign guarantee. The 'Gilt-edged' market deals in government securities.
• Treasury Bills (T-Bills): Short-term (e.g., 91, 182, 364 days) zero-coupon instruments issued by the Central Government.
• Government Securities (G-Secs) / Dated Securities: Long-term (e.g., 5 to 40 years) interest-bearing instruments issued by Central and State Governments. T-Bills have shorter maturity than G-Secs.
• Special securities issued to RBI/other institutions are also components of internal debt.
• Kisan Vikas Patra (KVP): Small savings instrument relaunched by Modi Govt.
• Available in denominations of Rs. 1,000, Rs. 5,000, Rs. 10,000, and Rs. 50,000.
• No upper ceiling on investment.
• No tax benefits are available on these investments (i.e., interest/ capital gains not exempt).
• Inflation-Indexed Bonds (IIBs):
• Provide protection to investors from inflation uncertainty as principal and/or interest is adjusted for inflation.
• Government can potentially reduce real coupon rates on borrowing as inflation risk premium is removed.
• Interest received and capital gains on IIBs are taxable.
• Redeemable Debt: Debt where the principal amount is repaid by the government on maturity, with interest paid until then.
• Irredeemable/Perpetual Debt: Debt where the government only pays interest, and the principal is never returned.
• Debt Sustainability & Management:
• Debt-trap: A situation where a country needs to borrow more money (aid/ debt) to meet its existing debt servicing requirements (interest and principal repayments).
• Fiscal Policy Weakening: Public debt, fear of capital flight, and interest sensitiveness of investment can all weaken the effectiveness of fiscal policy.
• Government debt (e.g., USA's) is typically backed by the "full faith and credit" of the government (ability to tax and generate revenue), not by hard assets. Default means claims cannot be exercised.
• Thirteenth Finance Commission (13th FC): Proposed the combined debtGDP ratio of the Centre and States should be 68% by 2014-15 (Centre 45%, States 23%).
• Public sector savings in India turned positive from the year 2003-04, after being negative from 1998-99.
• S.S. Tarapore Committee (1997): Formed to lay out a roadmap for Capital Account Convertibility (CAC). India has achieved full Current Account Convertibility but not full Capital Account Convertibility.
• Tax Concepts (for differentiation):
• Regressive Tax: A tax where the tax rate decreases as the income of the taxpayer increases.

Public Expenditure: Classification, trends, and impact on development

• Public Expenditure Classification:
• Revenue Expenditure: Recurring, annual, does not create assets or reduce liabilities. Examples: Salaries, interest payments, subsidies, pensions, defence (operational costs), maintenance (e.g., worn-out machine parts). High revenue expenditure can indicate resource misallocation or backwardness if it crowds out productive investment.
• Capital Expenditure: Non-recurring, creates assets or reduces liabilities. Examples: Infrastructure (roads, power), irrigation, government loans. High capital expenditure is generally positive for long-term economic growth and can facilitate private investment.
• Plan Expenditure: Historically, expenditure on specific plans and schemes for development.
• Non-Plan Expenditure: Recurring expenditure not tied to specific plans. Includes interest payments, defence, subsidies, pensions, public administration, and maintenance of existing assets/infrastructure created in previous plans. Public administration expenditure falls under non-plan.
• Developmental Expenditure: Directly contributes to economic development. Examples: Expenditure on economic services (agriculture, industry, energy, transport), social and community services (education, health), grants to states for developmental projects. Defence expenditure is NOT considered developmental.
• Non-Developmental Expenditure: Does NOT directly contribute to economic development. Examples: Interest payments, subsidies, defence expenditure.
• Major Components of Union Government Expenditure:
• Largest/Major Item of Revenue/NonPlan Expenditure: Interest Payments consistently comprise the major portion or largest item (e.g., Union Budget 2022-23, 2023-24, 2015-16, 2011-12, 2008-10, and generally in recent years).
• Other significant revenue/non-plan expenditure items: Defence services, Major subsidies, Pensions.
• In recent Union Budgets (e.g., 2023-24), after Interest Payments, States' share of taxes and duties, Centrally Sponsored Schemes, and Central Sector Schemes are major outlays.
• Budget 2025 (Projected Trend): Interest Payments > State taxes/duties > Central Sector Schemes > Centrally Sponsored Schemes.
• Expenditure Policy: Must be Elastic (flexible).
• Specific Budget Data/Trends (Historical Context for MCQs):
• RBI Study on State Finances (latest for MCQ context): Capital spending is maximum on Water Supply and Sanitation.
• Budget 2017-18: MGNREGA allocation Rs. 48,000 Cr. Agriculture credit target Rs. 10 Lac Crore. 100 percent village electrification targeted by 1 May, 2018. Total allocation for rural, agriculture and allied sector was significantly higher than Rs. 80,000 crore.
• Budget 2011-12: Transport sector allocated largest outlay.
• Budget 2010-11 Central Plan Outlay (descending order): Transport > Rural Development > Social Services > Energy.
• Budget 2021-22 Railway Allocation: Rs. 1,10,055 crore.
• State Expenditure on Infrastructure (2019-23 Ranking): 1. Uttar Pradesh, 2. Maharashtra, 3. Tamil Nadu, 4. Karnataka.
• Institutions & Definitions:
• National Investment and Infrastructure Fund (NIIF): Created to support infrastructure projects in the country.
• Global Infrastructure Facility (GIF): A World Bank collaboration that facilitates the preparation and structuring of complex infrastructure Public-Private Partnerships (PPPs) to enable mobilization of private sector and institutional investor capital.
• Public Finance Scope: Studies financial activities of the Government, including Analysis of Public Expenditure, Public Revenue, and Financial Administration. It does NOT include the functioning of Commercial Banks.
• Audit of Public Enterprises: Includes Government Department Audit, Government Statutory Corporations Audit, and Government Companies Audit. Does NOT typically include Co-operative Societies Audit.
• Contingencies: The cost of unforeseen items or for the expenses of miscellaneous petty items which do not fall under any subhead of item or work.
• Central vs. State Government Expenditure:
• Central Government expenditure includes: Debt servicing, defence expenditure, administrative expenses of the Central Government.
• Maintenance of law and order and police force is primarily a State Government expenditure.
• Investment spending by public companies is corporate spending and not strictly regarded as "public expenditure" in the government budget context.

Role of Fiscal Policy in Economic Stabilization and Growth

• Fiscal Policy: Government's use of spending and taxation to influence the economy, aiming for stabilization and growth.
• John Maynard Keynes: Introduced fiscal policy as a tool to rectify economic downturns, notably the Great Depression of 1929-30.
• Economic Recession Measures (Expansionary Fiscal Policy): In a recession, government typically increases expenditure on public projects and/or cuts tax rates to stimulate demand and growth.
• Economic Boom/Inflation Measures (Contractionary Fiscal Policy): In periods of high inflation or overheating economy, government may decrease expenditure and/or increase tax rates to curb demand.
• Fine tuning of demand: Refers to the practice of actively using fiscal and monetary policy to stabilize the economy.
• Rahn Curve: A graphical representation indicating an optimal level of government spending that maximizes economic growth; beyond this point, further increases in government spending may impede growth.
• Twelfth Five Year Plan (2012-17): Aimed for "Faster, Sustainable and More Inclusive Growth."
• COVID-19 Economic Stimulus (India): Government of India and RBI together announced a stimulus worth ₹ 29.87 lakh crore, which amounted to 15% of GDP, to mitigate the pandemic's economic impact.

Sources of Government Revenue: Tax and Non-Tax Revenue

• Government revenue sources are broadly classified into Tax Revenue and Non-Tax Revenue.
• Tax Revenue: Compulsory payments to the government by individuals/entities.
• Direct Taxes:
• Imposed on income and wealth.
• Examples: Income Tax (personal), Corporate Tax, Wealth Tax, Capital Gains Tax.
• Corporate Tax (or Corporation Tax) is a major direct tax on company profits, collected by the Union Government.
• Income Tax (other than Corporate Tax) is a direct tax on individual income, collected by the Union Government but shared with states.
• Expenditure Tax was introduced in India by T.T. Krishnamachari.
• Indirect Taxes:
• Imposed on commodities and services, borne by the final consumer.
• Examples: Goods and Services Tax (GST), Union Excise Duties, Customs Duty, Sales Tax (pre-GST), Service Tax (preGST), Value Added Tax (VAT).
• GST is a comprehensive indirect tax introduced in 2017, subsuming various central and state indirect taxes.
• Union Excise Duty is levied on the production of goods.
• Customs Duty is levied on imported and exported goods.
• Service Tax was increased from 10% to 12% in Union Budget 2006-07.
• Central Government Tax Revenue Sources (Major Contributors, order varies by year):
• Historically (pre-GST): Corporate Tax, Income Tax, Union Excise Duties, Service Tax. Corporate Tax often highest.
• Post-GST (e.g., 2019-20 BE, 2022-23, 2023-24): GST and Corporate Tax are generally the largest contributors to the Union Government's gross tax revenue, followed by Income Tax. Their relative rank (1st or 2nd) can vary annually.
• In Budget Estimates 2020-21, Corporate Tax was 18%, Income Tax 17%, Customs 7%, Central Excise 4%.
• Least source of income to Government of India can be Customs Duty or Union Excise Duty (post-GST consolidation).
• State Government Tax Revenue Sources:
• Examples: Land Revenue, Registration Fee, Commercial Tax, State GST, Motor Vehicle Tax, Entertainment Tax, Excise on alcoholic liquors, Professional tax.
• Land Revenue is collected and utilized by State Governments.
• Customs Duty is not a source of tax revenue for State Governments.
• Tax-GDP Ratio: India's Tax-GDP ratio was approximately 11.7% in FY 2021-22.
• Personal Income Tax: Proceeds are shared between Central and State Governments. The percentage of people giving personal income tax in India is low.
• Production Taxes: Excise Duty is a production tax. (Stamp Duty and Property Tax are generally not considered production taxes in the same vein).
• Non-Tax Revenue: Government income from sources other than taxes.
• Examples: Interest receipts (on loans given by government), Dividends and profits (from Public Sector Undertakings - PSUs), External grants, Disinvestment Receipts (classified under Capital Receipts but often listed with non-tax revenue receipts in discussions), Spectrum Fees, License fees, Tolls.
• Non-Tax Revenue receipts for the Union Government include: Disinvestment Receipts, Spectrum Fees, Dividends from PSUs, and Interest Received on Loans given by the Government.
• Cess and Surcharge:
• Cess: A tax levied for a specific purpose, usually temporary. The Union Government imposed a 0.5% cess on all taxable services to fund the 'Swachh Bharat Programme' (historically, before GST).
• Bharatnala Pariyojana (National Highways) is funded from: Cess collected from Petrol and Diesel, Amount collected from Toll, and External assistance.
• Union Budget 2021-22 proposed an Agriculture Development Cess.
• Surcharge on taxable income has been recommended for "expansion of education".
• Black Money:
• Refers to income on which tax is evaded or assets not reported to the Government.
• The main cause of worry for the Government of India is the loss of revenue to the State Exchequer due to tax evasion.
• Income Declaration Scheme (IDS), 2016, launched by the Finance Minister, declared approximately ₹ 65,250 crore till September 30, 2016.
• Voluntary Disclosure Scheme 1997 was launched by the Finance Minister with effect from 1st July 1997.
• "Tax havens" are typically small countries which impose low or no tax on foreign individuals/businesses.
• Foreign Direct Investment (FDI):
• The FDI limit in the insurance sector was increased to 74%.
• Diesel Pricing Policy:
• The price of diesel in India consists of: Fuel component + Customs duty + Excise duty + Sales VAT + Dealer's commission.
• Asia Pacific Tax Hub:
• Launched by the Asian Development Bank (ADB) for better tax coordination among its members.
• Kisan Vikas Patra (re-issued by Modi government):
• Investment can be made in denominations like Rs 1,000, Rs 5,000, Rs 10,000, and Rs 50,000.
• There is no limit on the maximum amount of investment.
• However, no tax benefit is given under this scheme.

Subsidies: Types, rationale, and economic implications

• Subsidies: Financial assistance by government to individuals or businesses; aims to lower prices, promote production, or support income.
• Rationale: Social welfare, economic stability, promoting specific sectors, correcting market failures.
• Economic Implications: Can distort market prices, lead to inefficient resource allocation, increase fiscal deficit.
• Analogy: Subsidies are akin to steroids as prescriptions – offer short-term relief, not enduring cure.
• Opportunity Cost: When a commodity is provided free by the Govt, the opportunity cost transfers from consumers to the taxpaying public.
• Direct Benefit Transfer (DBT):
• Objectives: Ensure direct transfer to bank accounts electronically, reduce payment delays, curb pilferage & duplication. Not primarily for increasing economy-wide investment.
• 'Pahal' scheme: Related to Direct Benefit Transfer for LPG (DBTL).

selected schemes.

• Viability Gap Funding (VGF): Central Government scheme supporting economically justified infrastructure projects that are marginally short of financial viability.
• Jan Samarth Portal: National portal for credit-linked government schemes.
• Major Subsidy Expenditures:
• Food Subsidy: Highest expenditure among major subsidies in BE 2019-20 and 2023-24.
• Urea Subsidy: Expenditure estimated at ₹ 0.48 lakh crore in BE 2020-21.
• Petroleum Subsidies & Deregulation:
• Decontrol of fuel prices: Prices fixed by oil firms, market-linked (no more subsidy), aligned to global crude prices, and change periodically.
• Subsidies on PDS kerosene and domestic LPG are borne by the Consolidated Fund of India.
• Oil Pool Account: Dismantled w.e.f.
• UDAY (Ujwal DISCOM Assurance Yojana): Scheme for financial turnaround and revival of power distribution companies (DISCOMs).
• Committees:
• Kirit Parikh Committee: Suggested methodology for pricing of diesel and cooking fuel.
• Dr. R. A. Mashelkar Committee: Recommended a national auto fuel policy, including Bharat Stage II Emission Norms throughout the country by April 1, 2005 (not 2004).
• Fiscal Management:
• Curbing Revenue Deficit: Advisable measures include cutting expenditures on subsidies and cutting social expenditures.
• Historical Context: Subsidy as a percentage of GDP was highest around 2008-09.

Taxation System in India: Direct, Indirect taxes, and Tax Reforms (including GST)

• Fiscal Policy & Revenue: Taxation System in India
• I. General Principles of Taxation
• Direct Taxes:
• Impact and incidence fall on the same person (burden cannot be shifted).
• Examples: Income Tax, Corporate Tax, Wealth Tax, Gift Tax, Capital Gains Tax, Securities Transaction Tax (STT).
• Tend to reduce inflation.
• Indirect Taxes:
• Impact and incidence fall on different persons (burden can be shifted).
• Examples: Goods and Services Tax (GST), Value Added Tax (VAT), Customs Duty, Excise Duty, Service Tax, Sales Tax, Entertainment Tax, Luxury Tax.
• Tend to promote inflation.
• High ratio of indirect taxes to total revenue leads to rise in price level and higher burden on the poor (regressive nature).
• Generally cheaper and easier to collect.
• Types of Tax Systems:
• Progressive Tax: Tax rate increases as income/wealth increases. (India's Income Tax). Based on 'ability to pay' principle.
• Ability to Pay Principle: Amount of taxes people pay should relate to their income or wealth.
• Regressive Tax: Tax rate decreases as income/wealth increases, or fixed tax takes a larger share from lower incomes. (Sales Tax can be regressive).
• Proportional Tax: Same tax rate for all income levels. Not equitable, less elastic than progressive.
• Degressive Tax: Progressive up to a certain income limit, then proportional.
• Other Principles:
• Benefit Principle: Individuals taxed in proportion to benefit received from Government programs.
• Adam Smith's Canons of Taxation: Equality, Certainty, Convenience, Economy. (Canon of Fiscal Adequacy was NOT advocated by Adam Smith).
• Tax Incidence/Burden:
• Independent of who the tax is explicitly imposed upon.
• Depends on elasticity of demand and supply curves.
• Shifted forward to consumers if demand is inelastic relative to supply.
• Shifted backward to producers if supply is relatively more inelastic than demand.
• Tax Expenditure: Revenue foregone by the Government due to exemptions, deductions (e.g., corporation tax exemptions, accelerated depreciation, export profits from SEZ units).
• Laffer Curve: Represents the relationship between tax rates and government revenue.
• II. Direct Taxes in India
• Income Tax:
• Direct and progressive tax.
• Mumbai pays the highest income tax.
• 'Sugam' Income Tax Return form: For small businessmen.
• Aayakar Setu: Mobile app by CBDT for tracking TDS, paying taxes, and applying for PAN.
• Exemptions: Members of Scheduled Tribes in Manipur, Mizoram, Nagaland, and Tripura (under Section 10(26) of Income Tax Act).
• Senior Citizens: 'Very Senior Citizens' (80 years and above) category introduced in Budget 2011-12.
• Agricultural Income: Taxation on agricultural income in India is relatively low.
• Cryptocurrency Tax (Budget 2022-23): 30% tax plus cess on income from transfer of Virtual Digital Assets.
• Corporate Tax (Corporation Tax):
• Direct tax levied by the Central Government on the profit (before distribution of dividend) of registered companies and corporations.
• Not levied on individuals or Hindu Undivided Families (HUFs).
• 2% TDS (Tax Deducted at Source) on cash withdrawal of more than Rs. 1 crore from banks (introduced in 2019 Finance Bill).
• Capital Gains Tax:
• Tax on profit realized when an investment/asset is sold for a higher price than its original purchase price.
• Triggered only when an asset is 'realized' (sold), not while held.
• Short-term capital gain: If an asset is held for less than 24 months (duration may vary by asset type).
• Cost Inflation Index: Helps reduce inflationary gains, thereby reducing long-term capital gains tax.
• Surcharge: As of April 1, 2022, 15% surcharge may be levied on LongTerm Capital Gains on all types of assets.
• Angel Tax:
• A type of capital gains tax imposed when unlisted start-ups receive funding at a share price higher than the fair market value of shares sold.
• Start-ups registered with the Department for Promotion of Industry and Internal Trade (DPIIT) are exempted under certain conditions.
• Wealth Tax: A direct tax, recommended for abolition by the Kelkar Committee.
• Minimum Alternative Tax (MAT): Introduced in the 1996-97 Budget.
• General Anti-Avoidance Rule (GAAR):
• Aimed at curbing aggressive tax planning and tax avoidance by overseas and domestic investors.
• Implemented from April 1, 2017.
• Direct Tax Code (DTC):
• Related to Income Tax.
• Task Force constituted in November 2017 to review the Income Tax Act, 1961, and draft a new Direct Tax Law; Convenor was Shri Arbind Modi.
• III. Indirect Taxes (Pre-GST & Post-GST)
• Value Added Tax (VAT):
• An indirect, consumption-based tax.
• Replaced Sales Tax (not Customs Duty or Excise Duty directly, but many state-level sales taxes).
• Imposed on all stages between production and final sale.
• First introduced in Haryana in India (2005).
• Karnataka collects VAT through Epayment.
• Central Value Added Tax (CENVAT): Related to Union Excise Duties.
• Excise Duty:
• An indirect tax levied at the time of manufacture of any product.
• Central Excise Duty was subsumed under GST.
• Petroleum Products: Basic Excise Duty is shareable with states; Additional Excise Duty and Special Additional Excise Duty on petroleum products are NOT shareable with states.
• Customs Duty:
• An indirect tax levied on import (and sometimes export) of goods.
• Levied by the Central Government.
• NOT subsumed under GST.
• Service Tax:
• An indirect tax, introduced during 1994-95.
• Subsumed under GST.
• Central Sales Tax (CST):
• Levied on interstate trade.
• Levied in Union Territories and Special Economic Zones (SEZs).
• Burden of CST was removed with GST introduction.
• Cesses:
• Swachh Bharat Cess (SBC): Rate was 0.5% (prior to GST).
• Krishi Kalyan Cess (KKC): Rate was 0.50%, calculated similar to Service Tax (prior to GST).
• Both SBC and KKC were subsumed into GST.
• Toll Tax: Generally not a tax/duty levied by the Government of India, but by highway operators or local bodies.
• IV. Goods and Services Tax (GST)
• Motto: 'One Tax, One Market, One Nation'.
• Nature: Destination-based consumption tax. It replaced a production-based taxation system.
• Implementation:
• Came into effect from July 1, 2017.
• Introduced by Finance Minister Arun Jaitley.
• Proposed by a task force headed by Vijay Kelkar.
• Recommended by the 13th Finance Commission.
• Constitutional Amendment:
• Implemented through the 101st Amendment of the Constitution of India.
• The Constitution (122nd Amendment) Bill, 2014 was related to GST.
• Taxes Subsumed under GST:
• Central Taxes: Central Excise Duty, Service Tax, Central Sales Tax, Additional Excise Duties, Excise Duty under Medicinal & Toilet Preparations Act, Additional Customs Duty (CVD), Special Additional Customs Duty (SAD), Central Cesses & Surcharges on supply of goods/services.
• State Taxes: State VAT/Sales Tax, Purchase Tax, Luxury Tax, Entry Tax (all forms), Entertainment Tax (except those levied by local bodies), Taxes on advertisements, lotteries, betting & gambling, State Cesses & Surcharges relating to supply of goods/services.
• Items NOT Covered/Subsumed under GST:
• Alcohol for human consumption.
• Five petroleum products: Crude oil, Petrol, High-speed diesel, Aviation Turbine Fuel (ATF), Natural Gas.
• Electricity.
• Basic Customs Duty.
• Property Tax, Stamp Duty, Income Tax, Corporate Tax.
• GST Structure:
• CGST (Central GST): Levied by the Centre on intra-state supply.
• SGST (State GST): Levied by the State on intra-state supply.
• IGST (Integrated GST): Levied by the Centre on inter-state supply and imports. (Shared between Centre and States).
• Most goods and services taxed under GST are shared by the Central and State Governments in a 50:50 ratio.
• GST is based on a system of concurrency of indirect taxes, benefiting consuming states.
• GST Council:
• Chaired by the Union Finance Minister.
• Union Minister of State in charge of Finance is a member.
• Every decision is taken by a majority of not less than three-fourths (75%) of the weighted votes of members present and voting.
• Decides tax rates, exempted goods, and thresholds.
• A seven-member committee headed by Himanta Biswa Sarma was formed to address states' revenue shortfalls after GST rollout.
• GST Rates & Exemptions:
• Maximum GST rate prescribed by law is 40% (20% CGST + 20% SGST), though highest slab is 28%.
• Electric vehicles: GST reduced from 12% to 5% (2019).
• Electric vehicle chargers: GST reduced from 18% to 5%.
• 0% GST: Sanitary napkins, raw material for brooms, Rakhi, marble deities.
• Unworked diamonds: 0.25% GST.
• Precious metals: 1% GST.
• Exempted Goods (examples): Cereal grains hulled, chicken eggs cooked, newspapers containing advertising material. (Fish processed and canned is NOT exempted).
• GST Exemption Thresholds:
• Businesses supplying goods: Aggregate turnover less than INR 40 lakhs in a financial year (general).
• Hilly/Northeastern states (goods suppliers): Exemption limit is Rs. 20 lakhs.
• Hilly/Northeastern states (service suppliers): Exemption limit is Rs. 10 lakhs.
• Input Tax Credit (ITC): A mechanism under GST to avoid double taxation by allowing businesses to claim credit for taxes paid on inputs.
• e-Way Bill: A document required to be carried by a person in charge of a conveyance carrying any consignment of goods (if value exceeds a certain limit).
• Harmonised System of Nomenclature (HSN) Code:
• Multipurpose international product nomenclature for systematic classification of goods.
• Developed by the World Customs Organization (WCO).
• Applies to Customs and GST in India.
• Per Capita GST Revenue (FY 2017-18, descending order): Haryana, Maharashtra, Karnataka, Punjab.
• V. Tax Reforms & Committees
• Chelliah Committee (Raja J. Chelliah, 1991):
• Recommended comprehensive tax policy reforms.
• Recommended abolition of tax rebates under Section 88 of the Income Tax Act.
• Kelkar Committee (Dr. Vijay L. Kelkar, 2002):
• Recommended tax reforms, including:
• Abolition of Wealth Tax.
• Elimination of standard deduction.
• Exemption from tax on dividends and capital gains from listed equity.
• Proposed the Goods and Services Tax (GST).
• Also recommended abolition of tax rebates under Section 88.
• Post-Economic Reform Period (1991 onwards): Tax reform measures generally implied a decline in tax rates and efforts to reduce evasion.
• VI. International Taxation
• 'Two-pillar solution/package': Refers to the proposal for a minimum global corporate tax (OECD/G20 initiative).
• Base Erosion and Profit Shifting (BEPS): Refers to curbing tax evasion by multinational companies.

8. Planning

Practice MCQs: Fiscal Policy & Revenue

Disinvestment and Privatization as Fiscal Tools

1. Which one of the following statements is not correct?

   Asked in: KPSC KAS Prelims 2024

   1. Creation of National Investment and Infra‐ structure Fund (NIIF) was announced in the Union Budget, 2015-16.
   2. NIIF is a fund for enhancing infrastructure facility in the country. B. Only two statements are incorrect
   3. All three statements are incorrect
   4. All statements are correct
   Show answer

   Answer: B. NIIF is a fund for enhancing infrastructure facility in the country. B. Only two statements are incorrect

   - Software and Business services are the largest components of India's services exports. - NMP focuses on monetizing existing public assets. - The INR's share in global forex turnover was 1.6% as per the 2022 BIS survey.

2. Which among the following is the largest trading Government Company of India ?

   Asked in: UPPSC Upper Mains 2008 · UPSC CDS 2 2016

   1. Food Corporation of India
   2. Mineral and Metal Trading Corporation.
   3. Khadi & Village Industries Corporation.
   4. Trade Fair Authority of India.
   Show answer

   Answer: B. Mineral and Metal Trading Corporation.

   MMTC Limited, a Public Sector Undertaking (PSU), has historically been one of India's leading international trading companies, dealing in a wide range of products including minerals, metals, precious metals, fertilizers, and agro products. Its large volume of international trade business often positioned it as the largest trading PSU. C. NIIF and NIF (National Investment Fund) are the names of the same organization. D. NIIF can have more than one alternative investment fund. Ans: C National Investment and Infrastructure Fund (NIIF) was announced in the Union Budget 2015-16 as a fund to attract investment into the country's infrastructure sector. National Investment Fund (NIF) was created in 2005 with the proceeds from disinvestment of central public sector enterprises. These two funds serve different purposes and are distinct entities.

3. The main difference between Monetization Pipeline (as announced on 7th September, 2021 by Finance Minister) and disinvestment is

   Asked in: GPSC Prelims CSP 2 2022

   1. Disinvestment brings revenue to the govern‐ ment while Monetization does not.
   2. Disinvestment is only of Public Sector Units while Monetization can be in any kind of units.
   3. This option is missing.
   4. Disinvestment is planned while Monetization is ad hoc.
   Show answer

   Answer: B. Disinvestment is only of Public Sector Units while Monetization can be in any kind of units.

   This question asks for the main difference between government policies of disinvestment and asset monetization. The core distinction lies in the transfer of ownership (disinvestment) versus the transfer of operational rights while retaining ownership (monetization).

4. When the Department of Disinvestment was created as a separate department in India?

   Asked in: GPSC Prelims CSP 1 2023

   1. 1992
   2. 1995
   3. 1997
   4. 1999
   Show answer

   Answer: D. 1999

   Initially, disinvestment matters were handled by the Department of Public Enterprises. Recognizing the growing importance of disinvestment as a policy tool, a separate department was established under the Ministry of Finance.

5. Match List I with List II: List I List II (i) A company which has acquired (a) Conor merged with other companies, glomerate gaining stake in various industries. (ii) An economic system where (b) Golden transactions between private Handparties are free from any form of shake economic intervention. (iii) A redundancy agreement (c) Blue where employees are given a Chip severance package. (iv) Stocks with national repute for (d) Laissez their ability to operate profitably in Faire good and bad times, quality, reliability.

   Asked in: HPPSC HPAS Prelims 2021

   1. (a)-(iii), (b)-(ii), (c)-(i), (d)-(iv)
   2. (a)-(ii), (b)-(iii), (c)-(i), (d)-(iv)
   3. (a)-(i), (b)-(iii), (c)-(iv), (d)-(ii)
   4. (a)-(ii), (b)-(i), (c)-(iv), (d)-(iii)
   Show answer

   Answer: C. (a)-(i), (b)-(iii), (c)-(iv), (d)-(ii)

   This question is identical to ID 11172 and requires matching business and economic terms with their definitions. (a) Conglomerate: A company which has acquired or merged with other companies, gaining stake in various industries. This matches definition (i). (b) Golden Handshake: A redundancy agreement where employees are given a severance package. This matches definition (iii). (c) Blue Chip: Stocks with national repute for their ability to operate profitably in good and bad times, quality, reliability. This matches definition (iv). (d) Laissez Faire: An economic system where transactions between private parties are free from any form of economic intervention. This matches definition (ii).

6. With reference to 'Bharat 22', which of the following statements is/are correct ? 1. It is the Exchange Traded Fund (ETF). 2. It is an unmarketable security. 3. This aimed at helping speed up the government's disinvestment programme. Select the correct answer using the code given below :

   Asked in: PPSC CS Prelims 2018

   1. 1 only
   2. 1 and 3 only
   3. 2 and 3 only
   4. 1, 2 and 3
   Show answer

   Answer: B. 1 and 3 only

   - Bharat 22 is an ETF. - ETFs are marketable securities traded on exchanges. - The aim was to facilitate disinvestment of government holdings in PSUs.

7. The proceeds from disinvestment are included as

   Asked in: UPSC CAPF 2022

   1. non-tax revenue
   2. revenue receipts
   3. capital receipts
   4. tax revenue
   Show answer

   Answer: C. capital receipts

   - Government receipts are broadly classified into Revenue Receipts and Capital Receipts. - Revenue Receipts are those receipts that do not create a liability or lead to a reduction in assets. Examples include tax revenues (income tax, corporation tax, etc.) and non-tax revenues (fees, fines, interest receipts, dividends from PSUs). - Capital Receipts are those receipts that either create a liability (like borrowings) or lead to a reduction in financial assets (like disinvestment or recovery of loans). - Disinvestment involves the sale of government's equity stake in Public Sector Undertakings (PSUs). This reduces the government's financial assets (its ownership in PSUs). Therefore, the money received from disinvestment is treated as a Capital Receipt.

Fiscal Deficits: Concepts, measures, and financing of deficits

8. Deficit financing means that the government borrows money from the

   Asked in: APSC CCE Prelims Exam 2015 · PPSC CS Prelims 2018

   1. Revenue Department
   2. World Bank
   3. Reserve Bank of India
   4. State Bank of India
   Show answer

   Answer: C. Reserve Bank of India

   Deficit financing refers to the government spending more than it earns through revenue. One method of financing this deficit, particularly in earlier times, was borrowing from the central bank (Reserve Bank of India in India), often involving printing more currency or creating credit. This is a form of debt monetization.

9. What is the fiscal deficit target of India for the financial year 2016-17 ?

   Asked in: BPSC Prelims Exam 60 62rd

   1. 3.9% of GDP
   2. 3.5% of GDP
   3. 4.9% of GDP
   4. 4.5% of GDP
   Show answer

   Answer: B. 3.5% of GDP

   This target was a reduction from the 3.9% of GDP achieved in the previous financial year (2015-16) and aimed at adhering to the fiscal consolidation path outlined in the Fiscal Responsibility and Budget Management (FRBM) Act targets.

10. Revenue deficit in India implies that the Indian Government needs to

    Asked in: BPSC Prelims Exam 66th

    1. borrow in order to finance its expenses which will create capital assets
    2. borrow in order to finance its expenses which do not create capital assets
    3. the Indian Government needs to borrow from the Reserve Bank of India against government se‐ curities
    4. Indian Government needs to borrow from in‐ ternational financial institutions
    Show answer

    Answer: B. borrow in order to finance its expenses which do not create capital assets

    Revenue deficit is defined as the excess of revenue expenditure over revenue receipts. Revenue expenditure includes expenses incurred for purposes other than the creation of physical or financial assets (e.g., salaries, interest payments, subsidies, pensions). Revenue receipts include tax and non-tax revenues. When the government has a revenue deficit, it means its routine expenditures are more than its routine income. To cover this gap, the government needs to borrow. This borrowing is used to finance those expenditures that do not create capital assets.

11. As per the Union Budget, 2021, the fiscal deficit is estimated to be how much percent of the GDP in 2021-22?

    Asked in: BPSC Prelims Exam 67th Cancelled

    1. 8.8%
    2. 7.8%
    3. 7.6%
    4. 6.8%
    Show answer

    Answer: D. 6.8%

    - The fiscal deficit figure indicates the total borrowing required by the government for the financial year. - This estimate was significantly higher than the pre-pandemic levels due to increased government spending aimed at stimulating the economy recovering from the COVID-19 impact. - The budget also laid out a glide path to gradually reduce the fiscal deficit over the subsequent years.

12. Consider the following statements about the latest developments in the Union Government finances: 1. The fiscal deficit of the Union Government had reached 9.2 percent of GDP during the pandemic FY21. 2. The fiscal deficit has moderated to 7.7 percent of GDP in FY22. 3. The revenue collection over the last two years has gone down. Which of the above statements is/are correct?

    Asked in: BPSC Prelims Exam 69th

    1. Only 1
    2. 1 and 2
    3. 2 and 3
    4. None of the above
    Show answer

    Answer: A. Only 1

    - Fiscal deficit is the difference between total government expenditure and its total receipts (excluding borrowings). - FY21 saw a significant spike in fiscal deficit due to increased spending and reduced revenues during the pandemic. - The government has been on a path of fiscal consolidation, reducing the deficit in subsequent years. - Revenue collection showed recovery and growth in FY22 and FY23.

13. The excess of total expenditure of Government over its total receipts, excluding borrowings, is known as

    Asked in: UPSC CDS 1 2021

    1. Primary deficit
    2. Fiscal deficit
    3. Current deficit
    4. Capital deficit
    Show answer

    Answer: B. Fiscal deficit

    Fiscal deficit is defined as the difference between the government's total expenditure and its total receipts, excluding borrowings. It indicates the total borrowing requirement of the government.

14. The contraction of private investment spending due to deficit spending by the Government is called

    Asked in: UPSC CDS 1 2023

    1. crowding out
    2. crowding in
    3. pump priming
    4. dumping
    Show answer

    Answer: A. crowding out

    - Deficit spending by the government means the government is spending more than it collects in revenue, requiring it to borrow money. - Increased government borrowing increases the demand for funds in the financial markets. - Increased demand for funds, with a given supply, leads to higher interest rates. - Higher interest rates increase the cost of borrowing for private firms and individuals. - This higher cost discourages private investment spending (e.g., on new factories, equipment, or housing), hence 'crowding out' private investment.

Fiscal Federalism: Centre-state financial relations and Finance Commissions

15. Who among the following is the Chairman of the Fourteenth Finance Commission?

    Asked in: UPSC CDS 2 2016

    1. C. Rangarajan
    2. Vijay Kelkar
    3. Y. V. Reddy
    4. Rakesh Mohan
    Show answer

    Answer: C. Y. V. Reddy

    Dr. Y. V. Reddy, former Governor of the Reserve Bank of India, was appointed as the Chairman of the 14th Finance Commission. The Commission was constituted in January 2013 and submitted its report in December 2014, covering the period from April 1, 2015 to March 31, 2020.

16. Which one of the following criteria got the highest weight for determination of shares of States in the formula given by the 14th Finance Commission?

    Asked in: UPSC CDS 2 2017

    1. Population
    2. Income distance
    3. Area
    4. Tax effort
    Show answer

    Answer: B. Income distance

    - The 14th Finance Commission used specific criteria for horizontal devolution (distribution of central taxes among states). - The weights assigned were: Income Distance (50%), Population (2011) Some sources give slightly different distributions or include a component for demographic performance, but Income Distance consistently receives the highest weight). - Among the options provided (Population, Income distance, Area, Tax effort), Income Distance had the highest weight (50%). Tax effort was a criterion used by some previous Finance Commissions, but not the 14th FC.

17. Gadgil formula was introduced for devolution of tax revenue from the Centre to the States for the first time in the year _____.

    Asked in: GPSC Prelims CSP 2 2019

    1. 1960-61
    2. 1969-70
    3. 1975-76
    4. 1982-83
    Show answer

    Answer: B. 1969-70

    - The Gadgil formula was named after D.R. Gadgil, the then Deputy Chairman of the Planning Commission. - It was designed to ensure objective criteria for allocating central assistance to states for their development plans. - The formula considered factors like population, per capita income, tax effort, specific problems, and performance in national objectives.

18. As per 13th Finance Commission Recommendations during 2010-15, transfers to the states in the form of 'grant-in-aid' are expected to be :

    Asked in: HPPSC HPAS Prelims 2011

    1. Rs. 44,000 crore
    2. Rs. 1,64,882 crore
    3. Rs. 3,18,581 crore
    4. Rs. 1,07,552 crore
    Show answer

    Answer: C. Rs. 3,18,581 crore

    The Finance Commission is a constitutional body in India that makes recommendations on the distribution of tax revenues between the Union and the States, and among the States themselves. It also determines the principles governing grant-in-aid to the states by the Centre.

19. The recommendation of the 14th Finance Commission for increase the share of net proceeds of union taxes between centre to states has been fixed at

    Asked in: JPSC CS Prelims 2016

    1. 32 percent
    2. 37 percent
    3. 42 percent
    4. 41 percent
    Show answer

    Answer: C. 42 percent

    - The 14th Finance Commission (Chairman: Y. V. Reddy) recommended a record increase in the vertical devolution of the divisible pool of central taxes to states. - The share recommended was 42% of the net proceeds of union taxes, which was a 10 percentage point increase from the 32% recommended by the 13th Finance Commission. - This recommendation was accepted by the Union Government.

20. Arrange the following in increasing order of their percentage of contribution to GSDP 2023-24: (a) State taxes (b) Share of Central taxes (c) Grants from Centre (d) Non-tax revenue Choose the correct answer from the options given below :

    Asked in: KPSC KAS Prelims 2024

    1. (a), (b), (c), (d)
    2. (b), (c), (d), (a)
    3. (c), (d), (a), (b)
    4. (d), (a), (b), (c)
    Show answer

    Answer: C. (c), (d), (a), (b)

    - State Taxes (a) constitute the largest share of a state's own revenue. - Share of Central Taxes (b) is a significant transfer from the Union government based on Finance Commission recommendations. - Grants from Centre (c) are specific purpose or untied grants, generally smaller than the tax share. - Non-tax revenue (d) includes fees, fines, interest, profits, etc., usually the smallest component. - The typical increasing order of these sources is Non-tax

21. In accordance with the recommendation of the 15th Finance Commission, states will be allowed a fiscal deficit of 4.0% of GSDP of which 0.5% will be tied to reform the following sector.

    Asked in: TNPSC CS Prelims 2024

    1. Agriculture sector reform
    2. Power sector reform
    3. Industrial sector reform
    4. Service sector reform
    Show answer

    Answer: B. Power sector reform

    - The 15th Finance Commission recommended flexibility in states' fiscal deficit limits, allowing for additional borrowing capacity linked to specific reforms. - A key reform area identified was the power sector, particularly focusing on reducing Aggregate Technical and Commercial (AT&C) losses and bridging the gap between the cost of supply and the revenue realized by discoms. - An additional borrowing ceiling of 0.5% of GSDP was linked to performance criteria in the power sector.

Fiscal Responsibility and Budget Management (FRBM) Act

22. Statement I: The overall fiscal deficit of the States in India during 2017-2018 stayed above the FRBM threshold level of 3 percent for the third successive year. Statement II: Special Category States had run up a higher level of fiscal deficit in 2017-2018 compared to 2016-2017.

    Asked in: UPSC CDS 2 2018

    1. Both the statements are individually true and Statement II is the correct explanation of Statement I
    2. Both the statements are individually true but Statement II is not the correct explanation of Statement I
    3. Statement I is true but Statement II is false
    4. Statement I is false but Statement II is true
    Show answer

    Answer: B. Both the statements are individually true but Statement II is not the correct explanation of Statement I

    - Statement I is false: Data shows that the consolidated fiscal deficit of the States in India during 2017-2018 (Revised Estimates) was around 2.8% of GSDP, which was below the FRBM threshold level of 3%. It had been slightly above 3% in some preceding years, but fell back below in 2017-18. - Statement II is true: Available data for 2017-2018 indicates that Special Category States, facing unique developmental challenges and revenue constraints, did generally run up a higher level of fiscal deficit in 2017-2018 compared to 2016-2017, often exceeding the 3% limit.

23. The Committee to suggest changes Fiscal Responsibilities and Budget Management (F.R.B.M.) is

    Asked in: GPSC Prelims CSP 1 2017

    1. N. K. Singh Committee
    2. Bimal Jalan Committee
    3. Arvind Mayaram Committee
    4. P. J. Nayak Committee
    Show answer

    Answer: A. N. K. Singh Committee

    The committee was constituted in 2016 by the Ministry of Finance to review the FRBM Act and suggest changes. It submitted its report in 2017, recommending a debt-to-GDP ratio target and adjustments to the fiscal deficit path.

24. According to FRBM Act, India's fiscal deficit should not exceed:

    Asked in: HPPSC HPAS Prelims 2020

    1. 2 percent of GDP
    2. 3 percent of GDP
    3. 4 percent of GDP
    4. 3.5 percent of GDP
    Show answer

    Answer: B. 3 percent of GDP

    - The FRBM Act aims to institutionalize fiscal discipline and reduce fiscal deficits. - It mandates targets for fiscal deficit and revenue deficit. - The target for fiscal deficit has typically been set at 3% of GDP.

25. Which of the following statements is/are correct about Fiscal Responsibility and Budget Management (FRBM) 2003?

    Asked in: KPSC KAS Prelims 2024

    1. The FRBM Act made it mandatory for the Government to place Long Term Fisc‐ al Statement, Microeconomic Framework Statement and Fiscal Policy Strategy Statement along with the Union Budget documents in Parliament annually.
    2. The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of Gross State Domestic Product (GDP) in the medium-term fiscal policy statement.
    3. Under no circumstances can the set targets of fiscal deficits and revenue be ex‐ ceeded.
    4. After the enactment of FRBM Act, Government has met the targets only twice till now. A. Only one statement is correct B. Only two statements are correct C. Only three statements are correct D. None of the above
    Show answer

    Answer: A. The FRBM Act made it mandatory for the Government to place Long Term Fisc‐ al Statement, Microeconomic Framework Statement and Fiscal Policy Strategy Statement along with the Union Budget documents in Parliament annually.

    - Mandatory documents under FRBM Act are Medium-term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and Macroeconomic Framework Statement. - Targets are projected as a percentage of Union GDP, not GSDP. - The Act includes escape clauses allowing deviation from targets under specific circumstances. - Meeting FRBM targets consistently has been a challenge for the Indian government.

26. Consider the following statements: 1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023; comprising 40% for the Central Government and 20% for the State Governments. 2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments. 3. As per the Constitution of India, it is mandatory for a State to take the Central Government's consent for raising any loan if the former owes any outstanding liabilities to the latter. Which of the statements given above is/are correct ?

    Asked in: UPSC IAS 2018

    1. 1 only
    2. 2 and 3 only
    3. 1 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: C. 1 and 3 only

    - The N.K. Singh FRBM Review Committee recommended specific debt-to-GDP targets for the Centre and States. - Central government liabilities are typically higher than State government liabilities as a percentage of GDP. - States need Central government's consent to raise loans if they have outstanding loans from the Centre.

27. The Fiscal Responsibility and Budget Management Act, 2003 aims to bring down the fiscal deficit to a certain percentage of GDP. What is the target fiscal deficit as per the Act?

    Asked in: UPSC Combined Section Officer 2019 20

    1. 3.5%
    2. 4.5%
    3. 5.5%
    4. 6.5%
    Show answer

    Answer: B. 4.5%

    The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 originally targeted a fiscal deficit of 3% of GDP by March 31, 2008. This target and timeline have been revised multiple times through amendments and policy statements based on prevailing economic conditions. While the original act aimed for 3%, the options provided do not include 3%. Among the given options, 4.5% is a stated medium-term fiscal deficit target (specifically for FY 2025-26) as part of the current fiscal consolidation path outlined by the government under the FRBM framework.

28. The objective of the Fiscal Responsibility and Budget Management Act, 2004 is

    Asked in: WBPSC CS Prelims 2017

    1. to reduce revenue deficit.
    2. to reduce fiscal deficit.
    3. to ensure that public debt does not exceed 50% of the GDP of the year from 2011.
    4. All of the above
    Show answer

    Answer: D. All of the above

    The FRBM Act's core objectives were to establish fiscal discipline, reduce fiscal and revenue deficits, and manage public debt sustainably.

Government Budgeting: Structure, types, and implications

29. Economic Survey of India is related to

    Asked in: CGPSC Prelims Exam 2015 · CGPSC Prelims Exam 2018

    1. NITI Ayog
    2. Reserve Bank of India
    3. Ministry of Finance
    4. Finance Commission
    Show answer

    Answer: C. Ministry of Finance

    The Economic Survey is an annual document presented by the Government of India to the Parliament. It reviews the country's economic developments over the past year and provides insights into the economic outlook for the future. It is prepared by the Economics Division of the Department of Economic Affairs (DEA) under the guidance of the Chief Economic Advisor (CEA), both of which fall under the Ministry of Finance.

30. Who was the Chairman of a government appointed committee which recommended to shift to a January to December financial year ?

    Asked in: GPSC Prelims CSP 1 2017

    1. Shankar Acharya
    2. Arun Jaitely
    3. Hasmukh Adiya
    4. P. V. Rajaraman
    Show answer

    Answer: A. Shankar Acharya

    The committee that recommended shifting the financial year to January-December was chaired by Shankar Acharya.

31. Economic Survey in India is published officially, every year by

    Asked in: GPSC Prelims CSP 2 2017

    1. Reserve Bank of India
    2. Ministry of Finance, Govt. of India
    3. Ministry of Commerce, Govt. of India
    4. Ministry of Industries, Govt. of India
    Show answer

    Answer: B. Ministry of Finance, Govt. of India

    It is prepared by the Economics Division of the Department of Economic Affairs under the guidance of the Chief Economic Adviser.

32. Which of the following statements are correct regarding Budget Procedure? 1. The revenue budget consists of transactions that have implications upto 1 year 2. The capital budget consists of transactions that have implications of more than 1 year 3. Revenue budget consists of revenue receipts as well as revenue expenditure, but Capital budget consists of expenditure only.

    Asked in: GPSC Prelims CSP 2 2021

    1. 1, 2 and 3
    2. 1 and 2 only
    3. 2 and 3 only
    4. 1 and 3 only
    Show answer

    Answer: B. 1 and 2 only

    - Revenue Budget: Deals with income and expenditure within the current year. - Capital Budget: Deals with creation/disposal of assets and liabilities with implications beyond the current year. - Budget Components: Both revenue and capital budgets have receipts and expenditure sides.

33. 'Budget' is an instrument of

    Asked in: JPSC CS Prelims 2014

    1. monetary policy of the government
    2. commercial policy of the government
    3. fiscal policy of the government
    4. money-saving policy of the government
    Show answer

    Answer: C. fiscal policy of the government

    The Budget is the annual financial statement of the government, detailing its planned revenue and expenditure for the upcoming fiscal year.

34. The revenue estimates of the Budget in India are prepared by

    Asked in: JPSC CS Prelims 2015

    1. the Central Board of Direct Taxes
    2. the Cabinet Secretariat
    3. the respective commissions
    4. the Ministry of Finance
    Show answer

    Answer: D. the Ministry of Finance

    - The Ministry of Finance is responsible for preparing the Union Budget. - This includes preparing revenue and expenditure estimates. - The Budget Division within the Department of Economic Affairs is the nodal body.

35. What is the name of Innovation Council proposed in the Railway Budget - 2015 to promote Innovation ?

    Asked in: KPSC KAS Prelims 2014

    1. Navachar
    2. Railtech
    3. Kayakalp
    4. Sankalp
    Show answer

    Answer: C. Kayakalp

    Kayakalp was a comprehensive transformation agenda for Indian Railways focusing on improving quality, customer experience, and efficiency through innovation and technology.

Impact of Fiscal Policy on Income Distribution, Inflation, and Employment

36. Consider the following statements: An additional spending by the Government of ₹ X is likely to have less impact on income than an additional transfer of ₹ X to households. An additional spending by the Government of ₹ X is likely to have less impact on income if it is not accompanied by an expansion in money supply. Which of the statements given above is/are correct ?

    Asked in: UPSC CDS 2 2024

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: B. 2 only

    - Government spending typically has a higher multiplier than transfers. - Government spending can lead to crowding out if not accommodated by monetary policy.

37. Which of the following redistributive policy/policies the government will not adopt if it wants to bridge ‘economic inequality’? 1. Rationalizing subsidies 2. Progressive tax policies 3. Regressive expenditures.

    Asked in: GPSC Prelims CSP 2 2022

    1. 1 and 2 only
    2. 2 and 3 only
    3. 1 and 3 only
    4. 3 only
    Show answer

    Answer: D. 3 only

    - Redistributive policies aim to shift resources or opportunities to reduce economic disparities. - Progressive taxes and targeted social spending (expenditures) are tools to reduce inequality. - Regressive taxes (e.g., sales tax without exemptions on necessities) and regressive expenditures increase inequality.

38. In the context of inflation in India, consider the following : Rising administered prices Rising oil prices Pressure of growing population Increase in indirect taxation. In which of the above factors, Indian Government is responsible for inflationary tendencies ?

    Asked in: MPSC CS Prelims 2012

    1. 2 and 3
    2. 1, 2 and 3
    3. 1 and 4
    4. All the above
    Show answer

    Answer: D. All the above

39. Rising administered prices Prices of certain goods and services (like MSPs, fuel prices, utility tariffs) are set or influenced by the government. Increases in these directly contribute to inflation. 2. Rising oil prices While international oil prices are external, the domestic price of fuel is significantly impacted by government taxes (excise duties, VAT), which are direct policy decisions affecting inflation. 3. Pressure of growing population While population growth itself is a demographic factor, the government's ability to manage the resulting increase in demand through appropriate supply-side measures, infrastructure development, and fiscal/monetary policies determines whether this pressure translates into significant inflation. The government is responsible for managing the economy to mitigate inflationary pressures from such factors. 4. Increase in indirect taxation Taxes on goods and services (like GST, excise duties, customs duties) directly increase the cost of production or the price paid by consumers, leading to cost-push inflation. This is a direct government policy decision. 160. Robinhood effect is related to which of the following ?

    Asked in: OPSC CS Prelims 2020

    1. Income and consumption
    2. Income generation
    3. Income redistribution
    4. Income taxation
    Show answer

    Answer: C. Income redistribution

    The core concept of the Robinhood effect is the transfer of economic resources in a way that reduces income inequality.

40. Which of the following measures would contribute to inflation more ?

    Asked in: PPSC CS Prelims 2013

    1. Repayment of Public Debt
    2. Borrowing from public to finance Budget defi‐ cit
    3. Reducing Fiscal Deficit
    4. Creating new money to finance Budget deficit
    Show answer

    Answer: D. Creating new money to finance Budget deficit

    Inflation is typically caused by an increase in the money supply relative to the goods and services available or by excessive demand. Option D, "Creating new money to finance Budget deficit" (also known as printing money or monetizing the deficit), directly increases the money supply. When the government finances its spending by simply printing money instead of taxing or borrowing from the public, it injects additional money into the economy without a proportional increase in output, leading to an increase in aggregate demand and potentially inflation. Option A (Repayment of Public Debt) might have complex effects, but is not a direct cause of inflation in isolation. Option B (Borrowing from public) finances the deficit by absorbing existing money from circulation, which is generally less inflationary than printing money. Option C (Reducing Fiscal Deficit) implies less government spending or more revenue collection, which is generally anti-inflationary.

41. According to Nobel Laureate Abhijit Banerjee (Economist), what is the only solution to overcome the economic pain in the short run in the wake of Covid-induced economic crisis?

    Asked in: TNPSC CS Prelims 2021

    1. Putting more money in the hands of big cor‐ porates
    2. Giving more tax cuts for big corporates
    3. Putting more money in the hands of poor
    4. Giving more tax cuts to the poor
    Show answer

    Answer: C. Putting more money in the hands of poor

    Abhijit Banerjee, along with Esther Duflo and Michael Kremer, received the Nobel Prize in Economics for their experimental approach to alleviating global poverty. Their work emphasizes targeted interventions and direct support for the poor to boost consumption and stimulate the economy from the bottom up during downturns.

42. Consider the following statement : Statement-I: Price policy aims at controlling fiscal deficit. Statement-II: Fiscal deficit leads to inflationary pressure. Which is correct answer?

    Asked in: TNPSC CS Prelims 2014

    1. (A) is correct but (R) is wrong
    2. (A) is wrong but (R) is correct
    3. Both (A) and (R) are wrong
    4. (A) and (R) are correct and (R) is the correct explanation of (A)
    Show answer

    Answer: B. (A) is wrong but (R) is correct

    Statement I (A) is wrong. Price policy (e.g., minimum support prices, price controls) is concerned with regulating the prices of goods and services, primarily to control inflation or support producers/consumers. Controlling the fiscal deficit (the difference between government spending and revenue) is the domain of fiscal policy, which involves decisions about taxation and government expenditure. Statement II (R) is correct. A high fiscal deficit, especially if financed by borrowing from the central bank (monetization) or from the public which crowds out private investment, can lead to an increase in the money supply or aggregate demand, putting upward pressure on prices and leading to inflation.

Objectives and Components of Fiscal Policy

43. Which one of the following was not included in the intended objectives of the Union Budget, 2017-18?

    Asked in: BPSC Prelims Exam 64th

    1. Transform India
    2. Clean India
    3. Educate India
    4. Energize India
    Show answer

    Answer: C. Educate India

    'Transform India' focused on good governance and quality of life. 'Energise India' aimed at empowering society and unleashing the potential of youth. 'Clean India' addressed corruption, black money, and clean government. 'Educate India' was not listed as one of these three specific high-level intended objectives, although the budget did allocate funds for education and related schemes.

44. In India, which one among the following formulates fiscal policy ?

    Asked in: CGPSC Prelims Exam 2014 · WBCS Main Paper 5 2022

    1. Ministry of Finance
    2. Finance Commission
    3. Reserve Bank of India
    4. Planning Commission
    Show answer

    Answer: A. Ministry of Finance

    Fiscal policy is the domain of the executive government, specifically the ministry responsible for finance.

45. The Fiscal Policy intends to 1. Control the price level in the country 2. Achieve full employment, or near full employment 3. Maintain the economy's growth rate Select the correct answer code:

    Asked in: GPSC Prelims CSP 2 2024

    1. 1, 2
    2. 2, 3
    3. 1, 3
    4. 1, 2, 3
    Show answer

    Answer: D. 1, 2, 3

    - Fiscal policy involves the use of government expenditure and revenue collection to influence the economy. - Key objectives include macroeconomic stability, growth, employment, and price stability.

46. 'Budget' is an instrument of

    Asked in: JPSC CS Prelims 2015

    1. monetary policy of the government
    2. commercial policy of the government
    3. fiscal policy of the government
    4. money-saving policy of the government
    Show answer

    Answer: C. fiscal policy of the government

    - The budget details government revenue and expenditure plans. - Fiscal policy involves using government spending and taxation to influence the economy. - The budget is the key document outlining the government's fiscal policy.

47. Which of the following is NOT a tool of fiscal policy ?

    Asked in: RPSC RAS Prelims 2023

    1. Public expenditure
    2. Interest rate
    3. Deficit financing
    4. Taxation
    Show answer

    Answer: B. Interest rate

    Fiscal policy tools directly involve the government's budget (revenue and expenditure), whereas monetary policy tools involve the central bank's management of money and credit.

48. Consider the following statement. The objectives of fiscal policy are 1. Capital formation 2. Equitable distribution 3. Unemployment 4. Regional Balance From these, which are correct statement?

    Asked in: TNPSC CS Prelims 2021

    1. 2, 3 and 4
    2. 1, 2 and 4
    3. 1, 3 and 4
    4. 1, 2 and 3
    Show answer

    Answer: D. 1, 2 and 3

    - Core fiscal policy objectives include economic growth, employment, and equity. - Capital formation, equitable distribution, and addressing unemployment directly relate to these core objectives.

49. Which one of the following is part of fiscal policy ?

    Asked in: UKPSC CS Prelims 2012

    1. Production policy
    2. Tax policy
    3. Foreign policy
    4. Interest rate policy
    Show answer

    Answer: B. Tax policy

    Fiscal policy refers to the use of government spending and taxation to influence the economy.

Public Debt: Sources, types, debt sustainability, and management

50. At present, where from the maximum resources are mobilised for India's public expenditure under plans ?

    Asked in: CGPSC Prelims Exam 2013

    1. From current receipts
    2. From abroad
    3. From public enterprises
    4. From borrowings
    Show answer

    Answer: D. From borrowings

    Historically, resources for India's public expenditure under plans, particularly the capital expenditure component, were significantly mobilised through borrowings, both internal (like market borrowings, small savings, provident funds) and external aid/ borrowings. While current receipts (tax and non-tax revenue) are the largest source for overall government revenue, borrowings are crucial for financing the developmental and investment expenditures undertaken as part of the Five Year Plans, often bridging the gap between total expenditure requirements and current receipts. In many plan periods, the total amount mobilised through borrowings constituted a substantial, often maximum, portion of the resources available for public expenditure, especially when considering capital outlays.

51. Which of the following statement(s) is/are correct?

    Asked in: GPSC Prelims CSP 2 2022

    1. If the rate of taxation increases up to a certain limit and after that it is constant with the change in income, then it is called Regressive Tax.
    2. Those loans which are never returned by the government although it pays the interest thereon are called Redeemable debt.
    3. Both (A) and (B)
    4. Neither (A) nor (B)
    Show answer

    Answer: D. Neither (A) nor (B)

    This question tests understanding of fundamental concepts in public finance: different types of taxes based on their impact on income (regressive) and different types of government debt based on repayment terms (redeemable vs. irredeemable).

52. Modi Government relaunched the Kisan Vikas Patra (KVP) investment scheme to tap household savings for funding infrastructure development in the country. Consider the following statements about this and pick the correct statement : (i) The saving instrument will be available in the denomination of Rs. 1,000, Rs. 5,000, Rs. 10,000 and Rs. 50,000. (ii) There will be no upper ceiling on investment. (iii) No tax benefits would be available on these investment. Answer(s) is/are :

    Asked in: HPPSC HPAS Prelims 2014

    1. (i) only
    2. (ii) only
    3. (i) and (iii) only
    4. All of the above
    Show answer

    Answer: D. All of the above

    Upon its relaunch in 2014, KVP was available in the specified denominations, had no stated upper limit on investment, and did not offer tax benefits under Section 80C, although interest earned was taxable.

53. Which among the following is not the source of internal public debt ?

    Asked in: MPSC CS Prelims 2012

    1. Loans from Banks and other Financial Institu‐ tions
    2. Insurance Fund
    3. Provident Fund
    4. Loans from International Monetary Fund
    Show answer

    Answer: D. Loans from International Monetary Fund

    Internal public debt is the debt raised by the government from sources within the country. Sources of internal public debt include borrowing from commercial banks and other financial institutions (A), funds managed by insurance companies (B), and accumulated funds from provident funds (C), all of which are domestic entities or schemes. Loans from international financial institutions like the International Monetary Fund (IMF) are sources of external public debt, as they are loans taken from entities outside the country.

54. What are gilt-edged securities ?

    Asked in: OPSC CS Prelims 2018

    1. Securities issued by the multinationals
    2. Securities issued by the Government
    3. Securities issued by the private sectors
    4. Securities issued by the joint venture compan‐ ies
    Show answer

    Answer: B. Securities issued by the Government

    The term "gilt-edged" traditionally referred to the gold-leaf edges of physical certificates for these bonds, symbolising their high quality and safety. They are essentially government securities or government bonds.

55. Debt-trap means

    Asked in: PPSC CS Prelims 2015

    1. More aid is needed to meet the debt servicing requirements.
    2. More debt is needed to finance development expenditure.
    3. More debt is required to finance subsidy schemes.
    4. All of the above
    Show answer

    Answer: A. More aid is needed to meet the debt servicing requirements.

    A debt trap is characterized by the inability to repay existing debt without incurring new debt, often leading to a spiral of increasing indebtedness.

56. With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)" ? Government can reduce the coupon rates on its borrowing by way of IIBs. IIBs provide protection to the investors from uncertainty regarding inflation. The interest received as well as capital gains on IIBs are not taxable. Which of the statements given above are correct ?

    Asked in: UPSC IAS 2022

    1. 1 and 2 only
    2. 2 and 3 only
    3. 1 and 3 only
    4. 1, 2 and 3
    Show answer

    Answer: A. 1 and 2 only

    Inflation-Indexed Bonds are debt instruments where principal and/or interest payments are linked to an inflation index, protecting investors' purchasing power. They are a tool for governments to borrow at potentially lower real costs and offer investors inflation protection.

Public Expenditure: Classification, trends, and impact on development

57. Non-developmental expenditure involves the following (I) interest payments (II) subsidies (III) defence (IV) irrigation Which one of the following is true?

    Asked in: APSC CCE Prelims Exam 2015

    1. I only
    2. II, III and IV
    3. I and II only
    4. I, II and III
    Show answer

    Answer: D. I, II and III

    Non-developmental expenditure refers to government spending that does not directly contribute to economic growth or capital formation. This includes necessary but non-productive expenses such as interest payments on government debt (I), various types of subsidies (II) (though some subsidies could arguably have developmental aspects, they are generally categorized here), and defence expenditure (III). Irrigation (IV) falls under infrastructure development and is typically classified as developmental expenditure.

58. According to the latest Reserve Bank of India study on State finances, capital spending is maximum on

    Asked in: UPSC CDS 2 2018

    1. rural development
    2. water supply and sanitation
    3. urban development
    4. education
    Show answer

    Answer: B. water supply and sanitation

    According to Reserve Bank of India studies on State finances for the period around 2017-2018, Capital Outlay by states was maximum on Urban Development. This sector often includes significant infrastructure projects like urban transport, housing, water supply, and sanitation within urban areas.

59. Which one among the following items comprises the major portion of revenue expenditure of the Union Government of India ?

    Asked in: UPSC CDS 2 2024

    1. Salaries
    2. Interest Payments
    3. Road Transport and Highways
    4. Defence Services
    Show answer

    Answer: B. Interest Payments

    Interest payments represent the largest single item of non-plan revenue expenditure for the Government of India year after year.

60. The expenditure policy of the government must be _______.

    Asked in: GPSC Prelims CSP 2 2021

    1. Elastic
    2. Inelastic
    3. Rigid
    4. Constant
    Show answer

    Answer: A. Elastic

    - Government expenditure policy, a key component of fiscal policy, needs to be flexible and adaptable to changing economic conditions. - In times of economic slowdown or recession, the government needs to increase expenditure (expansionary policy) to stimulate demand. - In times of economic boom or high inflation, the government may need to decrease expenditure (contractionary policy) to cool down the economy. - Elasticity or flexibility allows the government to adjust its spending levels and priorities in response to these varying needs, making the policy effective in achieving macroeconomic stability and growth objectives. - Rigid or constant expenditure would imply an inability to respond effectively to the dynamic nature of the economy.

61. Which of the following statements are correct regarding Public Expenditure? 1. Revenue Expenditure is of recurring type which is incurred year after year 2. High revenue expenditure indicates poverty and backwardness of the economy 3. High capital expenditure indicates high private investment of company 4. Capital expenditure results in the acquisition of a tangible or intangible asset or payment liabilities

    Asked in: GPSC Prelims CSP 2 2022

    1. 1, 2, 3 and 4
    2. 1, 2 and 3 only
    3. 1, 2 and 4 only
    4. 2, 3 and 4 only
    Show answer

    Answer: C. 1, 2 and 4 only

    Public expenditure is broadly divided into revenue expenditure (recurring, consumption-oriented) and capital expenditure (asset-creating, investment- oriented). The composition and magnitude of public expenditure reflect the government's priorities and fiscal health, impacting economic growth and development.

62. In the Budget for 2017-18, the funds allocated for MGNREGA is :

    Asked in: HPPSC HPAS Prelims 2016

    1. Rs. 45,000 Cr.
    2. Rs. 48,000 Cr.
    3. Rs. 35,000 Cr.
    4. Rs. 55,000 Cr.
    Show answer

    Answer: B. Rs. 48,000 Cr.

    In the Union Budget presented on February 1, 2017, for the financial year 2017-18, the allocation for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme was increased to Rs. 48,000 crore. This was the highest-ever allocation for the scheme at that time.

63. For the Budget proposals 2017-18; which of the following is not correct ?

    Asked in: HPPSC HPAS Prelims 2016

    1. Target for agriculture credit has been fixed to the tune of Rs. 10 Lac Crore
    2. New Mini Labs in Krishi Vigyan Kendra will be established
    3. Total allocation for rural, agriculture and allied sector is Rs. 80,000 crore
    4. Achieving 100 percent village electrification by 1 May, 2018
    Show answer

    Answer: C. Total allocation for rural, agriculture and allied sector is Rs. 80,000 crore

    - Option A is correct: The target for agriculture credit was indeed fixed at Rs. 10 Lac Crore in the 2017-18 budget. - Option B is correct: The budget proposed setting up new Mini Labs in Krishi Vigyan Kendras. - Option D is correct: Achieving 100 percent village electrification by 1 May, 2018, was a target under the Deendayal Upadhyaya Gram Jyoti Yojana and was mentioned in the context of the budget's goals. - Option C is incorrect as the allocated amount for rural, agriculture and allied sectors was much higher.

Role of Fiscal Policy in Economic Stabilization and Growth

64. Consider the following statements regarding Rahn Curve.

    Asked in: GPSC Prelims CSP 2 2023

    1. It describes how household expenditure on a particular good or service varies with household income.
    2. It is a graphical representation of the relation‐ ship between unemployment and the job vacancy rate.
    3. It is a graph which indicates that there is a level of government spending that maximizes economic growth.
    4. It is a method for predicting the likely produc‐ tion rate of any finite resource over time.
    Show answer

    Answer: C. It is a graph which indicates that there is a level of government spending that maximizes economic growth.

    The Rahn Curve hypothesizes that economic growth is maximized at a specific level of government spending, and deviations above or below this level can reduce growth.

65. Which of the following was the aim of the Twelfth Five Year Plan (2012 – 17)?

    Asked in: MPSC CS Prelims 2018

    1. To achieve economic growth and stable devel‐ opment
    2. To achieve faster growth and development
    3. To achieve faster and more inclusive growth
    4. To achieve faster, sustainable and more inclusive growth
    Show answer

    Answer: D. To achieve faster, sustainable and more inclusive growth

    - India's Five Year Plans guided its economic development. The 12th Plan was the last in the series. - The theme evolved over previous plans: The 10th Plan (2002-07) aimed for "Faster and More Inclusive Growth". The 11th Plan (2007-12) continued with "Faster and More Inclusive Growth". - Building on the previous plans, the 12th Plan added 'sustainable' to the objective, aiming for "Faster, Sustainable and More Inclusive Growth". This addition reflected growing concerns about environmental sustainability and the long-term impact of economic growth.

66. Which of the following economists, introduced fiscal policy as a tool to rectify the Great Depression of 1929-30 ?

    Asked in: UKPSC CS Prelims 2012

    1. Prof. Keynes
    2. Prof. Pigou
    3. Prof. Marshall
    4. Prof. Crowther
    Show answer

    Answer: A. Prof. Keynes

    Keynesian economics advocates for active government intervention, primarily through fiscal policy, to stabilize the economy during recessions.

67. Which among the following steps is most likely to be taken at the time of an economic recession?

    Asked in: UPSC IAS 2021

    1. Cut in tax rates accompanied by increase in interest rate
    2. Increase in expenditure on public projects
    3. Increase in tax rates accompanied by reduction of interest rate
    4. Reduction of expenditure on public projects
    Show answer

    Answer: B. Increase in expenditure on public projects

    - During an economic recession, there is a decrease in aggregate demand. Governments employ expansionary policies to boost demand. - Increasing expenditure on public projects (like infrastructure) directly injects money into the economy, creates jobs, increases income, and stimulates further spending through the multiplier effect. This is an expansionary fiscal policy. - Cutting tax rates is also an expansionary fiscal policy, as it increases disposable income, potentially leading to increased consumption and investment. Increasing tax rates is contractionary. - Reducing interest rates is an expansionary monetary policy aimed at making borrowing cheaper to encourage investment and consumption. Increasing interest rates is contractionary. - To combat a recession, expansionary policies are needed. Options A, C, and D involve either contractionary elements or exclusively contractionary policies (D). Option B is a clear expansionary fiscal policy.

68. The practice of using fiscal and monetary policy to stabilize the economy is known as

    Asked in: WBCS Main Paper 5 2022

    1. Laissez-Faire economics.
    2. Fine tuning of demand
    3. Supply side economics
    4. Monetarism
    Show answer

    Answer: B. Fine tuning of demand

    Fine-tuning refers to the precise adjustment of economic policies to maintain stability and achieve desired economic outcomes.

69. In order to recover the economy from impact of COVID-19 pandemic, Government of India and RBI together announced a stimulus worth ₹ 29.87 lakh crore, which is - (1) 15 percent of GDP (2) 10 percent of GDP (3) 12 percent of GDP (4) 20 percent of GDP

    Asked in: Head Master Praveshika School (Sanskrit Edu.) 2021

    1. Option 1
    2. Option 2
    3. Option 3
    4. Option 4
    Show answer

    Answer: C. Option 3

    Economic stimulus packages are financial measures undertaken by governments and central banks to boost economic activity during downturns. The COVID-19 pandemic caused a severe economic shock, necessitating significant policy interventions.

70. 60 Which of the following fiscal measures is used to get the economy out of recession? (1) Increase in government expenditure (2) Decrease in government expenditure (3) Increase in taxes (4) Demonetisation

    Asked in: Sub Inspector Comb. Comp. Exam 2016

    1. (1) and (2) only
    2. (1) and (3) only
    3. (2) and (4) only
    4. (1), (2) and (3) only
    Show answer

    Answer: B. (1) and (3) only

    The question tests the understanding of fiscal policies used to combat economic recession. Standard economic theory dictates that expansionary fiscal policies like increased government spending and decreased taxes are used.

Sources of Government Revenue: Tax and Non-Tax Revenue

71. The Government of India earns maximum revenue from

    Asked in: APSC CCE Prelims Exam 2014

    1. Income Tax
    2. Corporate Tax
    3. Sales Tax
    4. Goods and Services Tax
    Show answer

    Answer: B. Corporate Tax

    GST is a comprehensive indirect tax levied on the supply of goods and services. Since its implementation in 2017, it has become the largest single source of central government's gross tax revenue, often competing closely with or surpassing Corporate Tax and Personal Income Tax collections.

72. Which is the most important source of income for the Government of India?

    Asked in: APSC CCE Prelims Exam 2015

    1. Interest
    2. Excise duty
    3. License fee
    4. Income tax
    Show answer

    Answer: D. Income tax

    Before the implementation of GST in 2017, the major sources of central government's tax revenue included Corporation Tax, Income Tax, Union Excise Duties, and Customs. While Corporation Tax often contributed the largest single chunk, Income Tax (Personal Income Tax) was also a significant source and typically higher than Union Excise Duties individually among the options provided. Together, Direct Taxes (Income Tax + Corporation Tax) constituted the largest category of tax revenue.

73. The Union Government has decided to impose 0.5% cess on which services to fund the 'Swachhh Bharat Programme'?

    Asked in: APSC CCE Prelims Exam 2016

    1. All non-taxable services
    2. All charitable services
    3. Non-refundable services
    4. All taxable services
    Show answer

    Answer: D. All taxable services

    It was introduced with effect from 15th November 2015 at the rate of 0.5% on all taxable services.

74. In the recent Union Budget, the FM has increased the Foreign Direct Investment (FDI) limit in the insurance sector from the existing one to

    Asked in: BPSC Prelims Exam 67th Cancelled

    1. 50%
    2. 62%
    3. 74%
    4. 100%
    Show answer

    Answer: C. 74%

    - The increase in FDI limit aims to attract more foreign capital into the Indian insurance market. - This is expected to help in increasing insurance penetration and improving product offerings and services. - The decision required amendments to the Insurance Act, 1938.

75. What was the Tax-GDP ratio in the financial year 2021-22 in India?

    Asked in: BPSC Prelims Exam 67th Re Exam

    1. 11.7%
    2. 11.5%
    3. 10.9%
    4. 12.5%
    Show answer

    Answer: A. 11.7%

    - The Tax-GDP ratio is an indicator of the government's ability to mobilize resources through taxation. - It represents the total tax revenue (Centre + States) as a percentage of GDP. - For FY 2021-22, this ratio stood at around 11.7%.

76. As per the Budget Estimates of 2019-20, the following are some of the important sources of tax receipts for the Union Government: Corporation Tax Taxes on Income other than Corporation Tax Goods and Services Tax Union Excise Duties Which one of the following is the correct descending order of the foresaid tax receipts as a percentage of GDP?

    Asked in: UPSC CDS 2 2020

    1. 1, 2, 3, 4
    2. 1, 3, 2, 4
    3. 3, 2, 1, 4
    4. 2, 4, 3, 1
    Show answer

    Answer: A. 1, 2, 3, 4

    In the BE 2019-20, the relative shares of gross tax revenue were approximately 31% from Corporation Tax, 26% from Income Tax, 23% from GST (Centre's share), and 12% from Union Excise Duties. This confirms the descending order: Corporation Tax > Taxes on Income > GST > Union Excise Duties.

77. In which year, the percentage of Own Tax Revenue to Total Tax Revenue of this state is least during the period 2014-15 to 2017-18 ?

    Asked in: CGPSC Prelims Exam 2018

    1. 2014-15
    2. 2015-16
    3. 2016-17
    4. 2017-18
    Show answer

    Answer: B. 2015-16

    The question requires analyzing financial data to find the year with the lowest ratio of Own Tax Revenue to Total Tax Revenue.

Subsidies: Types, rationale, and economic implications

78. The new scheme 'Pahal' by the Government of India is related to

    Asked in: APSC CCE Prelims Exam 2015

    1. nutritional support to the secondary school children
    2. direct benefit transfer under Right to Food Act
    3. direct benefit transfer for LPG (DBTL)
    4. cash transfer to the farmers due to inclement weather and crop loss
    Show answer

    Answer: C. direct benefit transfer for LPG (DBTL)

    The 'Pahal' scheme is related to the direct transfer of LPG subsidy to consumers' bank accounts (DBTL).

79. As per the Budget Estimates of expenditure on major subsidies during 2019-20, the maximum expenditure was likely to be on

    Asked in: UPSC CDS 2 2020

    1. urea subsidy
    2. petroleum subsidy
    3. food subsidy
    4. fertilizer subsidy
    Show answer

    Answer: C. food subsidy

    The Budget Estimates for 2019-20 projected significant expenditures on various subsidies. Among the major categories listed: Food subsidy (~₹1.84 lakh crore), Fertiliser subsidy (~₹0.80 lakh crore), and Petroleum subsidy (~₹0.37 lakh crore). The Food subsidy was clearly the largest among these. Fertiliser subsidy is the total of Urea subsidy and P&K subsidy; Urea subsidy is a component, not the total fertiliser subsidy.

80. Which committee was set-up to suggest methodology for pricing of diesel and cooking fuel ?

    Asked in: KPSC KAS Prelims 2014

    1. Kirit Parikh Committee
    2. Hanumantha Rao Committee
    3. Naresh Chandra Committee
    4. Athreya Committee
    Show answer

    Answer: A. Kirit Parikh Committee

    Notable reports include the 2009 report which recommended dismantling of price controls and moving towards market-determined pricing for petrol and diesel, and adjustments for kerosene and LPG subsidies.

81. Government of India decides to decontrol petrol prices, Diesel, LPG, Kerosene prices. But what is decontrol ?

    Asked in: KPSC KAS Prelims 2014

    1. Prices to be fixed by oil firms, not govern‐ ment.
    2. No more subsidy, but market-linked prices.
    3. Prices aligned to global crude prices and prices change periodically.
    4. All of the above.
    Show answer

    Answer: D. All of the above.

    - Prices to be fixed by oil firms, not government: This is the fundamental mechanism of decontrol, shifting price-setting authority from the government to the companies. - No more subsidy, but market- linked prices: Decontrol typically involves reducing or eliminating subsidies, leading to prices that reflect market dynamics (demand, supply, and international rates). - Prices aligned to global crude prices and prices change periodically: In a decontrolled regime, domestic prices are usually linked to international prices of crude oil and refined products, leading to periodic revisions based on market fluctuations.

82. Which of the following two statements is/ are correct ? a. Subsidies are akin to steroids as prescriptions. b. Steroids promise enduring cure.

    Asked in: MPSC CS Prelims 2016

    1. Only a
    2. Only b
    3. Both a and b
    4. Neither a nor b
    Show answer

    Answer: A. Only a

    Statement (a) draws an analogy between subsidies and steroids used as prescriptions. This comparison suggests that subsidies, like steroids, can be beneficial when applied appropriately for a specific issue (like a prescription) but can also have negative side effects, lead to dependency, or mask underlying problems if misused or overused. This is a common critique and perspective on the use of subsidies in economics. Statement (b) claims that steroids promise an enduring cure. This is generally not true in a medical context; steroids are often used to manage symptoms, reduce inflammation, or suppress the immune system, but they typically do not provide a permanent cure for the underlying condition. Therefore, statement (b) is incorrect.

83. Which one of the following is a purpose of 'UDAY', a scheme of the Government?

    Asked in: UPSC IAS 2016

    1. Providing technical and financial assistance to start-up entre- preneurs in the field of renewable sources of energy
    2. Providing electricity to every household in the country by 2018
    3. Replacing the coal-based power plants with natural gas, nuclear, solar, wind and tidal power plants over a period of time
    4. Providing for financial turnaround and revival of power distribution companies
    Show answer

    Answer: D. Providing for financial turnaround and revival of power distribution companies

    State-owned power distribution companies in India have historically suffered from significant financial losses and debt, primarily due to AT&C (Aggregate Technical and Commercial) losses and tariffs not covering the cost of supply. The UDAY scheme provides a framework for states to take over a portion of their DISCOMs' debt, and for operational improvements to reduce losses and improve efficiency.

84. If a commodity is provided free to the public by the Government, then

    Asked in: UPSC IAS 2018

    1. the opportunity cost is zero.
    2. the opportunity cost is ignored.
    3. the opportunity cost is transferred from the consumers of the product to the tax-paying pub‐ lic.
    4. the opportunity cost is transferred from the consumers of the product to the Government.
    Show answer

    Answer: C. the opportunity cost is transferred from the consumers of the product to the tax-paying pub‐ lic.

    Opportunity cost is the value of the next-best alternative use of resources. When the government provides a commodity for free, the resources used to produce or acquire that commodity are not free from the perspective of society or the economy. Those resources (labor, materials, capital) could have been used to produce other goods or services. The cost of these foregone alternatives is the opportunity cost. Since the consumer doesn't pay for the commodity, the burden of this opportunity cost (funding the production/acquisition) is shifted to the general public, primarily through taxes. Taxpayers pay for the resources used by the government, effectively bearing the opportunity cost that consumers would have borne through direct payment.

Taxation System in India: Direct, Indirect taxes, and Tax Reforms (including GST)

85. Name of the city which pays the highest income tax

    Asked in: APSC CCE Prelims Exam 2006

    1. Mumbai
    2. Delhi
    3. Kolkata
    4. Chennai
    Show answer

    Answer: A. Mumbai

    This question likely refers to the city that contributes the highest amount to the national direct tax revenue (which includes income tax and corporate tax). Mumbai, being the financial capital of India and home to numerous large corporations and high- net-worth individuals, has historically been the largest contributor to direct tax collections in India, often competing with Delhi-NCR depending on the specific year and metrics.

86. Which one of the following correctly describes the 'Angel Tax'?

    Asked in: APSC CCE Prelims Exam 2020

    1. A tax imposed on the super-rich people
    2. A tax relief given for doing social work
    3. A type of capital gains tax imposed when start- ups receive funding, which is higher than the fair market value of the shares sold
    4. A tax relief given to start-ups for doing innovative work
    Show answer

    Answer: C. A type of capital gains tax imposed when start- ups receive funding, which is higher than the fair market value of the shares sold

    - This tax is aimed at curbing the generation and use of unaccounted money through share premiums. - It primarily impacts funding received by startups, often from angel investors or other domestic investors, where valuations can be subjective and high. - While it's not strictly a capital gains tax on the investment itself, it taxes the 'income' arising from the share premium deemed in excess of FMV.

87. Consider the following statements regarding the Goods and Services Tax (GST) of India : (i) GST is a successor to VAT used in India on the supply of goods and services. (ii) GST came into effect from 1st July, 2017 through the implementation of the one hundred and first Amendment of the Constitution of India. (iii) Every decision of the GST Council is to be taken by a majority of not less than three-fourths of the weighted votes of the members present and voting at the meeting. (iv) The GST Council is chaired by the Prime Minister of India. Select the correct statement/ statements using the codes given below.

    Asked in: APSC CCE Prelims Exam 2023

    1. (i) only
    2. (ii) only
    3. (iii) and (iv) only
    4. (ii), (iii) and (iv) only
    Show answer

    Answer: D. (ii), (iii) and (iv) only

    The Goods and Services Tax (GST) is a comprehensive indirect tax on the supply of goods and services throughout India. It was enacted by the Constitution (One Hundred and First Amendment) Act, 2016. The GST Council, the governing body, is chaired by the Union Finance Minister.

88. Which of the following statements are correct ? Ability to pay principle of taxation holds that the amount of taxes people pay should relate to their income or wealth The Benefit Principle of taxation states that individuals should be taxed in proportion to the benefit they receive from Government programmes A progressive tax takes a larger share of tax from poor families than it does from rich families Indirect taxes have the advantage of being cheaper and easier to collect Select the correct answer using the code given below:

    Asked in: UPSC CDS 1 2016

    1. 1 and 3 only
    2. 2 and 4 only
    3. 1, 2 and 4 only
    4. 1, 2, 3 and 4
    Show answer

    Answer: C. 1, 2 and 4 only

    Understanding the basic principles and types of taxation (ability to pay, benefit principle, progressive, indirect taxes) is crucial.

89. Consider the following statements about impact of tax : A tax is shifted forward to consumers if the demand is inelastic relative to supply. A tax is shifted backward to producers if the supply is relatively more inelastic than demand. Which of the statements given above is/are correct?

    Asked in: UPSC CDS 1 2018

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: C. Both 1 and 2

    Tax incidence is determined by the relative elasticity of demand and supply; the burden falls more on the less elastic side of the market.

90. Which one of the following canons of taxation was not advocated by Adam Smith?

    Asked in: UPSC CDS 1 2019

    1. Canon of equality
    2. Canon of certainty
    3. Canon of convenience
    4. Canon of fiscal adequacy
    Show answer

    Answer: D. Canon of fiscal adequacy

    - Adam Smith's four canons of taxation are Equality, Certainty, Convenience, and Economy. - Fiscal adequacy is a principle of taxation related to revenue generation, but not one of Smith's original four canons.

91. Which one of the following items is not covered under GST ?

    Asked in: UPSC CDS 1 2022

    1. Cosmetics
    2. Medical grade oxygen
    3. Jewellery
    4. Petrol
    Show answer

    Answer: D. Petrol

    Certain petroleum products (like petrol, diesel, natural gas, ATF, crude oil) and alcohol for human consumption were excluded from GST at its inception and remain outside the GST framework, attracting old taxes like excise duty and VAT.