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 61–70 of 99 questions
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q61. Consider the following statements about Centrally Sponsored Schemes (CSS): I. They are formulated on subjects in the State List to encourage states to prioritize national goals. II. The general sharing pattern for "Core" schemes is 60:40 between Centre and general category States. III. General category states mostly contribute 40% towards the "Core" CSS. IV. The Centre’s contribution to North-Eastern and Himalayan States is typically 90%. V. All CSS must be implemented through direct benefit transfer (DBT) directly from the Central Government to beneficiaries, bypassing the State treasury. Which of the combinations given above represents correct statements?
Explanation
Centrally Sponsored Schemes are designed for subjects in the State List but are partially funded by the Union to achieve national development goals. The standard sharing ratio for core schemes is sixty to forty for general states. For North-Eastern and Himalayan states, the Union contributes ninety percent of the total project cost to support their unique developmental challenges and financial limitations.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q62. Which of the following is NOT a consequence of the proliferation of Centrally Sponsored Schemes on State finances?
Explanation
The rise of Centrally Sponsored Schemes often limits state flexibility because these programs come with strict central guidelines and mandatory matching requirements. States must divert their own resources to meet these conditions, reducing the funds available for their own unique priorities. This can strain both the financial health and the administrative capacity of state governments to manage numerous overlapping programs.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q63. What is the most appropriate reason for the rationalisation of Centrally Sponsored Schemes into umbrella schemes based on the recommendations of a Sub-Group of Chief Ministers?
Explanation
Rationalizing Centrally Sponsored Schemes into umbrella programs aims to simplify the fiscal landscape. By grouping related schemes, the government reduces administrative complexity and allows states to tailor implementations to local needs. This shift was recommended to enhance efficiency and ensure that central funding effectively supports state efforts without imposing overly rigid or redundant requirements on the local administration.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q64. Identify the correct pair regarding the categorization of schemes in India:
Explanation
Central Sector Schemes are entirely funded and implemented by Union Ministries on subjects within the Union List. In contrast, Centrally Sponsored Schemes involve cooperation between the Centre and States. Identifying these differences is key to understanding how policy is executed. While the Centre provides the framework and funding for sector schemes, it relies on state machinery for sponsored programs.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q65. Match the body or mechanism in List I with its function in federalism in List II:
Body/Mechanism
Function in Federalism
A. Planning Commission
i. Investigates and discusses subjects of common interest among States
B. NITI Aayog
ii. Statutory body recommending tax devolution based on constitutional mandate
C. Finance Commission
iii. Recommends policy direction utilizing cooperative and competitive federalism
D. Inter-State Council
iv. Exercised the power to allocate discretionary plan grants to states
Choose the correct answer:
Explanation
Various bodies facilitate federal relations. The Planning Commission formerly managed discretionary plan grants, while NITI Aayog now provides policy direction. The Finance Commission is a statutory body recommending tax devolution. The Inter-State Council serves as a forum for discussing common interests. Together, these institutions coordinate the economic and administrative activities of the Union and the States to promote national unity.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q66. Consider the following statements contrasting the Planning Commission with NITI Aayog: I. Unlike the Planning Commission, NITI Aayog does not possess the power to allocate funds to States or Ministries. II. NITI Aayog includes State Chief Ministers in its Governing Council, promoting cooperative federalism. III. NITI Aayog functions under the mandate of promoting policy coordination. Which of the combinations given above is correct?
Explanation
NITI Aayog serves as a policy think-tank and does not have the power to allocate funds, which distinguishes it from the erstwhile Planning Commission. Its Governing Council, including Chief Ministers, fosters a bottom-up approach to development. While it coordinates policy, it does not manage the mandatory devolution of taxes, which remains the constitutional responsibility of the Finance Commission.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q67. What was the defining characteristic of "Plan grants" administered by the erstwhile Planning Commission that caused friction in fiscal federalism?
Explanation
Plan grants under the Planning Commission were often criticized for being discretionary and tied to specific central conditions. This gave the Centre significant influence over state development agendas, sometimes at the expense of local priorities. The lack of a rigid, formula-based approach led to friction, as states felt their fiscal autonomy was being undermined by the top-down nature of these allocations.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q68. Which statement correctly highlights a federal implication of replacing the Planning Commission with NITI Aayog?
Explanation
With the abolition of the Planning Commission, the role of the Finance Commission in fiscal devolution has become even more central. Most financial transfers to states are now governed by the commission’s recommendations, reducing the prevalence of discretionary plan grants. This shift emphasizes formula-based, transparent devolution, aiming to provide states with more predictable and untied resources for their developmental activities.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q69. What is a primary effect of NITI Aayog’s introduction of indices like the Health Index and the Export Preparedness Index among States?
Explanation
NITI Aayog’s use of performance indices encourages states to improve their governance through healthy competition. By ranking states on health, education, and exports, the Aayog highlights best practices and areas for improvement. This "competitive federalism" motivates states to innovate and improve public service delivery, as they strive to climb the rankings and attract investment through better performance metrics.
RAS PrelimsIndian Economy · Fiscal Federalism and Finance Commission
Q70. Consider the following statements about Special Category States (SCS): I. The concept was first introduced on the recommendations of the Fifth Finance Commission. II. SCS status provides states with significant benefits in Central assistance and tax exemptions. III. The Constitution of India explicitly defines the criteria for granting SCS status in Part XXI. IV. After the 14th Finance Commission recommendations, no new states have been granted official SCS status, and central plan assistance is largely subsumed in higher tax devolution. Which combination represents the correct statements?
Explanation
Special Category Status was introduced by the 5th Finance Commission to support disadvantaged states with hilly terrains and low resources. While it provided significant aid, the 14th Finance Commission’s move to increase general tax devolution to forty-two percent led to the phasing out of the SCS designation for new states. Central assistance is now primarily through increased tax shares.
Answer key for these questions
Q
Correct answer
61
(a) I, II, III, and IV only
62
(a) It provides States with absolute flexibility in designing local interventions.
63
(b) To reduce administrative overlaps and provide greater flexibility for States
64
(b) Central Sector Schemes -- Implemented directly by the Central Ministries
65
(a) A-iv, B-iii, C-ii, D-i
66
(a) I and II only
67
(d) They were discretionary and conditional, often bypassing local state priorities
68
(c) Devolution is now channelled primarily through the Central Finance Commission
69
(b) It fosters competitive federalism by benchmarking state performance.
70
(a) I, II and IV only
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.
