Test: Economy NCERT Based Test - 1 - UPSC MCQ

• Statement 2 is incorrect: The export surplus was not used for the welfare of the Indian economy.

Supplementary notes:

The Drain of Indian Wealth

• Britain maintained monopoly control over India’s exports and imports.
• India’s foreign trade was restricted to Britain.
• The opening of the Suez Canal further intensified British control over India’s foreign trade.
• The most important characteristic of India’s foreign trade throughout the colonial period was the generation of a large export surplus. This surplus came at a huge cost to the country’s economy.
• The export surplus did not result in any flow of gold or silver in India. Rather, this was used to make payments for the expenses incurred by an office set up by the colonial government in Britain, expenses on war, again fought by the British government and the import of invisible items. 
• This led to the drain of Indian wealth.

The Drain of Wealth Theory

• It refers to the economic critique of the colonial rule in India that was advocated by the early nationalists.
• They described it as the constant one-way flow of wealth from India to England for which India received no returns as ‘Drain of Wealth’.

To understand what a rise in SENSEX means, let's consider the options one by one:
A: A rise in the prices of shares of all companies registered with Bombay Stock Exchange.
This option suggests that a rise in SENSEX indicates an increase in the prices of shares of all companies registered with the Bombay Stock Exchange. However, this is not entirely accurate as the SENSEX is an index that represents the overall performance of a group of companies, not necessarily all companies.
B: A rise in the prices of shares of all companies registered with National Stock Exchange.
This option is incorrect as the SENSEX is associated with the Bombay Stock Exchange (BSE), not the National Stock Exchange (NSE). The NSE has its own index called the Nifty.
C: An overall rise in the prices of shares of a group of companies registered with Bombay Stock Exchange.
This option is the correct answer. A rise in SENSEX indicates an overall increase in the prices of shares of a group of companies registered with the Bombay Stock Exchange. The SENSEX is calculated based on the market capitalization of the top 30 companies listed on the BSE.
D: A rise in price of shares of all companies belonging to a group of companies registered with Bombay Stock Exchange.
This option is incorrect as the SENSEX represents the performance of a specific group of 30 companies, not all companies registered with the BSE.
In conclusion, option C is the correct answer. A rise in SENSEX signifies an overall rise in the prices of shares of a group of companies registered with the Bombay Stock Exchange.

A status of financial health in which expenditure exceeds revenue (income). The amount by which a government, company, or individual’s spending exceeds its income over a particular period of time, also called deficit or deficit spending, opposite of Budget surplus.

• Option (b) is correct:

Supplementary notes:

Terms and Definitions

• In a fixed exchange rate system, when some government action increases the exchange rate (thereby, making domestic currency cheaper) is called Devaluation.
• On the other hand, a Revaluation is said to occur, when the Government decreases the exchange rate (thereby, making domestic currency costlier) in a fixed exchange rate system.
• An increase in exchange rate implies that the price of foreign currency (dollar) in terms of domestic currency (rupees) has increased. This is called the Depreciation of domestic currency (rupees) in terms of foreign currency (dollars).
• Similarly, in a flexible exchange rate regime, when the price of domestic currency (rupees) in terms of foreign currency (dollars) increases, it is called Appreciation of the domestic currency (rupees) in terms of foreign currency (dollars).
• Accommodating transactions (termed ‘below the line’ items), on the other hand, are determined by the gap in the balance of payments, that is, whether there is a defi cit or surplus in the balance of payments. In other words, they are determined by the net consequences of autonomous transactions. Since the offi cial reserve transactions are made to bridge the gap in the BoP, they are seen as the accommodating item in the BoP (all others being autonomous).

CRR is a specified minimum fraction of the total deposits of customer, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country. The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the RBI. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their major depositors.

Often these loans are very short in duration. Lower bank rates can help to expand, when unemployment is high by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.

• Option (d) is correct: Golden Revolution is related to National Horticulture Mission.

Supplementary notes:

Agricultural revolution

• The agricultural revolution refers to the significant change in the agriculture that occurs when there are discoveries, inventions, or new technologies implemented. These changes the ways of production and increase the production rate. There are various types of Agricultural Revolutions that have occurred in India. They are as follows:
  
  

An OMO is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks. This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit.

The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow. OMO makes bank rate policy effective and maintains stability in the government securities market.

The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net transfer payments. The total deficit (which is often called the Fiscal Deficit or just the ‘deficit’) is the primary deficit plus interest payments on debts. A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue Deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than the expected ones, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue.

• All statements are correct

Supplementary notes:

Revenue Deficit

• The revenue deficit refers to the excess of the government’s revenue expenditure over revenue receipts. Revenue defi cit = Revenue expenditure – Revenue receipts.
• The revenue deficit includes only such transactions that affect the current income and expenditure of the government.
• When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.
• This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build-up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure. Since a major part of revenue, expenditure is committed to expenditure, it cannot be reduced.
• Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.
• The revenue deficit is to be met from the capital receipt, which is through the borrowing and sale of assets. Given the same level of fiscal deficit, a higher revenue deficit is worse than lower one because it implies a higher repayment burden in the future not matched by the benefi ts via investment. 

Dumping is said to occur when the goods are exported by a country to another country at a price lower than its original value. This is an unfair trade practice which can have a distortive effect on international trade. Anti-dumping is the measure to rectify the situation arising out of dumping of goods and its trade distortive effect.

Departments under the Ministry of Finance:
The correct answer is D: All 1, 2, and 3.
Explanation:
The Ministry of Finance in any country typically consists of various departments that oversee different aspects of economic and financial management. In this case, the departments under the Ministry of Finance are as follows:
1. Economics Affairs: This department is responsible for analyzing and formulating policies related to the economic development of the country. It focuses on issues such as fiscal policies, monetary policies, budgeting, and economic planning.
2. Expenditure: The Expenditure department deals with the management of government finances and expenditures. It is responsible for budget preparation, allocation of funds to different sectors, monitoring expenditure patterns, and ensuring financial discipline.
3. Disinvestment: The Disinvestment department handles the process of selling government-owned assets or shares in public sector enterprises. It aims to reduce the government's stake in public enterprises and promote private sector participation. Disinvestment can help raise funds for the government, improve efficiency in public enterprises, and encourage competition.
Therefore, all three departments – Economics Affairs, Expenditure, and Disinvestment – come under the Ministry of Finance.

• Both statements are correct

Supplementary notes:

Privatization

• Privatization implies the shedding of the ownership or management of a governmentowned enterprise. Government companies are converted into private companies in two ways:
• By the withdrawal of the government from ownership and management of public sector companies and/or
• By the outright sale of public sector companies.
• Privatization of the public sector enterprises (PSEs) by selling off part of the equity of PSEs to the public is known as disinvestment.
• The purpose of the sale is mainly to improve financial discipline and facilitate modernization. It is also envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the public sector units (PSUs).
•  An efficient and profit earning PSU is a revenue generator for the government. But if a PSU is an inefficient and loss-making one, then the same PSU exerts unnecessary burden on the government’s scarce revenues and further may lead to the budget deficit. Hence the loss-making PSUs should be privatized whereas it would be unfair to privatize a profit-making PSU.
• Instead of privatization of profit-making PSUs, the government can allow more degree of autonomy and accountability in their operations, which will not only increase their productivity and effi ciency but also enhance their competitiveness with their private counterparts.

An expenditure which neither creates assets nor reduces liability is called Revenue Expenditure. Examples of revenue expenditure are salaries of government employees, interest payment on loans taken by the government, pensions, subsidies, grants, rural development, education and health services, etc.

A supply of goods includes the following: the transfer of ownership of goods by agreement. the sale of movable goods on a commission basis by an auctioneer or agent acting in his or her own name but on the instructions of another person. the handing over of goods under a hire-purchase contract.

• Option (d) is correct: Inventory is a stock of unsold finished goods and raw materials. It is a stock variable and it is treated as capital.

Supplementary notes:

Inventory

• The stock of unsold finished goods, or semi-finished goods, or raw materials which a firm carries from one year to the next is called inventory. It is a stock variable.  Inventories are treated as capital. 
• It may have a value at the beginning of the year; it may have a higher value at the end of the year. In such a case inventories have increased (or accumulated).
• If the value of inventories is less at the end of the year compared to the beginning of the year, inventories have decreased (decumulated).
• Change of inventories of a fi rm during a year ≡ production of the firm during the year (value added + intermediate goods used by the firm)  – sale of the firm during the year (‘≡’ stands for identity, which always holds irrespective of what variables we have on the left hand and right-hand sides of it).
• For example: Suppose that a firm had an unsold stock worth of Rs. 100 at the beginning of a year. During the year, it had produced Rs. 1,000 worth of goods and managed to sell Rs. 800 worth of goods. Therefore, Rs. 200 is the difference between production and sales. This Rs 200 worth of goods is the change in inventories. This will add to the Rs. 100 worth of inventories the firm started with. Hence the inventories at the end of the year are, Rs. 100 + Rs. 200 = Rs. 300. Here, change in inventories takes place over a period of time and is treated as an investment. Therefore, it is a flow variable.

• Option (c) is correct:

Supplementary notes:

Gross Domestic Product (GDP)

• It is the market value of all the goods and services produced in the country during a year.
• GDP is like a cake and growth is increasing in the size of the cake. If the cake is larger, more people can enjoy it. It is necessary to produce more goods and services if the people of India are to enjoy (in the words of the First Five Year Plan) a more rich and varied life.

Quota

• Protection from imports took two forms: tariffs and quotas.
• Tariffs are a tax on imported goods; they make imported goods more expensive and discourage their use.
• Quotas specify the number of goods which can be imported. The effect of tariffs and quotas is that they restrict imports and, therefore, protect domestic firms from foreign competition.

Land Reforms

• At the time of independence, the land tenure system in India was characterised by intermediaries (variously called jagirdars, zamindars, etc.) who merely collected rent from the actual tillers of the soil without any contribution towards improvements in the farm.
• Thus, the low productivity of the agricultural sector in India promoted to land reforms.

High Yielding Variety (HYV) seeds

• These seeds are of better quality than normal quality seeds, which are used in order to obtain a healthy and surplus crop.
• These seeds have a good immune system to fight with insects and other diseases.
• Examples: Paddy, Wheat, Maize, Jowar, Bajra and other crops utilized HYV seeds over a large area within a short period. 
• HYV seeds yield more under irrigated conditions.
• The use of these seeds required the use of fertiliser and pesticide in the correct quantities.
• The farmers who could benefit from HYV seeds required reliable irrigation facilities as well as the financial resources to purchase fertiliser and pesticide.

Subsidy

• The monetary assistance given by the government for productive activities is known as Subsidy.
• During the Green Revolution, its adoption provides an incentive for the adoption of the new HYV technology by farmers.
• Subsidies were needed to encourage farmers to test the new technology. 

• Statement 1 is incorrect: It primarily benefi ted the wheat-growing regions only.

Supplementary notes:

Green Revolution

• At independence, about 75% of the country’s population was dependent on agriculture. Productivity in agriculture was very low because of the use of old technology and the absence of an appropriate infrastructure for the vast majority of farmers.
• Dependence on monsoon was the major setback for Indian farmers. Thus, in this scenario, Green Revolution was implemented to make India a selfsufficient country by increasing the production of food-grains by using HYV seeds and to ensure food security in India and to upgrade the mode of technology used in the agriculture. It also aimed to enhance marketed surplus in India.
• Green revolution included various measures like (i) Use of High Yielding Varieties (HYV) seeds (ii) Increase in irrigation cover (iii) Use of insecticides and pesticides (iv) Consolidation of land holdings (land ceiling) (v) Improvement in rural infrastructure (vii) Use of chemical fertilizers.
• In the first phase of the green revolution (approximately mid 1960s upto mid 1970s), the use of HYV seeds was restricted to the more affl uent states such as Punjab, Andhra Pradesh and Tamil Nadu. Further, the use of HYV seeds primarily benefi ted the wheatgrowing regions only.
• In the second phase of the green revolution (mid-1970s to mid-1980s), the HYV technology spread to a larger number of states and benefited more variety of crops. 

• Statement 2 is incorrect: Public health is assessed by various indicators like infant mortality and maternal mortality rates, life expectancy and nutrition levels, along with the incidence of communicable and noncommunicable diseases.

Supplementary notes:

Health

• It is not only an absence of disease but also the ability to realize one’s potential. It is a yardstick of one’s wellbeing.
• It is related to the overall growth and development of the nation. People’s health is assessed by taking into account various indicators like infant mortality and maternal mortality rates, life expectancy and nutrition levels, along with the incidence of communicable and non-communicable diseases.
• Indian healthcare delivery system is broadly categorized into two components: public and private. The public delivery system consists of basic healthcare facilities in the form of primary healthcare centers (PHCs) in rural areas, secondary and tertiary healthcare institutions in key towns and cities. The private sector primarily caters to secondary, tertiary and quaternary care.
  The main characteristics of the health of people in our country:
• There have been noteworthy improvements in health indicators such as life expectancy, infant mortality rate (IMR), the maternal mortality rate (MMR), etc as well due to increasing penetration of healthcare services across the country.
• Rise in life expectancy to 68 years in 2016.
• Control over deadly diseases like cholera, smallpox, malaria, polio, and leprosy.
• Malnutrition in children, another serious concern in India, is also being addressed at a rapid rate than ever before. 

• Statement 1 is incorrect: Agricultural marketing is a process that involves the assembling, storage, processing, transportation, packaging, grading and distribution of different agricultural commodities across the country.

Supplementary notes:

Agricultural Marketing

• Agricultural marketing is a process that involves the assembling, storage, processing, transportation, packaging, grading and distribution of different agricultural commodities across the country.

Importance of Agricultural marketing

• Advanced agricultural practices adopted during the green revolution resulted in surplus production which changed the subsistence face of Indian agriculture.
• Approximately 33% of the output of food grains, pulses and nearly all of the productions of cash crops like cotton, sugarcane, oilseeds, etc. are marketed as they remain surplus after meeting the consumption demands.
• As the agriculture sector produces raw materials for many of the other industries, the marketing of such commercial products is important.
  
• Increased effici ency of the marketing mechanisms would result in the distribution of products at lower prices to consumers having a direct bearing on national income.
• An improved marketing system stimulates the growth in the agro-based industries mainly in the fi eld of processing.

Measures initiated by the Government to improve the marketing aspects

• Regulation of the market to create orderly and transparent marketing conditions.
• Provision of physical infrastructure facilities like roads, railways, warehouses, godowns, cold storages and processing units.
• However, the current infrastructure facilities are quite inadequate to meet the growing demand and need to be improved.
• Cooperative marketing, in realizing fair prices for farmers’ products.
• Policy instruments like the assurance of minimum support prices (MSP) for agricultural products, maintenance of buffer stocks of wheat and rice by Food Corporation of India and distribution of food grains and sugar through PDS. These instruments aim at protecting the income of the farmers and providing foodgrains at a subsidized rate to the poor.
• Emerging Alternate Marketing Channels:
• Some examples of these channels are Apni Mandi (Punjab, Haryana, and Rajasthan); Hadaspar Mandi (Pune); Rythu Bazars (vegetable and fruit markets in Andhra Pradesh and Telangana) and Uzhavar Sandies (farmers markets in Tamil Nadu).

• All statements are corrrect

Supplementary notes:

Investment

• An investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
• In other words, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth.
• It is oriented toward future returns, and thus entails some degree of risk.
• It is a gross or net addition to capital stock and is always capital formation.
• A measure of the final output, which comprises capital goods, constitutes the Gross Investment of an economy.
• It does not denote the purchase of shares or property or even having an insurance policy.
• Common forms of investment include financial markets (e.g. stocks and bonds), credit (e.g. loans or bonds), assets (e.g. commodities or artwork), and real estate.

• All statements are correct

Supplementary notes:

Liberty Indicator

• Liberty indicator is a measure of ‘the extent of democratic participation in social and political decision-making’ but it has not been given any extra weight.
• Some obvious ‘liberty indicators’ like measures of ‘the extent of Constitutional protection given to rights of citizens’ or ‘the extent of Constitutional protection of the Independence of the Judiciary and the Rule of Law’ have not even been introduced so far.
• Without including these and giving them overriding importance in the list, the construction of a Human Development Index may be said to be incomplete and its limited usefulness.

• All statements are correct

Supplementary notes:

Land Reforms

• At the time of independence, the land tenure system in India was characterized by intermediaries (variously called jagirdars, zamindars, etc.) who merely collected rent from the actual tillers of the soil without any contribution towards improvements in the farm.
• Thus, the low productivity of the agricultural sector in India demanded land reforms.

Aims of Land reforms

• To change in the ownership of landholdings
• Abolition of Intermediaries:  The Zamindari system was abolished to end exploitation. The abolition of intermediaries meant that tenants were freed from being exploited by the zamindars.
• The shift in ownership to the tenants gave them the incentive to increase output and this contributed to the growth of agriculture.
• Land Ceiling: It was the policy to promote equity in agriculture in which the size of the land was fixed at a maximum level, which could be owned by an individual. Its purpose was to reduce the concentration of land ownership in a few hands.
•  Government control: To bring tenants under the direct control of the government. 

• Statements 2 is incorrect: Population explosion implies the death rate is decreasing while the birth rate remains constant at a high level.

Supplementary notes:

Demographic Transition Theory

• Theory of Demographic Transition is a theory that throws light on changes in birth rate and death rate and consequently on the growth rate of population. “Demographic transition refers to a population cycle that begins with a fall in the death rate, continues with a phase of rapid population growth and concludes with a decline in the birth rate”-E.G. Dolan.
• According to this theory, economic development has the effect of bringing about a reduction in the death rate. There are four stages of demographic transition according to Max.

First Stage

• This stage is called a high population growth potential stage. It is characterized by high and fluctuating birth and death rates which will almost neutralize each other.
• People mostly live in rural areas and their main occupation is agriculture which is in the stage of backwardness.
• The tertiary sector consisting of transport, commercial banking, and insurance is underdeveloped.
• All these factors are responsible for the low income and poverty of the masses.
• Social beliefs and customs play an important role in keeping the birth rate high.
• The death rate is also high because of primitive sanitation and the absence of medical facilities. People live in dirty and unhealthy surroundings.

Second Stage

• It is called the stage of Population Explosion. In this stage, the death rate is decreasing while the birth rate remains constant at a high level.
• Agricultural and industrial productivity increases, means of transport and communication develops. There is great mobility of labor.
• Education expands. Income also increases. People get more and better quality of food products. Medical and health facilities are expanded.
• During this stage economic development is speeded up due to individual and government efforts. Increased use of better technology, mechanization, and urbanization takes place. But there is no substantial change in the men, the attitude of the people and hence birth rate stays high i.e., economic development has not yet started affecting the birth rate.

Third Stage

• It is also characterized as a population stage because the population continues to grow at a fast rate. In this stage, the birth rate as compared to the death rate declines more rapidly.
• As a result, the population grows at a diminishing rate. This stage witnesses a fall in the birth rate while the death rate stays constant because it has already declined to the lowest minimum.
• Birth rate declines due to the impact of economic development changed social attitudes and increased facilities for family planning.
• The population continues to grow fast because the death rate stops falling whereas the birth rate though declining but remains higher than the death rate.

Fourth Stage  

• It is called the stage of a stationary population. 
• Birth rate and death rate are both at a low level and they are again near balance.
• The birth rate is approximately equal to the death rate and there is little growth in population. It becomes more or less stationary at a low level.
• The details about the population of British India were first collected through a census in 1881. Though suffering from certain limitations, it revealed the unevenness in India’s population growth. Subsequently, every ten years such census operations were carried out. Before 1921, India was in the first stage of demographic transition. The second stage of transition began after 1921.

• Both statements are correct

Supplementary notes:

Great Leap Forward (GLF)

• After the establishment of the People’s Republic of China under one-party rule, all critical sectors of the economy, enterprises, and lands owned and operated by individuals were brought under government control.
• The Great Leap Forward (GLF) campaign initiated in 1958 aimed at industrialising the country on a massive scale.
• People were encouraged to set up industries in their backyards.
• In rural areas, communes were started. Under the Commune system, people collectively cultivated lands. In 1958, there were 26,000 communes covering almost all the farm population.
• GLF campaign met with many problems:
• A severe drought caused havoc in China killing about 30 million people. 
• When Russia had conflicts with China, it withdrew its professionals who had earlier been sent to China to help in the industrialisation process.
• In 1965, Mao introduced the Great Proletarian Cultural Revolution (1966–76) under which students and professionals were sent to work and learn from the countryside.