Test: Economics - 1 - UPSC MCQ

• The Global Multidimensional Poverty Index (MPI) was developed in 2010 by the Oxford Poverty & Human Development Initiative (OPHI) and the United Nations Development Programme and uses health, education and standard of living indicators to determine the degree of poverty experienced by a population. It has since been used to measure acute poverty across over 100 developing countries. 

• The Human Poverty Index (HPI) was the first such measure, which was replaced by the Multidimensional Poverty Index (MPI) in 2010 (section 8 elaborates on the differences between the two). The MPI is an index designed to measure acute poverty. Acute poverty refers to two main characteristics.

• The Global MPI uses three standard dimensions: Health; Education; Standard of Living. The MPI is an index of acute multidimensional poverty. It shows the number of people who are multi-dimensionally poor. It reflects deprivations in very rudimentary services and core human functioning for people across 104 countries.

Amartya Sen, (born November 3, 1933, Santiniketan, India), Indian economist who was awarded the 1998 Nobel Prize in Economic Sciences for his contributions to welfare economics and social choice theory and for his interest in the problems of society's poorest members.

Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset.

Primary Deficit is the difference between the current year's fiscal deficit and the interest paid on the borrowings of the previous year. Primary Deficit indicates the borrowing requirements of the government, excluding interest.

The base effect refers to the impact of the rise in price level (i.e. last year’s inflation) in the previous year over the corresponding rise in price levels in the current year (i.e., current inflation): if the price index had risen at a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to a relatively lower inflation rates. On the other hand, if the inflation rate was too low in the corresponding period of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current inflation.

A tax haven is a foreign country or corporation used to avoid or reduce income taxes, especially by investors from another country. A tax haven is a country or place that has a low rate of tax so that people choose to live there or register companies there in order to avoid paying higher tax in their own countries.

A Recession has a domino effect, where increased unemployment leads to less growth and a drop in consumer spending, affecting businesses, which lay off workers due to losses.

A recession occurs when there are two or more consecutive quarters of negative gross domestic product (GDP) growth.

Factors that Cause Recessions: 

• High interest rates are a cause of recession because they limit liquidity, or the amount of money available to invest.
• Another factor is increased inflation. Inflation refers to a general rise in the prices of goods and services over a period of time.

Government of India is divesting its share from public sector undertakings,. Most of government undertakings were incurring losses during the pre liberalization period. Hence, after the introduction of new economic policy in 1991, government started downsizing its share in PSU. But the process of disinvestment is very slow due to host of legal and political hurdles. 

• Loan recoveries are the money, which the government had lent out in past, their capital comes back to the government when the borrowers repay them as capital receipts.
• Long-term capital accruals to the government through the Provident Fund (PF), Postal Deposits, various small saving schemes (SSSs) and the government bonds sold to the public (as Indira Vikas Patra, Kisan Vikas Patra, Market Stabilization Bond, etc.) are also capital receipts.
• Grants are revenue receipts.

Since 2007-08, the contribution of direct tax has been more than indirect tax. Before this, the trend was opposite. Corporation tax is the largest contributor among the taxes.

The Economic Survey is complied by Department of economic affairs, Ministry of Finance. Office of economic advisor publishes WPI, while CSO publishes IIP and CPI.

Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors.

Assistance provided by the Centre to five year plan. The Government’s support to the Central plan is called the Gross Budgetary Support. In the recent years the GBS has been slightly more than 50% of the total Central Plan. The share of the GBS in Central Plan has been rising since 2008-09.

ERD = RD – Grants for capital formation.
Therefore, here ERD = 3% – 1.8% = 1.2%. The rest two data about primary deficit and non-plan expenditure is not needed to calculate ERD. Effective Revenue was first introduced in the Union Budget 2011-12. While revenue deficit is the difference between revenue receipts and revenue expenditure, this accounting system includes all grants from the Union Government to the state governments as revenue expenditure, even if they are used to create assets. Such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature.

As a part of financial sector reforms, the Reserve Bank has deregulated interest rates on deposits, other than savings bank deposits. The interest rate on savings bank deposits has remained unchanged at 3.5 per cent per annum since March 1, 2003. Keeping in view progressive deregulation of interest rates, it was proposed in the Second Quarter Review of Monetary Policy 2010-11 announced on November 2, 2010 to prepare a Discussion Paper to delineate the pros and cons of deregulating the savings bank deposits interest rate. 

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

Subsidies have obvious fiscal effects since a large part of subsidies emanate from the budget. They directly increase fiscal deficits.

Subsidies eventually lead to inflation because the government pays for it. The government can pay for it in two ways. It can either cut spending elsewhere, or create more money.

If it creates more money, there is automatically more money in the system, and since production of goods hasn't changed, it essentially means that for the same quantity of goods, there is more money in the economy. So automatically, everything in the economy assumes a higher number in monetary terms. This is the root cause of inflation.

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.

Borrowings from RBI. Monetized deficit indicates the level of support extended by the Reserve Bank of India to the government’s borrowing programme. Since borrowings from Reserve Bank of India directly add to money supply, this measure is termed monetized deficit. It is obvious that monetized deficit is only a part of fiscal deficit.

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections. So, loans to corporations and state government do not come under PSL.

IIP or the index of industrial production is the number denoting the condition of industrial production during a certain period ( month for eg. ). It does not show the volume of industrial activity but only its growth with respect to a reference period. As IIP shows the status of industrial activity, one can find out if the industrial activity has increased, decreased or remained same.

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.

Indirect Taxes are not levied on individuals, but on goods and services. Customers indirectly pay this tax in the form of higher prices. Some of the significant indirect taxes include Value Added Tax, Service Tax Central Sales Tax, Central Excise Duty, Customs Duty, stamp duties and expenditure tax. Tip given to waiter goes into their unofficial income and is therefore not accounted for taxing purpose 

An expenditure which neither creates assets nor reduces liability is called Revenue Expenditure, e.g., salaries of employees, interest payment on past debt, subsidies, pension, etc. These are financed out of revenue receipts. Broadly, any expenditure which does not lead to any creation of assets or reduction in liability is treated as revenue expenditure.

Under CRR a certain percentage of the total bank deposits has to be kept in the current account with RBI which means banks do not have access to that much amount for any economic activity or commercial activity. Banks can’t lend the money to corporates or individual borrowers, banks can’t use that money for investment purposes.In short, CRR is the amount in cash which banks have to keep with RBI. Any decrease in CRR will therefore increase cash availability with the banks. Repo rate and SLR would not be affected by changes in CRR. They are separate mechanisms, the rate of which is decided by RBI.