UPSC Prelims Practice Questions — Rising state borrowings complicate Indian central bank’s rate playbook

Q1. Which one of the following constitutes the single largest source of gross market borrowings by State Governments in India to finance their fiscal deficits?

  • A. Ways and Means Advances (WMA) from the Reserve Bank of India
  • B. State Development Loans (SDLs)
  • C. Loans from the National Small Savings Fund (NSSF)
  • D. External assistance routed through the Government of India

Q2. With reference to the recommendations of the 15th Finance Commission (2021-26) on State finances vis-à-vis its predecessor, consider the following statements: 1. The 15th Finance Commission retained the normal fiscal deficit ceiling for States at 3% of GSDP for the terminal years of its award period, the same level recommended by the 14th Finance Commission. 2. Unlike the 14th Finance Commission, the 15th Finance Commission permitted an additional annual borrowing window of 0.5% of GSDP linked to power-sector reforms by the States. 3. For 2025-26, the 15th Finance Commission raised the regular fiscal deficit ceiling for States to 5% of GSDP, formalising the COVID-era relaxation. Which of the statements given above is/are correct?

  1. The 15th Finance Commission retained the normal fiscal deficit ceiling for States at 3% of GSDP for the terminal years of its award period, the same level recommended by the 14th Finance Commission.
  2. Unlike the 14th Finance Commission, the 15th Finance Commission permitted an additional annual borrowing window of 0.5% of GSDP linked to power-sector reforms by the States.
  3. For 2025-26, the 15th Finance Commission raised the regular fiscal deficit ceiling for States to 5% of GSDP, formalising the COVID-era relaxation.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q3. With reference to State Development Loans (SDLs) in India, which of the following statements are correctly identified? 1. They are dated securities issued by State Governments to finance their fiscal deficits. 2. They are auctioned by the Reserve Bank of India on behalf of the State Governments. 3. They carry an explicit guarantee of the Government of India. 4. They are eligible securities for meeting the Statutory Liquidity Ratio (SLR) requirement of scheduled commercial banks. Which of the statements given above are correctly identified?

  1. They are dated securities issued by State Governments to finance their fiscal deficits.
  2. They are auctioned by the Reserve Bank of India on behalf of the State Governments.
  3. They carry an explicit guarantee of the Government of India.
  4. They are eligible securities for meeting the Statutory Liquidity Ratio (SLR) requirement of scheduled commercial banks.
  • A. 1, 2 and 3 only
  • B. 1, 2 and 4 only
  • C. 2 and 4 only
  • D. 1, 2, 3 and 4

Q4. Under which one of the following provisions of the Constitution of India are the States required to obtain the prior consent of the Government of India before raising any loan if any part of a loan previously made to them by the Centre is still outstanding?

  • A. Article 280
  • B. Article 292
  • C. Article 293
  • D. Article 360

Q5. The auctions for issuance of State Development Loans (SDLs) on behalf of the State Governments are conducted by which one of the following?

  • A. Department of Economic Affairs, Ministry of Finance
  • B. Internal Debt Management Department of the Reserve Bank of India
  • C. Public Debt Office of the State Bank of India
  • D. Clearing Corporation of India Limited (CCIL)