Test: Indian Economy -3 - UPSC MCQ

• A stock that offers exponential returns on its original investment is called a multi-bagger stock. The term multi-bagger was coined by legendary fund manager Peter Lynch in his best-selling book ‘ One Up on Wall Street’. The returns offered by such stocks should be at least 100 percent and can go up to more than 1000 percent within a specific period of time. Hence statement 1 is correct. 
• Multibagger stocks are not a category of stocks like large caps or small caps. Instead, they explain the nature of stocks that have high growth potential. Multibagger stocks are undervalued and are often found in high-growth industries. These stocks have strong fundamentals, such as sound management and innovative production techniques, making them ideal investment opportunities. They often look like risky bets and take a very long time to show results. However, once they start growing, it takes less time to deliver multibagger returns. Multibagger stocks can be low-priced or high-priced but are definitely undervalued. Hence statement 2 is not correct. 
• Price Earnings Ratio or Price to Earnings Multiple is the ratio of the share price of a stock to its earnings per share (EPS). PE ratio is one of the most popular valuation metrics of stocks. It provides an indication of whether a stock at its current market price is expensive or cheap. The P/E ratio of multibagger stocks tends to grow at a faster rate than its stock price.

• A common method used to estimate poverty in India is based on the income or consumption levels and if the income or consumption falls below a given minimum level, then the household is said to be Below the Poverty Line (BPL). 
• Poverty: According to the World Bank, Poverty is pronounced deprivation in well-being and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity. 
• Poverty Line: The conventional approach to measuring poverty is to specify a minimum expenditure (or income) required to purchase a basket of goods and services necessary to satisfy basic human needs and this minimum expenditure is called the poverty line. 
• Poverty Line Basket: The basket of goods and services necessary to satisfy basic human needs is the Poverty Line Basket (PLB). 
• Poverty Ratio: The proportion of the population below the poverty line is called the poverty ratio or headcount ratio (HCR). Hence option (b) is the correct answer.

• Sterilization by the Reserve Bank of India (RBI): The RBI often uses its instruments of money creation for stabilizing the stock of money in the economy from external shocks. Suppose due to future growth prospects in India investors from across the world increase their investments in Indian bonds which under such circumstances, are likely to yield a high rate of return. They will buy these bonds with foreign currency. 
• Since one cannot purchase goods in the domestic market with foreign currency, a person or a financial institution that sells these bonds to foreign investors will exchange its foreign currency holding into a rupee at a commercial bank. The bank, in turn, will submit this foreign currency to RBI and its deposits with RBI will be credited with an equivalent sum of money. The commercial bank’s total reserves and deposits remain unchanged (it has purchased the foreign currency from the seller using its vault cash, which, therefore, goes down; but the bank’s deposit with RBI goes up by an equivalent amount – leaving its total reserves unchanged).
• There will, however, be increments in the assets and liabilities on the RBI balance sheet. RBI’s foreign exchange holding goes up. On the other hand, the deposits of commercial banks with RBI also increase by an equal amount. But that means an increase in the stock of high-powered money – which, by definition, is equal to the total liability of RBI. 
• With a money multiplier in operation, this, in turn, will result in an increased money supply in the economy. This increased money supply may not altogether be good for the economy’s health. If the volume of goods and services produced in the economy remains unchanged, the extra money will lead to an increase in the prices of all commodities. 
• People have more money in their hands with which they compete each other in the commodities market for buying the same old stock of goods. As too much money is now chasing the same old quantities of output, the process ends up in bidding up prices of every commodity – an increase in the general price level, which is also known as inflation. 
• RBI often intervenes with its instruments to prevent such an outcome. In the above example, RBI will undertake an open market sale of government securities of an amount equal to the amount of foreign exchange inflow in the economy, thereby keeping stock of high-powered money and total money supply unchanged. Thus it sterilizes the economy against adverse external shocks. This operation of RBI is known as sterilization. Hence option (b) is the correct answer.

Statement 1 is correct: Index of Industrial Production (IIP) is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. 

Statement 2 is not correct: With the inception of the Central Statistical Organization (now known as National Statistics Office (NSO)) in 1951, the responsibility for compilation and publication of IIP was vested with it, under the Ministry of Statistics and Programme Implementation. Statement 3 is not correct : Base year: 2011-2012 

• Sources of data:NSO compiles the Index of Industrial Production (IIP) using secondary data received from 14 source agencies in various Ministries/Departments or their attached/subordinate offices. 
• The Department of Industrial Policy and Promotion (DIPP) is the source for the major chunk of data for the calculation.

• Factor cost is the cost of an item of goods or a service in terms of the various factors which have played a part in its production or availability. 
• In order to arrive at the market prices, we have to add to the factor cost the total indirect taxes less total subsidies. Also, it does not generally include direct taxes. Hence option (b) is the correct answer. 
• Once goods and services are produced they are sold in a marketplace at a set market price. The market price is the price that consumers will pay for the product when they purchase it from the sellers. Taxes charged by the government will be added to the factor price while subsidies provided will be reduced from the factor price to arrive at the market price. Taxes are added on because taxes are costs that increase the price, and subsidies are reduced because subsidies are already included in the factor cost, and cannot be double-counted when the market price is calculated. The market price will be decided, depending on the cost of production, demand for the product, and prices that are charged by competitors. In economics, the market price is identified as the price at which demand for the product or service is equal to its supply. Changes in the levels of demand and supply, cost of factor inputs, and other economic and environmental conditions can affect the market price of a good or service.

• Disguised Unemployment 
  • It is a situation in which more people are doing work than actually required. Even if some are withdrawn, production does not suffer. In other words, it refers to a situation of employment with surplus manpower in which some workers have zero marginal productivity. Hence option (b) is the correct answer. 
  • Overcrowding in agriculture due to the rapid growth of the population and lack of alternative job opportunities may be cited as the main reasons for disguised unemployment in India. o Note: ✓ Casual Unemployment: When a person is employed on a day-to-day basis, casual unemployment may occur due to short-term contracts, shortage of raw materials, fall in demand, change of ownership, etc.
    • Chronic Unemployment: If unemployment continues to be a long-term feature of a country, it is called chronic unemployment. The rapid growth of the population and inadequate level of economic development on account of the vicious circle of poverty are the main causes of chronic unemployment.

• Cash Reserve Ratio (CRR) is the average daily balance that a bank is required to maintain with the Reserve Bank as a percent of its net demand and time liabilities (NDTL) as of the last Friday of the second preceding fortnight that the Reserve Bank may notify from time to time in the Official Gazette.
• Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank.
• CRR is one of the monetary policy tools that the RBI uses to control inflation. During high inflation in the economy, RBI increases the CRR to lower the bank’s loanable funds. Thus, when banks are required to deposit more cash with the RBI the total loanable funds with the banks will reduce. The less availability of funds with the banks will lead to an increase in the interest rates charged by the Banks. Hence, option (b) is the correct answer.
• The rise in interest rates decreases the liquidity in the market which further seeks to reduce the aggregate demand and thereby inflation in the economy. Hence, options (a) and (c) are not correct.
• A high-interest rate by the banks is likely to attract households to save more money with banks. Thus an increase in CRR is likely to increase household savings with the banks. Hence, option (d) is not correct.

• Under Article 112 of the Constitution of India, the Annual Financial Statement has to distinguish the expenditure of the Government on revenue account from other expenditures. The government Budget, therefore, comprises of Revenue Budget and Capital Budget. The Revenue Budget consists of the revenue receipts of the Government (tax revenues and other revenues like interest and dividends on investments made by the Government, fees, and other receipts for services rendered by the Government) and the expenditure met from these revenues.
• Revenue expenditure does not result in the creation of assets for the Government of India while Capital Expenditure is related to the creation of Assets, Capital expenditure also includes investment by the government that yields profits or dividends in the future.
• Revenue Expenditure relates to those expenses incurred for the normal functioning of the government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties (even though some of the grants may be meant for the creation of assets). Pensions and Subsidies, Salaries, and interest payments on market loans form a part of the revenue expenditure of the Government. Hence options 1, 2 and 4 are correct. o Effective Revenue Deficit is the difference between revenue deficit and grants for the creation of capital assets. It signifies the amount of capital receipts that are being used for actual consumption expenditure of the Government.
• Purchase of new weapons and weapon systems such as missiles, tanks, fighter jets, and submarines requires extensive capital investment. Nearly a third of the central government’s capital expenditure goes into the defense sector, mostly for weapon purchases. Hence the purchase of Rafale jets forms a part of Capital expenditure. Hence option 3 is not correct.

• The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states
• The Bretton Woods Institutions are the World Bank and the International Monetary Fund (IMF). They were set up at a meeting of 43 countries in Bretton Woods, New Hampshire, the USA in July 1944. Their aims were to help rebuild the shattered postwar economy and to promote international economic cooperation.
• The World Bank: The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. It is headquartered in Washington D.C.
• The IMF: The International Monetary Fund (IMF) is an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
• WTO: The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. Governments use the organization to establish, revise, and enforce the rules that govern international trade. It is headquartered in Geneva, Switzerland.
• WEF: The World Economic Forum is an international non-governmental and lobbying organization based in Cologny, canton of Geneva, Switzerland. It was founded on 24 January 1971 by German engineer and economist Klaus Schwab.
• Hence, option (c) is the correct answer.

• Article 292 of the Indian Constitution states that the Government of India can borrow amounts specified by the Parliament from time to time. Article 293 of the Indian Constitution mandates that the State Governments in India can borrow only from internal sources. Thus the Government of India incurs both external and internal debt, while State Governments incur only internal debt. As per the recommendations of the 12th Finance Commission, access to external financing by the States for various projects is facilitated by the Central Government, which provides the sovereign guarantee for these borrowings. From April 1, 2005, all general category states borrow from multi-lateral and bilateral agencies ( World Bank, ADB etc.) on a back-to-back basis viz. the interest cost and the risk emanating from currency and exchange rate fluctuations are passed on to States. In the case of special category states ( North-eastern states, Himachal, Uttarakhand and J&K), external borrowings of state governments are given by the Union Government as 90 per cent loan and 10 per cent grant.
• In India, total Central Government Liabilities constitute the following three categories; [i] Internal Debt. [ii] External Debt. [iii] Public Account Liabilities
• Public Debt in India includes only Internal and External Debt incurred by the Central Government. Internal Debt includes liabilities incurred by resident units in the Indian economy to other resident units, while External Debt includes liabilities incurred by residents to non-residents.
• The major instruments covered under Internal Debt are as follows:
  • Dated Securities: Primarily fixed coupon securities of short, medium and long-term maturity which have a specified redemption date. These are the single most important component of financing the fiscal deficit of the Central Government (around 91 % in 2010-11) with an average maturity of around 10 years. Hence option 2 is correct.
  • Treasury-Bills: Zero-coupon securities that are issued at a discount and redeemed in face value at maturity. These are issued to address short term receipt-expenditure mismatches under the auction program of the Government. These are primarily issued in three tenors, 91,182 and 364 days. o 14-Day Treasury Bills. o
  • Securities issued to International Financial Institutions: Securities issued to institutions viz. IMF, IBRD, IDA, ADB, IFAD etc. for India’s contributions to these institutions etc. Hence option 1 is correct. o Securities issued against ‘Small Savings’: All deposits under small savings schemes are credited to the National Small Savings Fund (NSSF). The balance in the NSSF (net of withdrawals) is invested in special Government securities.
  • Market Stabilization Scheme (MSS) Bonds: Governed by a MoU between the GoI and the RBI, MSS was created to assist the RBI in managing its sterilization operations. GoI borrows under this scheme from the RBI, while proceeds from such borrowings are maintained in a separate cash account with the latter and is used only for redemption of T-bills /dated securities raised under this scheme. Hence option 3 is correct.
• Gross External Debt, is defined as the outstanding amount of those actual current liabilities, that require payment(s) of principal and/or interest by the debtor, in the future as per the terms laid out in the contract between the debtor and the creditor and that are owed to non-residents by the residents of the economy.
• In India, (Gross) External Debt is classified primarily into Long term and Short term:
  • Long-Term debt is further classified into (a) Multilateral Debt (b) Bilateral Debt (c) ‘IMF’ signifying SDR allocations to India by the IMF (c) Export Credit (d) (External) Commercial Borrowings (e) NRI Deposits and (d) Rupee Debt. Hence option 4 is not correct.
  • Short Term Debt is classified into (a) Trade Credits (of up to 6 months and above 6 months and up to 1 year) (b) Foreign Institutional Investors’ (FII) Investment in Government Treasury-Bills and Corporate Securities (c) Investment in Treasury-bills by foreign Central Banks and International Institutions etc. and (iv) External Debt liabilities of the Central Bank and Commercial Banks.

• Managed Floating Exchange Rate: Without any formal international agreement, the world has moved on to what can be best described as a managed floating exchange rate system. India is having this type of exchange rate system. This system is also known as 'dirty floating'. It is a mixture of a flexible exchange rate system (the floating part) and a fixed rate system (the managed part).
• In this hybrid exchange rate system, the exchange rate is basically determined in the foreign exchange market through the operation of market forces. Market forces mean the selling and buying activities by various individuals and institutions. So far, the managed floating exchange rate system is similar to the flexible exchange rate system. But during extreme fluctuations, the central bank under a managed floating exchange rate system (like the RBI) intervenes in the foreign exchange market. The objective of this intervention is to minimize the fluctuation in the exchange rate of the rupee. Since, the exchange rate is basically determined by market forces, the upward and downward movements in the value of the rupee are appreciation and depreciation. Hence statement 1 is correct and statement 2 is correct.

• 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. Hence statement 1 is not correct.
  • Deflation causes the nominal costs of capital, labor, goods, and services to fall, though their relative prices may be unchanged.
  • By definition, monetary deflation can only be caused by a decrease in the supply of money or financial instruments redeemable in money. Reduced investment spending by the government or individuals may also lead to this situation.
  • Deflation leads to a problem of increased unemployment due to slack in demand.
• Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term. Hence statement 2 is not correct.
  • Unlike inflation and deflation, which refer to the direction of prices, disinflation refers to the rate of change in the rate of inflation.
  • A healthy amount of disinflation is necessary since it prevents the economy from overheating.
• Deflation is represented as a negative growth rate, such as -1%, while disinflation is shown as a change in the inflation rate, say, from 3% one year to 2% the next. Disinflation is considered the opposite of reflation, which occurs when a government stimulates an economy by increasing the money supply.

• Under the WTO Agreement on Agriculture (AoA), domestic agri-subsidies are classified into three categories; green, blue and amber. Under WTO principles, "amber box" subsidies create trade distortions because they encourage excessive production through farm subsidies to fertilizers, seeds, electricity, and irrigation.
• They are also called as Aggregate Measure of Support. As per the WTO norms, the AMS can be given up to 10 % of a country’s agricultural GDP (at 1986-88 prices) in the case of developing countries. On the other hand, the limit is 5% for a developed economy. This limit is called the de minimis level of support. It is thus minimal amounts of domestic support that are allowed even though they distort trade — up to 5% of the value of production for developed countries, 10% for developing countries. 
• Hence option (b) is the correct answer.

• One of the core functions of the Central bank is to issue the currency of the country. This currency issued by the central bank can be held by the public or by commercial banks and is called the ‘high- powered money’ or ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit creation.
• High high-powered money is also defined as the total liability of the monetary authority of the country (RBI). It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI. If a member of the public produces a currency note to RBI the latter must pay her value equal to the figure printed on the note. Similarly, the deposits are also refundable by RBI on demand from deposit-holders. These items are claims that the general public, government, or banks have on RBI and hence are considered to be the liability of RBI. Hence, option (b) is the correct answer.
• High-powered money is the base for the expansion of Bank deposits and the creation of a money supply. The supply of money varies directly with changes in the monetary base and inversely with the currency and reserve ratios.
• The amount of money that banks generate with deposits by the public is called a Money Multiplier.

• Special Drawing Rights (SDR) is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. To date, a total of SDR 660.7 billion (equivalent to about US$943 billion) have been allocated.
• The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
  • Currencies included in the SDR basket have to meet two criteria: the export criterion and the freely usable criterion.
• The SDR serves as the unit of account of the IMF and other international organizations. The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. SDRs can be exchanged for these currencies.
• The SDR value in terms of the U.S. dollar is determined daily based on the spot exchange rates observed at around noon London time. Hence, option (d) is correct.
• The IMF has the authority to prescribe other holders of SDRs, nonmembers, member countries that are not SDR Department Participants. SDRs cannot be held by private entities or individuals.

• According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement. It is a statement of the estimated receipts and expenditure of the Government in a financial year (which begins on 01 April of the current year and ends on 31 March of the following year). In addition to it, the Budget contains:
  • Estimates of revenue and capital receipts,
  • Ways and means to raise the revenue,
  • Estimates of expenditure,
  • Details of the actual receipts and expenditure of the closing financial year and the reasons for any deficit or surplus in that year, and
  • The economic and financial policy of the coming year, i.e., taxation proposals, prospects of revenue, spending program, and introduction of new schemes/projects.
• Fiscal Deficit: It is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year. A surplus arises if receipts are more than expenditures. Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
• From the financing side: Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad. The gross fiscal deficit is a key variable in judging the financial health of the public sector and the stability of the economy.
• Gross Primary Deficit is Gross Fiscal Deficit minus Net interest liabilities. Net Primary Deficit is Net Fiscal Deficit minus net interest payments. The net interest payment is interest paid minus interest receipt. A shrinking primary deficit indicates progress towards fiscal health. Hence statement 2 is correct.
• Effective Revenue deficit is a term introduced in the Union Budget 2011-12. While revenue deficit is the difference between revenue receipts and revenue expenditure, the present accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless, they do result in the creation of durable assets; an effective revenue deficit excludes those revenue expenditures (or transfers) in the form of grants for the creation of capital assets.
• In short, Effective Revenue Deficit is the difference between revenue deficit and grants for the creation of capital assets. Effective Revenue Deficit signifies that amount of capital receipts that are being used for actual consumption expenditure of the Government. Hence statement 1 is correct.

Fiscal deficit refers to the amount by which a government's spending exceeds its revenue in a given fiscal year, leading to increased borrowing and accumulation of debt.

• It represents the amount of borrowing required by the government to meet its spending obligations when its expenses surpass its income. So, Option A is correct.
• Option A  B is incorrect because the fiscal deficit can be positive if the government's revenue is greater than its expenditure.
• Option A  C is also incorrect because the fiscal deficit cannot be claimed to be a sign of a developing economy only as developed countries also experience a fiscal deficit.
• Option A  D is also incorrect as the fiscal deficit can also be financed both through external as well as domestic borrowing.

• Most-favoured-nation (MFN): Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members.
• A most-favored-nation (MFN) clause requires a country to provide any concessions, privileges, or immunities granted to one nation in a trade agreement to all other World Trade Organization member countries. Although its name implies favoritism toward another nation, it denotes the equal treatment of all countries. Hence option (b) is the correct answer
• Equal treatment of imported and locally produced goods after foreign goods enter the domestic market is a clause under WTO's another principle known as National Treatment: Treating foreigners and locals equally.

• The World Bank Group is one of the world’s largest sources of funding and knowledge for developing countries. Its five institutions share a commitment to reducing poverty, increasing shared prosperity, and promoting sustainable development. The Five institutions include
  • International Bank for Reconstruction and Development (IBRD): The world’s largest development bank, IBRD provides financial products and policy advice to help countries reduce poverty and extend the benefits of sustainable growth to all of their people.
  • International Development Association (IDA): It is the part of the World Bank that helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty by providing zero to low-interest loans (called “credits”) and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions. Hence, pair 2 is not correctly matched.
  • International Finance Corporation (IFC): IFC, a member of the World Bank Group, advances economic development and improves the lives of people by encouraging the growth of the private sector in developing countries. Hence, pair 1 is not correctly matched.
  • Multilateral Investment Guarantee Agency (MIGA): MIGA's goal is to promote foreign direct investment into developing countries to support growth. Hence, pair 3 is correctly matched.
  • International Centre for Settlement of Investment Disputes (ICSID): ICSID is the world’s leading institution devoted to international investment dispute settlement. It has extensive experience in this field, having administered the majority of all international investment cases.

1. Green Revolution started in India in the early 1950s. - This statement is incorrect. The Green Revolution in India began in the mid-1960s. It was officially launched in 1965, aimed at increasing agricultural production through modern technology and high-yielding variety (HYV) seeds, particularly in wheat and rice.

2. It was marked by an increase in the use of High-Yielding Variety (HYV) seeds. - This statement is correct. One of the key features of the Green Revolution was the introduction and widespread adoption of HYV seeds, which were capable of producing much greater amounts of crop per acre compared to traditional varieties.

3. The HYV seeds significantly lowered the use of irrigation in India. - This statement is incorrect. The Green Revolution actually led to an increase in the use of irrigation. HYV seeds require more water to achieve their high yields compared to traditional varieties. Thus, there was a significant expansion in irrigated areas to support the cultivation of these new seed varieties.

Given these clarifications, the incorrect statements are 1 and 3. Thus, the correct answer is:

1. 1 and 3 only

• The RBI controls the money supply in the economy in various ways. The tools used by the Central bank to control money supply can be quantitative or qualitative. Quantitative tools control the extent of money supply by changing the CRR and SLR, or bank rate or open market operations. Hence option 3 is not correct. 
• Qualitative tools include persuasion by the Central bank in order to make commercial banks discourage or encourage lending which is done through moral suasion, margin requirement, etc. Hence options 1 and 2 are correct.

Currency Swap Agreement:

• The currency swap agreement between the two countries is entered between the Central Banks of the two countries. Hence, statement 1 is correct.
• One country exchanges its national currency for that of another or even a third one. Hence, statement 2 is correct.
• Examples: India and Japan signed a currency swap agreement in 2018 worth $ 75 billion. India can/will get Yen(or dollars) from Japan worth a max of $ 75 billion and Japan will get equivalent Indian Rupees as per the market exchange rate at the time of transaction. o In July 2020, India and Sri Lanka signed a currency swap agreement worth $ 400 million in which India will give dollars to SL and in return India will get a ‘Sri Lankan Rupee’.

• The Basel Accords are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regard to capital risk, market risk, and operational risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. The Basel Committee has issued three sets of regulations which are known as Basel-I, II, and III.
• In Basel-I norms the capital adequacy ratio was agreed upon—a requirement was imposed upon the banks to maintain a certain amount of free capital to their assets cushion against probable losses in investments and loans.
• The capital adequacy ratio is the percentage of total capital to the total risk—weighted asset. CAR, a measure of a bank’s capital, is expressed as a percentage of a bank’s risk-weighted credit exposures: CAR= Total of Tier 1 & Tier 2 capitals ÷ Risk-Weighted Assets.
• The Reserve Bank of India decided in April 1992 to introduce a risk-asset ratio system for banks (including foreign banks) in India as a capital adequacy measure in line with the Capital Adequacy Norms prescribed by Basel Committee. It was aimed at Improving the banking sector’s ability to absorb shocks arising from financial and economic stress.
• Market risk refers to the risk to a bank resulting from movements in market prices in particular changes in interest rates, foreign exchange rates, and equity and commodity prices. In simpler terms, it may be defined as the possibility of loss to a bank caused by changes in the market variables.
• Credit risk is most simply defined as the potential that a bank’s borrower or counterparty may fail to meet its obligations in accordance with agreed terms. • Currently, Basel III norms are implemented in India with effect from April 1, 2013.
• Hence option (a) is the correct answer.

• Expert group constituted by the Planning Commission and, chaired by Suresh Tendulkar, was constituted to review methodology for poverty estimation and to address the following shortcomings of the previous methods:
  • Obsolete Consumption Pattern: Consumption patterns were linked to the 1973-74 poverty line baskets (PLBs) of goods and services, whereas there were significant changes in the consumption patterns of the poor since that time, which were not reflected in the poverty estimates.
  • Inflation Adjustment: There were issues with the adjustment of prices for inflation, both spatially (across regions) and temporally (across time).
  • Health and Education Expenditure: Earlier poverty lines assumed that health and education would be provided by the state and formulated poverty lines accordingly.
• Recommendations:
  • Shift from Calorie Consumption based Poverty Estimation: It based its calculations on the consumption of the items like cereal, pulses, milk, edible oil, non-vegetarian items, vegetables, fresh fruits, dry fruits, sugar, salt & spices, other food, intoxicants, fuel, clothing, footwear, education, medical (non-institutional and institutional), entertainment, personal & toilet goods. Hence option 1 is correct.
  • Uniform Poverty line Basket: Unlike Alagh committee (which relied on separate PLB for rural and urban areas), Tendulkar Committee computed new poverty lines for rural and urban areas of each state based on the uniform poverty line basket and found that all India poverty line (2004-05) was:
    • ₹446.68 per capita per month in rural areas
    • ₹578.80 per capita per month in urban areas. Hence option 2 is correct. o Private Expenditure: Incorporation of private expenditure on health and education while estimating poverty. Hence option 4 is correct.
  • Price Adjustment Procedure: The Committee also recommended a new method of updating poverty lines, adjusting for changes in prices and patterns of consumption (to correct spatial and temporal issues with price adjustment), using the consumption basket of people close to the poverty line. Hence option 3 is correct.
  • Mixed Reference Period: The Committee recommended using Mixed Reference Period based estimates, as opposed to Uniform Reference Period based estimates that were used in earlier methods for estimating poverty.
• Tendulkar committee computed poverty lines for 2004-05 at a level that was equivalent, in Purchasing Power Parity (PPP) terms to Rs 33 per day.
  • Purchasing Power Parity: The PPP model refers to a method used to work out the money that would be needed to purchase the same goods and services in two countries.

• Labor force (also called work force) is the total number of people employed or seeking employment in a country or region. One is classified as ‘not in labor force’, if he or she was engaged in a relatively longer period in any one of the non-gainful activities.
• The unemployment rate is defined as the percentage of persons unemployed among the persons in the labor force. Hence statement 1 is correct.
• It is calculated as follows:
  • Unemployment rate = (Unemployed Workers / Total labor force) X 100
• The Worker participation rate is defined as the percentage of total workers (main and marginal) to the total population. Hence statement 2 is correct.
• It is calculated as follows: 
  • Work participation rate = (Total Workers / Total Population) X 100

• 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. Through fiscal policy, the government of a country controls the flow of tax revenues and public expenditure to navigate the economy. If the government receives more revenue than it spends, it runs a surplus, while if it spends more than the tax and non-tax receipts, it runs a deficit.
• Contractionary fiscal policy is when the government either cuts spending or raises taxes. It gets its name from the way it contracts the economy. It reduces the amount of money available for businesses and consumers to spend.
• This policy involves raising taxes or cutting government spending, so that (Government spending < Tax revenue) it cuts upon the aggregate demand (thus, economic growth) and reduces the inflationary pressures in the economy.
• The following can be potential traits of Contractionary Fiscal Policy as they aid in increasing the revenue of the government:
  • Decreased expenditure in infrastructure development such as the building of schools, hospitals
  • Decrease in Subsidies and pensions
  • Increased Tax rates (specially on sin goods, so as to increase the revenue available)
  • Cutting incentives of employees to work, stagnation of wages
• All these traits and methods, involve shrinking or contracting the economy, the money left in the hands of the consumer decreases, leading to decrease in the Purchasing power, which theoretically leads to reduced inflation.
• Hence option (a) is the correct answer

• Foreign Exchange Rate (also called Forex Rate) is the price of one currency in terms of another. It links the currencies of different countries and enables the comparison of international costs and prices. For example, if we have to pay Rs 50 for $1 then the exchange rate is Rs 50 per dollar.
• People demand foreign exchange because they want to purchase goods and services from other countries; they want to send gifts abroad; and, they want to purchase financial assets of a certain country.
• A rise in the price of foreign exchange will increase the cost (in terms of rupees) of purchasing a foreign good. This reduces demand for imports and hence the demand for foreign exchange also decreases, other things remaining constant.
• A rise in the price of foreign exchange will reduce the foreigner’s cost (in terms of USD) while purchasing products from India, other things remaining constant. This increases India’s exports and hence the supply of foreign exchange may increase.
• Hence, option (b) is the correct answer.

• GDP is the market value of all final goods and services produced within a domestic territory of a country measured in a year. There are three ways to calculate the national income; namely product method, expenditure method, and income method.
  • The Product or Value-Added Method: In the product method, the aggregate annual value of goods and services produced (if a year is the unit of time) is calculated. If we sum the gross value added of all the firms of the economy in a year, we get a measure of the value of the aggregate amount of goods and services produced by the economy in a year (just as we had done in the wheat-bread example). Such an estimate is called Gross Domestic Product (GDP).
  • Expenditure Method: An alternative way to calculate the GDP is by looking at the demand side of the products. This method is referred to as the expenditure method. o The expenditure approach is the most commonly used GDP formula, which is based on the money spent by various groups that participate in the economy. GDP = C + G + I + NX;
    • C = consumption or all private consumer spending within a country’s economy, including, durable goods (items with a lifespan greater than three years), nondurable goods (food & clothing), and services.
    • G = total government expenditures, including salaries of government employees, road construction/repair, public schools, and military expenditures.
    • I = sum of a country’s investments spent on capital equipment, inventories, and housing.
    • NX = net exports or a country’s total exports less total imports. o Income Method: As we mentioned in the beginning, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together (final expenditure is the spending on final goods, it does not include spending on intermediate goods). Total National Income – the sum of all wages, rent, interest, and profits.
• Balance of Payment: In international economics, the balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world. Balance of Payment is primarily an indicator of an economy's link with the outside world and is not used as a method to calculate the national income. Hence option (c) is the correct answer.

Both the statements are correct: Textile Industry in India

• Share in Domestic Trade: The domestic apparel & textile industry in India contributes approx. 2.3 % to the country’s GDP, 13% to industrial production and 12% to exports.
• Production of Raw Material: China, India and the United States are the top 3 leading cotton producing Nations in the world.
• Amended Technology Upgradation Fund Scheme (ATUFS): In order to promote ease of doing business in the country to achieve the vision of generating employment and promoting exports through “Make in India’’ with "Zero effect and Zero defect" in manufacturing, ATUFS was launched in 2016 to provide credit linked Capital Investment Subsidy (CIS).

• GVA is the value of total output produced in the economy less the value of intermediate consumption (the output which is used in the production of output further, and not used in final consumption). It is important to understand the concepts such as basic prices, factor cost, and market price to understand GVA.
• The distinction between factor cost, basic prices, and market prices are based on the distinction between net production taxes (production taxes fewer production subsidies) and net product taxes (product taxes less product subsidies).
• Production taxes and subsidies are paid or received in relation to production and are independent of the volume of production such as land revenues, stamp and registration fees. Product taxes and subsidies, on the other hand, are paid or received per unit or product, e.g., excise tax, service tax, export, and import duties, etc. Hence, statements 1 and 2 are correct.
• Factor cost includes only the payment to factors of production, it does not include any tax. In order to arrive at the market prices, we have to add to the factor cost the total indirect taxes less total subsidies. The basic prices lie in between: they include production taxes (fewer production subsidies) but not product taxes (fewer product subsidies). Therefore in order to arrive at market prices we have to add product taxes (less product subsidies) to the basic prices.