Public Finance and Finance Commission: Articles and Deficits

The correct answer is C, Article 280. Article 280 requires the President to constitute a Finance Commission at the expiration of every fifth year, or earlier if the President considers it necessary, consisting of a Chairman and four other members, and lists the matters on which it is to make recommendations. Option A is wrong because Article 112 deals with the Annual Financial Statement, the document popularly called the Union Budget. Option B is wrong because Article 266 deals with the Consolidated Fund and the Public Account of India, from the first of which no money may be drawn without the authority of Parliament. Option D is wrong because Article 324 vests the superintendence, direction and control of elections in the Election Commission of India, which is a different constitutional body altogether.

The correct answer is C, A and C only. Statement A is correct: Article 280 provides that the Commission shall consist of a Chairman and four other members appointed by the President. Statement C is also correct: Article 280 is the very article that lists the matters on which the Commission makes its recommendations, including tax devolution and grants-in-aid. Statement B is wrong, and this is the trap the question is built on. The recommendations of the Finance Commission are advisory in nature, and the Union government is not legally bound to accept them; Article 281 only requires the report, with a memorandum explaining the action taken, to be laid before each House of Parliament. Because B is false, options A, B and D, each of which includes B, cannot be right, leaving A and C only.

The correct answer is C, The President of India. The Finance Commission is constituted by the President under Article 280, and it therefore makes its recommendations to the President. Under Article 281 the President must cause every recommendation, together with an explanatory memorandum on the action taken on it, to be laid before each House of Parliament. Option A is wrong because NITI Aayog is an executive body set up by a Cabinet resolution in 2015 and has no role in receiving the Commission's report. Option B is wrong because the Finance Minister and the Ministry of Finance act on the recommendations once accepted but are not the authority the report is addressed to. Option D is wrong because the Prime Minister chairs the Union Council of Ministers and NITI Aayog but does not receive the report either.

The correct answer is B, total expenditure minus total receipts other than borrowings. Fiscal deficit measures the whole amount the government must borrow in a year, because it compares everything it spends with everything it earns from taxes, non-tax revenue, recovery of loans and disinvestment, leaving borrowing out of the receipts side. Option A is wrong because that formula gives the revenue deficit, which shows borrowing for routine running rather than the total borrowing requirement. Option C is wrong because subtracting interest payments from the fiscal deficit, not from total expenditure, gives the primary deficit. Option D is wrong because there is no standard deficit defined in that way; capital receipts themselves include borrowings, so such a figure would double count the very item that fiscal deficit is meant to isolate.

The correct answer is B, at the expiration of every fifth year. Article 243-I, inserted by the seventy-third Constitutional Amendment of 1992, requires the Governor of a State to constitute a Finance Commission at the expiration of every fifth year to review the financial position of the Panchayats and to recommend how taxes, duties, tolls and fees should be divided between the State and its Panchayats. Article 243-Y makes the same body examine the finances of the Municipalities. Options A, C and D are wrong simply because the Constitution fixes the interval at five years, the same interval Article 280 sets for the central Finance Commission, which makes the two easy to remember together. Note also that the State Finance Commission, like the central one, is a constitutional body and not a statutory one.

The correct answer is C, Constitutional body. The State Finance Commission owes its existence directly to the Constitution: Article 243-I, added by the seventy-third Amendment, requires the Governor to constitute it every fifth year for the Panchayats, and Article 243-Y extends the arrangement to the Municipalities. A body created by the Constitution itself is called a constitutional body, which is the highest of these categories. Option A is wrong because a merely legal or statutory body is one set up by an ordinary law of the legislature, such as the National Human Rights Commission. Option B is wrong because a non-statutory body rests only on an executive decision, as NITI Aayog and the former Planning Commission do. Option D is wrong because option C states the position correctly. A simple ladder helps here: a constitutional body is named in the Constitution, a statutory body is created by an ordinary Act, and a non-statutory body rests on an executive order alone; Article 243-I puts the State Finance Commission on the first rung.

The correct answer is A, Interest payments. Primary deficit equals fiscal deficit minus interest payments. Interest is the price of borrowing done in earlier years, so removing it leaves the gap created by the current year's own decisions on spending and taxation, which is why economists read the primary deficit as a measure of present fiscal discipline. Option B is wrong because revenue receipts are already counted on the receipts side in arriving at the fiscal deficit itself. Option C is wrong because capital expenditure is part of total expenditure and is not deducted again; a fiscal deficit financing capital works is treated differently in quality, but the formula does not change. Option D is wrong because grants given to States for creating capital assets are deducted from the revenue deficit to give the effective revenue deficit, not from the fiscal deficit.

The correct answer is B, Article 112. Article 112 requires the President to cause a statement of the estimated receipts and expenditure of the Government of India for every financial year to be laid before both Houses of Parliament, and that statement is the Annual Financial Statement. It shows the revenue and the capital accounts separately and distinguishes expenditure charged on the Consolidated Fund, which is not submitted to the vote of Parliament. Option A is wrong because Article 110 defines a Money Bill and lists the matters a Money Bill may deal with. Option C is wrong because Article 114 deals with the Appropriation Bill, through which money is withdrawn from the Consolidated Fund after the demands for grants are voted. Option D is wrong because Article 266 establishes the Consolidated Fund and the Public Account themselves.

The correct answer is D, K. C. Neogy. K. C. Neogy chaired the first Finance Commission, which was constituted in 1951 under Article 280 soon after the Constitution came into force, and whose recommendations covered the sharing of income tax and union excise duties with the States. Option A is wrong because C. D. Deshmukh was Union Finance Minister in that period and later Governor of the Reserve Bank of India, but he did not chair the Commission. Option B is wrong because K. Santhanam chaired the second Finance Commission, not the first. Option C is wrong because A. K. Chanda chaired the third Finance Commission and is better remembered as a Comptroller and Auditor General of India. Remembering Neogy for the first and Santhanam for the second is enough for most papers.

The correct answer is C, Corporation tax. A direct tax is one whose burden cannot be shifted: the person or company assessed both pays it and bears it. Corporation tax, charged on the profits of companies, and income tax, charged on the income of individuals, are the two main direct taxes of the Union. Option A is wrong because the Goods and Services Tax is an indirect tax collected from the seller but passed on to the buyer in the price of goods and services. Option B is wrong because customs duty is levied on imports and exports and is likewise recovered from the consumer. Option D is wrong because excise duty, now confined to a few products such as petroleum and tobacco after GST, is also indirect. The test is simple: ask whether the payer can pass the burden on.

The correct answer is B, 2003. The Fiscal Responsibility and Budget Management Act was passed by Parliament in 2003 and brought into force in 2004. It aims at fiscal discipline by placing limits on the fiscal deficit and on government debt, and by requiring the government to lay before Parliament each year a Medium-term Fiscal Policy Statement, a Fiscal Policy Strategy Statement and a Macroeconomic Framework Statement along with the Budget. Option A is wrong because 1991 is the year of the balance of payments crisis and the beginning of economic liberalisation, not of this Act. Option C is wrong because 2005 is associated with the Right to Information Act and the rural employment guarantee law. Option D is wrong because 2016 is the year of the insolvency code and the monetary policy framework amendments.

The correct answer is C, Article 267. Article 267 allows Parliament by law to establish a Contingency Fund of India, held at the disposal of the President so that advances can be made for unforeseen expenditure before Parliament authorises it; the amount is afterwards recouped from the Consolidated Fund through a supplementary appropriation. Option A is wrong because Article 265 lays down that no tax shall be levied or collected except by authority of law. Option B is wrong because Article 266 creates the Consolidated Fund of India and the Public Account, from the first of which no money may be drawn without parliamentary authority. Option D is wrong because Article 270 deals with taxes levied and collected by the Union and distributed between the Union and the States, which is the divisible pool the Finance Commission works on.