UPSC Prelims Previous Year Questions 2020: Indian Economy | Indian Economy for UPSC CSE PDF Download

Ans: (a)

• Foreign debt is money borrowed by a government, corporation or private household from another country’s government or private lenders. Total foreign debt can be a combination of short-term and long-term liabilities.
• In comparison to long term foreign debts, short term foreign debts are more volatile and can cause liquidity crunch in the times of global crisis. Therefore, not depending on short-term foreign borrowings can certainly give some immunity to India in times of global crisis. Hence, statement 1 is correct.
• Foreign banks have been instrumental in introducing Indian customers to ATMs and credit cards. Besides, with Indian firms increasingly looking for investments overseas, foreign banks can play a critical role in raising money for them, connecting them with a global clientele and consumers.
• However, Foreign portfolio investors (FPIs) today are the biggest shareholders of many foreign banks, meaning in the event of global crisis, the FPIs will withdraw their money and park it somewhere else, thus, creating volatility and a cash crunch in the market. Hence, statement 2 is not correct.
• Capital account convertibility is the freedom of foreign investors to purchase Indian assets (such as equity, bonds, property) and that of the domestic citizens to purchase foreign financial assets. Some of the disadvantages of full capital account convertibility include higher volatility, an increased burden of foreign debt, and an effect on the balance of trade and exports. Thus allowing full capital account convertibility will hurt the economy in the times of global crisis. Hence, statement 3 is not correct.

Therefore, option (a) is the correct answer.

Ans: (d) 

• The total stock of money in circulation among the public at a particular point of time is called money supply. It needs to be noted that total stock of money is different from total supply of money.
• Supply of money is only that part of total stock of money which is held by the public at a particular point of time.
• The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets.
• RBI publishes figures for four alternative measures of money supply, viz. M1, M2, M3 and M4.
  • M1 = CU + DD
  • M2 = M1 + Savings deposits with Post Office savings banks 
  • M3 = M1 + Net time deposits of commercial banks
  • M4 = M3 + Total deposits with Post Office savings organisations (excluding National Savings Certificates)
• CU is currency (notes plus coins) held by the public and DD is net demand deposits held by commercial banks.
• M1 and M2 are known as narrow money. M3 and M4 are known as broad money. Their order of liquidity is: M1 > M2 > M3 > M4.
• M1 is a narrow measure of the money supply that includes physical currency, demand deposits, traveler’s checks, and other checkable deposits.
• M1 is the most liquid and easiest for transactions. Hence, on the withdrawal of cash from the Demand Deposit Account, there will be no immediate effect on aggregate money supply in the economy.

Therefore, option (d) is the correct answer.

Ans: (d) 

• Gold Tranche or Reserve Tranche is the component of a member country’s quota with the International Monetary Fund (IMF) i.e. in the form of gold or foreign currency. For any member country, out of the total quota, 25% should be paid in the form of foreign currency or gold. Hence, this is called a reserve tranche or gold tranche. The remaining 75% can be in domestic currencies and it is called credit tranche. It is basically an emergency account that IMF members can access without agreeing to conditions or paying a service fee.

Therefore, option (d) is the correct answer.

Ans: (c)

• Public investment is an investment by the State (Central, state and local governments or through publicly owned companies) to build the nation’s capital stock by devoting resources to the basic physical infrastructure (such as roads, bridges, rail lines, airports, and water distribution), innovative activity (basic research), green investments (clean power sources), and education that leads to higher productivity and/or higher living standards.
• Minimum Support Price (MSP) provides a market intervention mechanism to work as an insurance policy for the farmers to save them from price falls. It is not helping in enhancing productivity in the agriculture sector. Thus, fixing the MSP for agricultural produce of all crops does not add to national capital stock or lead to higher productivity. Hence, statement 1 is not correct.
• Computerization of Primary Agricultural Credit Societies will enhance productivity in the agricultural sector, as there will be easy and timely access of credit. Similar will be the impact of setting up cold storage facilities. Hence, statements 2 and 6 are correct.
• Social capital is the value that can be created through networking and trust built within and between people and organisations. Building cohesiveness within a community lowers the transaction costs of working together and enhanced trust can enable communities to overcome societal dilemmas. Strong social networks can serve as safety nets to help resource poor individuals or communities cope with shocks, especially when formal types of risk management such as credit or insurance are unavailable. Within farming communities, social capital can also improve productivity because it is a pre-requisite for the management of natural resources or the adoption of new practices and technologies. Building social capital for smallholders can also positively impact the adoption of new technologies such as the use of improved seeds, soil and water conservation practices, and agroforestry. Hence, statement 3 is correct.
• Free electricity to farmers has, apart from financial stress on the state, resulted in excessive use of water, encouragement of installation of more pump sets and depleting groundwater table. Hence, statement 4 is not correct.
• Waiver of agricultural loans is not investment as it affects the health of the banking sector. Hence, statement 5 is not correct.

Therefore, option (c) is the correct answer.

Ans: (a)

• The Interest Coverage Ratio (ICR) is a debt ratio and profitability ratio used to determine how easily a company can pay interest on its outstanding debt. It measures how many times a company can cover its current interest payment with its available earnings. It may be calculated by dividing a company’s earnings before interest and taxes (EBIT) during a given period by the company’s interest payments due within the same period. Hence, statement 1 is correct.
  
• ICR is commonly used by lenders, creditors, and investors to determine the company riskiness relative to its current debt or for future borrowing. Hence, statement 2 is correct.
• The higher the interest coverage ratio the better. The lower the ratio, the more the company is burdened by debt expense. When a company’s interest coverage ratio is only 1.5 or lower, its ability to meet interest expenses may be questionable. Hence, statement 3 is not correct.

Therefore, option (a) is the correct answer.

Ans: (d)

• Minimum Support Price (MSP) is a floor price decided by the government at which it procures crops from farmers. MSP’s aim is to protect farmers against the sharp decline in the agricultural prices during good harvest seasons. However, the MSP fixed on any crop attracts farmers to produce that specific crop which may lead to its over- production. MSP also distorts the market because the government procurement agencies buy 70-80% rice by forcing out private players. If the government sets MSP higher than the market rates, then private players won’t buy crops from farmers and the crops are procured by the government. Which creates inefficiencies in the markets. The farmers usually do not prefer producing other crops on which there is no fixed MSP eventually leading to price rise of those crops. Hence, factor/ policy 1 is correct.
• Government in India typically buys more than a third of the country’s rice output at a fixed price, which has a direct impact on price of rice. Hence, factor/policy 2 is correct. 
• In India, the government stockpiles cereals like wheat and rice for distribution to poor which impacts the price of rice. The government sells the procured crops through the Public Distribution System at subsidised rates. Hence, factor/policy 3 is correct.
• A subsidy means the government pays part of the cost. It can be provided both to the producer as well as the consumer. In India, subsidized food grains are distributed through TPDS which impacts the price of food grains sold through Fair Price Shops. Hence, factor/policy 4 is correct.

Therefore, option (d) is the correct answer.

Ans: (b)

• As per data from the Department of Commerce, Indo- Sri Lanka bilateral trade value for a decade (2007 to 2016) was 3.0, 3.4, 2.1, 3.8, 5.2, 4.5, 5.3, 7.0, 6.3, 4.8 (in billion USD). It reflects continuous fluctuation in the trend of trade value. There has been an overall increase but the same cannot be said as consistent rise in trade value. Hence statement 1 is not correct.
• Bangladesh has been a major textile trading partner for India, with a share of more than 5% in exports and over 7% in imports. While annual textile exports to Bangladesh averages $2,000 million, imports are worth $400 (Year: 2016-17).
• The major items of exports are fibre and yarn of cotton, man-made staple fibres and man-made filaments while major import items include apparel and clothing, fabric and other made up textile articles. Hence, statement 2 is correct.
• According to the data, in 2016-17, Bangladesh is India’s largest trading partner in South Asia, followed by Nepal, Sri Lanka, Pakistan, Bhutan, Afghanistan and Maldives. The level of Indian exports also follows the same order. Hence, statement 3 is not correct.

Therefore, option (b) is the correct answer.

Ans: (b)

• The Kisan Credit Card (KCC) scheme was introduced in 1998 for providing adequate and timely credit support from the banking system under a single window with flexible and simplified procedure to the farmers for their cultivation and other needs like purchase of agriculture inputs such as seeds, fertilizers, pesticides etc. and draw cash for their production needs.
• The scheme was further extended in the year 2004 for the investment credit requirement of farmers viz allied and non-farm activities.
• Kisan Credit Card is provided with the following objectives: 
  • The short term credit requirements for cultivation of crops Post harvest expenses
  • Produce marketing loan
  • Consumption requirements of farmer household
  • Working capital for maintenance of farm assets and activities allied to agriculture, like dairy animals, inland fishery, etc.
  • Investment credit requirement for agriculture and allied activities like pumpsets, sprayers, dairy animals, etc.
• The Kisan Credit Card Scheme is implemented by Commercial Banks, RRBs, Small Finance Banks and Cooperatives.

Therefore, option (b) is the correct answer.

Ans: (a)

• Wholesale Price Index (WPI) is a measure of the average change in the prices of goods in the wholesale market or at the wholesale level. It is published by the Office of Economic Adviser, Ministry of Commerce and Industry.
• Consumer Price Index (CPI) is the measure of changes in the price level of a basket of consumer goods and services bought by households. There are four types of CPI based on items basket:
  • CPI for Industrial Workers (IW) 
  • CPI for Agricultural Labourer (AL) 
  • CPI for Rural Labourer (RL)
  • CPI (Rural/Urban/Combined)
• Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the Central Statistical Organisation (CSO) in the Ministry of Statistics and Programme Implementation.
• Weightage of items in CPI is based on average household expenditure taken from consumer expenditure surveys. The weightage of food in CPI is far higher (approx. 46%) than in WPI (approx. 24%). A significant proportion of WPI items basket represents manufacturing inputs and intermediate goods like minerals, basic metals, machinery etc. Hence, statement 1 is correct.
• Moreover, WPI does not capture changes in the prices of services, which CPI does. Hence, statement 2 is correct.
• WPI is used as a key measure of inflation in some economies. However, the RBI no longer uses it for policy purposes, including setting repo rates. In April 2014, the RBI adopted the CPI or retail inflation as a key measure of inflation to set the monetary and credit policy. Hence, statement 3 is not correct.

Therefore option (a) is the correct answer.

Ans: (d)

• The Government of India announces Minimum Support Prices (MSP) for 22 major agricultural commodities each year in both the crop seasons after taking into account the recommendations of the Commission for Agricultural Costs and Prices (CACP). CACP recommends MSP for twenty two (22) crops and Fair & Remunerative Price (FRP) for sugarcane.
  • 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley and ragi), 
  • 5 pulses (gram, tur, moong, urad, lentil),
  • 7 oilseeds (groundnut, rapeseed-mustard, soyabean, seasmum, sunflower, safflower, nigerseed), and
  • 4 commercial crops (copra, sugarcane, cotton and raw jute).
• The Department of Food & Public Distribution declares Fair and Remunerative Prices (FRP) for sugar.
• The overall procurement quantity should not normally exceed 25% of the actual production of the commodity for that particular year/season. Over and above the procurement limit of 25%, if any, prior approval of the Department of Agriculture (DAC) shall be required. Hence, statement 1 is not correct.
• The MSP is fixed by the Central government, based on the average of MSP proposals made by various states, some of which can be higher than the Centre’s recommendation.
• While the proposals based on input costs vary from state to state, the MSP is fixed to avoid price inequity. When the market prices dip to a level that is below the MSP, the government agencies buy over the produce in order to protect the farmers. Thus market prices can rise above MSP. Hence, statement 2 is not correct.

Therefore, option (d) is the correct answer.

Ans: (c)

• Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note and held in a dematerialized form through any of the depositories approved by and registered with SEBI. Hence, statement 1 is correct.
• Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Hence, statement 2 is not correct.
• Call money is a short-term, interest-paying loan from 1 to 14 days made by a financial institution to another financial institution. Hence, statement 3 is correct.
• A zero-coupon bond is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. Hence, statement 4 is not correct.

Therefore, option (c) is the correct answer.

Ans: (b)

• Foreign Direct Investment (FDI) is the investment through capital instruments by a person resident outside India in:
  • An unlisted Indian company; or
  • 10% or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company.
• Therefore, FDI can be in a listed or unlisted company. Hence, option (a) is not
• correct.
• The capital invested in India via FDI is non debt creating and not allowed to serve debt. Hence, option (b) is correct and (c) is not correct.
• An investment is called Foreign Portfolio Investment, if the investment made by a person (or institutional investors) resident outside India in capital instruments is:
  • less than 10% of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company, or
  • less than 10% of the paid up value of each series of capital instruments of a listed Indian company. Hence, option (d) is not correct.

Therefore, option (b) is the correct answer.

Ans: (d)

• As of August 2020, India’s merchandise exports were USD 22.70 billion and merchandise imports were USD 29.47 billion which clearly means that merchandise exports are less than its merchandise imports. Hence, statement 1 is correct.
• As per the Economic Survey 2020, India’s imports of iron and steel have decreased but imports of chemicals, fertilizers and machinery have increased. Hence, statement 2 is not correct.
• As of April-August 2020-21, the service exports are estimated at USD 84.47 billion as compared to the estimated service imports of USD 49.56 billion. This means, India’s exports of services are more than its import of services. Hence, statement 3 is correct.
• Trade deficit is a situation when the exports of goods is less than its imports whereas the current account deficit is a situation when the overall trade in goods and services is on the negative side (i.e. country imported more than it exported). As of now, India’s exports of goods are less than its imports but the exports of services is more than its imports. Moreover, the overall trade balance is negative because of high trade deficit. Therefore, India suffers from an overall trade/current account deficit. Hence, statement 4 is correct.

Therefore, option (d) is the correct answer.

Ans: (a)
West Texas intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.

• WTI is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.
• It is sourced from US oil fields, primarily in Texas, Louisiana, and North Dakota.

Therefore, option (a) is the correct answer.

Ans: (d)

• Debts are contractual obligations to repay monetary loans, often with related interest expenses.
• Non-financial debt:
  • It consists of credit instruments issued by governmental entities, households and businesses that are not included in the financial sector.
  • It includes industrial or commercial loans, Treasury bills and credit card balances. They share most of the same characteristics with financial debt, except the issuers are non-financial. Hence, statements 1, 2 and 3 are correct. 

Therefore, option (d) is the correct answer.

Ans: (c)

• Under the Agreement on Trade-Related Investment Measures (TRIMS) of the World Trade Organization (WTO), commonly known as the TRIMS Agreement (negotiated during the Uruguay Round 1986-1994), WTO members have agreed not to apply certain investment measures that discriminate against foreign goods that restrict or distort trade (national treatment under GATT Article III) or leads to quantitative restrictions (Article XI), both of which violate basic WTO principles. Hence, statement 1 is correct.
• This agreement applies only to measures that affect trade in goods. Hence, statement 2 is not correct.
• The Agreement is not concerned with the regulation of foreign investment. The disciplines of the TRIMS Agreement focus on investment measures that infringe GATT Articles III and XI. In other words, it focusses on investment measures that discriminate between imported and exported products. Hence, statement 3 is not correct.

Therefore, option (c) is the correct answer.

Ans: (b)

• Expansionary monetary policy, or easy monetary policy, is when a central bank uses its tools to stimulate the economy. It increases the money supply, lowers interest rates, and increases demand. It boosts economic growth.
• Statutory Liquidity Ratio (SLR) is a monetary policy tool that the Reserve Bank of India (RBI) uses to assess the liquidity at the banks’ disposal. It is the minimum percentage of deposits that a commercial bank has to maintain in the form of cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. Raising SLR makes banks park more money in government securities and reduce the level of cash in the economy. Doing the opposite helps maintain cash flow in the economy. Reducing SLR leaves more liquidity with banks, which in turn can fuel growth and demand in the economy. Hence, statement 1 is not correct.
• Marginal standing facility (MSF) is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely. With the increase of MSF Rate, cost of borrowing increases for banks resulting in reduced available resources to lend. Hence, statement 2 is correct.
• Repo Rate, or repurchase rate, is the key monetary policy rate of interest at which the central bank or the Reserve Bank of India (RBI) lends short term money to banks, against the collateral of government and other approved securities under the liquidity adjustment facility (LAF). Bank Rate is the interest rate which the RBI charges on its long-term lendings. Under expansionary monetary policy, RBI reduces repo rate and bank rate to increase liquidity in the banking sector. Hence, statement 3 is not correct.

Therefore, option (b) is the correct answer.

Ans: (b)

• A 2017 NITI Aayog Report, “Changing Structure of Rural Economy of India Implications for Employment and Growth”, provides the following information regarding the rural economy.
• Worker productivity has increased for both rural and urban areas. For rural areas it was ₹ 37273 in 2004-05 and ₹ 101755 in 2011-12, while for urban areas it was ₹ 120419 in 2004-05 and ₹ 282515 in 2011-12. Hence, statement 1 is not correct.
• The rural share in the total workforce declined steadily from 76.1% in 1999-2000 to 70.9% in 2011-12. Hence, statement 2 is not correct.
• One of the significant changes in the rural production structure is the growing share of the non-farm sector, which increased from 37% in 1980-81 to 65% in 2009-10, and thus shows that in terms of value of production, rural is no longer merely agricultural. Hence, statement 3 is correct.
• Rural employment showed 2.16% annual growth rate during the pre-reform period, which decelerated in the post-reform period to 1.45% and turned negative (–0.28%) in the period of economic acceleration. Hence, statement 4 is correct.

Therefore, option (b) is the correct answer.

Ans: (b)

• Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business.
• In rural India, there exists a 3-tier rural cooperative structure:
  • Tier-I: It includes state cooperative banks (StCBs) at the state level;
  • Tier-II: It includes central cooperative banks (CCBs) at the district level; and
  • Tier- III: It includes primary agricultural credit societies (PACSs).
• According to a report of the RBI, in 2016-17, scheduled commercial banks contributed the major share (78- 80%) in agricultural and allied credit. Cooperative institutions also play a significant role in extending agricultural credit and the share of all cooperative banks/institutions (i.e. StCBs, DCCBs and PACSs put together) constituted 15-16%.
• The RRBs contributed the remaining 5% of the agricultural credit. Hence, statement 1 is not correct.
• The most significant function of the district central cooperative bank is to provide financial support to the primary cooperative societies that are affiliated to it in the district. Hence, statement 2 is correct.

Therefore, option (b) is the correct answer.

Ans: (b)

• Cyber Insurance is designed to guard businesses from the potential effects of cyber- attacks. It helps an organisation mitigate risk exposure by offsetting costs, after a cyber-attack/breach has happened. In simple terms, cyber insurance is designed to cover the fees, expenses and legal costs associated with cyber breaches.
• Coverage includes:
  • Response to breach events (notification, call centre service, breach resolution, mitigation services, public relation and crisis management).
  • Investigation & fines including lawyers, professional fees, administration cost etc.
  • Expenses such as forensic, IT audit, crisis management, legal costs. Privacy & data liability
  • Loss of personal identifiable information. Loss of corporate confidential info.
  • Network liability such as DDoS Attacks.
  • Multimedia covers including copyright issues. Business Interpretation
  • Income loss, business interruption cost, system damage and restoration cost, any extra expenses.
  • Cyber theft
  • Fund transfer frauds E-theft loss
  • E-communication loss
  • Cyber extortion
• Hence, benefits mentioned 1, 3 and 4 are correct.

Therefore, option (b) is the correct answer.