Fiscal Policy & Budgeting — UPSC Prelims practice questions

Q: How many Fiscal Policy & Budgeting MCQs are available for UPSC Prelims practice?

PrelimsAI currently has 80+ Fiscal Policy & Budgeting MCQs under Indian Economy. This page shows 12 sample questions in full.

Q: How many Fiscal Policy & Budgeting previous year questions are included?

36+ questions in this chapter are tagged as UPSC Prelims PYQs. PYQs are prioritised in the visible sample set when available.

Q: Do these Fiscal Policy & Budgeting questions include explanations?

Yes. The 12 visible sample questions show the correct option and explanation on this page.

Q: Where should I go after practising Fiscal Policy & Budgeting?

Continue with Planning in India or Monetary Policy & Banking, or return to the Indian Economy subject page for more chapter-wise practice.

Question 1

Consider the following statements:
1. Capital receipts either create a liability or reduce the assets of the Government.
2. Borrowings and disinvestment proceeds are capital receipts.
3. Interest received on loans by the Government creates a liability of the Government.
Which of the statements given above is/are correct? (A) 1 and 2 only (B) 2 and 3 only (C) 1 and 3 only (D) 1, 2 and 3

Accepted Answer

(A) 1 and 2 only — Correct. Capital receipts either create liabilities, like borrowings, or reduce assets, like recovery of loans or disinvestment. Interest received on loans is a revenue receipt and does not create a liability.

Question 2

If fiscal deficit is Rs. 50,000 crore and interest liabilities are Rs. 1,500 crore, the gross primary deficit is: (A) Rs. 48,500 crore (B) Rs. 51,500 crore (C) Rs. 58,500 crore (D) Rs. 60,000 crore

Accepted Answer

(A) Rs. 48,500 crore — Correct. Primary deficit is obtained by subtracting interest payments from fiscal deficit. Therefore, 50,000 - 1,500 = Rs. 48,500 crore.

Question 3

Revenue expenditure of a government is Rs. 80,000 crore, revenue receipts are Rs. 60,000 crore, borrowings are Rs. 10,000 crore, and interest payments are Rs. 6,000 crore. Consider the following statements:
1. Revenue deficit is Rs. 20,000 crore.
2. Fiscal deficit is Rs. 10,000 crore.
3. Primary deficit is Rs. 4,000 crore.
Which of the statements given above are correct? (A) 1 and 2 only (B) 2 and 3 only (C) 1 and 3 only (D) 1, 2 and 3

Accepted Answer

(D) 1, 2 and 3 — Correct. Revenue deficit = 80,000 - 60,000 = 20,000 crore. Fiscal deficit is reflected by the borrowing requirement of Rs. 10,000 crore, and primary deficit = fiscal deficit - interest payments = 10,000 - 6,000 = Rs. 4,000 crore.

Question 4

Which of the following would most appropriately be classified as capital expenditure of the government? (A) Salary paid to school teachers (B) Interest payment on past debt (C) Construction of a new highway (D) Subsidy on fertilizer

Accepted Answer

(C) Construction of a new highway — Correct. Construction of a new highway creates a long-term physical asset and is therefore capital expenditure.

Question 5

With reference to household savings in India, which of the following can represent a channel through which such savings finance government borrowing?
1. Investment in dated government securities
2. Small savings collections routed to the government
3. Bank deposits that are partly used by banks to hold government securities
Select the correct answer using the code given below: (A) 1 only (B) 1 and 2 only (C) 1, 2 and 3 (D) 2 and 3 only

Accepted Answer

(C) 1, 2 and 3 — Correct. Household savings finance government borrowing directly through securities and small savings, and indirectly through banks that invest part of their resources in government paper.

Question 6

Consider the following:
1. Acquiring new technology for an existing factory
2. Financing a project through debt
3. Financing a project through equity
Which of the above is/are classified as capital expenditure? (A) 1 only (B) 2 only (C) 1 and 2 only (D) 1, 2 and 3

Accepted Answer

(A) 1 only — Correct. Acquiring new technology creates a long-term asset and is capital expenditure. Debt financing and equity financing are methods of raising funds, not expenditure items themselves.

Question 7

In a situation of economic recession, which of the following measures is/are appropriate?
1. Cut in tax rates accompanied by an increase in public expenditure
2. Reduction in public works programmes
3. Increase in transfer payments to support demand
Select the correct answer using the code given below: (A) 1 only (B) 1 and 3 only (C) 2 and 3 only (D) 1, 2 and 3

Accepted Answer

(B) 1 and 3 only — Correct. Recessions are commonly addressed through expansionary fiscal policy, including tax cuts, higher public expenditure, and support payments that strengthen aggregate demand.

Question 8

The Government Bond Yields in India are influenced by:
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates in India
Select the correct answer using the code given below: (A) 1 and 2 only (B) 2 only (C) 2 and 3 only (D) 1, 2 and 3

Accepted Answer

(D) 1, 2 and 3 — Correct. Indian government bond yields are influenced by global monetary conditions (including US Federal Reserve policy), RBI's own monetary policy actions, and domestic inflation and interest rate expectations.

Question 9

Non-financial debt of a country includes:
1. Housing loans owed by households
2. Credit card bills owed by households
3. Treasury bills issued by the government
Select the correct answer using the code given below: (A) 1 only (B) 1 and 2 only (C) 3 only (D) 1, 2 and 3

Accepted Answer

(D) 1, 2 and 3 — Correct. Non-financial debt includes all borrowings by non-financial entities such as households, corporations, and the government. Housing loans, credit card bills, and treasury bills all qualify.

Question 10

The Macro Economic Framework Statement is presented as a mandate of the: (A) Parliamentary convention (B) Constitutional provisions relating to the Annual Financial Statement alone (C) Appropriation process under Article 113 (D) Fiscal Responsibility and Budget Management Act, 2003

Accepted Answer

(D) Fiscal Responsibility and Budget Management Act, 2003 — Correct. The FRBM Act, 2003 mandates the presentation of statements such as the Macro Economic Framework Statement to improve fiscal transparency and accountability.

Question 11

Which of the following items were GST-exempt at the time of the question?
1. Cereal grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers with advertisements
Select the correct answer using the code given below: (A) 1, 2 and 4 only (B) 2 only (C) 1, 3 and 4 only (D) 1, 2, 3 and 4

Accepted Answer

(A) 1, 2 and 4 only — Correct. Cereal grains, cooked eggs, and newspapers were among the exempt items, whereas processed and canned fish was not exempt in the way suggested.

Question 12

With reference to equalization levy, consider the following statements:
1. It was introduced as part of the Income-tax Act.
2. A non-resident can automatically claim tax credit under a Double Taxation Avoidance Agreement for such levy.
Which of the statements given above is/are correct? (A) 1 only (B) 2 only (C) Both 1 and 2 (D) Neither 1 nor 2

Accepted Answer

(D) Neither 1 nor 2 — Correct. Equalization levy is a separate levy outside the Income-tax Act, and tax credit under DTAAs is not automatic in the blanket manner stated.

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