Question 1

Which one of the following best describes the 'Crowding Out Effect' in the context of fiscal policy?

Accepted Answer

A situation where private investment increases due to increased Government spending. * (b) is correct: The "Crowding Out Effect" refers to an economic scenario where aggressive expansionary fiscal policy or high government borrowing increases the demand for loanable funds. This pushes up market interest rates, making borrowing expensive for private firms and reducing overall private sector investment.

Question 2

With reference to the Government of India, consider the following information:
Organization | Some of its functions | It works under
I. Directorate of Enforcement | Enforcement of the Fugitive Economic Offenders Act, 2018 | Internal Security Division-I, Ministry of Home Affairs
II. Directorate of Revenue Intelligence | Enforces the provisions of the Customs Act, 1962 | Department of Revenue, Ministry of Finance
III. Directorate General of Systems and Data Management | Carrying out big data analytics to assist tax officers for better policy and nabbing tax evaders | Department of Revenue, Ministry of Finance

In how many of the above rows is the information correctly matched?

Accepted Answer

Only one. * Row I is incorrectly matched: The Directorate of Enforcement (ED) handles the Fugitive Economic Offenders Act, 2018, but operates under the Department of Revenue, Ministry of Finance, not the Ministry of Home Affairs. * Row II is correctly matched: The Directorate of Revenue Intelligence (DRI) enforces the Customs Act, 1962, under the CBIC, Department of Revenue, Ministry of Finance. * Row III is incorrectly matched: Carrying out big data analytics to assist tax officers and nab evaders is the function of the Directorate General of Analytics and Risk Management (DGARM), which was set up in 2018 under the CBIC. * Therefore, only one row is correctly matched.

Question 3

Consider the following statements:
Statement I: In India, income from allied agricultural activities like poultry farming and wool rearing in rural areas is exempted from any tax.
Statement II: In India, rural agricultural land is not considered a capital asset under the provisions of the Income-tax Act, 1961.

Which one of the following is correct in respect of the above statements?

Accepted Answer

Statement I is correct but Statement II is not correct. * Statement I is not correct: While core agricultural income is exempted under the Income Tax Act, non-agricultural income such as earnings from poultry farming, dairy farming, and bee hiving is not exempted from taxation. * Statement II is correct: Under section 2(14) of the Income-tax Act, 1961, the term "capital asset" explicitly excludes rural agricultural land in India, meaning any gain from its sale is not taxable as capital gains. Thus, option (d) is correct.

Question 4

Consider the following statements:
I. Capital receipts create a liability or cause a reduction in the assets of the Government.
II. Borrowings and disinvestment are capital receipts.
III. Interest received on loans creates a liability of the Government.

Which of the statements given above are correct?

Accepted Answer

I and II only. * Statement I is correct: All those receipts of the government that either create a financial liability or cause a reduction in fiscal assets are termed capital receipts. * Statement II is correct: Borrowings raise an obligation (creating liability), and disinvestment (sale of government assets or PSU shares) reduces the total asset pool, so both are capital receipts. * Statement III is incorrect: Interest received on loans granted by the central government is classified as non-tax revenue receipt. It represents current income and does not create any liability or reduce public assets.

Question 5

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.

Accepted Answer

I and III only. * All three calculations are correct: * I. Revenue Deficit = Revenue Expenditure (80,000 cr) - Revenue Receipts (60,000 cr) = 20,000 crores. * II. Fiscal Deficit is equivalent to total government borrowings, which stands at 10,000 crores. * III. Primary Deficit = Fiscal Deficit (10,000 cr) - Interest Payments (6,000 cr) = 4,000 crores.

Question 6

A country's fiscal deficit stands at 50,000 crores. It is receiving 10,000 crores through non-debt creating capital receipts. The country's interest liabilities are 1,500 crores. What is the gross primary deficit?

Accepted Answer

48,500 crores. * (a) is correct: The Gross Primary Deficit is calculated by subtracting interest liabilities directly from the overall Fiscal Deficit. * Primary Deficit = Fiscal Deficit (50,000 crores) - Interest Payments (1,500 crores) = 48,500 crores. (The non-debt creating capital receipts are already evaluated within the net fiscal deficit total).

Question 7

Which of the following statements with regard to recommendations of the 15th Finance Commission of India are correct?
I. It has recommended grants of 4,800 crores from the year 2022-23 to the year 2025-26 for incentivizing States to enhance educational outcomes.
II. 45% of the net proceeds of Union taxes are to be shared with States.
III. 45,000 crores are to be kept as performance-based incentive for all States for carrying out agricultural reforms.
IV. It reintroduced tax effort criteria to reward fiscal performance.

Accepted Answer

I, II and IV. * Statement I is correct: The 15th Finance Commission (XVFC) recommended performance-based incentive grants totaling ₹4,800 crore (allocated as ₹1,200 crore each year) from 2022–23 to 2025–26 to encourage states to step up educational outcomes. * Statement II is incorrect: To preserve financial predictability and resource stability during the pandemic, the vertical devolution share to the states was maintained at 41 per cent, not 45%. (This adjusted the previous 42% rule by 1% to account for the changed status of Jammu & Kashmir into the Union Territories of Ladakh and J&K). * Statement III is correct: The commission specifically recommended setting aside an allocation of ₹45,000 crore as a performance-linked financial incentive for states executing agricultural reforms. * Statement IV is correct: The horizontal tax devolution framework re-introduced a specialized tax effort criterion to explicitly reward superior fiscal performance among states.

Indian Economy: Fiscal Policy & Taxation PYQ.

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