Prepare for the UPSC Prelims with a focused approach on Indian Economy – Public Finance through topic-wise questions. Delve into the intricacies of public finance, exploring concepts such as government expenditure, revenue, fiscal policy, and more. This resource offers a structured and comprehensive collection of questions tailored to deepen your understanding of the economic landscape of India. Whether you’re revising core principles or exploring advanced topics, these questions provide valuable practice to enhance your proficiency and confidence for the exam. Gain insights into the dynamics of public finance and its implications on the broader economy, empowering you to tackle related questions with ease. Elevate your preparation with this specialized resource, designed to hone your knowledge and analytical skills in Indian Economy – Public Finance for the UPSC Prelims.
Q1. The following table shows the percentage distribution of revenue expenditure of Government of India in 1989-90 and 1994-95. (1996)
Expenditure Head (Per cent to total)
| Years | 1989-90 | 1994-95 |
| Defence | 15.1 | 13.6 |
| Interest Payments | 227.7 | 38.7 |
| Subsidies | 16.3 | 8.0 |
| Grants to State/UTs | 13.6 | 16.7 |
| Others | 27.4 | 23.0 |
Based on this table, it can be said that the Indian economy is in poor shape because the Central Government continues to be under pressure to
(a) reduce expenditure on defence
(b) spend more and more on Interest payments
(c) reduce expenditure on subsidies
(d) spend more and more as grants-in-aid to State Government/Union Territories
Ans. (b)
Based on the data provided in the table, it’s evident that the Indian economy is facing challenges, particularly due to increasing pressure on the Central Government to allocate more funds towards interest payments. This is highlighted by the significant rise in interest payments from 27.7% in 1989-90 to 38.7% in 1994-95, which is the highest increase among the given expenditure categories.
Furthermore, the percentage distribution of revenue expenditure on Defence and Subsidies has been declining, although there has been a marginal increase in State Grants. This indicates a shifting allocation of funds within the revenue expenditure categories.
During the early 1990s, India encountered significant internal and external financial imbalances, making it vulnerable to adverse external shocks. These challenges were exacerbated by a high inflation rate of 12.0%. Additionally, the sudden impact of the Gulf War further compounded the fragile economic situation faced by India during that period.
Q2. Match List I with List II and select the correct answer using the codes given below the lists.(1997)
| List I (Committees) | List II (Chaired by) |
| A. Disinvestment of Shares in Public Sector Enterprises | 1. Raja Chelliah |
| B. Industrial Sickness | 2. Omkar Goswami |
| C. Tax Reforms | 3. RN Malhotra |
| D. Reforms in Insurance Sector | 4. C. Rangarajan |
Codes
A B C D
(a) 1 4 2 3
(b) 4 2 1 3
(c) 4 1 2 3
(d) 1 3 4
Ans. (b)
A-4, B-2, C-1, D-3:
A – The Committee on Disinvestment of Shares in Public Sector Enterprises was chaired by C. Rangarajan. The committee recommended disinvesting up to 49% of equity in industries explicitly reserved for the public sector and over 74% in other industries.
B – Omkar Goswami of the Indian Statistical Institute served as the chairman of the Tax Reforms Committee, which submitted its report on 13th July 1993. The committee suggested a new definition of industrial sickness and recommendations to modify the Sick Industrial Companies Act (SICA) and the role of the Board for Industrial and Financial Reconstruction (BIFR).
C – The Government of India appointed a Tax Reforms Committee under Prof. Raja Chelliah to lay out an agenda for reforming India’s tax system. The committee submitted its three reports in 1991, 1992, and 1993. It suggested broadening the tax base, reforming the personal taxation system, and reducing corporate tax rates.
D – The RN Malhotra Committee on Reforms in the Insurance Sector recommended introducing a concept of professionalization in the insurance sector and paving the way for foreign capital. The committee also recommended the introduction of private players in the insurance sector.
Q3. The Minimum Alternative Tax (MAT) was introduced in the Budget of the Government of India for the year (1997)
(a) 1991-92
(b) 1992-93
(c) 1995-96
(d) 1996-97
Ans. (d)
The Minimum Alternative Tax (MAT) was indeed introduced in the Government of India’s Budget for the fiscal year 1996-97. It was established as a means to ensure that all companies are subject to income tax regulations. MAT functions as a provision in Direct Tax laws aimed at curbing tax exemptions utilized by companies, thereby ensuring they contribute at least a minimum amount of corporate tax to the government.
MAT is triggered when a company’s taxable income falls below 15% (plus applicable surcharge and cess) of its book profit under the Companies Act, 2013, as per Income Tax provisions. This ensures that even if a company avails significant exemptions and deductions, it still pays a minimum level of tax.
Q4. The Kelkar proposals which were in the news recently were the (2003)
(a) recommendations for reforms in the power sector
(b) recommendations for tax reforms
(c) guidelines for the privatisation of public sector undertakings
(d) guidelines for reducing vehicular pollution and the promotion of CNG use
Ans. (b)
The Vijay Kelkar Committee, established in 2002, aimed to rationalize India’s complex tax structure. Some of its key recommendations are as follows:
- Enhance taxpayers’ service in terms of quality and quantity.
- Expand the coverage of the Personal Account Number (PAN) to include all citizens.
- Rationalize income tax slabs and eliminate surcharge on personal income tax.
- Reduce corporate tax rates to 30% for domestic companies and 35% for foreign companies.
- Abolish Minimum Alternate Tax (MAT) and Wealth Tax.
These recommendations were geared towards simplifying the tax regime, improving taxpayer services, and fostering economic growth.
Q5. Consider the following statements. (2005)
1. Global Trust Bank has been amalgamated with the Punjab National Bank.
2. The second report of the Kelkar Committee dealing with direct and indirect taxes has maintained its original recommendation including the abolition of exemptions relating to housing loans.
Which of the statement(s) given above is/are correct?
(a) Only
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
Ans. (b)
Only statement (2) is accurate.
The subsequent report from the Kelkar Committee, which addresses both direct and indirect taxes, has upheld its original proposal, which includes the elimination of exemptions associated with housing loans. This committee was established in 2015 under the leadership of the then Finance Minister of India, Arun Jaitley, and consisted of 10 members. It presented its recommendations on November 19, 2015.
Among the significant suggestions put forth by the Committee were:
- Introducing a public-private partnership (PPP) model.
- Establishment of autonomous regulatory bodies.
- Adoption of the PPP approach for airport, port, and railway ventures.
- Implementation of electronic toll collection for roads.
Q6. Which one of the following statements is correct? Fiscal Responsibility and Budget Management Act (FRBMA) concerns (2006)
(a) Fiscal deficit only
(b) Revenue deficit only
(c) Both fiscal deficit and revenue deficit
(d) Neither fiscal deficit nor revenue deficit
Ans. (c)
The Fiscal Responsibility and Budget Management Act (FRBMA) of 2003, which became effective on July 5, 2004, addresses both Fiscal deficit and Revenue deficit. The primary goal of the FRBM Act is to enhance transparency within India’s fiscal management frameworks. Its overarching objective is to guide India towards fiscal stability and grant the Reserve Bank of India (RBI) the leeway to address inflation effectively. The FRBM Act suggests that revenue deficit, fiscal deficit, tax revenue, and total outstanding liabilities should be forecasted as a percentage of Gross Domestic Product (GDP) in the medium-term fiscal policy statement.
Q7. Which one of the following is the correct statement? Service Tax is a/an (2006)
(a) direct tax levied by the Central Government
(b) indirect tax levied by the Central Government
(c) direct tax levied by the State Government
(d) indirect tax levied by the State Government
Ans. (b)
Service Tax is an indirect tax imposed by the Central Government, meaning it is not directly charged to taxpayers. Instead, it is typically imposed on goods and services, leading to increased prices for consumers. Some examples of indirect taxes in India encompass service tax, central excise, customs duty, and Value Added Tax (VAT).
Q8. Consider the following. (2009)
1. Fringe Benefit Tax
2. Interest Tax
3. Securities Transaction Tax
Which of the above mentioned is/are Direct Tax/Taxes?
(a) Only 1
(b) 1 and 3
(c) 2 and 3
(d) 1,2 and 3
Ans. (d)
Fringe Benefit Tax, Interest Tax, and Securities Transaction Tax are all examples of Direct Taxation. Fringe Benefit Tax is levied on employers for expenses incurred in providing services to employees that cannot be individually accounted for. Interest Tax is a direct tax imposed on interest accrued in certain cases; however, it was abolished in March 2000. Securities Transaction Tax is imposed on stock market transactions, applicable to both buyers and sellers during a transaction.
Q9. In India, the tax proceeds of which one of the following as a percentage of gross tax revenue has significantly declined in the last five year? (2009)
(a) Service tax
(b) Personal income tax
(c) Excise duty
(d) Corporation tax
Ans. (c)
In India, the proportion of tax revenues generated from Excise duty as a percentage of the overall gross tax revenue has notably decreased over the past five years. This decline can be attributed to the gradual reduction of Excise duty rates, aimed at enhancing the competitiveness of domestic producers in the global market by lowering prices. Concurrently, the expansion of various services within the service tax framework, alongside a burgeoning economy and rising incomes, has led to an improvement in other tax revenues across India.
Q10. Which one of the following statements is an appropriate description of deflation? (2010)
(a) It is a sudden fall in the value of a currency against other currencies.
(b) It is persistent recession in both the financial and real sectors of economy.
(c) It is a persistent fall in the general price level of goods and services.
(d) It is a fall in the rate of inflation over a period of time.
Ans. (c)
Deflation is characterized by a sustained decline in the overall price level of goods and services. This phenomenon can be caused by either an increase in the supply of goods and services or by a lack of growth (or a decrease) in the supply of money and credit. In either scenario, when prices have the ability to adjust downward, it leads to a general trend of decreasing prices across various sectors.
Q11. Which one of the following is responsible for the preparation and presentation of Union Budget to the Parliament? (2010)
(a) Department of Revenue
(b) Department of Economic Affairs
(c) Department of Financial Services
(d) Department of Expenditure
Ans. (b)
The budget division of the Department of Economic Affairs (DEA) within the Ministry of Finance serves as the central entity tasked with crafting the Budget. Collaborating closely with NITI Aayog and relevant ministries, it undertakes the budget-making process, which typically commences around August or September, approximately six months ahead of its presentation date. Before the start of the financial year on April 1st, the Budget must receive approval from both houses of Parliament.
Q12. With reference to India, consider the following statements. (2010)
1. The Wholesale Price Index (WPI) in India is available on a monthly basis only.
2. As compared on Consumer Price Index for Industrial Workers (CPI) (IW), the WPI gives less weight to food articles.
Which of the statement(s) given above is/are correct?
(a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
Ans. (c)
Both statements (1) and (2) are accurate. The Wholesale Price Index (WPI) in India has been available on a monthly basis since 2012. This index reflects the average price change of commodities at the wholesale level and is published by the Economic Advisor under the Ministry of Commerce and Industry. Items covered under the Wholesale Price Index include manufacturing inputs and intermediate goods like minerals, machinery, and basic metals. In India, the WPI serves as the primary measure of inflation, with a base year of 2011-12.
Compared to the Consumer Price Index for Industrial Workers (CPI (IW)), the WPI assigns less weight to food articles. The Consumer Price Index (CPI), on the other hand, tracks the prices of goods and services bought by consumers. It encompasses various commodities and services such as transportation, food, and medical care, among others.
Q13. In India, which of the following is regulated by the Forward Markets Commission? (2010)
(a) Currency Futures Trading
(b) Commodities Futures Trading
(c) Equity Futures Trading
(d) Both Commodities Futures and Financial Futures Trading
Ans. (b)
The regulation of commodities futures trading was overseen by the Forward Markets Commission (FMC). A commodity futures contract entails an agreement to purchase or sell a specific commodity at a predetermined future date, with the price and quantity of the commodity established at the time of the agreement.
Previously, the Forward Markets Commission held the regulatory authority over commodity futures markets. Meanwhile, the Securities and Exchange Board of India (SEBI) was responsible for regulating financial markets. However, in 2015, the Forward Markets Commission was merged with SEBI, consolidating regulatory oversight of both commodity futures and financial markets under a single entity.
Q14. Consider the following actions by the government. (2010)
1. Cutting the tax rates
2. Increasing the government spending
3. Abolishing the subsidies
In the context of economic recession, which of the above actions can be considered a part of the ‘fiscal stimulus’ package?
(a) 1 and 2
(b) Only 2
(c) 1 and 3
(d) 1, 2 and 3
Ans. (a)
Both statements (1) and (2) are accurate.
Reducing tax rates and augmenting government spending are crucial fiscal stimuli in the context of economic recession. Decreased tax rates have the potential to stimulate saving and investment, thereby enhancing the productive capacity of the economy.
Similarly, increasing government spending is also regarded as a fiscal stimulus during economic downturns. By elevating inflation and expected inflation, government spending can effectively lower real interest rates, thus further stimulating economic activity.
Q15. Which one of the following is not a feature of Limited Liability Partnership firm? (2010)
(a) Partners should be less than 20
(b) Partnership and management need not be separate
(c) Internal governance may be decided by mutual agreement among partners
(d) It is corporate body with perpetual succession
Ans. (a)
The statement “Partners should be less than 20” is not a characteristic of Limited Liability Partnership (LLP) firms. In an LLP, the partnership and management roles may not necessarily be separate, and internal governance can be determined through mutual agreement among partners. Additionally, an LLP is considered a corporate entity with perpetual succession. Introduced in India in 2008, an LLP requires a minimum of two partners for incorporation, but there is no upper limit on the maximum number of partners that can be part of an LLP.
Q16. Which one of the following was not stipulated in the Fiscal Responsibility and Budget Management Act, HON 2003? (2010)
(a) Elimination of revenue deficit by the end of the fiscal year 2007-08.
(b) Non-borrowing by the Central Government from Reserve Bank of India except under certain circumstances.
(c) Elimination of primary deficit by the end of the fiscal year 2008-09.
(d) Fixing government guarantees in any financial year as a percentage of GDP.
Ans. (c)
The Fiscal Responsibility and Budget Management Act, 2003 did not mandate the elimination of the primary deficit by the end of the fiscal year 2008-09. Its introduction aimed to institutionalize financial discipline, decrease India’s fiscal deficit, enhance macroeconomic management, and improve the overall management of public funds by transitioning towards a balanced budget and reinforcing fiscal prudence. The FRBM Act was implemented to ensure that the Central Government takes responsibility for maintaining intergenerational equity in fiscal management and achieving long-term macroeconomic stability. This involved removing fiscal impediments to the effective conduct of monetary policy and adopting prudent debt management practices consistent with fiscal sustainability.
Q17. In the context of governance, consider the following. (2010)
1. Encouraging Foreign Direct Investment inflows.
2. Privatisation of higher educational institutions.
3. Down-sizing of bureaucracy.
4. Selling/offloading the shares of Public Sector Undertaking.
Which of the above can be used as measures to control the fiscal deficit in India?
(a) 1, 2 and 3
(b) 2, 3 and 4
(c) 1, 2 and 4
(d) 3 and 4
Ans. (d)
Reducing the size of bureaucracy and divesting shares of Public Sector Undertakings directly contribute to the reduction of fiscal deficit. While privatizing higher education institutions might have a positive impact, its effect is likely to be minimal. Without clarity on where Foreign Direct Investment inflows are directed, it is challenging to ascertain their actual impact on the fiscal situation.
Q18. Economic growth is usually coupled with (2011)
(a) deflation
(b) inflation
(c) stagflation
(d) hyper-inflation
Ans. (b)
Economic growth is often associated with inflation. Economic expansion occurs when there is an increase in the money supply within the market. This surge in money supply boosts consumers’ purchasing power, leading to heightened demand for products. Generally, robust economic growth results in higher inflation rates. When Aggregate Demand (AD) in an economy expands at a faster pace than aggregate supply, it typically leads to an uptick in inflation. If demand is outpacing supply growth, it implies that economic expansion exceeds the long-term sustainable growth rate.
Q19. A rapid increase in the rate of inflation is sometimes attributed to the ‘Base Effect’. What is ‘base effect’? (2011)
(a) It is the impact of drastic deficiency in supply due to failure of crops.
(b) It is the impact of the surge in demand due to rapid economic growth.
(c) It is the impact of the price levels of previous year on the calculation of inflation rate.
(d) None of the statements (a), (b) and (c) given above is correct in this context.
Ans. (c)
The Base Effect pertains to the influence of the previous year’s inflation (i.e., the rise in price levels) on the corresponding rise in price levels in the current year, affecting current inflation. This term is typically utilized in discussions about inflation.
If the price index had experienced a substantial increase during the corresponding period of the previous year, resulting in a high inflation rate, some of the potential rise is already taken into account. Consequently, a similar absolute increase in the price index in the current year will result in a relatively lower inflation rate.
Q20. Why is the Government of India disinvesting its equity in the Central Public Sector Enterprises (CPSE)? (2011)
1. The government intends to use the revenue earned from the disinvestment mainly to pay back the external debt.
2. The government no larger intends to retain the management control of the CPSEs.
Which of the statement(s) given above is/are correct?
a) Only 1
(b) Only 2
(c) Both 1 and 2
(d) Neither 1 nor 2
Ans. (d)
Both statements (1) and (2) are incorrect, as the Government of India is actually divesting its equity in the Central Public Sector Enterprises (CPSEs) with the objective of reducing the financial burden, enhancing public finances, and introducing competition and market discipline.
Central Public Sector Enterprises are companies in which the Government of India or other CPSEs hold a direct stake of 51% or more. When the government sells off its stake, it is referred to as disinvestment, which involves the action of selling or liquidating an asset or subsidiary.
Both statements (1) and (2) are incorrect, as the Government of India is actually divesting its equity in the Central Public Sector Enterprises (CPSEs) with the objective of reducing the financial burden, enhancing public finances, and introducing competition and market discipline.
Central Public Sector Enterprises are companies in which the Government of India or other CPSEs hold a direct stake of 51% or more. When the government sells off its stake, it is referred to as disinvestment, which involves the action of selling or liquidating an asset or subsidiary.
Q21. Which one of the following statements appropriately describes the ‘fiscal stimulus’? (2011)
(a) It is a massive investment by the government in manufacturing sector to ensure the supply of goods to meet the demand surge caused by rapid economic growth.
(b) It is an intense affirmative action of the government to boost economic activity in the country.
(c) It is government’s intensive action of financial institutions to ensure disbursement of loans to agriculture and allied sectors to promote greater food production and contain food inflation.
(d) It is an extreme affirmative action by the government to pursue its policy of financial inclusion.
Ans. (b)
A fiscal stimulus can be defined as a proactive measure undertaken by the government to bolster economic activity within the country. This entails various initiatives, including tax rebates, incentives, and other supportive measures. It serves as a tool utilized by the government to invigorate the economy and mitigate the risk of financial crises.
A stimulus package typically incorporates tax rebates and increased government spending, which in turn stimulates demand. This cyclical process of incentivizing spending fosters economic growth and stability.
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