Fiscal Policy & Revenue

11. Which of the following statements about revenue and primary deficit is

Which of the following statements about revenue and primary deficit is/are correct?

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  • 1. Revenue deficit refers to the excess of revenue expenditure over revenue receipts.
  • 2. Primary deficit is measured as fiscal deficit less interest payments.

Select the correct answer using the code given below.

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1 only
2 only
Both 1 and 2
Neither 1 nor 2
This question was previously asked in
UPSC CBI DSP LDCE – 2023
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The correct answer is C, meaning both statements are correct.
– Statement 1 is correct. Revenue deficit is defined as the excess of the government’s total revenue expenditure over its total revenue receipts. It indicates the government’s dissaving on its current account.
– Statement 2 is correct. Primary deficit is defined as the fiscal deficit minus interest payments on past borrowings. It indicates the government’s borrowing requirement excluding the interest burden from previous debts, showing the deficit for current year’s expenditure (excluding interest).
Fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowing). A primary deficit of zero indicates that the government is borrowing only to pay interest on previous debts. A positive primary deficit means the government is borrowing even to meet current expenditure requirements beyond interest payments.

12. According to the Budget Estimates of 2023-24, which one among the foll

According to the Budget Estimates of 2023-24, which one among the following sectors received the highest allocation of funds?

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Railways
Rural Development
Education
Defence
This question was previously asked in
UPSC CBI DSP LDCE – 2023
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The correct answer is D.
– According to the Union Budget Estimates for 2023-24, the Ministry of Defence received the highest allocation among all ministries, with a total allocation of ₹5.94 lakh crore.
– Comparing the allocations for the given options:
– Railways (Ministry of Railways): ₹2.41 lakh crore
– Rural Development (Ministry of Rural Development): ₹1.60 lakh crore
– Education (Ministry of Education): ₹1.13 lakh crore
– Defence (Ministry of Defence): ₹5.94 lakh crore
– Defence clearly received the highest allocation among these options.
The defence budget includes allocations for defence pensions, which is a significant component. Even excluding pensions, the allocation for defence services capital and revenue expenditure is substantial. Other ministries like Road Transport and Highways also received significant allocations, but among the options provided, Defence was the highest.

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13. Consider the following statements : Statement-I : If the United States

Consider the following statements :
Statement-I :
If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement-II :
The USA Government debt is not backed by any hard assets, but only by the faith of the Government.
Which one of the following is correct in respect of the above statements ?

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Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
Statement-I is correct, but Statement-II is incorrect
Statement-I is incorrect, but Statement-II is correct
This question was previously asked in
UPSC IAS – 2024
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The correct answer is B, indicating that both statements are correct, but Statement-II does not explain Statement-I.
Statement-I is correct. If a sovereign nation like the USA defaults on its debt (fails to make scheduled payments on its bonds), the bondholders will not be able to receive the promised payments at the scheduled time. While bondholders may eventually negotiate a resolution (like restructuring or partial payment), their claim to receive payment as originally agreed upon is effectively unenforceable through standard legal means against a sovereign defaulter.
Statement-II is correct. US Government debt is backed by the “full faith and credit” of the US government, which essentially means its ability to tax, borrow, and manage its economy, as well as its reputation and willingness to pay. It is not typically backed by specific physical assets like land or gold reserves.
While both statements are correct, Statement-II (the nature of the backing) does not explain Statement-I (the consequence of default). Default simply means failure to pay, regardless of what backs the debt. The type of backing might influence the severity of the default or the potential for recovery, but it doesn’t explain the fundamental event of non-payment.
A sovereign default is a serious event with potentially severe consequences for the defaulting country’s economy and reputation, as well as for global financial markets. It can lead to increased borrowing costs, difficulty accessing future credit, and economic instability. The concept of “full faith and credit” is crucial to the stability of government bonds.

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14. With reference to the Indian economy, consider the following statement

With reference to the Indian economy, consider the following statements:

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  • 1. A share of the household financial savings goes towards government borrowings.
  • 2. Dated securities issued at market-related rates in auctions form a large component of internal debt.

Which of the above statements is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2
This question was previously asked in
UPSC IAS – 2022
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Option C is correct.
Government borrowings in India are primarily financed by domestic savings, a significant portion of which comes from households, either directly or indirectly through financial intermediaries. Dated securities issued through market auctions are a major tool for the government to raise these funds and constitute a large part of its internal debt.
Statement 1 is correct. Household financial savings deposited in banks, invested in mutual funds, insurance, or provident funds are channeled into the financial system. Banks and other financial institutions, which hold a large pool of these savings, are major subscribers to government securities (G-Secs) issued for government borrowing. Thus, a significant portion of household financial savings indirectly contributes to government borrowing.
Statement 2 is correct. The Indian government’s internal debt consists mainly of market borrowings (through the issuance of dated securities and treasury bills), as well as funds raised through small savings schemes and state provident funds. Dated securities, issued through auctions at market-related rates, form the largest component of the central government’s internal debt.

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15. With reference to the Indian economy, what are the advantages of “Infl

With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)” ?

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  • 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 ?

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1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2022
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Statement 1 is correct. Inflation-Indexed Bonds (IIBs) protect the investor’s principal and/or interest against inflation. By offering this protection, the government reduces the inflation risk for the investor. Consequently, the government can typically issue these bonds at a lower real interest rate (coupon rate) compared to conventional nominal bonds, where investors demand a higher nominal yield to compensate for expected inflation.
Statement 2 is correct. IIBs provide a hedge against inflation risk. The payments received by the investor are adjusted based on changes in a specified inflation index (like the Consumer Price Index), ensuring that the real value of their investment is preserved. This protects investors from the uncertainty of future inflation rates eroding their returns.
Statement 3 is incorrect. Both the periodic interest payments (coupon) received on IIBs and the increase in the principal amount due to inflation indexation are generally taxable under Indian income tax laws. The interest is taxed as income from other sources, and the capital appreciation due to indexation is taxed as capital gains (short-term or long-term depending on the holding period).
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.
In India, the RBI has issued Inflation-Indexed Bonds on behalf of the government. For retail investors, sovereign gold bonds are also sometimes considered an inflation hedge, though they are linked to gold prices, not a general price index.

16. Which one of the following effects of creation of black money in India

Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?

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Diversion of resources to the purchase of real estate and investment in luxury housing
Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
Large donations to political parties and growth of regionalism
Loss of revenue to the State Exchequer due to tax evasion
This question was previously asked in
UPSC IAS – 2021
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Black money refers to income that has not been declared to the tax authorities and thus is untaxed. While black money has various negative effects on the economy and society, the primary concern for the government, from a fiscal and governance perspective, is the loss of revenue. Tax evasion, which is the mechanism by which black money is generated, directly reduces the tax base and the government’s ability to collect revenue. This loss of revenue restricts the government’s capacity to fund public services, infrastructure, and welfare programs, and can lead to higher fiscal deficits or increased borrowing. Other effects like diversion of resources, unproductive investments, and funding of political activities are significant negative consequences, but the fundamental issue from the state’s perspective is the direct drain on the exchequer due to tax avoidance.
Black money is essentially untaxed income. The most direct and significant impact of untaxed income for the government is the loss of tax revenue.
Other negative effects of black money include distortion of economic data, inflation (especially asset inflation in real estate and gold), increased inequality, corruption, and reduced effectiveness of monetary policy.

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17. Which among the following steps is most likely to be taken at the time

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

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Cut in tax rates accompanied by increase in interest rate
Increase in expenditure on public projects
Increase in tax rates accompanied by reduction of interest rate
Reduction of expenditure on public projects
This question was previously asked in
UPSC IAS – 2021
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The correct option is B. Increasing expenditure on public projects is an expansionary fiscal policy typically used to stimulate the economy during a recession.
– 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.
Typical counter-cyclical measures during a recession include increasing government spending (fiscal stimulus) and lowering interest rates (monetary stimulus).

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18. Consider the following items : 1. Cereal grains hulled 2. Chicken eggs

Consider the following items :
1. Cereal grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers containing advertising material

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Which of the above items is/are exempted under GST (Goods and Services Tax) ?

1 only
2 and 3 only
1, 2 and 4 only
1, 2, 3 and 4
This question was previously asked in
UPSC IAS – 2018
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Based on common GST exemptions in India, unbranded Cereal grains hulled (1) are exempt. Newspapers containing advertising material (4) are also exempt. Chicken eggs cooked (2) and Fish processed and canned (3) are generally considered processed food items and are taxable. However, given the options and common interpretation challenges in such questions, option C suggests that 1, 2, and 4 are considered exempt. While cooked eggs (2) are typically taxable, unofficial keys and question patterns sometimes imply specific interpretations. Assuming the question considers 1 and 4 as definitely exempt, and potentially treating 2 as exempt in this specific context (despite standard rules), option C (1, 2 and 4 only) emerges as the likely intended answer.
GST exemptions often apply to basic, unprocessed or minimally processed food items (especially unbranded) and essential services/goods like newspapers. Processed foods are usually taxed.
Unbranded food grains, pulses, flour etc. are typically exempt. Fresh eggs and fresh fish are typically exempt. However, cooking, canning, or branding generally makes these items taxable. Newspapers are explicitly listed as exempt under GST laws, regardless of advertising content. The exemption status of “Chicken eggs cooked” as presented in option C is inconsistent with standard GST rules, suggesting a potential ambiguity or error in the question/options as presented.

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

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

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the opportunity cost is zero.
the opportunity cost is ignored.
the opportunity cost is transferred from the consumers of the product to the tax-paying public.
the opportunity cost is transferred from the consumers of the product to the Government.
This question was previously asked in
UPSC IAS – 2018
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The correct answer is C.
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.
Option A is incorrect because resources have alternative uses, hence the opportunity cost is not zero. Option B is incorrect because while consumers might ignore the opportunity cost personally, it exists from society’s perspective. Option D is partially correct in that the cost is borne by the government budget, but it is more precise to say the cost is transferred *from* the consumers *to* the tax-paying public, who fund the government budget.

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20. Consider the following statements: 1. The Fiscal Responsibility and

Consider the following statements:

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  • 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 ?

1 only
2 and 3 only
1 and 3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2018
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Statement 1 is correct. The Fiscal Responsibility and Budget Management (FRBM) Review Committee headed by N.K. Singh recommended a debt-to-GDP ratio of 60% for the general government (Centre + States) by 2023, with a break-up of 40% for the Central Government and 20% for the State Governments.
Statement 2 is incorrect. As per government data around the time this question would be relevant (e.g., pre-pandemic years), the Central Government’s liabilities were significantly higher than 21% of GDP and also higher than the State Governments’ liabilities. State Governments’ total outstanding liabilities were typically around 25-30% of GDP, while the Centre’s liabilities were closer to 50-55% of GDP. The statement provides figures that are roughly the opposite of the actual situation.
Statement 3 is correct. Article 293(3) of the Constitution of India states that a State may not, without the consent of the Government of India, raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India. This makes the Centre’s consent mandatory for states indebted to the Centre before raising further loans.
– 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.
The debt-to-GDP ratio is a key indicator of fiscal health. High debt levels can constrain government spending and increase vulnerability to economic shocks. The FRBM Act aims to ensure fiscal discipline.

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