Test: Indian Economics - 2 - UPSC MCQ

Answer & Explanation

d) 4 only. SLR, statutory liquidity ratio is the amount of money that is invested in certain specified securities predominantly central government and state government securities. Investing in government securities by bank is one way of fulfilling the requirement of SLR. In this way, SLR acts as a lending mechanism to government. Repo rate is a rate at which banks borrow from RBI for short periods up to 7 or 14 days but predominantly overnight.

 Answer & Explanation

a) 1 only. FPI is also called Foreign institutional Investments ( FIIs). Because of their volatility they are also called hot money. Loans from international financial institutions are given for a fixed tenure and hence are stable. FDI is not part of FPI, but are accounted separately.

Answer & Explanation

d) 1, 2, 3 and 4. RBI’s functions – acting as banker’s bank, managing India’s Forex and handling govt’s borrowing programme

These three are well defined, no confusion over this.

Now let’s read more on inflation management by RBI . Before march 2015, the Reserve Bank was not formally an inflation targeting central bank. The defining features of an inflation targeting central bank are a precise mandate, a single instrument (the policy interest rate) in its armoury, a single minded devotion to achieving this target and a principal-agent relationship with the Government. This is what D.Subbarao said in 2011 -https://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=563

So, even though RBI was informally helping manage inflation, it was not it’s function as defined by the RBI Acvt, 1934

However, in March 2015 it was formally decided that from now, RBI will have the official mandate to manage inflation. Read here – http://www.thehindu.com/business/Economy/pact-binds-rbi-to-inflation-target/article6952317.ece

For this the RBI Act, 1934 will be amended. The amendment has yet not happened, because passing a legislation takes some time. But it has been now fully agreed that such an amendment will be made.

http://www.livemint.com/Politics/MnCWYH7KLMzth6uugVVJDO/Budget-2015–RBI-Act-to-be-amended-inflation-to-be-kept-be.html

 Answer & Explanation

b) 1 and 3 only. Increase in subsidy of LPG will reduce the pocket expenditure of people on LPG, making more money available with them, thereby increasing demand and pulling inflation. Similar will be the effect of decrease of income tax rates – more money availability. Increase in fuel prices will lead to cost-push inflation.

 Answer & Explanation

d) banks lending only to risk free sectors. A ‘Narrow Bank’ can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets

 Answer & Explanation

c) 3 only. GDP (market price) = GDP ( factor cost) + indirect taxes – subisdies. This equation makes it clear that any increase in indirect taxes will increase the GDP at market prices.

Answer & Explanation

b) 2 only. Shares are equity instruments, while bonds and debentures are debt instruments. Debt instruments are assets that require a fixed payment to the holder, usually with interest. Examples of debt instruments include bonds (government or corporate), debentures and mortgages. Equity financing allows a company to acquire funds (often for investment) without incurring debt, eg shares.

Answer & Explanation

a) 1 only. Expansionary fiscal policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy. Such a fiscal policy will increase the expenditure, thereby increasing fiscal deficit. Increase in wages of labour is unrelated. There can be a decrease ( not increase ) in income tax rates, so statement 3 is false.

 Answer & Explanation

d) 1, 2, 3 and 4. Microfinance refers to a variety of financial services that target low-income clients. Since the clients of microfinance institutions (MFIs) have lower incomes and often have limited access to other financial services, microfinance products tend to be for smaller monetary amounts than traditional financial services. These services include loans, savings, insurance, and remittances (payments). So, microfinance is not limited to loans and deposits only, it includes other financial services also.

Answer & Explanation

a) 1 only. IFC lends money to private sector companies of its member countries only and not all countries.

 Answer & Explanation

b) 1, 3 and 4 only. Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society. Disinvestment is reducing the government ownership in public sector enterprises. It is not in any way related to inclusive growth. The rest three helps in inclusive growth.

Answer & Explanation

d) Both (b) & (c). Statement b and c essentially implies the same thing, though they are differently worded. National treatment: Treating foreigners and locals equally – Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax. Read more –https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm

Answer & Explanation

d) 1, 2, 3 and 4. In participatory development (PD), people are willingly involved in a wide range of development activities, as agents and beneficiaries of development. Participatory development seeks to engage local populations in development projects. It is clear from the definition of PD that NGOs, Pressure Groups, and Cooperatives are involved in it. There might be some confusion over how state is a part of PD. It is actually the state activity that can facilitate or hinder PD. If state does not allow NGOs or pressure groups, how can they function? On the other hand, states through their policy and support can facilitate PD. In last few years, the role of the state in participatory development has changed: from the reconstruction and development programme to growth, employment and redistribution.

Answer & Explanation

b) Value of agricultural production. TFA runs in a clause that says farm subsidies cannot be more than 10 percent of the value of agricultural production

Answer & Explanation

d) 1, 2 and 3. The mandate of 14th the Finance Commission is much larger than those of previous ones. All the three are included in its mandate. This has raised concerns about its enlarged role.

Context – http://businesstoday.intoday.in/story/fourteenth-finance-commission-insulate-the-economy-from-politics/1/191594.html

Answer & Explanation

c) 2 and 3 only.  Nutrition and access to electricity are included, while maternal mortality is not. Access to telephone comes under assets and is thus included.

Explanation: Incentivizing farmers – This is done by announcing the minimum support prices (MSP) and other schemes like price stabilization fund schemes for plantation crops. The buffer stocks helps in providing food through the PDS, thus ensuring food security. It also acts as a cushion during price rises due to shortfall, thus helping in stabilizing prices.

Answer: d)

Explanation: All these are features of a boom phase of business cycle. During boom phase, the demand goes on increasing and the economy heats up. The supply is limited and hence there develops a demand-supply lag.

A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Tax havens also share limited or no financial information with foreign tax authorities.

1, 3 and 4 only. Inclusive growth is a concept that advances equitable opportunities for economic participants during economic growth with benefits incurred by every section of society. Disinvestment is reducing the government ownership in public sector enterprises. It is not in any way related to inclusive growth. The rest three helps in inclusive growth.