UPSC IAS Prelims 2021: Important Questions on Economics – Topic 8 (Fiscal Policy)

UPSC IAS Prelims 2021: Important Questions on Economics – Topic 8 (Fiscal Policy) : Fiscal policy is the use of government revenue collection (mainly taxes but also non-tax revenues such as divestment, loans) and expenditure (spending) to influence the economy. Fiscal policy in India is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly. This makes the topic important for UPSC IAS Prelims 2021 exam.  To help the aspirants in their preparation, we have provided the 10 most important questions from the Fiscal Policy topic of Economics for UPSC Prelims 2021.


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Ques 1: The Fiscal Responsibility and Budget Management (FRBM) Act aimed for

  1. eliminating both revenue deficit and fiscal deficit
  2. giving flexibility to RBI for inflation management

Which of the statements given above is/are correct?

 (a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: b

Explanation:

FRBM Act had the objective of ensuring prudence in fiscal management by eliminating revenue deficit, REDUCING ( and not eliminating ) fiscal deficit, establishing improved debt management and improving transparency in a medium term framework with quantitative targets to be adhered by the state with regard to deficit measures and debt management. The act was also expected to give necessary flexibility to Reserve Bank of India (RBI) for managing inflation in India.

Ques 2: Consider the following statements regarding Fiscal Policy:

  1. It helps to maintain the economy’s growth rate so that certain economic goals can be achieved.
  2. It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: c

Explanation:

Main objectives of Fiscal Policy in India

Economic growth: It helps to maintain the economy’s growth rate so that certain economic goals can be achieved.

Price stability: It controls the price level in the country so that when the inflation is too high, prices can be regulated.

Full employment: It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.

Ques 3: Financial market is classified into money market and capital market. Which of these are money market instruments?

  1. T-Bills
  2. Preference shares
  3. Commercial papers

Select the correct answer using the codes given below.

(a) 1 and 2 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1,2 and 3

Ans: b

Explanation:

The short-term debts and securities sold on the money markets—which are known as money market instruments—have maturities ranging from one day to one year and are extremely liquid. The Treasury bills are short-term money market instrument that mature in a year or less than that. Commercial Paper is short-term loan that is issued by a corporation use for financing accounts receivable and inventories. Preference shares are capital market instrument.

Ques 4: Fiscal consolidation is one of the objectives of India’s economic policy. Which of the following would help in fiscal consolidation?

  1. increasing taxes
  2. getting more loans
  3. reducing subsidies

Select the correct answer using the codes given below.

(a) 1 and 2 only

(b) 1 and 3 only

(c) 2 and 3 only

(d) 1, 2 and 3

Ans: b

Explanation:

Fiscal consolidation is a reduction in the underlying fiscal deficit. So, by increasing revenues and decreasing expenditure, we can undertake fiscal consolidation. While getting more loans may increase receipts, it will not help in fiscal consolidation as that loan has to be repaid back along with interest. So loans add more to the expenditure than it contributes to receipts. Increasing taxes and reducing subsidies will of course increase revenues and decrease expenditure respectively contributing to fiscal consolidation.

Ques 5: Consider the following statements regarding the Input Tax Credit (ITC):

  1. It is a mechanism to avoid cascading of taxes.
  2. The Goods and Services Tax mechanism in India does not incorporate the ITC.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: a

Explanation:

Uninterrupted and seamless chain of input tax credit is one of the key features of Goods and Services Tax.

One of the most important features of the GST system is that the entire supply chain is subject to GST to be levied by Central and State Government concurrently. As the tax charged by the Central or the State Governments would be part of the same tax regime, credit of tax paid at every stage would be available as set-off for payment of tax at every subsequent stage.

Ques 6: Which of the following subject(s) is/are not under the purview of Goods and Services Tax in India?

  1. Alcohol for human consumptions
  2. Petroleum Products
  3. Electricity

Select the correct answer using the code given below:

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) All of the above

Ans: d

Explanation:

Alcohol for human consumption has been kept outside the purview of GST in India at present. These goods are subject to existing State levies.

Petroleum Products such as petroleum crude, motor spirit (petrol), high speed diesel, natural gas and aviation turbine fuel etc. are also kept outside the purview of GST in India.

At present, electricity is not subject to GST and power companies pay multiple taxes on capital goods and other inputs like excise duty, customs duty etc.

Ques 7: The Central Government had recently allowed additional borrowing limit to the States for current financial year subject to which of the following reform(s)?

  1. Implementation of One Nation One Ration Card System
  2. Ease of doing business reform
  3. Implementation of National Education Policy 2020

Select the correct answer using the code given below:

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) All of the above

Ans: a

Explanation:

n view of the unprecedented COVID-19 pandemic, the Central Government had in May, 2020 allowed additional borrowing limit of up to 2 percent of Gross State Domestic Product (GSDP) to the States for the year 2020-21.

One percent of this is subject to implementation of following four specific State level reforms, where weightage of each reform is 0.25 percent of GSDP

Ques 8: Which of the following constitute the internal debt of the Central Government?

  1. Treasury Bills
  2. Non-marketable securities issued by Central Government

Select the correct answer using the code given below:

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: c

Explanation:

 Marketable securities include fixed tenor and fixed/ floating rate dated securities, and short-term borrowings through treasury bills.

Nonmarketable securities in internal debt are the special Central Government securities issued to National Small Savings Fund (NSSF), securities issued to international financial institutions, special securities issued against securitisation of balances under postal insurance and annuity funds (POLIF and RPOLIF), compensation & other bonds, special securities issued to public sector banks/ EXIM Bank and 14-day Intermediate Treasury Bills.

Ques 9: Consider the following statements regarding the GST e-Invoice System:

  1. Presently, Invoice Reference Number (IRN) can be generated only by tax payers whose turnover is more than Rs. 500 Crores.
  2. Each Invoice uploaded by the tax payer gets a unique Invoice Reference Number (IRN).

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: c

Explanation:

The GST e-invoice system was launched on 1st October, 2020 for the businesses with aggregate turnover of more than Rs. 500 Crores in the financial year.

Each Invoice uploaded by the tax payer will get the unique number called as Invoice Reference Number (IRN). IRN is of 64 Characters length.

Ques 10: Consider the following statements regarding the Direct Tax Vivad se Vishwas Act, 2020:

  1. It provided for a mechanism for resolution of pending tax disputes related to income tax and corporation tax.
  2. The disputes involving undisclosed foreign income or assets are not covered under the said mechanism.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans: c

Explanation:

The Direct Tax Vivad se Vishwas Act, 2020 provides a mechanism for resolution of pending tax disputes related to income tax and corporation tax.

The proposed mechanism does not cover certain disputes:

(i) where prosecution has been initiated before the declaration is filed,

(ii) which involve persons who have been convicted or are being prosecuted for offences under certain laws (such as the Indian Penal Code), or for enforcement of civil liabilities, and

(iii) involving undisclosed foreign income or assets.

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