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 11–20 of 26 questions
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UPSC 2016Indian Economy · Public Finance
Q11. There has been a persistent deficit budget year after year. Which action/actions of the following can be taken by the Government to reduce the deficit? 1. Reducing revenue expenditure 2. Introducing new welfare schemes 3. Rationalising subsidies 4. Reducing import duty Select the correct answer using the code given below.
Explanation
A budget deficit occurs when government expenses exceed revenue. It can be used as an indicator of the financial health of a country. It is a term more commonly used to refer to government spending and receipts rather than businesses or individuals. When a budget deficit occurs, it means that the current expenses surpass the income generated from regular operations. To correct its nation’s budget deficit, often referred to as a fiscal deficit, a government may cut back on certain expenditures or increase revenue-generating activities.
Statement 1 is correct: Reducing the revenue expenditure will certainly help in bridging the gap. Reducing revenue expenditure (such as government spending on salaries, interest payments, and subsidies) directly reduces the fiscal deficit. By controlling unproductive expenditure, the government can balance its budget more effectively.
Statement 2 is incorrect: Introducing new welfare schemes will most likely result in increasing expenditure and so will expanding industries which would require capital infusion. These steps will increase the budget deficit.
Statement 3 is correct: Rationalizing subsidies (for instance, by cutting unnecessary subsidies or targeting them better) can help reduce the fiscal deficit. Subsidies consume a significant portion of government revenue, and streamlining them would lead to savings.
Statement 4 is incorrect: Reducing import duties can reduce government revenue (as import duties are a source of income). This could increase the fiscal deficit if the loss in revenue isn’t compensated by other measures or increased economic activity.
UPSC 2016Indian Economy · Public Finance
Q12. Which of the following is/are included in the capital budget of the Government of India? 1. Expenditure on acquisition of assets like roads, buildings, machinery, etc. 2. Loans received from foreign governments 3. Loans and advances granted to the States and Union Territories Select the correct answer using the code given below.
Explanation
Capital Budget consists of capital receipts (like disinvestment, borrowing, loans from public or foreign governments, Reserve Bank of India, etc) and capital expenditure (like expenditure on development of machinery, health facilities, etc). Capital budgeting implies setting targets for projects/schemes to ensure maximum profitability.
Statement 1 is correct: Capital Expenditure includes the expenditure on the acquisition of land, building, machinery, equipment, creating assets such as roads and hospitals, repayment of government borrowings.
Statement 2 is correct: Capital receipts components are Loan borrowings, disinvestments, funds received from the issue of shares or debentures, etc.
Statement 3 is correct: Loans, and advances by the central government to state and union territory governments, etc. are also included in the capital budget of the Government of India.
Additional insight:
The capital budget is divided into two parts i.e. capital receipts and capital expenditure. Capital Receipts: Capital receipts refer to incoming cash flows. They can be both non-debt and debt receipts. Loans from the general public, foreign governments and RBI form a major part of capital receipts. Capital Expenditure: Capital expenditure is the expenditure on the development of machinery, equipment, building, health facilities, acquisition of assets like land, research & development, education, etc.
UPSC 2016Indian Economy · Public Finance
Q13. With reference to ‘Financial Stability and Development Council’, consider the following statements: 1. It is an organ of NITI Aayog. 2. It is headed by the Union Finance Minister. 3. It monitors macroprudential supervision of the economy. Which of the statements given above is/are correct?
Explanation
Statement 1 is incorrect: The Financial Stability and Development Council (FSDC) was set up by the government in December 2010. It serves as the top forum for financial matters. The FSDC was established well before the NITI Aayog came into existence.
Statement 2 is correct: The Chairman of the Financial Stability and Development Council (FSDC) is the Union Finance Minister.
Statement 3 is correct: The Council monitors macro-prudential supervision of the economy, which includes functioning of large financial conglomerates.
Additional insight:
The Chairman of the Financial Stability and Development Council (FSDC) is the Union Finance Minister and its members include:
The heads of financial sector Regulators (RBI, SEBI, PFRDA & IRDAI) Finance Secretary and/or Secretary, Department of Economic Affairs, Secretary, Department of Financial Services, Chief Economic Adviser. The Council can invite experts to its meeting if required. Functions of the FSDC:
To improve inter-regulatory coordination, institu-tionalise financial sector development, and strengthen the system for preserving financial stability. To monitor macro-prudential supervision of the economy. It assesses the functioning of the large financial conglomerates.
Exam tip:
S1 and S2 itself contradicts, an organ of NITI and headed by FM, hence either is clearly false, eliminating options A and D. The name ""Financial stability" make the probability of S2 being true more.
UPSC 2015Indian Economy · Public Finance
Q14. With reference to the Fourteenth Finance Commission, which of the following statements is/are correct? 1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent. 2. It has made recommendations concerning sector-specific grants. Select the correct answer using the code given below.
Explanation
The Fourteen Finance Commission was constituted (FFC) by the President on January 2, 2013 under chairmanship of Dr. Y. V. Reddy to give recommendations on specified aspects of Centre-State fiscal relations during 2015-2020. The Commission submitted its report to the President on December 15, 2014.
Statement 1 is correct: The Fourteenth Finance Commission has radically enhanced the share of the states in the central divisible pool from the current 32% to 42% which is the biggest ever increase in vertical tax devolution.
Statement 2 is incorrect: Unlike the thirteenth Finance Com-mission, the Fourteenth Finance Commission did not make any recommendation concerning sector specific-grants.
Additional insight:
Recently, The Sixteenth Finance Commission of India was established under Article 280 of the Constitution to recommend the distribution of tax revenues between the Union and the States for the five-year period commencing April 1, 2026. Terms of Reference for the Sixteenth Finance Commission:
The 16th Finance Commission shall make recommendations as to the following matters, namely: i. The distribution between the Union and the States of the net proceeds of taxes which are to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation between the States of the respective shares of such proceeds; ii. The principles which should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues under article 275 of the Constitution for the purposes other than those specified in the provisos to clause (1) of that article; and iii. The measures needed to augment the Consolidated Fund of a State to supplement the resources of the Panchayats and Municipalities in the State on the basis of the recommendations made by the Finance Commission of the State.
UPSC 2015Indian Economy · Public Finance
Q15. With reference to the Union Government, consider the following statements: 1. The Department of Revenue is responsible for the preparation of the Union Budget that is presented to the Parliament. 2. No amount can be withdrawn from the Consolidated Fund of India without the authorization from the Parliament of India. 3. All the disbursements made from Public Account also need the authorization from the Parliament of India. Which of the statements given above is/are correct?
Explanation
Statement 1 is incorrect: The budget is prepared by the Department of Economic Affairs. The Budget Division under Department of Economic Affairs is responsible for the preparation and submission to Parliament of the Central Governments Budget other than Railways, as well as the supplementary Demands for Grants and Demands for Excess Grants. The Department of Revenue plays a key role in managing In-dia’s financial resources by overseeing tax collection and enforcing economic laws. It is responsible for collecting both direct taxes (such as income tax and wealth tax) and indirect taxes (like GST, customs duty, and excise duty). It does not prepare budget.
Statement 2 is correct: Consolidated Fund of India (Article 266) is a fund to which all receipts are credited and all payments are debited. No money out of this fund can be appropriated (issued or drawn) except in accordance with parliamentary law.
Statement 3 is incorrect: Provident fund deposits, savings bank deposits, remittances etc are credited to the Public Account. The Public Account is operated by the executive action i.e. payment from this account can be made without Parliamentary appropriation.
UPSC 2015Indian Economy · Public Finance
Q16. A decrease in tax to GDP ratio of a country indicates which of the following? 1. Slowing economic growth rate 2. Less equitable distribution of national income Select the correct answer using the codes given below.
Explanation
A tax-to-GDP ratio is a gauge of a nation’s tax revenue relative to the size of its economy as measured by gross domestic product (GDP).
Statement 1 is correct: A decrease in the tax-to-GDP ratio may indicate that the government is collecting less tax revenue relative to the size of the economy. This can happen due to slowing economic growth, which reduces corporate profits, incomes, and consumption, leading to lower tax collections. However, this is not always the case, as tax policy changes (like tax cuts) can also reduce the ratio without reflecting economic slowdown.
Statement 2 is incorrect: A decrease in the tax-to-GDP ratio does not necessarily indicate less equitable distribution of na-tional income. While lower tax revenue relative to the size of the economy could result from tax cuts, evasion, or shifts toward in-direct taxes, these factors do not directly determine income in-equality. The impact on equity depends on the structure of the tax system and government policies--if the decline stems from broad-based tax cuts benefiting all income groups, it may not affect income distribution significantly. However, if it results from reduced taxation on the wealthy or increased reliance on regressive indirect taxes, it could exacerbate inequality. Thus, a falling tax-to-GDP ratio alone is not a definitive indicator of less equitable income distribution.
UPSC 2010Indian Economy · Public Finance
Q17. Which one of the following authorities makes recommendation to the Governor of a State as to the principles for determining the taxes and duties which may be appropriated by the Panchayats in that particular State?
Explanation
The State Finance Commission (SFC) is the authority responsible for making recommendations to the Governor of a State regarding the principles for determining the taxes, duties, tolls, and fees that may be assigned to or appropriated by the Panchayats (local self-governments) in that State. It is constituted under Article 243-I of the Indian Constitution by the Governor of each state. It makes recommendations regarding the distribution of financial resources between the State Government and the Panchayati Raj Institutions (PRIs), including the principles for:
1. Determining taxes, duties, tolls, and fees to be assigned or appropriated by Panchayats.
2. Grants-in-aid to the Panchayats from the state’s consolidated fund.
3. Measures to improve the financial position of Panchayats.
UPSC 2010Indian Economy · Public Finance
Q18. Consider the following actions by the Government: 1. Cutting the tax rates 2. Increasing the government spending 3. Abolishing the subsidies in the context of economic recession Which of the above actions can be considered a part of the "fiscal stimulus" package?
Explanation
A fiscal stimulus refers to government measures aimed at boosting economic activity during periods of recession or economic downturn. These measures typically involve either increasing government spending, reducing taxes, or both, to enhance aggregate demand and mitigate the effects of a recession.
Statement 1 is correct: Reducing tax rates increases disposable income for individuals and businesses, encouraging higher consumption and investment. This surge in spending can stimulate economic activity.
Statement 2 is correct: Increasing government expenditures directly injects money into the economy, leading to increased demand for goods and services. This can result in job creation and heightened economic output.
Statement 3 is incorrect: Abolishing subsidies can lead to higher prices for certain goods and services, potentially reducing consumer spending. During a recession, this could further suppress demand, counteracting stimulative efforts.
UPSC 2010Indian Economy · Public Finance
Q19. Which one of the following is responsible for the preparation and presentation of Union Budget to the Parliament?
Explanation
The preparation and presentation of the Union Budget to the Parliament is primarily handled by the Budget Division within the Department of Economic Affairs (DEA), which operates under the Ministry of Finance. The DEA is the nodal agency responsible for formulating and monitoring the country’s economic policies and programs. A principal responsibility of this department is the preparation and presentation of the Union Budget to the Parliament. Options (a), (c), and (d) are incorrect:
Department of Revenue administers taxes (both direct and indirect) and provides tax revenue estimates for the budget. Department of Financial Services deals with financial institutions, banking, insurance, and pension reforms and provides sector-specific information for the budget. Department of Expenditure manages government expenditure, budgeting, and accounts and helps in implementing expenditure control mechanisms.
UPSC 2010Indian Economy · Public Finance
Q20. In the context of governance, consider the following: 1. Encouraging Foreign Direct Investment inflows 2. Privatization of higher educational Institutions 3. Down-sizing of bureaucracy 4. Selling/offloading the shares of Public Sector Undertakings Which of the above can be used as measures to control the fiscal deficit in India?
Explanation
Fiscal deficit refers to the gap between the government’s total expenditure and its total revenue, excluding money from borrowings.
Statement 1 is incorrect: FDI involves investment from foreign entities into domestic businesses and assets. While FDI can stimulate economic growth, enhance infrastructure, and create jobs, it does not directly impact the fiscal deficit. This is because FDI pertains to the private sector and doesn’t directly alter government revenues or expenditures.
Statement 2 is incorrect: Privatization of higher educational institutions may reduce the government’s expenditure on education but it is not a direct or widely accepted measure to control fiscal deficit.
Statement 3 is correct: Reducing the size of the bureaucracy directly cuts government expenditure on salaries, pensions, and administrative costs. This is a valid measure to control fiscal deficit as it reduces the government’s recurring expenditure.
Statement 4 is correct: Selling or offloading shares of PSUs (disinvestment) is a direct measure to increase government revenue. The proceeds from disinvestment are used to bridge the fiscal deficit.
Answer key for these questions
Q
UPSC year
Correct answer
11
2016
(c) 1 and 3 only
12
2016
(d) 1, 2 and 3
13
2016
(c) 2 and 3 only
14
2015
(a) 1 only
15
2015
(c) 2 only
16
2015
(a) 1 only
17
2010
(b) State Finance Commission
18
2010
(a) 1 and 2 only
19
2010
(b) Department of Economic Affairs
20
2010
(d) 3 and 4 only
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.
