Q31. Select the correct historical sequence of the establishment of these institutions/bodies in India from earliest to latest:
Fiscal Federalism and Finance Commission: RAS Prelims MCQs
99 RAS Prelims MCQs on fiscal federalism and the Finance Commission cover the constitutional financial provisions, the sharing of taxes between the Union and States, and the GST framework. The Articles on the Consolidated Fund and Contingency Fund, the duties of the Finance Commission and the criteria it uses are asked as facts and statements.
Practice questions based on the RPSC RAS Prelims syllabus. They follow the exam pattern but are not past-paper questions.
Showing 31–40 of 99 questions
Q32. What is the most appropriate reason for the 15th Finance Commission reducing the vertical tax devolution to States from 42% (under 14th FC) to 41%?
Explanation
The vertical devolution share was adjusted from forty-two percent to forty-one percent to account for the status change of Jammu and Kashmir. Following its reorganization into the Union Territories of Jammu and Kashmir and Ladakh, the responsibility for their funding shifted to the Centre. This one percent reduction ensured that the necessary resources remained available for the newly formed territories.
Q33. Consider Statement I and Statement II regarding the 15th Finance Commission.
Statement I: The 15th Finance Commission introduced a new criterion called "Demographic Performance" in horizontal devolution.
Statement II: The purpose of the "Demographic Performance" criterion was to reward states with a lower Total Fertility Rate (TFR).
Statement I: The 15th Finance Commission introduced a new criterion called "Demographic Performance" in horizontal devolution.
Statement II: The purpose of the "Demographic Performance" criterion was to reward states with a lower Total Fertility Rate (TFR).
Explanation
The 15th Finance Commission introduced the "Demographic Performance" criterion to reward states that effectively managed their population growth. This was measured using the Total Fertility Rate, incentivizing states that met replacement level targets. By including this metric, the commission balanced the use of 2011 population data, ensuring that states with successful family planning programs were not financially disadvantaged.
Q34. Consider the following statements regarding the 15th Finance Commission recommendations:
I. It recommended a non-lapsable fund for modernisation of defence and internal security.
II. It recommended revenue deficit grants for all 28 states for the entire award period.
III. Sector-specific grants were recommended for health, school education, and agriculture.
IV. It suggested a glide path to reduce the combined debt-to-GDP ratio of Centre and States.
V. It recommended states to update their Fiscal Responsibility Legislation.
Which of the combinations given above represents correct statements?
I. It recommended a non-lapsable fund for modernisation of defence and internal security.
II. It recommended revenue deficit grants for all 28 states for the entire award period.
III. Sector-specific grants were recommended for health, school education, and agriculture.
IV. It suggested a glide path to reduce the combined debt-to-GDP ratio of Centre and States.
V. It recommended states to update their Fiscal Responsibility Legislation.
Which of the combinations given above represents correct statements?
Explanation
The 15th Finance Commission recommended a non-lapsable defence fund, sector-specific grants, and a debt reduction glide path. It also urged states to modernize their fiscal responsibility laws. However, it did not recommend revenue deficit grants for all states for the whole period; instead, these grants were targeted only at states that faced persistent budgetary gaps after tax devolution.
Q35. Which criterion was entirely dropped by the 15th Finance Commission for horizontal devolution that was previously used by the 14th Finance Commission?
Explanation
Previous Finance Commissions relied on 1971 population data to prevent penalizing states with lower birth rates. However, the 15th Finance Commission shifted exclusively to 2011 population data to reflect the current fiscal needs of states more accurately. To address concerns about population control, the commission introduced a new demographic performance criterion, effectively replacing the outdated 1971 population metric.
Q36. Consider the following criteria used for tax devolution by the 15th Finance Commission:
I. Tax and Fiscal Efforts
II. Demographic Performance
III. Forest and Ecology
Which of the combinations given above are considered ‘Performance-based’ criteria?
I. Tax and Fiscal Efforts
II. Demographic Performance
III. Forest and Ecology
Which of the combinations given above are considered ‘Performance-based’ criteria?
Explanation
Performance-based criteria aim to incentivize states to improve their governance and demographic outcomes. Tax and fiscal effort rewards states for efficient revenue collection relative to their economic capacity. Demographic performance rewards states for achieving lower fertility rates. While forest and ecology is an important criterion, it is primarily compensatory for the lost opportunity cost of maintaining green cover.
Q37. Which of the following is NOT a type of grant-in-aid recommended by the Finance Commission?
Explanation
The Finance Commission recommends statutory grants, including revenue deficit grants, local body support, and disaster relief funds. These are primarily governed by Article 275. In contrast, discretionary grants under Article 282 are made by the Union or States for any public purpose and do not require the commission’s recommendation. They allow the executive to respond to specific policy needs.
Q38. What is the primary purpose of ‘Post-Devolution Revenue Deficit Grants’ recommended by the Finance Commission?
Explanation
Post-devolution revenue deficit grants are designed to support states that still face a financial shortfall after receiving their share of central taxes. The Finance Commission assesses each state’s revenue and expenditure to determine if a gap exists. These grants ensure that every state has enough resources to maintain basic services and administrative functions, regardless of their inherent revenue-generating capacity.
Q39. Identify the correct pair regarding local body grants as recommended by the 15th Finance Commission:
Explanation
The 15th Finance Commission introduced tied grants for local bodies to ensure funding for national priorities. Specifically, these funds are earmarked for drinking water, rainwater harvesting, and sanitation services. This approach ensures that basic infrastructure is developed at the grassroots level. Basic grants, on the other hand, provide untied funds that local bodies can use for other local needs.
Q40. Match the type of grant in List I with its targeted outcome or feature in List II:
Choose the correct answer:
| Type of Grant | Targeted outcome/Feature |
|---|---|
| A. Revenue Deficit Grants | i. Empowerment of PRIs and ULBs |
| B. State Disaster Risk Management Fund (SDRMF) | ii. Meeting the assessed gap in revenue accounts |
| C. Sector-specific Grants | iii. Enhancing health systems and education quality |
| D. Local Body Grants | iv. Mitigation and capacity building for natural calamities |
Explanation
Fiscal federalism involves various grants to support specific state needs and local administration. Revenue deficit grants address the gap in state budgets, while the disaster risk management fund provides for natural calamities. Sector-specific grants target improvements in critical areas like health. Local body grants empower grassroots governance by providing essential funding for rural and urban administrative units throughout the Indian federation.Answer key for these questions
| Q | Correct answer |
|---|---|
| 31 | (a) Planning Commission -- NITI Aayog -- GST Council -- 15th Finance Commission |
| 32 | (b) To adjust for the reorganization of Jammu and Kashmir into Union Territories |
| 33 | (a) Both Statement I and Statement II are correct |
| 34 | (b) I, III, IV and V only |
| 35 | (d) Population of 1971 |
| 36 | (a) I and II only |
| 37 | (b) Discretionary Grants under Article 282 |
| 38 | (d) Bridging the state budgetary gap after accounting for central tax sharing |
| 39 | (a) Tied Grants -- Funds reserved for drinking water and sanitation priorities |
| 40 | (a) A-ii, B-iv, C-iii, D-i |
Key facts from Fiscal Federalism and Finance Commission
- The President appoints the Chairman and members of the Finance Commission; Article 280(3) lists its duties, including the distribution of net proceeds of taxes.
- Article 266 provides for the Consolidated Funds; the Contingency Fund is at the disposal of the President.
- Article 268 covers Union-levied duties that are collected and kept by the States.
- Horizontal fiscal imbalance among States is addressed by the tax devolution formula recommended by the Finance Commission; revenue deficit grants help States that cannot meet basic needs.
- The 15th Finance Commission dropped the criterion of the 1971 population for horizontal devolution.
- The GST Council is an example of cooperative federalism; the GST Compensation Cess was extended to March 2026 to repay back-to-back loans of the Centre.
Frequently asked questions
How many RAS Prelims practice MCQs are there on Fiscal Federalism and Finance Commission?
This page has 99 practice MCQs on Fiscal Federalism and Finance Commission (Indian Economy). Each has the correct answer, and most have an explanation.
Who appoints the Finance Commission?
The President of India, under Article 280, every five years or earlier. The Commission recommends how the net proceeds of taxes are shared between the Union and the States and among the States.
Which Article lists the duties of the Finance Commission?
Article 280(3). It sets out the duties, including recommending the distribution of the net proceeds of taxes between the Union and the States and the principles that govern grants-in-aid to States.
What kind of federalism does the GST Council show?
Cooperative federalism. The Council, with the Union Finance Minister as chairperson and State Finance Ministers as members, takes decisions on GST rates and rules jointly, and the votes of the Centre and States are weighted.