Public Finance: UPSC Previous Year Questions (Indian Economy)
4 previous year UPSC Prelims questions on Public Finance (Indian Economy). Choose an option to see the answer and explanation.
Explanations state facts as of the year each question was asked; words like “recently” refer to that year.
Showing 1–4 of 4 questions
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.
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
Frequently asked questions
How many previous year UPSC questions are there on Public Finance?
This page covers 4 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 should I use previous year UPSC questions for Prelims?
Attempt each question first, then open the answer and read the explanation for every option. Repeat by chapter, and track which statements UPSC reuses across years. Previous year questions show the exam pattern and difficulty level.
Which years are covered for Public Finance?
Questions on Public Finance (Indian Economy) are available for 15 years, from 1997 to 2025. Use the Year filter to practise a single paper.
