UPSC Prelims Practice Questions — The fiscal tightrope for State govts.

Q1. In the context of Indian fiscal federalism, the term 'vertical fiscal imbalance' most precisely refers to:

• A. the mismatch between the concentration of major revenue-raising powers with the Union and the bulk of expenditure responsibilities resting with the States
• B. the disparity in per capita revenues and development levels between richer and poorer States
• C. the excess of a State's revenue expenditure over its revenue receipts in a given year
• D. the difference between the Union's fiscal deficit and the combined fiscal deficit of the States

Q2. The 'Net Borrowing Ceiling' imposed on State governments by the Union is best described as:

• A. the annual limit on the total borrowings a State may undertake, fixed as a percentage of its GSDP and, since 2022, made inclusive of the State's off-budget borrowings
• B. the excess of a State's total expenditure over its total receipts excluding borrowings in a financial year
• C. the accumulated stock of a State's past borrowings expressed as a share of GSDP
• D. the excess of a State's revenue expenditure over its revenue receipts that it is required to eliminate

Q3. The annual fiscal deficit limit of 3% of GSDP recommended for the States for the award period 2026-31 was recommended by which one of the following?

• A. The Sixteenth Finance Commission
• B. The Fifteenth Finance Commission
• C. The FRBM Review Committee chaired by N.K. Singh
• D. The Reserve Bank of India

Q4. With reference to the criteria used by the Fifteenth Finance Commission (2021-26) for the horizontal devolution of taxes among States, consider the following: 1. Income Distance 2. Fiscal Discipline 3. Demographic Performance 4. Tax and Fiscal Effort Which of the above is/are correctly identified as criteria used by the Fifteenth Finance Commission?

1. Income Distance
2. Fiscal Discipline
3. Demographic Performance
4. Tax and Fiscal Effort

• A. 1 and 3 only
• B. 1, 3 and 4
• C. 2, 3 and 4
• D. 1, 2 and 4

Q5. In the horizontal devolution formula of the Finance Commission, the criterion of 'Income Distance' is defined as:

• A. the difference between a State's per capita income and that of the State having the highest per capita income, giving a larger share to States with lower per capita income
• B. the gap between a State's own tax revenue and its total revenue expenditure
• C. the shortfall of a State's per capita income below the national average per capita income
• D. the difference between a State's GSDP growth rate and the national GDP growth rate

Q6. Consider the following items of State government expenditure: 1. Salaries 2. Interest payments 3. Pension payments 4. Subsidies Which of the above is/are correctly identified as components of 'committed expenditure'?

1. Salaries
2. Interest payments
3. Pension payments
4. Subsidies

• A. 1 and 3 only
• B. 1, 2 and 3
• C. 2, 3 and 4
• D. 1, 2, 3 and 4

Q7. With reference to committed expenditure of State governments as estimated for 2025-26, consider the following statements: 1. On average, States are estimated to spend about half of their revenue receipts on committed expenditure. 2. States such as Assam, Himachal Pradesh, Kerala, Punjab and Tamil Nadu are estimated to spend more than 60% of their revenue receipts on committed items. 3. Bihar is estimated to spend more than 80% of its revenue receipts on committed expenditure. Which of the statements given above is/are correct?

1. On average, States are estimated to spend about half of their revenue receipts on committed expenditure.
2. States such as Assam, Himachal Pradesh, Kerala, Punjab and Tamil Nadu are estimated to spend more than 60% of their revenue receipts on committed items.
3. Bihar is estimated to spend more than 80% of its revenue receipts on committed expenditure.

• A. 1 only
• B. 1 and 2 only
• C. 2 and 3 only
• D. 1, 2 and 3

Q8. According to the Comptroller and Auditor General's report on State finances for FY2024-25, how many States had total outstanding liabilities exceeding the Fifteenth Finance Commission's indicative debt ceiling of 32.8% of GSDP?

• A. 8
• B. 13
• C. 18
• D. 22

Q9. With reference to the White Papers on State finances and the relative debt positions of Kerala and Tamil Nadu, consider the following statements: 1. Tamil Nadu's White Paper reported that the State's direct debt had nearly doubled to around ₹10 trillion over five years. 2. Among the five major southern States, Kerala has the highest debt-to-GSDP ratio, higher than that of Tamil Nadu. 3. Tamil Nadu's debt-to-GSDP ratio is higher than that of Kerala. Which of the statements given above is/are correct?

1. Tamil Nadu's White Paper reported that the State's direct debt had nearly doubled to around ₹10 trillion over five years.
2. Among the five major southern States, Kerala has the highest debt-to-GSDP ratio, higher than that of Tamil Nadu.
3. Tamil Nadu's debt-to-GSDP ratio is higher than that of Kerala.

• A. 1 only
• B. 1 and 2 only
• C. 2 and 3 only
• D. 1, 2 and 3

Q10. The GST compensation guaranteed to States for the first five years of GST is best described as:

• A. a guarantee that each State's GST revenue would be protected at an assumed 14% annual growth over its 2015-16 base-year revenue, for the period July 2017 to June 2022
• B. a permanent guarantee that every State would always receive 14% annual growth in its total tax revenue
• C. an assurance that the Centre would fully bear all expenditure shortfalls of every State arising from any tax reform
• D. a commitment that States would in every year receive grants equal to their entire loss of revenue from all subsumed taxes in perpetuity

Q11. With reference to transfers from the Union to the States, consider the following: 1. Tax devolution 2. Revenue deficit grants 3. Grants for Centrally Sponsored Schemes 4. Conditional sector- and State-specific Finance Commission grants Which of the above is/are correctly identified as 'untied' transfers?

1. Tax devolution
2. Revenue deficit grants
3. Grants for Centrally Sponsored Schemes
4. Conditional sector- and State-specific Finance Commission grants

• A. 1 only
• B. 1 and 2
• C. 1, 2 and 3
• D. 2 and 4