Test: Indian Economy -7 - UPSC MCQ

Economic efficiency is when every scarce resource in an economy is used and distributed among producers and consumers in a way that produces the most economic output and benefit to consumers. Economic efficiency can involve efficient production decisions within firms and industries, efficient consumption decisions by individual consumers, and efficient distribution of consumer and producer goods across individual consumers and firms. It is not necessary that income levels will be equal when resources are efficiently allocated.

Statement 1: Depreciation is the gradual decrease in the economic value of the capital stock of a firm, nation or other entity. It can happen either by physical depreciation like wear and tear or obsolescence or by changes in the demand for the services of the capital in question. Statement 2: Capital stock is anything that adds to the productive capacity of the economy. Spending on infrastructure actually increase the capital stock of the nation.

FDI is one of the reliable type of investment. FDI investment setup business in an economy, provide jobs and increase economic activities.

A participatory note, commonly known as a P-note or PN, is an instrument issued by a registered foreign institutional investor (FII) to an overseas investor who wishes to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).

India has joined the European Bank for Reconstruction and Development (EBRD) as the 69th shareholder, paving the way for more joint investment with Indian companies across the EBRD’s regions .Membership of EBRD would enhance India’s international profile and promote its economic interests. It will also give access to EBRD’s Countries of Operation and sector knowledge. The European Bank for Reconstruction and Development (EBRD) is an international financial institution that supports projects in over 30 countries, from eastern Europe to central Asia and the southern and eastern Mediterranean. Investing primarily in private sector clients whose needs cannot be fully met by the market, the EBRD promotes entrepreneurship and fosters transition towards open and democratic market economies.
EBRD Mandate:

• The mandate of the EBRD stipulates that it must only work in countries that are committed to democratic principles.
• Respect for the environment is part of the strong corporate governance attached to all EBRD investments.

Bank rates influence lending rates of commercial banks. Higher bank rate will translate to higher lending rates by the banks.

The objective of the ICI is to provide an advance indication on production performance of industries of ‘core’ nature before the release of Index of Industrial Production (IIP). ICI measures collective and individual performance of production in selected eight core industries viz. Coal, Crude Oil, Natural Gas, Petroleum Refinery Products, Fertilizers, Steel, Cement and Electricity.
The Index is compiled and released by Office of the Economic Adviser (OEA).

• The external debt of India is the total debt the country owes to foreign creditors. The debtors can be the Union government, state governments, corporations or citizens of India. The debt includes money owed to private commercial banks, foreign governments, or international financial institutions such as the International Monetary Fund (IMF) and World Bank.
• Long-term borrowings (more than a year to maturity) dominate India’s external debt.
• Commercial borrowings remained the largest component of external debt, with a share of 38.4 per cent, followed by non-resident deposits (24 per cent) and short-term trade credit (18.7 per cent).

Gross capital formation, in simple terms is equivalent to investment made. It was earlier called gross domestic investment. The part of GDP that is used is called gross domestic consumption, while the part that is saved is gross domestic savings (GDS). Some part of this GDS will be re-invested back, and that is called gross capital formation. Now, an increase in GDP or GDS will not necessarily lead to an increase in capital formation. Because how much is invested back will depend on many other factors.

In formulating the recommendations in respect of the level of minimum support prices and other non-price measures, the Commission for Agricultural Costs and Prices takes into account, apart from a comprehensive view of the entire structure of the economy of a particular commodity or group of commodities, the following factors:-

• Cost of production
• Changes in input prices
• Input-output price parity
• Trends in market prices
• Demand and supply
• Inter-crop price parity
• Effect on industrial cost structure
• Effect on cost of living
• Effect on general price level
• International price situation

What are open market operations?

• They are conducted by the RBI by way of sale or purchase of government securities (g-secs) to adjust money supply conditions.
• The central bank sells g-secs to suck out liquidity from the system and buys back g-secs to infuse liquidity into the system.
• These operations are often conducted on a day-to-day basis in a manner that balances inflation while helping banks continue to lend.
• The RBI uses OMO along with other monetary policy tools such as repo rate, cash reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.
• When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
• RBI carries out the OMO through commercial banks and does not directly deal with the public.

In agriculture Census, the operational holdings are categorised in five size classes as follows:

• Marginal: Below 1.00 hectare.
• Small: 1.00-2.00 hectare.
• Semi- Medium: 2.00-4.00 hectare.
• Medium: 4.00-10.00 hectare.
• Large: 10.00 hectare and above.

• Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value.
• Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged.

• GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products. The market value taken at current prices is the nominal GDP. The value taken at constant prices — that is prices for all products taken at an unchanged base year — is the real GDP.
• In simple terms, real GDP is nominal GDP stripped of inflation. Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year. Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.

Predatory Pricing – the pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market.

Liabilities of Reserve Bank
Notes Issued: The currency notes issued by the Reserve Bank are the Reserve Bank’s liability.
Notes in Circulation
Notes held in the Banking Department
Deposits: These represent the cash balances maintained with the Reserve Bank by the Central and State Governments, banks, all India financial institutions, such as, Export Import Bank (EXIM Bank) and NABARD, foreign central banks, international financial institutions, and the balance in different accounts relating to the Employees’ Provident Fund, Gratuity and Superannuation Funds.
Paid-up Capital and Reserve Fund: The Capital of the Bank, of ₹ 0.05 billion, is held by the Government of India and reserve funds i.e. Credit (Long-term Operations) Fund, National Agricultural Credit (Stabilisation) Fund, National Industrial Credit (Long-term Operations) Fund of the Bank are part of other liability.

Managed float regime is the current international financial environment in which exchange rates fluctuate from day to day, but central banks attempt to influence their countries’ exchange rates by buying and selling currencies to maintain a certain range.
Objective of this intervention is to minimise the fluctuation in the exchange rate of rupee.

Revenue receipts are of two types viz.
Tax Revenue and Non-tax revenue.
Tax revenues are either direct taxes or indirect taxes. Income Tax, Corporate tax, Gift Tax, Wealth Tax and Property tax etc. are direct taxes. Sales tax, Value Added Tax (VAT), Goods and Services tax (GST) are indirect tax.
Non-Tax Revenue Receipts are those revenue receipts which are not generated by Taxing the public.

They include:

• Money which the Government earns as “Dividends and profits” from public enterprises (PSUs). Interest which the Government earns on the money lent by it to external or internal borrowers.
• Money received through stamp printing, currency printing, medal printing etc.
• Money which the government accrues as fees, fines, penalties etc.
• Grants the Government of India receives from the external sources.
• In case of the state Governments, it may be the internal grant from the central Government.

MSP is announced for selected crops (22 mandated crops: 14 crops of the kharif season viz. paddy, jowar, bajra, maize, ragi, arhar, moong, urad, groundnut-in shell, soyabean, sunflower, sesamum, niger seed and cotton; 6 rabi crops viz. wheat, barley, gram, masur(lentil), rapeseed/mustard and safflower ; and two other commercial crops viz. jute and copra; MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively)

• Fair and Remunerative Price (FRP) is announced for sugarcane
• MSP price is kept relatively lower than market price

Statement 1: If high growth results in an imbalance of supply and demand (greater than supply), then inflation is likely. On the other hand, if supply outstrips demand due to high growth, prices will be depressed.
Statement 2: High growths are necessary for reducing poverty, but high growths may not always reduce poverty.
The benefits of high growth may be restricted to the top earners of the population and little or no benefit may accrue to the BPL.
Also, whether Economic growth results in increase in per capita income depends on whether the population of the country has grown or not. If population growth has outpaced economic growth rate, then per capita income will reduce.

In simple terms, inflation is basically too much money chasing too few goods, or excess demand chasing limited supply. In both these cases, the prices of goods rise faster as individual consumers bid higher in order to get the good.
Excess supply is likely to bring prices down, not high.
If income rises faster, demand for goods and services will also rise. On the other hand, if the economy is unable to satisfy the increased demand, for e.g. due to poor infrastructure, lack of production etc, the higher income will spiral the prices upwards and lead to high inflation.

• GDP at market prices calculates total value of goods and services produced within a year at market prices.
• If it increases, it means entrepreneurs have decided to produce more goods and services.
• This can happen even without an increase in actual investment, with the same machinery and labour.
• If the size of economy grows proportionately larger each year, while the growth rate is positive, it may not necessarily be increasing. So, statement 1 is incorrect.

• The current account records exports and imports in goods and services and transfer payments. 
• Trade in services denoted as invisible trade (because they are not seen to cross national borders).
• Transfer payments are receipts which the residents of a country receive ‘for free’, without having to make any present or future payments in return.
• They consist of remittances, gifts and grants. They could be official or private.

The main difference between revenue receipts and capital receipts is that in the case of revenue receipts, government is under no future obligation to return the amount, i.e., they are non-redeemable. But in case of capital receipts which are borrowings, government is under obligation to return the amount along with Interest.
Capital receipts may be debt creating or non-debt creating.
Examples of debt creating receipts are—Net borrowing by government at home, loans received from foreign governments, borrowing from RBI. Examples of non-debt capital receipts are—Recovery of loans, proceeds from sale of public enterprises (i.e., disinvestment), etc. These do not give rise to debt.

• Rupee mostly appreciates against dollar due to higher flows into the market.
• We need to avoid the appreciation of the rupee if we are to strengthen the domestic manufacturing industry. Any appreciation of the rupee facilitates more imports and less exports, adversely affecting domestic production.