Public Finance: UPSC Previous Year Questions (Indian Economy)
26 previous year UPSC Prelims questions on public finance appear here, from 1997 to 2025. The 2025 paper used numerical questions on revenue deficit and fiscal deficit alongside the 15th Finance Commission. UPSC also asks about the capital budget, FRBM, tax-to-GDP ratio and the Finance Commission’s role. Each explanation gives the formula or provision.
Explanations state facts as of the year each question was asked; words like “recently” refer to that year.
Showing 1–10 of 26 questions
Browse by year
UPSC 2025Indian Economy · Public Finance
Q1. Consider the following statements: 1. Capital receipts create a liability or cause a reduction in the assets of the Government. 2. Borrowings and disinvestment are capital receipts. 3. Interest received on loans creates a liability of the Government. Which of the statements given above are correct?
Explanation
Statement 1 is correct: Capital receipts are receipts that either create a liability for the government (such as borrowings) or lead to a reduction in assets (such as recovery of loans or disinvestment proceeds). They are distinguished from revenue receipts, which are the income earned from the government’s normal operations.
Statement 2 is correct: Borrowings (loans taken by the government) and disinvestment proceeds are classified as capital receipts. Borrowings increase the government’s liabilities, while disinvestment reduces government ownership in public sector undertakings (thus reducing assets).
Statement 3 is incorrect: Interest received on loans given by the government is a non tax revenue receipt, not a capital receipt or liability. Interest payment by the government, on the other hand, is an expenditure. Interest received on loans is income for the government. It’s revenue generated from money it has lent out.
Exam tip:
For S3, Since when "Interest received" is liability? If Receiving Interest Created Liability, We’d All Be in Trouble! If every time you got paid interest on your savings it created a liability, then banks would be broke, and we’d all be in debt from earning money! That’s an absurd scenario -- so logically, Statement 3 can’t be true. Giving option A as correct.
UPSC 2025Indian Economy · Public Finance
Q2. Suppose the revenue expenditure is 80,000 crores and the revenue receipts of the Government are 60,000 crores. The Government budget also shows borrowings of 10,000 crores and interest payments of 6,000 crores. Which of the following statements are correct? I. Revenue deficit is 20,000 crores. II. Fiscal deficit is 10,000 crores. III. Primary deficit is 4,000 crores. Select the correct answer using the code given below.
Statement 2 is correct: Fiscal Deficit = Total Expenditure - Total Receipts (excluding borrowings). A fiscal deficit is equal to borrowing. Here, total borrowing = 10,000 crores, which is the fiscal deficit as per budget accounting, because borrowings fill the gap between total expenditure and non-borrowed receipts.
Q3. A country’s fiscal deficit stands at 50,000 crores. It is 10,000 receiving crores through non-debt creating capital receipts. The country’s interest liabilities are 1,500 crores. What is the gross primary deficit?
Explanation
A fiscal deficit occurs when a government’s total expenditure exceeds its total revenue (excluding borrowings) in a financial year. It represents the amount the government needs to borrow to meet its expenses. Primary deficit is the fiscal deficit of the current year minus interest payments on previous borrowings. It shows the government’s borrowing requirement excluding interest obligations. To find the gross primary deficit, use the formula:
Gross Primary Deficit = Fiscal Deficit - Interest Payments It is given that:
Fiscal Deficit = 50,000 crores Interest Liabilities = 1,500 crores Placing these values in the above formula we get, Gross Primary Deficit = 50,000 - 1,500 = 48,500 crores Non-debt creating capital receipts are already accounted for in the fiscal deficit calculation and do not need to be subtracted again. Thus, Option (a) is the correct answer.
UPSC 2025Indian Economy · Public Finance
Q4. Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct? 1. It has recommended grants of Rs. 4,800 crores from the year 2022-23 to the year 2025-26 for incentivizing States to enhance educational outcomes. 2. 45% of the net proceeds of Union taxes are to be shared with States. 3. Rs. 45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms. 4. It reintroduced tax effort criteria to reward fiscal performance. Select the correct answer using the code given below.
Explanation
The 15th Finance Commission of India was constituted by the President of India in November 2017 under Article 280 of the Constitution. The Commission was chaired by N.K. Singh and its recommendations cover the five-year period from 2021-22 to 2025-26.
Statement 1 is correct: The 15th Finance Commission did recommend grants of Rs. 4,800 crore (Rs. 1,200 crore each year) from 2022-23 to 2025-26 for incentivising the States to enhance educational outcomes.
Statement 2 is incorrect: The 15th Finance Commission recommended a devolution of 41% of net Union taxes to states, not 45%.
Statement 3 is correct: The Commission recommended 45,000 crores as performance-based incentives for agricultural reforms.
Statement 4 is correct: The 15th Finance Commission reintroduced fiscal (tax) effort as a criterion for horizontal devolution.
Additional insight:
Key Recommendations of the 15th Finance Commission:
Vertical Devolution: The Commission recommended that states receive 41% of the divisible pool of central taxes for 2021-26, a slight reduction from the previous 42% due to the reorganization of Jammu & Kashmir into Union Territories. Horizontal Devolution: Allocation among states is based on criteria such as population, area, income, forest cover, and tax effort, aiming for equity and performance. Grants to States:
Revenue deficit grants: 2.9 lakh crore to 17 states to bridge the gap between their revenue and expenditure. Performance-based grants: 4,800 crore to incentivize educational outcomes and 45,000 crore for agricultural reforms. State-specific grants: 49,599 crore for areas like social needs, infrastructure, water, sanitation, and tourism. Grants to Local Bodies: 4.36 lakh crore allocated to local governments, with a portion linked to performance, supporting all three tiers of Panchayati Raj. Fiscal Roadmap: The Commission advised the Centre to reduce its fiscal deficit to 4% of GDP by 2025-26 and set phased targets for states. It also recommended a high-level group to review the FRBM Act and establish an independent Fiscal Council. Revenue Mobilization & GST: Strengthening income and asset-based taxation and rationalizing GST rates were emphasized to improve revenue and address structural issues in GST. Sectoral Recommendations:
Health: States should raise health spending to over 8% of their budgets, with a focus on primary care. Defence & Internal Security: A non-lapsable Modernisation Fund for Defence and Internal Security (MFDIS) should be created to address funding gaps. Disaster Risk Management: Mitigation funds should be set up at both national and state levels as per the Disaster Management Act
Exam tip:
The knowledge of just S2 fact that it’s 41% not 45%, which has been repeated multiple times in the last few years, is enough to reach correct answer option C.
UPSC 2022Indian Economy · Public Finance
Q5. With reference to the expenditure made by an organization or a company, which of the following statements is/are correct? 1. Acquiring new technology is capital expenditures. 2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure. Select the correct answer using the code given below.
Explanation
Statement 1 is correct: When a company uses its funds to acquire or upgrade physical assets, it is called Capital Expenditure (CapEx). These assets can include property, plants, buildings, technology, or equipment. CapEx is intended to provide long-term benefits to the organization.
Statement 2 is incorrect: When a company borrows money to be paid back at a future date with interestit is known as debt financing. It is not a capital expenditure. Equity financingis the process of raising capital through the sale of shares.It is an example of non-debt capital receipts, not revenue expenditure.
Additional insight:
Capital Expenditure (CapEx): refers to the funds a company spends on acquiring, upgrading, or maintaining physical assets such as property, buildings, technology, machinery, or equipment. These expenditures are intended to provide long-term benefits to the company by improving its production capacity, efficiency, or overall infrastructure. Equity Financing: Equity financingis the process of raising capital through the sale of shares.It is an example of non-debt capital receipts. Debt financing refers to the process of raising capital for a company by borrowing money. In this type of financing, the company takes on a loan or issues bonds to investors, promising to repay the borrowed amount along with interest over a specified period.
UPSC 2022Indian Economy · Public Finance
Q6. With reference to Indian economy, consider the following statements: 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?
Explanation
Statement 1 is correct: In India, people save through various financial options, including bank deposits, pension funds, insurance schemes, and government securities. Some of these savings are invested in government bonds and securities, helping the government fund its expenditures and manage its budget shortfall. Thus a portion of household financial savings is used to support government borrowing.
Statement 2 is correct: The Indian government raises money by issuing dated securities, which are long-term bonds with a fixed maturity date. Their interest rates are decided by market demand and supply. The government sells these securities through auctions, where banks, financial institutions, and investors place bids. These bonds make up a large part of the government’s internal debt, which is the money it owes to lenders with-in the country. The share of marketable securities in internal debt is at 76.4 per cent at end-March 2023 which is slightly moderate relative to 76.9 per cent at end-March 2022. The share of dated securities in public debt stood at 66.3 per cent at end-March 2023.
Outstanding Marketable Dated Securities (₹ crore, actuals at end-March)
Components
2018-19
2019-20
2020-21
2021-22
2022-23
(i) Issued through Borrowings
5479332
5965318
7114335
8007549
9127521
(ii) Conversion of Special Securities issued in lieu of ad-hoc Bills
47688
35688
33411
33360
24688
(iii) Conversion of recapitalisation bonds issued to Nationalised Banks
20809
20809
20809
19176
13712
Total Dated Securities (i to iii)
5547829
6021815
7168555
8060085
9165921
Percentage of Public Debt
73.5
70.3
68.1
66.5
66.3
Percentage of Gross Liabilities
59.5
57.3
58.8
58.1
58.7
Percentage of GDP
29.4
30.0
36.2
34.2
34.0
UPSC 2021Indian Economy · Public Finance
Q7. Which one of the following effects of the creation of black money in India has been the main cause of worry to the Government of India?
Explanation
Black money refers to income or wealth that is generated through illegal means or through legitimate activities that are not reported to the authorities for the purpose of avoiding taxes. It typically exists in the form of undeclared or unaccounted money, which is not taxed by the government.
Option (a) is incorrect: While this is a consequence of black money, it is not the primary concern. The real estate market may become inflated due to investments made with black money, but this diversion of funds does not directly impact the government’s ability to generate revenue through taxation. However, it can lead to inefficient allocation of resources.
Option (b) is incorrect: Black money often gets invested in unproductive assets like gold, precious stones, and luxury items. Al-though this can lead to economic inefficiencies, it does not directly cause a loss of government’s ability to generate revenue. The main problem lies in the undocumented nature of these transactions, leading to tax evasion.
Option (c) is incorrect: Black money can be funneled into undocumented political donations and may contribute to regional political growth. However, the core issue remains the loss of tax revenue rather than the political consequences.
Option (d) is correct: The main issue with black money is tax evasion, resulting in a significant loss of revenue for the government. Without the full collection of taxes, the government faces challenges in funding essential public services and development projects, which is the biggest concern for India’s economic health.
UPSC 2020Indian Economy · Public Finance
Q8. In the context of the Indian economy, non-financial debt includes which of the following? 1. Housing loans owed by households 2. Amounts outstanding on credit cards 3. Treasury bills Select the correct answer using the code given below:
Explanation
Non-financial debt refers to the debt owed by entities that are not part of the financial sector, such as households, businesses, and government bodies. This type of debt includes various forms of borrowing, such as housing loans, credit card balances, and government-issued instruments like Treasury bills. Housing Loans: Housing loans taken by house-holds are considered non-financial debt because they involve borrowing money for the purchase of property, which is a physical asset. These loans are typically not tied to financial assets like stocks or bonds. Credit Card Debt: The amounts owed on credit cards are also considered non-financial debt. Credit card debt is a form of borrowing, but it is not related to financial assets, rather to consumption or goods and services. Treasury Bills: Treasury bills are short-term borrowing instruments issued by the government to generate funds. Since they are issued by the government, which is outside the financial sector, they also fall under the category of non-financial debt.
UPSC 2018Indian Economy · Public Finance
Q9. With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct? 1. It is introduced as a part of the Income Tax Act. 2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements". Select the correct answer using the code given below:
Explanation
In 2016, India introduced a 6% Equalization Levy targeting income from online advertisement services provided by non-resident entities to Indian businesses. This measure aimed to tax digital transactions and level the playing field between domestic and foreign service providers. In 2020 it was expanded to include a 2% levy on e-commerce transactions by non-resident operators.
Statement 1 is incorrect: The Equalization Levy was introduced through the Finance Act, 2016 as a separate chapter and is not part of the Income Tax Act. This distinction ensures that the levy operates independently of the existing income tax framework.
Statement 2 is incorrect: Non-resident entities cannot claim a tax credit for this levy in their home countries which can potentially lead to double taxation. It doesn’t fall within the scope of Double Taxation Avoidance Agreements (DTAAs). Its exclusion from the Income Tax Act raises challenges regarding international tax credits and potential double taxation for foreign entities.
UPSC 2017Indian Economy · Public Finance
Q10. Consider the following statements: 1. Tax revenue as a percent of GDP of India has steadily increased in the last decade. 2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade. Which of the statements given above is/are correct?
Explanation
Statement 1 is incorrect: While there was some increase in tax revenue from 2014 to 2018, the growth was not always steady and was subject to fluctuations, especially due to changes in the economy and tax reforms like GST in 2017. Therefore, there was an overall increase, but it wasn’t a steady rise.
Statement 2 is incorrect: Fiscal deficit as a percent of GDP of India has not steadily increased in the last decade. Fig: Tax Revenue as a percentage of GDP.
Exam tip:
Key directive: "steadily increased" This is an absolute qualifier -- and UPSC loves to trap you with words like: "always", "never", "steadily", "continuously", "entirely", etc. So both statements become highly suspect and likely false.
Answer key for these questions
Q
UPSC year
Correct answer
1
2025
(a) I and II only
2
2025
(d) I, II and III
3
2025
(a) 48,500 crores
4
2025
(c) I, III and IV
5
2022
(a) 1 only
6
2022
(c) Both 1 and 2
7
2021
(d) Loss of revenue to the State Exchequer due to tax evasion
8
2020
(d) 1, 2 and 3
9
2018
(d) Neither 1 nor 2
10
2017
(d) Neither 1 nor 2
What UPSC has tested in Public Finance
Revenue deficit equals revenue expenditure minus revenue receipts; fiscal deficit equals borrowings plus other liabilities, that is total expenditure minus total receipts excluding borrowings.
Capital receipts create a liability or cause a reduction in the assets of the Government.
The Finance Commission is a constitutional body that recommends the sharing of taxes between the Centre and the States.
A decrease in the tax-to-GDP ratio can reflect a slowing economy or more tax exemptions.
India levied a 6% equalisation tax on online advertisement services offered by non-residents.
Frequently asked questions
How many previous year UPSC questions are there on Public Finance?
This page covers 26 previous year UPSC Prelims GS Paper-I questions on Public Finance (Indian Economy), asked from 1997 to 2025. Each has the correct answer and an explanation.
How is the revenue deficit calculated?
It is revenue expenditure minus revenue receipts. With revenue expenditure of ₹80,000 crore and revenue receipts of ₹60,000 crore, the revenue deficit is ₹20,000 crore. It shows how much current spending is not covered by current income.
What is the fiscal deficit?
The excess of total expenditure over total receipts, excluding borrowings. It equals the amount the government must borrow in a year, which is why it is the main measure of the government’s borrowing requirement and of the pressure it puts on the economy.
What does the Finance Commission do?
It recommends how the net proceeds of taxes should be shared between the Union and the States and among the States, and the principles for grants-in-aid, under Article 280. The President lays its report before Parliament.
