Test: Indian Economy -1 - UPSC MCQ

Explanation:

1. Coming of the festive season: During the festive season, there is an increase in consumer spending, which leads to increased demand for goods and services. This will encourage banks to lend more money, increasing the money supply in the economy.

2. Rise in interest rate: An increase in interest rates makes borrowing more expensive, which generally leads to a decrease in the money supply. This is because people are less likely to take out loans, and businesses are less likely to invest when borrowing is more expensive.

3. Injection of High-powered money in the economy: High-powered money refers to currency and reserves held by the central bank. When the central bank injects more money into the economy, it increases the money supply.

4. Decrease in interest rate: When interest rates decrease, borrowing becomes more attractive, leading to an increase in loans and investments. This, in turn, increases the money supply in the economy.

Introducing a Direct Tax code can be a prudent way to increase the Tax to GDP ratio. A Direct Tax code can simplify the tax laws, widen the tax base, and reduce the tax evasion, which can lead to an increase in tax collection and Tax to GDP ratio.

Lowering of the income tax exemption limit may increase the tax collection in the short term, but it can adversely impact the disposable income and demand, which can impact the economic growth.

Increasing excise duty on crude oil may increase the tax collection in the short term, but it can lead to an increase in inflation, which can negatively impact the economic growth.

Formalization of the labor market may increase the tax collection in the long term, but it can take time to implement, and it may not have an immediate impact on the Tax to GDP ratio.

• The most important role of RBI is as the controller of money supply and credit creation in the economy. RBI is the independent authority for conducting monetary policy in the best interests of the economy.

The instruments that the RBI uses for conducting monetary policy are as follows:

(1) Statement 1 is correct. Open Market Operations (OMO) - RBI purchases (or sells) government securities to the general public in a bid to increase (or decrease) the stock of high-powered

money in the economy.

(2) Statement 2 is correct. Varying Reserve Requirements - CRR and SLR also works through the Reserve Deposit Ratio route. A high (or low) value of CRR or SLR increases (or decreases) the

value of reserve deposit ratio, thus diminishing (or increasing) the value of money multiplier

and money supply in the economy in a similar fashion.

(3) Repo Rate - The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

(4) Statement 4 is correct. Moral Suasion can be undertaken by RBI to persuade commercial banksto follow the monetary policy directives given by the Monetary Policy Committee.

• Statement 3 is incorrect. Sterilization is one of the important functions of RBI where it sterilizes the economy against adverse external shocks. However, it is not an instrument of monetary policy transmission.

Option (a) is the correct answer.

• Statement 1 is incorrect: Public goods are distinct from private goods as they cannot be provided through the market mechanism and thus must be provided by the government. This is known as the “allocation function” of the government.

• Statement 2 is incorrect: Public goods such as roads, public parks, highways, railways are for the benefit of all. The consumption of such goods by several individuals is not “rivalrous” in the sense that a person can enjoy the benefits without reducing their availability to others.

• Statement 3 is correct: In case of private goods if one does not pay then one can be excluded from enjoying its benefits. However, in case of public goods there is no feasible way of excluding anyone from enjoying its benefits. Thus, non-payers cannot be excluded.

Since public goods are “non-rivalrous” and “non-excludable” it becomes difficult to collect fees for the public goods. This leadsto a problem of “Free-reider”. Since consumers will not voluntarily pay for what they are getting for free it breaks the link between producers and consumers and therefore the government must step in to provide for such gods. This is known as “Public provisioning”.

• Statement 1 is not correct: Tax-to-GDP ratio represents the size of a country's tax kitty relative to its GDP. It is a representation of the size of the government's tax revenue expressed as a percentage of the GDP. The higher the tax to GDP ratio the better the financial position the country will be in. The ratio represents that the government is able to finance its expenditure. A higher tax to GDP ratio means that the government is able to cast its fiscal net wide. It reduces a government's dependence on borrowings.

• Statement 2 is not correct: Developed nations typically have higher tax-to-GDP ratios than developing nations.

Explanation:

1. An increase in the number of tourists visiting a country can lead to a positive trade balance because tourists spend money on goods and services in the country they visit. This increases the country's exports, which in turn can lead to a positive trade balance if the value of exports exceeds the value of imports.

2. Depreciation of the Rupee means that the value of the Rupee decreases relative to other currencies. This makes the country's exports cheaper for foreign buyers, which can lead to an increase in exports. If the increase in exports is greater than the increase in imports, it can lead to a positive trade balance.

• Stagflation is characterised by slow economic growth and relatively high unemployment or economic stagnation which is at the same time accompanied by rising prices (inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

• The idea became popular during the 1970s when the U.S. economy witnessed high price inflation due to the oil shock as well as an economic recession marked by negative economic growth.

• Statement 1 is correct. As part of the ongoing DISHA Week to mark the successful completion of 2 years of the District Development Coordination & Monitoring Committee (DISHA), the Union Minister of Rural Development, Panchayati Raj and Mines, held wide ranging discussions on the DISHA initiative with Special Secretaries of the states/ UTs at Vigyan Bhawan in New Delhi. The discussions centered on various topics related to DISHA initiative and ways and means to make it a powerful and potent tool of participative governance.

• Statement 2 is incorrect. DISHA initiative has provision for all three level i.e. Central DISHA committee, State DISHA committee and District DISHA committee.

• Statement 3 is correct. State DISHA committees are envisaged with the objective of ensuring quality of expenditure, particularly in the context of optimization of public funds spent under different programmes of the Central Government and other escalated issues from Distri ct Disha Committees. The Union Minister also launched a Meeting Management Software to serve the objective of end-to-end solution of paperless meeting. This software will help in preparing Meeting Notice, Agenda setting, communicating with members, circulating agenda, meeting minutes and also generate triggers on items which require follow-up action. An e-book on DISHA was also released which lucidly elaborates background of DISHA initiative, learning experience, requirement of DISHA Dashboard its features and user manual, and guidelines of district and state level DISHA committees. It has been created for effective coordination and development of Central Government’s programme for infrastructure development or Social and human resource development

• The Chairperson of the committee will be the senior most Member of Parliament (Lok Sabha) elected from the district, nominated by the Union Ministry of Rural Development

• It will ensure the participation of people’s representative at all levels and successful implementation of flagship programme of central government.

• Ensure that all Central Government programmes are implemented in accordance with the guidelines. Real Time Monitoring:

• DISHA dashboard, the application, which is now available to all members of Parliament and State Assemblies as well district officials, allows the user to track the progress of multiple and diverse schemes in a certain district, block, or even a gram panchayat.

• The application automatically turns sets of statistics and data into interactive and visually accessible graphics and maps.

• Currently, 18 schemes are covered; the ultimate plan is to integrate all 42 Central schemes representing a total outlay of ₹3 lakh crore, which are already monitored by DISHA or District Development Coordination and Monitoring Committees.

• Several schemes have good Management Information Systems, but they don’t talk to each other. So, it is difficult for elected representatives and local planners to go through all the data and get a sense of what is happening in a particular place.

• Currently, geographic mismatches make it difficult to unite data; for instance, while the Rural Development Ministry tracks its schemes by gram panchayat, the Health Ministry tracks it by anganwadis, which are mapped by population, while crime data uses different boundaries

• Statement 1 is incorrect: In a market economy, all economic activities such as supply and demand interactions, individuals freely exchanging their products with each other etc. are organized through the market without any government interference. There may be some government intervention or planning, but usually it refers to an economy that is more market oriented in general. In this kind of an economy most economic decision making is done through voluntary transactions according to the laws of supply and demand. Hence the arrangement which allow people to buy and sell commodities freely are the defining features of a market economy.

• Statement 2 is correct: Most of the economies are mixed economies, where some important decisions are taken by the government and the economic activities are by and large conducted by the market. The extent of government control varies, for example the United States of America the role of government is minimal whereas in China, the role of the government is much more interventionist. Statement 3 is also correct: in a centrally planned economy, the government or the central authority plans all the important activities in the economy. All important decisions regarding production, exchange, and consumption of goods and services are made by the government. Centrally-planned economic mandates surrounding the production of goods and services are often executed by state owned enterprises, which are government-created legal entities that engage in commercial activities on a government's behalf. The government may try to achieve a particular allocation of resources and distribution of final goods and services which is thought to be desirable for society as a whole.

• Statement 1 is incorrect. The mission aims at sensitizing all railway employees (not all government employees) about the need to adhere to good ethics and to maintain high standards of integrity at work

• Statement 2 is incorrect. Launched by the Ministry of Railways launched on 27th July 2018 and not by the ministry of personnel, Public Grievances and Pensions.

2 and 3 only

Explanation:
1. NBFCs are not necessarily the largest net borrowers of funds from the financial system. The extent of their borrowing depends on their size, operations, and market conditions. It is not accurate to generalize them as the largest net borrowers.

2. NBFCs can acquire shares, stocks, and other securities issued by the government. They often invest in government securities as part of their asset portfolio.

3. NBFCs are not part of the Payment and Settlement system, which is the system that deals with the transfer of funds between parties, such as banks and other financial institutions. NBFCs are primarily involved in providing financial services, such as loans, investments, and leasing, but they do not have the authority to facilitate payments and settlements between parties.

• The correct answer is option (c), both 1 and 2. The Wholesale Price Index (WPI) and the Consumer Price Index (CPI) are two measures of inflation in India. The WPI is a measure of the average change in the prices of goods traded between businesses, while the CPI is a measure of the average change in the prices of goods and services consumed by households.

• With regard to the statements provided, statement 1 is correct. The WPI basket does not cover services, such as housing, education, and recreation, while the CPI basket does. This means that the WPI measures the change in prices of only a subset of the goods and services consumed by households, while the CPI measures the change in prices of a broader range of goods and services. Statement 2 is also correct, as the weightage of the food group is higher in the CPI basket than in the WPI basket. This reflects the fact that food is a larger share of household consumption compared to business expenditure. Therefore, the correct answer is option (c).

• Statement 1 is correct: G-secs practically carry no risk of default and, hence, are called riskfree gilt-edged instruments. Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.

• Statement 2 is not correct: Such securities are of two types:

  • Treasury Bills

    • They are short term instruments

    • With original maturities of less than one year- presently issued in three tenors, namely, 91 days, 182 days and 364 day

    • Government bonds or dated securities

    • They are Long term instruments.

    • With original maturity of one year or more.

• In India, the Central Government issues both treasury bills and bonds or dated securities

  • while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).

• Statement 1 and 2 is incorrect. Andhra Pradesh, with a score of 98.42 per cent, topped the 'ease of doing business' ranking among states prepared by the World Bank and the Department of Industrial Policy and Promotion (DIPP).

• Statement 3 is correct. In 3rd edition of the annual ranking of all states and UTs under the Business Reform Action Plan (BRAP) conducted by DIPP and the World Bank (not WTO). Last year, Andhra Pradesh and Telangana had jointly topped the chart.

• This year, Telangana has slipped to the second spot with a score of 98.33 per cent. Haryana came third with 98.07 per cent.

• The government floated the move to rank states last year with the aim of triggering competition among states to attract investments and improve business climate.

• The parameters include areas such as construction permit, labour regulation, environmental registration, access to information, land availability, and single window system. Others in the top ten are Jharkhand (4), Gujarat (5), Chhattisgarh (6), Madhya Pradesh (7), Karnataka (8), Rajasthan (9) and West Bengal (10). Meghalaya was ranked last at 36th position.

• Only 43.5 percent of entrepreneurs face no problem relating to corruption in their states, while 30.8 percent consider it to be moderate and the rest say it is very serious, according to NCAER State Investment Potential Index 2017.

• DIPP in collaboration with the World Bank conducts an annual reform exercise for all States/UTs under the Business Reform Action Plan (BRAP).

• The assessment under the BRAP 2017 is based on a combined score consisting of reform evidence score that is based on evidence uploaded by States/UTs and feedback score that is based on response garnered from the actual users of the services provided to the businesses.

• DIPP said 17 states have achieved a reform evidence score of more than 90 per cent and 15 have achieved a combined score of 90 per cent and more. About Business Reform Action Plan (BRAP)

• The aim of this exercise is to improve delivery of various Central Government regulatory functions and services in an efficient, effective and transparent manner.

• The reform plan has expanded from 285 to 372 action points till 2017.

• States and UTs have conducted reforms to ease their regulations and systems in areas such as labour, environmental clearances, single window system, construction permits, contract enforcement, registering property and inspections. States and UTs have also enacted Public Service Delivery Guarantee Act to enforce the timelines on registrations and approvals.

• The current assessment under the BRAP 2017 is based on a combined score consisting of Reform evidence score that is based on evidences uploaded by the States and UTs and Feedback score that is based on the feedback garnered from the actual users of the services provided to the businesses.

Therefore, both statements 1 and 2 are correct. Statement 1 is correct because the NIIF is an investment vehicle that funds infrastructure projects, and statement 2 is correct because the NIIF manages three funds that are registered as AIFs with SEBI. Therefore, the correct answer is option (c).

• Statement 1 is correct. Meghalaya became 1st state in India to ensure conservation of water and have its own State Water Policy. This move comes following a nod given by State Cabinet for the purpose.

• Statement 2 is correct. Policy also seeks to ensure the protection and conservation of catchment areas of all water sources in state so as to prevent degradation of quantity and quality of water sources. It also outlines issue of river pollution. Implementation: For the purpose of implementation of the policy via active participation of the community a Water Sanitation Village Council at the village level would be constituted.

Therefore, all three statements are correct. Statement 1 is correct because people can be exposed to arsenic through contaminated water, food, and tobacco smoke. Statement 2 is correct because long-term exposure to arsenic can cause cancer and skin lesions. Statement 3 is correct because arsenic is naturally present at high levels in the groundwater of some countries. Therefore, the correct answer is option (d).

• It was established under the Ministry of Consumer Affairs, Food and Public Distribution. Statement 3 is correct: It is operated under the joint responsibility of the Central and State Governments.

  • The Central Government, through the Food Corporation of India (FCI), purchases, stores, transports and allocates food grains to States. ○ The States identify eligible families, issue Ration Cards and supervise the functioning of Fair Price Shops (FPSs) etc.

• Statement 1 is incorrect. Ministry of Health and Family Welfare launched a Jan Jagrukta Abhiyaan in Delhi to accelerate vector control measures.

• Statement 2 is correct. Ministry of Health and Family Welfare is all set to launch a special campaign in Delhi to sensitize and mobilise the community on measures for prevention and control of Vector Borne Diseases (VBDs) like Malaria, Dengue and Chikungunya.

• Statement 3 is correct. This is probably the first time that three governments-national, state and local bodies- will converge in their efforts to mobilise the community for a public health activity. All Members of Parliament of Delhi and Mayors of all three Delhi Municipal Corporations for their active involvement in this campaign. A total of 286 ward-wise teams (in all 272 Municipal wards and 14 locations of NDMC) have been constituted with 20-25 members per team including officers of the Municipal Corporation along with officers from Central Government and Government of NCTD. The Northern Railways and Delhi Cantonment Board will also carry out the activities in campaign mode for prevention and control of VBDs in their areas.

• It is based on first-time collection of additional data during the annual round of Periodic Labour Force Survey for July 2020-June 2021.

• It is released by the Ministry of Statistics and Programme Implementation (MoSPI).

• It separates the categories of ‘temporary visitors’ and ‘migrants’.

• While ‘temporary visitors’ have been defined as the ones who arrived in households after March 2020 and stayed continuously for a period of 15 days or more but less than 6 months,

• The ‘migrants’ have been defined as those, for whom the last usual place of residence, any time in the past, is different from the present place of enumeration.

• The survey block was introduced in July 2020 and the period of survey for asking this information was July 2020-June 2021.

InvITs, or Infrastructure Investment Trusts, are investment vehicles that gather funds from investors to invest in infrastructure projects. As pass-through entities, InvITs pass their income and expenses directly to the unitholders. According to the latest budget for 2023-24, all income distributed by InvITs—including interest income, dividend income, and rental income—will be taxable for unitholders. Thus, statement 1 is incorrect.

The exemption of interest income from tax is intended to encourage investment in InvITs and promote infrastructure development in the country. In contrast, dividends received from InvITs are treated as regular income and are taxed according to the investor's applicable income tax slab rates.

InvITs are specifically recognized as borrowers under the 'Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002' (SARFAESI Act). The SARFAESI Act deals with the securitization and reconstruction of financial assets and the enforcement of security interests by banks and financial institutions, making statement 2 correct.

InvITs pool funds from investors to invest in income-generating infrastructure assets and are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Infrastructure Investment Trusts) Regulations, 2014. The regulatory framework for InvITs differs from that of traditional borrowers under the SARFAESI Act.

• Statements 1 and 2 are not correct: Repo Rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.

  • Repo stands for ‘repurchase option’ or ‘repurchase agreement’.

  • The central bank provides these short term loans against securities such as treasury bills or government bonds.

  • Reverse Repo Rate: This is the rate the central bank of a country pays its commercial banks to park their excess funds in the central bank. The reverse repo rate provided by RBI is generally lower than the repo rate.

  • While repo rate is used to regulate liquidity in the economy, reverse repo rate is used to control cash flow in the market.

  • When there is inflation in the economy, RBI increases the reverse repo rate.

• It encourages commercial banks to make deposits in the central bank and earn returns. Marginal Standing Facility: MSF or marginal standing facility is a system of the Reserve Bank of India that allows scheduled commercial banks to avail funds overnight.

  • It was introduced by the RBI as a provision for banks to avail overnight funds during a revision of the country’s monetary policy in 2011-12.

  • It is usually higher than the repo rate.

  • Banks can use their SLR or statutory liquidity ratio to take loans under MSF.

• This is a short-term loan used to maintain the liquidity of banks.

• Consumer Price Index (CPI) Inflation:

  • It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households.

  • It also represents retail inflation

• Statement 1 is incorrect. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).

• Since these prices remain fixed, if the Real GDP changes, the volume of production undergoes changes.

• Statement 2 is also incorrect. Nominal GDP is the value of GDP at the current prevailing prices. The ratio of nominal to real GDP is called GDP Deflator.

• Statement 3 is correct. The ratio of nominal GDP to real GDP (GDP Deflator) gives an idea of how the prices have moved from the base year. Nominal GDP

  • It is an assessment of economic production in an economy but includes the current prices of goods and services in its calculation.

  • GDP is typically measured as the monetary value of goods and services produced.

  • Since nominal GDP doesn't remove the pace of rising prices when comparing one period to another, it can inflate the growth figure.

• Real GDP

  • It is a measure of a country's total economic output that is adjusted for price changes.

  • Real GDP makes comparing of GDP in different years more meaningful, because it allows comparisons of the actual volume of goods and services without inflation.

  • Real GDP is calculated using a deflator or price index, a number that expresses prices in each year relative to a base year.

• The correct answer is option (b), 1, 2, 3, and 4. The Marginal Cost of funds based Lending Rate (MCLR) is a methodology used by banks in India to determine the interest rates on loans. The MCLR is the minimum interest rate that a bank must charge on a loan, and it is based on the marginal cost of funds, which is the cost of the bank's most expensive source of funds. The MCLR was introduced in 2016 to improve the transmission of policy rates into the lending rates of banks, and to ensure the availability of bank loans at interest rates that are fair to both borrowers and banks.

• All four statements provided are correct. Statement 1 is correct because the MCLR aims to improve the transmission of policy rates into the lending rates of banks. Statement 2 is correct because the MCLR helps banks to become more competitive and enhance their long-run value. Statement 3 is correct because the MCLR ensures the availability of bank loans at interest rates that are fair to both borrowers and banks. Statement 4 is correct because the MCLR aims to improve transparency in the methodology followed by banks for determining interest rates. Therefore, the correct answer is option (b).

• The correct answer is option (b), 2 only. The Sovereign Gold Bond (SGB) Scheme is a government-backed scheme that allows individuals and Hindu Undivided Families (HUFs) to invest in gold without physically holding the metal. The SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India, and they are denominated in units of one gram of gold.

• With regard to the statements provided, statement 1 is not correct, as the SGBs are not restricted for sale to individuals and HUFs only. The SGBs can also be purchased by banks, trusts, universities, charitable institutions, and other eligible entities. Statement 2 is correct, as the capital gains tax arising on the redemption of an SGB has been exempted. The capital gains tax on the sale of SGBs is the same as the capital gains tax on the sale of physical gold, which is currently taxed at a rate of 20% with indexation. Therefore, the correct answer is option (b).

• Statement 1 is incorrect. SEQI has been developed by NITI Aayog to evaluate the performance of States and Union Territories (UTs) in the school education sector. It has been developed through a collaborative process including key stakeholders such as the Ministry of HumanResource Development (MHRD), the World Bank and sector experts.

• Statement 2 is correct. Among the large states ,Kerala bagged the top spot while UttarPradesh scored the lowest. Among the smaller states Manipur bagged the top spot whereas Arunachal Pradesh came last.

• The correct answer is option (b), Guillotine. In parliamentary procedures, the guillotine is a process where all the outstanding demands of the budget are directly put to vote without further discussion in the House. The guillotine is used as a time-saving measure when there is a large volume of outstanding budget demands that need to be voted on, and it allows the House to proceed to the next stage of the budget process without having to debate each demand individually.

• The other options provided are not correct. A Policy Cut Motion is a motion introduced by the opposition in the legislature to cut the allocation for a particular policy or program. The simple closure and the kangaroo closure are parliamentary procedures that allow the House to close the debate on a motion and proceed to a vote without further discussion. Therefore, the correct answer is option (b).