UPSC Mains Answer PYQ 2022: Economics Optional Paper 2 (Part- 2) | Economics Optional Notes for UPSC PDF Download

Q5(a): Do you think that Indian development planning is a transition from centralised planning to indicative planning and subsequently to market based development ? Explain.
Ans: Indian development planning has adopted various approaches in the last 7 decades.

1947-1991
This period witnessed phase of centralized planning. In the centralized planning, planning took the form of a top-down approach, with a single planning agency setting plan directions. India had set up planning commission for this purpose. . Since 2nd FYP, state used to allocate resources for all the sectors and used to dictate what to produce and how much to produce.

1991-2014
After 1991 economic crisis, India adopted LPG reforms. Indicative planning is more in sync with these reforms. Thus,  it was adopted after 1991 (8th FYP).  Here the planning authority sets the broad goals for the economy. The implementation of the plan requires the co-ordination of the various units in the economy.

2014 Onwards 
In 2014 Planning commission was abolished and NITI aayog was established. It was a step towards market-based development. During this time private sector is assuming greater role than the public sector. The planning commission’s focus was on policy creation. On the other hand NITI Aayog focuses on program monitoring and evaluation.
Thus, it can be seen that Indian development planning is a transition from centralised planning to indicative planning and subsequently to market based development

Q5(b): Discuss the prospects and challenges faced by Indian Agriculture due to World Trade Organisation (WTO) provisions.
Ans: The agreement on agriculture was concluded in 1994. It has three important parts

1. Reduction in domestic subsidies
2. Reduction in export subsidies
3. Market access

Prospects for Indian Agriculture

1. This agreement have helped India to increase its agricultural export. India have  20 billion$ of agri exports and thus can possibly help India more in future.
2. Agricultural prices increased at the international level due to the reduction of trade barriers which benefitted Indian farmers in the form of high export earnings.

Challenges faced by Indian Agriculture 

1. TRIPS provisions related to plant varieties have affected Indian farmers. E.g. Recent PepsiCo case
2. Reduction in domestic subsidies will affect livelihood of Indian farmers.
3. Western countries are exploiting green and blue box subsidies which have no limits. On the other hand developing countries like India are dependent on Amber box subsidies which are curtailed.
4. Developed countries are putting phyto sanitary conditions on export of agricultural goods. For example Alphonso export was banned in Europe.

Overall, present WTO provisions are in favor of developed countries. India is consistently focusing on having fair WTO provisions which benefits every country in the world.

Q5(c): Analyse the challenges for economic recovery in India posed by sluggish growth in rural wage rates during the pandemic period.
Ans: As per the SBI report growth in real rural wages have declined since financial year 2017 and is a major cause of concern particularly during the Covid pandemic era.
Challenges for economic revovery in India posed by sluggish rural wages 

1. Rural income comprise close to 46 per cent of the total income of the country with the world’s second-largest population. Slowdown in rural wages affects overall growth
2. Sluggish rural wages have affected rural private consumption.
3. According to SBI report demand of various goods like two wheeler bikes, FMCG depends on rural income growth. Sluggish rural wages affects growth of this sector as well.
4. Sluggish rural wages affects savings as well. It in return affects investment.
5. According to IMF report India’s rural income, by its sheer size, has impacted overall global economic growth.

Indian economy is highly interconnected. The rural economy is one of the major part of it. Thus, sluggish rural wages can have long listing impact on overall Indian economy.

Q5(d): Do you think that flow of Foreign Direct Investment (FDI) would always be good for the growth of Indian economy ? Critically analyse.
Ans: Foreign direct investments (FDI) are substantial investments made by a foreign company in the country.
Role of FDI in contributing economic growth of India

1. FDI increases forex reserve. Recently India has touched $ 600 billion forex reserve. It helps in exchange rate stability.
2. It helps to generate jobs. Eg. Samsung is generating jobs in electronics manufacturing.
3. It brings new technology. Eg. Amazon has brought supply chain technologies in India
4. It helps in development of backward areas. Eg. The Hyundai unit at Sriperumbudur.

However FDI in India have been concentrated to certain states like Gujarat, Maharashtra, Tamilnadu and certain sectors like health, education, automobile, etc. It is leading to inequitable development. Also there are allegations that most of the FDI in India is coming from Singapore and Mauritius which is actually round tripped from India. Apart from this FDI may lead to instability in a country (Like the ASEAN crisis).
FDI is beneficial for India’s economic development. Government should focus on reducing its negative impacts so that benefits of FDI are maximized.

Q5(e): Discuss the desirability of increased public expenditure in India in recent years.
Ans: For the financial year 2023-24 the Indian government unveiled a 45 trillion rupees to boost economic growth. In FY 22-23, it was 39 trillion rupees.
Desirability if increased public expenditure 

1. COVID led to slowdown in the Indian economy. Private sector growth was sluggish. To boost growth public expenditure was necessary.
2. FY 2023-24 budget increased the capital expenditure by 33 %. Increased capital expenditure will crowd in private investment.
3. According to the Economic Survey, the social services expenditure witnessed an increase of 8.4% per cent in FY21 over FY20 and another 31.4 per cent increase in FY22 over FY21, being the pandemic years, which required enhanced outlay, especially in the health and education sectors.
4. India have border disputes with neighbouring countries. Chinese aggression increased in the last few years. Keeping this in mind the defence budget for 2023-24 hiked by 12.95 per cent from ₹5.25 lakh crore to ₹5.94 lakh crore – to allow the military to develop and/or buy advanced weapons systems, including new fighter jets, submarines and tanks.

Increased public expenditure is largely going towards capital expenditure which will help India to boost growth.

Q6(a): What is the objective of exchange rate management ? Do you think that the present regime of exchange rate management has been satisfactory in terms of building adequate foreign exchange reserves in India ? Discuss.
Ans: Exchange-rate regime is a system by which central bank or government manages its currency and foreign exchange market.
Objectives of exchange rate management 

1. Reduce volatility in exchange rate
2. Maintain adequate foreign exchange reduce
3. Prevent BoP crisis
4. Prevent sepculative destabilisation of currency
5. Ensure smooth functioning of international trad and capital flow

India’s present exchange rate regime 

In the current Indian exchange rate regime exchange rate are market determined. However, it is not completely market determined. RBI intervenes during the sharp volatility. India have adopted full current account convertibility and partial capital account convertibility.
This policy has helped India to build a forex reserve of more than 500 billion $. This is a significant jump from a 1991 BoP crisis when India mortgaged gold for the forex. This growth of forex reserve is gradual. Sharp volatilities have been avoided by the RBI. Increased forex reserve helped RBI to ensure the stable intervention in forex reserve.
However, increased forex reserve is largely attributed to capital inflow. There is deficit in current account. India has a trade deficit of around 3%. There is an often criticism that India’s managed exchange rate regime has led to the overvalued rupee which has affected competitiveness of Indian products.
India should gradually move towards a more liberal exchange rate regime. There should also be efforts to have full capital account convertibility. This will help India to achieve a large forex reserve.

Q6(b): Highlight the main features of National Policy for Skill Development and Entrepreneurship 2015.
Ans: The National Policy for Skill Development and Entrepreneurship 2015. acknowledges the need for an effective roadmap for promotion of entrepreneurship as the key to a successful skills strategy.
Main Features of National Policy for Skill Development and Entrepreneurship 2015
The Vision of the Policy is “to create an ecosystem of empowerment by Skilling on a large Scale at Speed with high Standards and to promote a culture of innovation based entrepreneurship which can generate wealth and employment so as to ensure Sustainable livelihoods for all citizens in the country”.
To achieve this Vision, the Policy has four thrust areas. It addresses key obstacles to skilling, including low aspirational value, lack of integration with formal education, lack of focus on outcomes, low quality of training infrastructure and trainers, etc. Further, the Policy seeks to align supply and demand for skills by bridging existing skill gaps, promoting industry engagement, operationalising a quality assurance framework, leverage technology and promoting greater opportunities for apprenticeship training.
Equity is also a focus of the Policy, which targets skilling opportunities for socially/geographically marginalised and disadvantaged groups. Skill development and entrepreneurship programmes for women are a specific focus of the Policy.
In the entrepreneurship domain, the Policy seeks to educate and equip potential entrepreneurs, both within and outside the formal education system. It also seeks to connect entrepreneurs to mentors, incubators and credit markets, foster innovation and entrepreneurial culture, improve ease of doing business and promote a focus on social entrepreneurship.
A Credit Guarantee Fund for skill development and a ‘National Credit Guarantee Trustee Company’ (NCGTC) has been set up to support the initiative of loans for the purpose of skilling and will be used to leverage credit financing in the skill landscape. It will be further expanded to ensure greater outreach and access to all citizens.

Q6(c): What is the main purpose of General Agreement on Trade in Services (GATS) ? What are the services covered under it ? State the modes under which the services are supplied.
Ans: GATS established a multilateral framework of rules and principles for trade in services.
Main Purpose of GATS 
The GATS was inspired by essentially the same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT): creating a credible and reliable system of international trade rules; ensuring fair and equitable treatment of all participants (principle of non-discrimination); stimulating economic activity through guaranteed policy bindings; and promoting trade and development through progressive liberalization.
Services Covered Under GATS
The GATS applies in principle to all service sectors, with two exceptions.
Article I (3) of the GATS excludes “services supplied in the exercise of governmental authority”. These are services that are supplied neither on a commercial basis nor in competition with other suppliers. Cases in point are social security schemes and any other public service, such as health or education, that is provided at non-market conditions.
Furthermore, the Annex on Air Transport Services exempts from coverage measures affecting air traffic rights and services directly related to the exercise of such rights.
Modes Under Which Services are Supplied 
The GATS distinguishes between four modes of supplying services: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.

1. Cross-border supply is defined to cover services flows from the territory of one member into the territory of another member (e.g. banking or architectural services transmitted via telecommunications or mail);
2. Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into another member’s territory to obtain a service;
3. Commercial presence implies that a service supplier of one member establishes a territorial presence, including through ownership or lease of premises, in another member’s territory to provide a service (e.g. domestic subsidiaries of foreign insurance companies or hotel chains); and
4. Presence of natural persons consists of persons of one member entering the territory of another member to supply a service (e.g. accountants, doctors or teachers). The Annex on Movement of Natural Persons specifies, however, that members remain free to operate measures regarding citizenship, residence or access to the employment market on a permanent basis.

Q7(a): Critically examine the various poverty alleviation programmes in India since 1970’s.
Ans: In 1970 India’s headcount poverty was around 53% which reduced significantly to 22% by 2011. As per the NITI Aayog report MDP in India is currently 15%.
Poverty Alleviation Programmes Since 1970
1970-1980
Then prime minister Indira Gandhi gave slogan Garibi Hatao. Fifith five year plan was based on this. It laid stress on employment, poverty alleviation (Garibi Hatao), and justice. It also assured a minimum income of Rs. 40 per person per month calculated at 1972-73 prices. It helped to decrease poverty to 45%. However, result was not as satisfactory as desirable.

1980-1990
Seventh Five-Year Plan focused on agricultural development, anti-poverty programmes, full supply of food, clothing, and shelter. It aimed at improving the living standards of the poor with a significant reduction in the incidence of poverty. However, poverty reduced to just 36%.

1990-2011
In this period India witnessed rapid reduction in poverty. World Bank study by Gaurav Datt suggest that poverty declined by 1.36 percentage points per annum after 1991, compared to that of 0.44 percentage points per annum prior to 1991. Datta gave credit to LPG reforms and rapid economic growth.
But Himanshu’s study suggest that it was PDS and MGNREGA which reduced poverty and not the reforms. It can be seen that India after reforms is seeing jobless growth.

2011 onwards
After 2011 India focused on reducing multi dimensional poverty. Indian government used various schemens like Pradhanmantri livelihood mission, Swach Bharat Abhiyan, Pradhan Mantri Awas Yojana, PM Ujwala Yojana, Ayushman Bharat Scheme, National food security act, etc to ensure it.
As a result, India’s population living in multidimensional poverty decreased from 24.85% in 2015-16 to 14.96% in 2019-21, reflecting a decline of 9.89 % points.
Thus, it can be seen that the Poverty Alleviation Programmes of the Indian government have been effective since 1990 to reduce poverty in India.

Q7(b): Differentiate between Current Account convertibility and Capital Account convertibility. What were the pre-conditions recommended by Tarapore Committee-I for adopting Capital Account convertibility .
Ans: Current account convertibility means freedom to convert domestic currency into foreign currency and vice versa for trade in goods and invisibles (services, transfers or income from investment).
Capital account convertibility means the freedom to conduct investment transactions without any constraints. It means no restrictions on the amount of rupees the Indian resident can convert into foreign currency to acquire any foreign asset and vice versa.
Tarapore Committee I
Before introducing full capital account convertibility following conditions should met.

1. Fiscal deficit should be less than 3.5%. However after Covid crisis there is chance of breaching this mark.
2. Inflation between range of 3 to 5%. In recent few years India has achieved this target.
3. Debt servicing ratio to be reduced to 20%. Currently it is 18%.
4. NPA should be less than 5%. However NPA in recent few years have touched double digit.
5. Forex reserve of more than 22 billion $. India has achieved this. India is currently sitting on 400 billion forex reserve

All conditions of Tarapore committee I has not met. Also there is need to revise these figures according to changing time and inflation. Thus, India should not rush to achieve full capital account convertibility

Q7(c): Describe the main features of Monetary Policy, 2022. How far the objectives of this policy differ from the previous monetary policy ?
Ans: Monetary policy in India is decided by the monetary policy committee.
Main Features of Monetary Policy 2022

1. Major focus is on reducing inflation
2. Increase the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points to 6.25 per cent with immediate effect.
3. Consequently, the standing deposit facility (SDF) rate stands adjusted to 6.00 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 6.50 per cent.
4. The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
5. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth

Difference with respect to previous policy 
Earlier MPC was more focused towards the growth of the economy. The MPC has adopted accommodative stance for the last two years to support the economy during the COVID-19 crisis. However, inflation has shown increasing trends. It forced MPC to change its stance to first neutral and then Hawkish.
The reverse repo rate is the rate at which RBI takes money from the banks when they have excess funds. Earlier there was use extensive use of reverse repo rate for managing liquidity. However, RBI has now introduced standing deposit facility. This move of RBI makes the reverse repo rate redundant for now. Policy corridor rate is now the difference between the Marginal Standing Facility Rate which is the emergency lending rate and the Standing Deposit Facility (SDF) rate which is the liquidity absorption rate.

Q8(a): What are the various methods of privatisation ? Point out the methods adopted by the government for disinvestment in India. Comment on the proceeds from disinvestment in India.
Ans: One of the most important part of LPG reforms was privatisation. This policy was intended to increased private sector participation in the public enterprises.
Various Methods of Privatisation 

1. IPO via share market eg Coal India
2. Strategic sales where government owenership reduces below 49% eg Balco
3. Employee – Management Buyout
4. ETF route to sell various PSU shares together.

Methods adopted by the government and its proceed 

Phase 1 (1991-1999)
Govt took policy decision to disinvest up to 20% of the equity in selected PSUs. The sectors limited for PSEs reduced from 18 to 3. In 1996 disinvestment commission was formed. Its aim was to formulate procedures for disinvestment.
Total target of INR 34,300 crore set between FY92 to FY99, the government was able to realize INR 16,809 crore (Only half). Crony capitalism and corruption was often alleged.

Phase 2 (1999-2004)
This phase saw 12 strategic sales which consisted of 10 privatisation deals and 2 CPSE to CPSE sales. During this phase government realize INR 24,619 crore out of a target of INR 58,500 crore. In this process crony capitalism and corruption was often alleged.

Phase 3 (2004-2014)
During this phase due to common minimum program strategic disinvestment was stalled. Instead of that ETF route was opted. However, the target of INR 1,93,000 crore was not realised. Instead, the government raised INR 1,14,045 crore.

Phase 4 (2014-2020)
National Disinvestment Policy, 2014 was formed. NITI Aayog is appointed as an advisor on strategic disinvestment. A clearance was given for the  strategic sales of 34 firms, out of which 8 CPSEs have been sold to another CPSE. Until FY2020, the government had realised INR 3,05,357 crore out of its target of INR 4,26,925 crore. 78% of the disinvestment proceeds have come from sale of minority stake.
Through these routes government have tried to increase private participation in the public enterprises.

Q8(b): What are the expectations from Foreign Trade Policy 2021-26? Elucidate your answer.
Ans: At the time of Mains discussion was going on regarding FTP 2021-26. Keeping this in mind this question was asked. However, on March 31st 2023 FTP was announced. Thus, question regarding exectation from FTP have become irrelevant. Kindly go through the policy as question might be asked regarding its provisions, obstacles, success, way forward, etc.

Q8(c): Point out the main features of Fiscal Responsibility and Budget Management (FRBM) Act. To what extent, it has been successful in achieving the targets ?
Ans: The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003 aims at establishing financial discipline to reduce fiscal deficit
Salient features of FRBM Act

1. It aims at reducing fiscal deficit to 6% (3% of the central government and 3% of the state government).
2. Revenue deficit should be eliminated by 2008 (Subsequently amended to replace it with effective revenue deficit)
3. Government in required to submit four documents in parliament Medium Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, Macroeconomic Framework Statement and Medium Term Expenditure Framework Statement
4. Escape Clause : Under section 4(2) on grounds of national security, calamity, etc, the set targets of fiscal deficits and revenue could be exceeded.
5. Limit Off Balance Sheet Liabilities for PPP at 0.5% of the GDP
6. Reform in the accounting system
7. No Monetisation of Debt

Success of FRBM Act
Target regarding Fiscal deficit was achieved in 2007-2008. Fiscal deficit was reduced to 2.5%. However, after 2008 financial crisis it further increased to 6%. Then onwards it has not achieved the given target again.
The revenue deficit decreased from 3.6% in 2003 to 1.1% in 2008. Primary deficit was eliminated. But after 2008 there has not been significant progress in managing revenue deficit.
The provision of nonmonetisation of debt has been successfully implemented. There were talks to use monetisation of debt during COVID crisis. However, even then it was not used.
FRBM act also put responsibility on state and center for adhering to fiscal deficit norms. It is seen that most states achieved and maintained the target fiscal deficit level (3 percent of GSDP) and eliminated the revenue deficit soon after the introduction of their Fiscal Responsibility Legislation (FRL). The average debt to GSDP ratio has fell by 10 %.