Test: Indian Economy -1 - UPSC MCQ

• The Market Intervention Scheme (MIS) is a price support mechanism implemented at the request of state governments for the procurement of perishable and horticultural commodities in the event of a fall in market prices. Hence statement 1 is not correct. 
• Its objective is to protect the growers of these horticultural/agricultural commodities from making distress sales in the event of a bumper crop. It is implemented when there is at least a 10% increase in production or a 10% decrease in the ruling rates over the previous normal year. 
• Under the MIS, a pre-determined quantity at a fixed Market Intervention Price (MIP) is procured by NAFED as the central agency. The area of operation is restricted to the concerned state only. Hence statement 2 is correct. 
• Proposal of MIS is approved on the specific request of State/UT Government, if they are ready to bear 50% loss (25% in case of North-Eastern States), if any, incurred on its implementation. 
• Under MIS, funds are not allocated to the States. Instead, the central share of losses as per the guidelines of MIS is released to the State Governments/UTs, for which MIS has been approved based on specific proposals received from them.

• Statutory Liquidity Ratio: The statutory liquidity ratio refers to that proportion of total deposits which the commercial banks are required to keep with themselves in a liquid form. Commercial banks generally make use of this money to purchase government securities. Thus, the statutory liquidity ratio, on the one hand, is used to siphon off the excess liquidity of the banking system, and on the other, it is used to mobilize revenue for the government. SLR is a tool for controlling liquidity in the domestic market via manipulating bank credit. Hence statement 2 is correct.
• Marginal Standing Facility: Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities. MSF is a very short-term borrowing scheme for scheduled commercial banks. Banks may borrow funds through MSF during severe cash shortage or acute shortage of liquidity. Hence statement 1 is correct.
• The MSF is the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which have a lower rate (i.e. repo rate) of interest in comparison with the MSF. 
• The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.
• MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging government securities, where the rates are lower in comparison with the MSF. Hence statement 3 is correct. o MSF represents the upper band of the interest corridor with repo rate at the middle and reverse repo as the lower band.

• According to National Commission for Enterprises in the Unorganised Sector, an unorganized sector refers to production or service-oriented enterprise owned by individuals or self- employed workers and if workers are employed, then the total number of workers cannot exceed 10. Central Statistical Organisation uses the term organized enterprise as small units with ten or more workers with power or 20 or more workers without power for the manufacturing sector. Hence, statement 1 is not correct. 
• The term ‘unorganized worker’ is defined in India under Section 2(m) of the Unorganized Workers Social Security Act, 2008. An unorganized worker is a home-based worker or a self-employed worker or a wage worker in the unorganized sector and includes a worker in the organized sector who is not covered by any of the Acts pertaining to welfare Schemes as mentioned in Schedule II of Unorganized Workers Social Security Act, 2008. Hence, statement 2 is not correct.
• The unorganized workers are essentially those who do not have the benefit of pension, provident fund, gratuity, maternity leave etc. and work mostly on daily/hourly wages. They are not represented by active trade unions.

• In WTO terminology, subsidies in general are identified by “boxes” which are given the colours of traffic lights: green (permitted), amber (slow down — i.e. need to be reduced), red (forbidden). In agriculture, things are, as usual, more complicated. The Agriculture Agreement has no red box, although domestic support exceeding the reduction commitment levels in the amber box is prohibited; and there is a blue box for subsidies that are tied to programmes that limit production. 
• Amber Box: Nearly all domestic support measures considered to distort production and trade (with some exceptions) fall into the amber box. These include measures to support prices, or subsidies directly related to production quantities.
• Green Box: The green box is defined in Annex 2 of the Agriculture Agreement. In order to qualify, green box subsidies must not distort trade, or at most cause minimal distortion. They have to be government- funded (not by charging consumers higher prices) and must not involve price support. 
  • They tend to be programmes that are not targeted at particular products, and include direct income supports for farmers that are not related to (are “decoupled” from) current production levels or prices. They also include environmental protection and regional development programmes. 
  • Green box” subsidies are therefore allowed without limits, provided they comply with the policy- specific criteria. Hence, statement 1 is correct. 
  • India's Public distribution system does not come under the Green Box. Hence, statement 2 is not correct. 
• Blue Box: This is the “amber box with conditions” — conditions designed to reduce distortion. Any support that would normally be in the amber box, is placed in the blue box if the support also requires farmers to limit production. At present there are no limits on spending on blue box subsidies.

• Bank rate is the rate at which central bank lends money to the commercial banks by buying their eligible rated securities - bills of exchange or commercial paper. 
• A change in bank rate affects other market rates of interest. An increase in bank rate leads to an increase in other rates of interest, and conversely, a decrease in bank rate results in a fall in other rates of interest. Bank rate is also referred to as the discount rate. A deliberate manipulation of the bank rate by the Reserve Bank to influence the flow of credit created by the commercial banks is known as bank rate policy. 
• An increase in bank rate results in an increase in the cost of credit or cost of borrowing. This in turn leads to a contraction in demand for credit. A contraction in demand for credit restricts the total availability of money in the economy, and hence loans taken by the commercial banks become more expensive. Hence statement 1 is not correct. 
• The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply. Hence statement 2 is correct. 
  • An increase in bank rate leads to decrease in reserves of the banks, which decreases the money supply in the economy. 
  • A low (or high) bank rate encourages banks to keep the smaller (or greater) proportion of their deposits as reserves, since borrowing from RBI is now less (or more) costly than before. As a result, banks use a greater(or smaller) proportion of their resources for giving out loans to borrowers or investors, thereby enhancing (or depressing) the multiplier process via assisting(or resisting) secondary money creation. In short, a low (or high) bank rate reduces(or increases) rdr and hence increases (or decreases) the value of the money multiplier, which is (1 + cdr)/(cdr + rdr). Thus, for any given amount of high-powered money, H, total money supply goes up. 
• Penal rates are linked with Bank Rates. For instance, if a bank does not maintain the required levels of CRR and SLR, then RBI can impose a penalty on such banks.
• Nowadays, the bank rate is not used a tool to control money supply, rather LAF (Repo Rate) is used to control the money supply in the economy.

• Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long-run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in the fiscal operation of the Government. 
• FRBM Act provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce the fiscal deficit, eliminate revenue deficit and generate revenue surplus in the subsequent years. The Act binds not only the present government but also the future Government to adhere to the path of fiscal consolidation. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds that Central Government may specify. Hence statement 2 is not correct. 
• Further, the Act prohibits borrowing by the government from the Reserve Bank of India, thereby, making monetary policy independent of fiscal policy. The Act bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit. The Act also requires the government to lay before the parliament three policy statements in each financial year namely Medium Term Fiscal Policy Statement; Fiscal Policy Strategy Statement and Macroeconomic Framework Policy Statement. Hence statement 1 is correct. 
• Through Finance Act 2012, amendments were made to the Fiscal Responsibility and Budget Management Act, 2003 through which it was decided that in addition to the existing three documents, the Central Government shall lay another document - the Medium Term Expenditure Framework Statement (MTEF) - before both Houses of Parliament in the Session immediately following the Session of Parliament in which Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement are laid. 
• The concepts of the “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are the two important features of the amendment to the FRBM Act in the direction of expenditure reforms. Effective Revenue Deficit is the difference between revenue deficit and grants for the creation of capital assets. This will help in reducing the consumptive component of the revenue deficit and create space for increased capital spending. Effective revenue deficit has now become a new fiscal parameter. The “Medium-term Expenditure Framework” statement will set forth a three-year rolling target for expenditure indicators.

• The National Sample Survey Organization (NSSO) provides three different estimates of employment and unemployment based on different approaches / reference periods used to classify an individual’s activity status. These are the o Usual status approach with a reference period of 365 days preceding the date of survey. Hence statement 1 is not correct. 
  • Current weekly status approach with a reference period of seven days preceding the date of survey o Current daily status approach with each day of the seven days preceding date of survey as the reference period. Hence statement 2 is correct. 
• The Usual Status approach to measuring unemployment uses a reference period of 365 days i.e. one year preceding the date of the survey of NSSO for measuring unemployment. This approach records only those persons as unemployed who had no gainful work for a major time during the 365 days preceding the date of the survey and are seeking or are available for work. Thus, the estimates of unemployment obtained on the basis of the usual status approach are expected to capture long-term unemployment. 
  • The usual status approach to measuring unemployment fails to capture the short-term fluctuations in employment and unemployment caused due to seasonality in labour markets. However, Current Weekly Status (CWS) measures these short-term fluctuations very well owing to its shorter reference period of a week. Hence statement 3 is correct.
• The Current Weekly Status (CWS) approach to measuring unemployment uses seven days preceding the date of the survey as the reference period. 
  • A person is considered to be employed if he or she pursues any one or more of the gainful activities for at least one-hour on any day of the reference week. On the other hand, if a person does not pursue any gainful activity, but has been seeking or available for work, the person is considered as unemployed. 
• The current daily status approach to measuring unemployment seeks to ascertain the activity status of an individual for each day of the reference week. It reports time disposition of an individual on each day of the reference week. This means that in addition to recording the activity being pursued, time-intensity is also recorded in quantitative terms for each day of the reference week.

• The Local Area Banks (LABs) are small private banks, conceived as low cost structures which would provide efficient and competitive financial intermediation services in a limited area of operation, i.e., primarily in rural and semi-urban areas, comprising three contiguous districts. 
• LABs were set up to enable the mobilization of rural savings by local institutions and, at the same time, to make them available for investments in the local areas. Hence statement 1 is correct. 
• Since LABs are being set up in district towns, their activities are focused on the local customers with lending primarily to agriculture and allied activities, small scale industries, agro-industrial activities, trading activities and the non-farm sector.
• LABs are also required to observe the priority sector lending targets at 40% of net bank credit (NBC) as applicable to other domestic banks such as scheduled commercial banks. Hence statement 2 is correct. 
  • Within the above target, these banks will adhere to the requirement of lending at least 25% of their priority sector deployments (10% of NBC) to the weaker sections. 
• In 2014, RBI has permitted LABs to be converted into small finance banks subject to them meeting the prescribed eligibility criteria.

• The expenditure method is a system for calculating gross domestic product (GDP) that combines consumption, investment, government spending, and net exports. It is the most common way to estimate GDP.
• In an economy, there are three main agencies, which buy goods and services. These are: Households, Firms, and the Government. 
  • It says everything that the private sector, including consumers and private firms, and government spend within the borders of a particular country, must add up to the total value of all finished goods and services produced over a certain period of time. 
• This final expenditure is made up of the sum of 4 expenditure items, i.e GDP= C+I+G+X-M namely:
  •  Consumption (C): Personal Consumption made by households, the payment of which is paid by households directly to the firms which produced the goods and services desired by the households. Hence option 1 is correct. 
  • Investment Expenditure (I): Investment is an addition to the capital stock of an economy in a given time period. It includes capital expenditures by firms on assets, such as equipment, production facilities, and plants.
• It is to be noted that final investment includes investment on capital goods and not on intermediate goods. Hence option 2 is not correct and option 3 is correct. 
  • Government Expenditure (G): It represents expenditures by the government on defense and non- defense goods and services, such as weaponry, health care, and education.
• Government expenditure on pension schemes, scholarships, unemployment allowances etc. are not included in this as all of them come under transfer payments. Hence option 4 is not correct. 
  • Net Exports (X-IM): Expenditure on foreign-made products (Imports) are expenditure that escapes the system, and must be subtracted from total expenditures. In turn, goods produced by domestic firms which are demanded by foreign economies involve expenditure by other economies on our production (Exports), and are included in total expenditure. The combination of the two gives us Net Exports.

• The GDP measures the aggregate production of final goods and services taking place within the domestic economy. It refers to total market value of all the final goods and services produced in an economy in a given period of time. For India, this time period is from 1st April to 31st March.
• This means it measures the value of final goods and services produced within a geographic boundary regardless of the nationality of the individual or firm. Therefore, goods and services produced by a foreign national within the territory of India, is also calculated in GDP. Hence statement (b) is the correct answer. 
• In GDP, only the final output of such goods and services are included. 
• The rule that only finished or final goods must be counted is necessary to avoid double or triple counting of raw materials, intermediate products, and final products. For example, the value of automobiles already includes the value of the steel, glass, rubber, and other components that have been used to make them. 
• As the GDP takes into account only the goods and services produced within the domestic territory, the goods and services produced by Indian citizens in foreign territory is not included. 
• GDP does not take into account externalities such as pollution from refinery of crude oil. Externalities refer to the benefits (or harms) a firm or individual causes to another for which they are not paid (or penalized). 
  • Externalities do not have any market in which they can be bought and sold. For example, let us suppose there is an oil refinery that refines crude petroleum and sells it in the market. The output of the refinery is the amount of oil it refines. We can estimate the value-added of the refinery by deducting the value of intermediate goods used by the refinery (crude oil in this case) from the value of its output. The value-added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river.
  • Hence their utility will fall. Pollution may also kill fish or other organisms of the river on which fish survive. As a result, the fishermen of the river may be losing their income and utility. Such harmful effects that the refinery is inflicting on others, for which it does not have to bear any cost, are called externalities. 
  • In this case, the GDP is not taking into account such negative externalities. Therefore, if we take GDP as a measure of the welfare of the economy we shall be overestimating the actual welfare. This was an example of a negative externality. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual welfare of the economy.

• The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100. Therefore, it is a ratio of nominal GDP to the real GDP. Hence statement 1 is correct. o GDP Deflator = Nominal GDP/Real GDP x 100
• Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices). Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices). Therefore, it indicates the change in prices of commodities from the base year to the current year. 
  • For example, suppose a country only produces bread. In the year 2000, it had produced 100 units of bread, the price was Rs 10 per bread.GDP at the current price was Rs 1,000. In 2001 the same country produced110 units of bread at a price of Rs 15 per bread. Therefore nominal GDP in 2001 was Rs 1,650 (=110 × Rs 15). Real GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base year) will be 110 × Rs 10 = Rs 1,100. 
  • The GDP deflator is1,650/1,100 = 1.50 (in percentage terms this is 150 per cent). This implies that the price of bread produced in 2001 was 1.5 times the price in 2000. Which is true because the price of bread has indeed gone up from Rs 10 to Rs 15. 
  • GDP deflator reflects the prices of all domestically produced goods and services in the economy whereas, other measures like CPI and WPI are based on a limited basket of goods and services, thereby not representing the entire economy (the basket of goods is changed to accommodate changes in consumption patterns, but after a considerable period of time). 
  • CPI and WPI) may differ from GDP deflators because o The goods purchased by consumers do not represent all the goods that are produced in a country. GDP deflator takes into account all such goods and services. 
  • CPI includes prices of goods consumed by the representative consumer, hence it includes prices of imported goods. GDP deflator does not include prices of imported goods. o The weights are constant in CPI – but they differ according to the production level of each good in the GDP deflator. Hence statement 2 is correct.
  • Changes in consumption patterns or the introduction of new goods and services or structural transformation are automatically reflected in the deflator which is not the case with other inflation measures. 
• However, WPI and CPI are available on a monthly basis whereas GDP deflator comes with a lag (yearly or quarterly, after quarterly GDP data is released). Hence, the monthly change in inflation cannot be tracked using a GDP deflator, limiting its usefulness.

• The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. 
• The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio. The cash reserve is kept with the RBI. Hence statement 1 is not correct. 
• Banks do not get any interest on the money that is with the RBI under the CRR requirements. The percentage of the CRR is decided by the RBI. 
  • Unlike Statutory Liquidity Ratio or SLR, which can be maintained in either gold or cash, CRR needs to be maintained only in cash. 
  • CRR helps in keeping inflation under control. At the time of high inflation in the economy, RBI increases the CRR, so that banks need to keep more money in reserves so that they have less money to lend further. 
• As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. 
  • Non Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement. Hence statement 2 is correct.

• Consumer Price Index is a measure of change in retail prices of goods and services consumed by defined population group in a given area with reference to a base year. Hence statement 1 is not correct. 
• This basket of goods and services represents the level of living or the utility derived by the consumers at given levels of their income, prices and tastes. 
• The CPI includes the prices of goods consumed by representative customers, hence it includes prices of imported goods. Hence statement 2 is correct. 
• The consumer price index measures change only in one of the factors i.e. prices. This index is an important economic indicator and is widely considered as a barometer of inflation, a tool for monitoring price stability and as a deflator in national accounts. 
• Consumer price index is used as a measure of inflation in around 157 countries. The dearness allowance of Government employees and wage contracts between labour and employer is based on this index. 
• In 2011 the CSO brought out a revised CPI, which was CPI (Urban), CPI (Rural) and CPI (Urban +Rural) with 2010 as the base price. CSO revised the base year of this newly set up index to 2012 in January 2015.

• Money multiplier is the ratio of the total money supply to the stock of high-powered money in an economy. Hence option (b) is the correct answer. o By definition, money supply is equal to currency plus deposits 
• M = CU + DD = (1 + cdr )DD ▪ where, cdr = CU/DD o High-powered money then consists of currency held by the public and reserves of the commercial banks, which include vault cash and banks’ deposits with RBI. 
• H = CU + R = cdr.DD + rdr.DD = (cdr + rdr)DD
  • Thus the ratio of money supply to high powered money ▪ M/H = 1+cdr/cdr+rdr > 1, as rdr > 1 
  • This is precisely the measure of the money multiplier. 
• The factors affecting the Money multiplier are the: Reserve ratio (SLR, CRR) and banking habits of the population, etc. 
  • For instance, assume that X bank has received a deposit of Rs 1000 and both SLR and CRR are maintained at 10 percent respectively i.e 20 percent in total. Now, the bank will keep Rs 200 as reserves (SLR and CRR) and the rest of the amount will be made available to the public in the form of loans. Now, a borrower takes a loan of Rs 800 from the bank either for consumption or for investment purposes. 
  • Suppose, the borrower has spent the loan taken for the purchase of an article. The seller of the article will receive the money and simultaneously deposit Rs 800 again with the bank. This happens because we have assumed that there is only a single bank in the economy. After receiving Rs 800 from the seller, the bank will again keep aside 20% of the amount i.e Rs 160 as reserves, and provide a loan to the public with the remaining amount. This process continues till the initial deposit of Rs 1000 becomes Rs 5000 i.e. 5 times the initial deposit. 
  • Reserve deposit ratio is the fraction of their total deposits which commercial banks keep as reserves.
  • Speculative demand is the demand for money as a store of wealth. 
  • Transaction demand is the demand for money for carrying out transactions.

• In India, the minerals are classified as minor minerals and major minerals. 
• According to section 3(e) of the Mines and Minerals (Development and Regulation) Act, 1957 “Minor Minerals” means building stones, gravel, ordinary clay, ordinary sand other than sand used for prescribed purposes, and any other mineral which the Central Government may, by notification in the Official Gazette, declare to be a minor mineral. (For the purposes of this Act, the word "minerals” includes all minerals except mineral oils- natural gas and petroleum). 
• Major minerals are those specified in the appendices to the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act 1957) and the common major minerals are Major Mineral are minerals like Agate, Asbestos, Barytes, Bauxite, Cadmium, Coal. Copper, Gold, Iron ore, Lead, Lignite, Manganese, Nickel, Rock Phosphate, Tungsten, Uranium, Wollastonite, Zinc, etc. It may be noted that there is no official definition for “major minerals” in the MMDR Act. Hence, whatever is not declared as a “minor mineral” may be treated as a major mineral. 
• The major-minor classification has nothing to do with the availability (abundance or scarcity) of these minerals, though it is correlated with the relative value of these minerals. Further, this classification is based more on their end-use, rather than the level of production, level of mechanization, export, and import, etc. (eg. Sand can be a major mineral or a minor mineral depending on where it is used; the same is the case for limestone).
•  Hence option (c) is the correct answer.

• The process of moving from self-employment and regular salaried employment to casual wage work is called casualization of the workforce. Casual workers are defined as those who work for others in farm or non-farm enterprises and are paid wages that are daily or periodic in nature. All daily wage-earning employees and some categories of contract employees are casual laborers. Hence, option (d) is the correct answer.
• The wage-paid labor is largely non-unionized due to the casual and seasonal nature of employment and the scattered location of enterprises. This sector is marked by low incomes, unstable and irregular employment, and a lack of protection either from legislation or trade unions.
• Formalization of the workforce refers to the situation wherein there is a continuous increase in the percentage of the workforce in the formal sector and a simultaneous decline in the percentage of the workforce in the informal sector. Around 90 percent workforce in India is in the ―unregulated informal sector.

• The balance of payments (BoP) records the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year. There are two main accounts in the BoP — the current account and the capital account. Hence, statement 1 is correct. 
• The essence of international payments is that , a country that has a deficit in its current account must finance it by selling assets or by borrowing abroad. Thus, any current account deficit must be financed by a capital account surplus, that is, a net capital inflow. 
• A country is said to be in a balance of payments equilibrium when the current account deficit is financed entirely by international lending without any reserve movements. Hence, if a country is having BoP equilibrium it's official foreign exchange reserves remain unchanged. Hence, statement 2 is not correct. 
• Alternatively, the country could use its reserves of foreign exchange in order to balance any deficit in its balance of payments. The reserve bank sells foreign exchange when there is a deficit. This is called an official reserve sale. The decrease (increase) in official reserves is called the overall balance of payments deficit (surplus).

• Hybrid Annuity Model (HAM) has been introduced by the Government to revive PPP (Public-Private Partnership) in highway construction in India. 
• HAM is a mix of The Build Operate and Transfer (BOT) Annuity and Engineering, Procurement and Construction (EPC) Models. As per the design, the government will contribute 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer. Hence, statement 1 is not correct. 
• Unlike the BOT model, under HAM there is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI). Hence, statement 2 is not correct. 
• The advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government. While the private partner continues to bear the construction and maintenance risks as in the case of the BOT (toll) model, he is required only to partly bear the financing risk. The government’s policy is that the HAM will be used in the case of stalled projects where other models are not applicable.

• A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income. A proportional tax is the same for low, middle, and high-income taxpayers. Proportional taxes are sometimes referred to as flat taxes. Proportional taxation is intended to create greater equality between marginal tax rates and average tax rates paid. Hence statement 1 is not correct. 
• Proportional taxes reduce the autonomous expenditure multiplier because taxes reduce the marginal propensity to consume out of income. The proportional income tax acts as an automatic stabilizer – a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP as compared to progressive taxation. Hence statement 2 is not correct. 
  • Progressive tax is the one where the tax rate increases with the taxpayer’s income. An example for progressive taxation is: 10% tax rate for income of Rs 2 lakh, 20% for Rs 5 lakh and 30% for Rs 10 lakh. Here, the tax liability or the absolute amount as well as the proportion of income to be paid as tax increases with the income of the taxpayer.

In News: Seven products from across India including four from Rajasthan were given the Geographical Indication (GI) tag by the Geographical Indications Registry in Chennai. Statements 1 and 2 are correct : Geographical Indication (GI) is a sign used on products that have a specific geographical origin and possess qualities or a reputation that are due to that origin. 

• In order to function as a GI, a sign must identify a product as originating in a given place. 
• Geographical Indications are covered as a component of intellectual property rights (IPRs) under the Paris Convention for the Protection of Industrial Property. 
• At the International level, GI is governed by the World Trade Organisation’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). 
• In India, Geographical Indications registration is administered by the Geographical Indications of Goods (Registration and Protection) Act, 1999 which came into force with effect from September 2003. 
• Statement 3 is not correct : The first product in India to be accorded with GI tag was Darjeeling tea in the year 2004-05.

‘Mahatma Gandhi National Rural Employment Guarantee Act, 2005' is a poverty alleviation programme of the Government of India, which provides the legal Right to Work in exchange for money to the citizens of the country. 

• Statement 1 is not correct: It aims to enhance livelihood security in rural areas by providing at least 100 days of guaranteed wage employment in a financial year to every household whose adult members volunteer to do unskilled manual work.
• Statement 2 is correct: According to the MGNREGA, there should be one ombudsperson per district, responsible for registering suo-moto complaints and disposing of them within 30 days.
• It has directed State governments to provide the facility to ombudspersons

India’s DPI experiment - “India Stack”: 

• The remarkable transformation of India’s digital landscape has been made possible by pioneering digital public infrastructure (DPI) experiments.
• The Indian DPI ecosystem envisioned as “India Stack” has been pivotal in unlocking the power of identity, payments, and data sharing to drive economic growth and foster a more inclusive digital economy. 
• Its transformative ability lies in 
  • Its potential to be used across multiple use cases, 
  • Enabling the creation of novel solutions that drive innovation, 
  • Inclusion and competition in the digital realm through its modular layers.

Statement 1 is not correct: Coastal aquaculture includes the farming of marine life such as shrimp, prawn or fish in controlled conditions. It is carried out in saline and brackish water. Statement 2 is correct: The Bill amends the Coastal Aquaculture Authority Act, 2005. 

• The Act defines coastal aquaculture as farming, under controlled conditions, of: (i) shrimp, (ii) prawn, (iii) fish or (iv) any other aquatic life in saline or brackish water.
• The Bill expands the scope of coastal aquaculture to include allied activities such as hatcheries and nucleus breeding centres.
• It also decriminalises certain offences under it to promote the ease of doing business. Statement 3 is not correct: Penalties: The 2005 Act penalises unregistered farms or farms in prohibited areas, with imprisonment up to three years and/or a fine of one lakh rupees.

The Bill replaces this and specifies that if coastal aquaculture is carried out illegally:

(i) the activity may be suspended,
(ii) structure may be removed,
(iii) crop may be destroyed,
(iv) the registration may be cancelled, and/or
(v) a penalty may be imposed

Both the Statements are correct.
What is Deflation?

• Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. 
• During deflation, the purchasing power of currency rises over time. Impact of Deflation 
• Deflation benefits consumers because they can purchase more goods and services with the same nominal income over time.
• Deflation can harm borrowers, who are bound to pay their debts in money that is worth more than the money they borrowed, as well as any financial market participants who invest or speculate on the prospect of rising prices.

What is the ‘Withdrawal of accommodative stance’? 

• The RBI has focused on its stance of ‘withdrawal of accommodation’ until all risks to inflation dissipate.
• An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth 
• Withdrawal of accommodation will mean reducing the money supply in the system which will rein in inflation further.

• According to RBI, Foreign Investment means any investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of an Limited Liability Partnership (LLP). Foreign Direct Investment (FDI) is the investment through capital instruments by a person resident outside of India: 
  •  in an unlisted Indian company or 
  •  in 10 percent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company. Foreign Portfolio Investment is any investment made by a person resident outside India in capital instruments where such investment is 
  • less than 10 percent of the post-issue paid-up equity capital on a fully diluted basis of a listed Indian company or 
  • less than 10 percent of the paid-up value of each series of capital instruments of a listed Indian company. Based on these definitions, Foreign investments on a small scale of less than 10 percent in a listed company cannot be treated as FDI. So, Assertion (A) is correct. 
• As per the Aravind Mayaram committee, any foreign investment of 10 or more than ten percent in a listed company will be classified as FDI. Further, in the case of an unlisted company, irrespective of a threshold limit will be classified as FDI. Hence the benchmark limit set by the committee to differentiate between FDI and FPI is 10% and not 25%. So, Reason (R) is not correct.

• Acquiring a loan currently requires (Loan Service Providers) LSPs to shoulder a host of responsibilities. These include sourcing, identity verification, underwriting, disbursement, recollections and dispute management. Each of these is a process unto itself, and their execution impacts the profits earned by an LSP. Taking these processes online would reduce the time and cost of loan disbursements and could reflect more favourable interest rates charged by lenders. The new technology, OCEN, bundles these lending processes and executes them online. It automates screening processes to decide on loan-worthy customers and the on boarding of new borrowers. These processes are being streamlined further by integrating the verification process with Aadhaar’s existing e- KYC system. OCEN is a credit protocol infrastructure that will mediate the interactions between loan service providers, usually fintech and mainstream lenders, including all large banks and NBFCs. So, Statement 1 is correct. 
• OCEN is being developed by iSPIRT, an Indian software industry think tank, not by the Reserve Bank of India. OCEN could be instrumental in building a credit marketplace or, more broadly, a digital ecosystem of lenders and loan service providers (LSPs). So, Statement 2 is not correct. 
• Digitalizing credit systems is also expected to help democratize them by connecting loan providers with customers who are not part of any formalized credit system. OCEN can also be used by non-bank small- scale lenders, thus expanding the scope of lending and borrowing. So, Statement 3 is correct.

• Non-debt receipts are those receipts that do not incur any future repayment burden for the government. Almost 75 percent of the total budget receipts are non-debt receipts. It refers to those government receipts that may lead to a decrease in assets but not an increase in liabilities. For example, disinvestments, recovery of loans, proceeds from the sale of public enterprises, etc., are non-debt-creating capital receipts. So, Option (c) is correct. 

ADDITIONAL INFORMATION:
RECEIPTS
About:

• Taxes and duties levied by the government form the biggest source of its income or receipts. 
•  The government spends this money on both operational and developmental needs. 
• Usually, there are two main sources of the government’s income – revenue receipts and capital receipts
• Revenue receipts can be defined as those that neither create any liability nor cause any reduction in the government's assets. 
• Capital receipts are receipts that create liabilities or reduce financial assets. They also refer to incoming cash flows.
• Capital receipts can be both non-debt and debt receipts. 
• Debt Receipts have to be repaid by the government. Around 25 percent of government expenditure is financed through borrowing. 
• A reduction in debt receipt (or borrowing) can be a big leap for the economy's financial health. Most of the capital receipts of the government are debt receipts.

Capital Account Convertibility refers to the freedom to convert local financial assets into foreign ones and vice versa. It is associated with changes of ownership in foreign/domestic financial assets and liabilities and embodies the creation and liquidation of claims on, or by, the rest of the world. The Reserve Bank of India established the Committee on Capital Account Convertibility (CAC) or Tarapore Committee to propose a roadmap for full convertibility of the rupee on the capital account. The members of the Committee included Dr. Surjit S. Bhalla, Shri M. G. Bhide, Dr. Kirit Parikh and Shri A V Rajwade. So, Option (d) is correct.

• GVA stands for Gross Value Added. GVA at basic prices is also called GVA Producer’s prices. The term Basic prices is an alternate term to describe Producer’s prices. It is different from market prices or buyer’s prices. While producers pay production taxes and receive production subsidies, buyers pay product taxes and get product subsidies. 
• Simply, GVA basic prices = GVA factor cost + Production Taxes - Production subsidies 
• The reward to employees (CE), entrepreneurs (OS) and consumption of fixed capital (CFC) is called factor cost. There is a difference between the tax on products and the tax on production. Tax on products includes taxes like sales tax and excise duty. It is the tax imposed as it was produced and sold. Tax on production refers to the tax imposed irrespective of production, like license fees and land tax. So, Option (a) is correct.