Fiscal Policy & Revenue

61. Consider the following statements: An additional spending by the Gov

Consider the following statements:

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  • 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 ?

1 only
2 only
Both 1 and 2
Neither 1 nor 2
This question was previously asked in
UPSC CDS-2 – 2024
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Statement 1 is incorrect. In a simple Keynesian model, direct government spending (G) on goods and services has a larger multiplier effect on income than transfer payments (Tr) to households. The government spending multiplier is 1/(1-MPC), while the transfer payment multiplier is MPC/(1-MPC), where MPC is the marginal propensity to consume (between 0 and 1). Since MPC < 1, 1 > MPC, so 1/(1-MPC) > MPC/(1-MPC). This means an additional spending of ₹ X by the government is likely to have a *greater* impact on income than an additional transfer of ₹ X, because households might save a portion of the transfer, whereas government spending is assumed to be fully injected into the economy as demand for goods/services.

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Statement 2 is correct. Government spending can be financed in various ways, including taxation, borrowing from the public, or by increasing the money supply (e.g., central bank purchasing government debt). If the government spending is financed by borrowing from the public without an increase in money supply, it can lead to increased demand for loanable funds, potentially raising interest rates. Higher interest rates can ‘crowd out’ private investment, thus reducing the overall positive impact of government spending on income. If the spending is accompanied by an expansion in money supply, it can mitigate or avoid this crowding out effect, potentially leading to a larger overall impact on income. Therefore, spending not accompanied by monetary expansion is likely to have a *less* impact than otherwise.

– Government spending typically has a higher multiplier than transfers.
– Government spending can lead to crowding out if not accommodated by monetary policy.
The actual impact of fiscal policy (spending and transfers) on income is complex and depends on various factors beyond simple multiplier models, including expectations, supply-side responses, and the specific nature of the spending or transfer.

62. Which one of the following expenditures is subtracted from Fiscal Defi

Which one of the following expenditures is subtracted from Fiscal Deficit to arrive at Primary Deficit ?

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Defence expenditure
Expenditure on subsidies
Interest payments
Pension
This question was previously asked in
UPSC CDS-2 – 2023
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Interest payments are subtracted from Fiscal Deficit to arrive at Primary Deficit.
Fiscal Deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowings). It indicates the total borrowing requirement of the government.
Primary Deficit is defined as Fiscal Deficit minus Interest Payments on previous borrowings.
Primary Deficit = Fiscal Deficit – Interest Payments
The primary deficit shows the borrowing requirement of the government excluding the interest burden on accumulated past debt. It reflects the current fiscal stance of the government.
A high primary deficit indicates the extent of fiscal profligacy in the current year, whereas a high fiscal deficit might be due to the interest burden on past debt even if the current year’s primary deficit is low or zero. Reducing interest payments is a key objective for fiscal consolidation, which can be achieved by reducing overall borrowing (and thus the fiscal deficit) over time.

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63. Which one of the following taxes is not subsumed under the Goods and

Which one of the following taxes is not subsumed under the Goods and Services Tax in India ?

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Customs Duties
Central Excise Duties
Service Tax
Taxes on Petroleum and Petroleum Products
This question was previously asked in
UPSC CDS-2 – 2023
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While many Central and State indirect taxes were subsumed under the Goods and Services Tax (GST) in India, taxes on petroleum and petroleum products are currently not subsumed and continue to be levied under the old tax regime (Central Excise Duty and State VAT/Sales Tax).
Central taxes subsumed include Central Excise Duty, Duties of Excise (Medicinal and Toilet Preparations), Additional Duties of Excise (Goods of Special Importance), Additional Duties of Excise (Textiles and Textile Products), Additional Duties of Customs (commonly known as CVD and SAD), Service Tax, and Cesses and surcharges insofar as they relate to supply of goods or services. State taxes subsumed include State VAT, Central Sales Tax, Luxury Tax, Entry Tax (all forms), Entertainment and Amusement Tax (except when levied by local bodies), Taxes on advertisements, Purchase Tax, Taxes on lotteries, betting and gambling, and State cesses and surcharges. Basic Customs Duty is also not subsumed under GST.
The taxes not subsumed under GST in India include Basic Customs Duty (BCD), Export Duty, Toll Tax, Stamp Duty, Property Tax, Electricity Duty, Taxes on Motor Vehicles, Taxes on passengers and goods, and Taxes on specific commodities like petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, aviation turbine fuel, and alcohol for human consumption. While Basic Customs Duty is also not subsumed, the continued exclusion of taxes on petroleum products from the general GST framework is a key aspect of the current GST system.

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64. As per the Budget Estimates of expenditure on major subsidies during 2

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

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urea subsidy
petroleum subsidy
food subsidy
fertilizer subsidy
This question was previously asked in
UPSC CDS-2 – 2020
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Based on the Budget Estimates of expenditure on major subsidies for the Union Government in 2019-20, the largest allocation was for 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.
Food subsidy is primarily channelled through the Food Corporation of India (FCI) for procuring, storing, and distributing food grains under schemes like the National Food Security Act. Fertiliser subsidy supports the availability of fertilisers to farmers at subsidised prices. Petroleum subsidy mainly covers LPG and Kerosene. In 2019-20, the allocation for food subsidy was the highest among these categories.

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65. As per the Budget Estimates of 2019-20, the following are some of the

As per the Budget Estimates of 2019-20, the following are some of the important sources of tax receipts for the Union Government:

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  • 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?

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1, 2, 3, 4
1, 3, 2, 4
3, 2, 1, 4
2, 4, 3, 1
This question was previously asked in
UPSC CDS-2 – 2020
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Based on the Union Budget Estimates for 2019-20, the major sources of tax revenue for the Union Government, in descending order as a percentage of GDP (or equivalently, as a percentage of total tax revenue), were Corporation Tax, followed closely by Taxes on Income (other than Corporation Tax, i.e., Personal Income Tax), then Goods and Services Tax (Centre’s share), and finally Union Excise Duties. The order 1, 2, 3, 4 corresponds to Corporation Tax, Taxes on Income, GST, and Union Excise Duties.
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.
While the percentages are of total tax revenue rather than GDP directly, the relative order of these major taxes as a proportion of GDP collected by the centre would remain the same. This distribution reflects the structure of India’s central government tax base in that period.

66. Which one of the following is correct about ‘Aaykar Setu’?

Which one of the following is correct about ‘Aaykar Setu’?

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It is a mechanism for achieving excellence in public sector delivery related to GST.
With the use of a mobile app, it facilitates online payment of taxes.
It is a communication strategy designed to collect information and build a database of tax defaulters.
It enables electronic filing and processing of import and export declarations.
This question was previously asked in
UPSC CDS-2 – 2018
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‘Aaykar Setu’ is a mobile application developed by the Income Tax Department of India. ‘Aaykar’ means Income Tax, and ‘Setu’ means bridge. The app serves as a bridge for taxpayers, providing them with information, facilitating online payment of taxes, linking Aadhaar with PAN, accessing Tax Return Preparer (TRP) services, and other relevant services. Therefore, it facilitates online payment of taxes using a mobile app.
– ‘Aaykar Setu’ is an initiative by the Indian Income Tax Department.
– It is a mobile app and web portal aimed at easing taxpayer services.
– It facilitates online payment of taxes, information access, and other services.
Aaykar Setu was launched in 2017. It integrates various services available to taxpayers through a single platform, enhancing convenience and accessibility. It is specifically related to Income Tax (Direct Taxes) and not GST (Indirect Taxes) or import/export procedures.

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67. Statement I: The overall fiscal deficit of the States in India during

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.

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Both the statements are individually true and Statement II is the correct explanation of Statement I
Both the statements are individually true but Statement II is not the correct explanation of Statement I
Statement I is true but Statement II is false
Statement I is false but Statement II is true
This question was previously asked in
UPSC CDS-2 – 2018
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Statement I is false, and Statement II is true.
– 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.
– Fiscal Responsibility and Budget Management (FRBM) Acts at the state level typically target a fiscal deficit limit of 3% of Gross State Domestic Product (GSDP).
– Special Category Status provides certain benefits, including more favorable terms for central assistance, but these states often exhibit higher fiscal stress due to structural factors.

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68. According to the latest Reserve Bank of India study on State finances,

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

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rural development
water supply and sanitation
urban development
education
This question was previously asked in
UPSC CDS-2 – 2018
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The correct answer is urban development.
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.
Capital spending by states is crucial for infrastructure creation and long-term economic growth. While sectors like education, water supply & sanitation, and rural development also receive capital expenditure, Urban Development, which encompasses various infrastructure categories within growing cities, has often accounted for the largest share in recent years according to RBI reports.

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69. Which one of the following criteria got the highest weight for determi

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?

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Population
Income distance
Area
Tax effort
This question was previously asked in
UPSC CDS-2 – 2017
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The question asks which criterion received the highest weight in the formula used by the 14th Finance Commission for determining the shares of states in the divisible pool of central taxes.
– 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) (27.5%), Area (15%), Forest Cover (7.5%). (Note: 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.
Income distance measures the distance of a state’s per capita income from the state with the highest per capita income. A higher income distance indicates a lower per capita income, and states with higher income distance typically receive a larger share of the divisible pool to address regional inequalities.

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70. Match List-I with List-II and select the correct answer using the code

Match List-I with List-II and select the correct answer using the code given below the Lists :

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List-I (Type of Deficit)List-II (Explanation)
A. Fiscal Deficit1. Total Expenditure – Revenue Receipts & Non-debt Capital Receipts
B. Revenue Deficit2. Revenue Expenditure – Revenue Receipts
C. Effective Revenue Deficit3. Revenue Deficit – Grants for Creation of Capital Assets
D. Primary Deficit4. Fiscal Deficit – Interest Payments
A-1, B-2, C-3, D-4
A-1, B-3, C-2, D-4
A-4, B-2, C-3, D-1
A-4, B-3, C-2, D-1
This question was previously asked in
UPSC CDS-2 – 2017
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The question asks to match different types of government deficits with their definitions. The definitions provided in List-II correspond directly to the standard definitions of these fiscal terms as used in government budgeting.
– **Fiscal Deficit:** Represents the total borrowing requirement of the government. It is calculated as Total Expenditure minus the sum of Revenue Receipts and Non-debt Capital Receipts. The formula A-1 is correct.
– **Revenue Deficit:** Occurs when the government’s revenue expenditure exceeds its revenue receipts. The formula B-2 is correct.
– **Effective Revenue Deficit:** Introduced to account for grants given by the Union Government to State Governments for the creation of capital assets. It is calculated as Revenue Deficit minus Grants for Creation of Capital Assets. The formula C-3 is correct.
– **Primary Deficit:** Represents the fiscal deficit excluding interest payments on previous borrowings. It indicates the government’s current year’s borrowing requirement to meet expenditure other than interest payments. The formula D-4 is correct.
Understanding different types of deficits is crucial for analyzing the fiscal health and policies of the government. While Revenue Deficit reflects a mismatch in the revenue account, Fiscal Deficit indicates the total resource gap. Primary Deficit helps understand the impact of current fiscal stance excluding the burden of past debt. Effective Revenue Deficit was a concept introduced to acknowledge that revenue expenditure includes grants that create future assets.

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