Fiscal Policy and the Budget — Practice Questions
UPSC Prelims-pattern practice questions on government budgeting with full explanations: charged expenditure, the three funds, deficits and budget procedure.
Questions
These are original UPSC-pattern practice questions. Attempt each one before revealing the answer.
Which one of the following is not charged on the Consolidated Fund of India?
Solution
Salaries of Union Ministers are voted expenditure. The President’s emoluments, the CAG’s salary and debt charges are charged expenditure listed in Article 112(3): discussed but not voted.
Answer: C
Consider the following statements:
- Money in the Public Account of India can be paid out without parliamentary appropriation.
- The Contingency Fund of India is placed at the disposal of the President.
- All loans raised by the Government of India are credited to the Public Account of India.
Which of the statements given above is/are correct?
Solution
Statement 1 is correct: in the Public Account the Government acts as a banker, so no appropriation is needed. Statement 2 is correct (Article 267). Statement 3 is incorrect: all loans raised by the Government go into the Consolidated Fund (Article 266(1)).
Answer: A
How many of the following are classified as revenue expenditure of the Union Government?
- Interest payments
- Grants-in-aid to States for the creation of capital assets
- Loans given to States
- Capital outlay on defence
Solution
Interest payments (1) and grants-in-aid to States (2) are revenue expenditure; grants stay “revenue” even when States build assets, which is why the effective revenue deficit exists. Loans (3) create a financial asset and defence capital outlay (4) creates physical assets, so both are capital expenditure. That makes two.
Answer: B
In the parliamentary budget process, the “guillotine” refers to:
Solution
On the last allotted day the Speaker puts all outstanding demands to vote together, discussed or not. Reducing a demand to ₹1 is a policy cut. The Rajya Sabha does not vote on demands, and the guillotine is unrelated to the Finance Bill.
Answer: D
From 1 April 1997, the system of Ways and Means Advances replaced which of the following arrangements between the Government of India and the RBI?
Solution
Ad hoc Treasury Bills let the Government monetise its deficit automatically. A 1994 agreement ended them from 1 April 1997; Ways and Means Advances now cover temporary mismatches. The MSS (2004) sterilises capital inflows; Cash Management Bills are short-term market instruments; OMOs are a monetary policy tool.
Answer: C
“The quality of government expenditure matters as much as its quantity.” Discuss with reference to India’s fiscal policy.
Solution
Introduction: Two budgets with the same fiscal deficit can have very different effects on growth and welfare. Quality refers to what the money is spent on and how efficiently it delivers outcomes.
Body:
- Capital vs revenue: capital expenditure (roads, railways, irrigation) usually has a higher fiscal multiplier and builds future capacity; a high revenue deficit means borrowing to fund consumption.
- Targeting: well-targeted subsidies and direct benefit transfers reduce leakages; untargeted subsidies are costly and regressive.
- Interest burden: rising interest payments crowd out development spending; debt sustainability depends on growth exceeding interest rates.
- Outcomes: outcome budgets and independent evaluation link rupees to results.
- Transparency: off-budget borrowings and pending bills hide the true deficit; disclosure improves credibility.
- Federal angle: much social spending happens at the State level; predictable transfers help States plan.
Conclusion: Fiscal consolidation that protects capital and social-sector spending, while trimming poorly targeted outlays, delivers both stability and growth.