Test: Indian Economy -3 - UPSC MCQ

• When the economy has both Current Account Deficit and Fiscal Deficit, it is said to be facing the twin deficit. Hence option (b) is the correct answer.

• Both deficits often reinforce each other.

• The current account measures the flow of goods, services and investments into and out of the country. There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.

  It comprises of following components:

  • Trade of goods,

  • Services, and

  • Net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.

• Hence, Current Account = Trade gap + Net current transfers + Net income abroad.

• It can be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.

• A fiscal deficit is a shortfall in a government's income compared with its spending. It is usually measured as percentage of GDP.

• A proportional tax is a taxing mechanism in which the taxing authority charges the same rate of tax from each taxpayer, irrespective of income. This means that lower class, or middle class, or upper-class people pay at the same rate of tax. Hence statement 1 is correct.

• Since the tax is charged at a flat rate for everyone, whether earning higher income or lower income, it is also called a flat tax.

• A proportional tax is based on the theory that since everybody is equal, taxes should also be charged the same way.

• A progressive tax is a tax in which the tax rate increases as the taxable amount increases. This sort of system is meant to affect higher-income people more than low- or middle-class earners to reflect the presumption that they can afford to pay more.

• The redistribution objective is sought to be achieved through progressive income taxation (not proportional taxation), in which higher the income, higher is the tax rate. Hence, statement 2 is not correct.

• The balance of payments (BoP) records the transactions in goods, services and assets between residents of a country with the rest of the world. There are two main accounts in the BoP – the current account and the capital account. The current account records exports and imports in goods and services and transfer payments.

• Trade-in services are denoted as invisible trade (because they are not seen to cross national borders). Services trade includes both factor and non-factor income. Factor income includes net international earnings on factors of production (like labor, land, and capital). Non-factor income is the net sale of service products like shipping, banking, tourism, software services, etc.

• 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 balance of exports and imports of goods is referred to as the trade balance. Adding trade in services and net transfers to the trade balance, we get the current account balance. The capital account records all international purchases and sales of assets such as money, stocks, bonds, etc.

• Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time.

• All else being equal, inflation decreases the amount of goods or services you would be able to purchase. Inflation reduces the value of a currency's purchasing power, having the effect of an increase in prices.

• Consumers are worst affected by rise in prices or inflation. Consumers will have to pay more for the rising cost of products due to the declining purchasing power of the currency. Increase in spending due to inflation would also eat into the savings of the poor and middle-income group. Thus poor and middle-income group are worst affected by the rise in the price level. Hence, statement 1 is correct.

• Most commonly used inflation indexes are the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

• Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time. Producers are worst affected by fall in prices or deflation. Their profit level falls due to fall in prices forcing them to reduce investment. Hence, statement 2 is not correct.

• Apart from the categories of aggregate macroeconomic variables such as National Income, Personal Income, Personal Disposable Income, another aggregate income categories used in National Income accounting is National Disposable Income.

• National Disposable Income = Net National Product at market prices + Net current transfers from the rest of the world.

• The significance of the National Disposable Income is that it gives an idea of what is the maximum amount of goods and services the domestic economy has at its disposal. Current transfers from the rest of the world include items such as gifts, aids, etc.

Hence both the statements are correct.

• Stagflation was first recognized during the 1970s, where many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.

• Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output. It is a period of rising inflation and unemployment but falling output. Hence, statement 1 is correct.

• Stagflation is a combination of stagnant economic growth, high unemployment, and high inflation. This scenario, of course, directly contradicts the theory behind the Philips curve.

• Stagflation was long believed to be impossible because the economic theories that dominated academic and policy circles ruled it out of their models by construction. In particular, the economic theory of the Phillips Curve portrayed macroeconomic policy as a trade-off between unemployment and inflation.

• The theory claims that economic growth comes with inflation, which in turn should lead to more jobs and less unemployment. However, the concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment. Hence, statement 2 is not correct.

• National Crime Records Bureau (NCRB) established on the recommendations of the National Police Commission (1977-1981) and the MHA’s Task Force (1985). Hence, statement 1 is correct.

• NCRB has also been designated as the Central Nodal Agency to manage technical and operational functions of the ‘Online Cyber-Crime Reporting Portal’ through which any citizen can lodge a complaint or upload a video clip as an evidence of crime related to child pornography, rape/gang rape. The Bureau has been entrusted to maintain National Database of Sexual Offenders (NDSO) and share it with the States/UTs on regular basis. Hence, statement 2 is correct.

• Industrial Policy Resolution 1956 (IPR 1956): In accordance with the goal of the state controlling the commanding heights of the economy, the Industrial Policy Resolution of 1956 was adopted. This resolution formed the basis of the Second Five Year Plan, the plan which tried to build the basis for a socialist pattern of society.

• This resolution classified industries into three categories:

  • The first category comprised industries which would be exclusively owned by the state

  • the second category consisted of industries in which the private sector could supplement the efforts of the state sector, with the state taking the sole responsibility for starting new units

  • the third category consisted of the remaining industries which were to be in the private sector. Hence option 1 is not correct.

• Although there was a category of industries left to the private sector, the sector was kept under state control through a system of licenses. No new industry was allowed unless a license was obtained from the government. This policy was used for promoting industry in backward regions; it was easier to obtain a license if the industrial unit was established in an economically backward area. In addition, such units were given certain concessions such as tax benefits and electricity at a lower tariff. The purpose of this policy was to promote regional equality. Hence option 2 is correct.

• Even an existing industry had to obtain a license for expanding output or for diversifying production (producing a new variety of goods). This was meant to ensure that the number of goods produced was not more than what the economy required. A license to expand production was given only if the government was convinced that the economy required a larger quantity of goods. Hence option 3 is not correct.

• The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, were created in 1944 at a meeting of 44 nations (the Allies) at Bretton Woods, New Hampshire to rebuild devastated economies after the war and to promote economic stability and economic development on a global scale.

• The founders wished to protect future generations against a repeat of a worldwide economic crisis like the one experienced during the Great Depression which was believed to have partially caused the subsequent rise of fascism and the outbreak of World War II. It was thought that if economic cooperation could be arranged on a permanent institutional basis, the world would be better protected against economic depression, and war and humanity could achieve economic prosperity on a global scale.

• World Economic Forum (WEF), based in Cologny-Geneva, Switzerland, is an NGO, founded in 1971. It is a membership-based organization, and membership is made up of the world's largest corporations.

Hence option (c) is the correct answer.

• The Supreme Court has recently held that compelling an unwilling person to undergo a DNA test would be a violation of his/her personal liberty and right to privacy. Hence, statement 1 is correct.

• The court is focusing on the widespread use of a technology that, on the one hand, promotes the cause of justice while violating privacy on the other. Autosomal DNA tests can be used to confirm relationships with a high level of accuracy for parent/child relationships and all relationships up to the second cousin level. Hence, statement 2 is correct.

• Option 1 is correct: In the short run an important factor in determining exchange rate movements is the interest rate differential i.e. the difference between interest rates between countries. There are huge funds owned by banks, multinational corporations and wealthy individuals which move around the world in search of the highest interest rates. If we assume that government bonds in country A pay 8 percent rate of interest whereas equally safe bonds in country B yield 10 percent, the interest rate differential is 2 percent. Investors from country A will be attracted by the high interest rates in country B and will buy the currency of country B selling their own currency.

• Option 2 is correct: Exchange rates in the market depend not only on the demand and supply of exports and imports, and investment in assets, but also on foreign exchange speculation where foreign exchange is demanded for the possible gains from appreciation of the currency. Money in any country is an asset. If Indians believe that the British pound is going to increase in value relative to the rupee, they will want to hold pounds. This expectation would increase the demand for pounds and cause the rupee-pound exchange rate to increase in the present, making the beliefs self-fulfilling.

• Option 3 is correct: When income increases, consumer spending increases. Spending on imported goods is also likely to increase. When imports increase, the demand curve for foreign exchange shifts to the right (i.e. demand of foreign currency increases). There is a depreciation of the domestic currency. If there is an increase in income abroad as well, domestic exports will rise and the supply curve of foreign exchange shifts outward. On balance, the domestic currency may or may not depreciate. What happens will depend on whether exports are growing faster than imports. In general, other things remaining equal, a country whose aggregate demand grows faster than the rest of the world’s normally finds its currency depreciating because its imports grow faster than its exports. Its demand curve for foreign currency shifts faster than its supply curve.

Hence, option a is correct.

• The Government of India under Aatma Nirbhar Bharat Abhiyaan recently announced the role for the private sector in India’s space programme, including in satellite launches and space-based services.

• New Space India Limited (NSIL): It is the commercial arm of ISRO with the primary responsibility of enabling Indian industries to take up high technology space-related activities.

• It is a wholly-owned Government of India company, under the administrative control of Department of Space (DOS). Hence statement 1 is not correct.

• NSIL is not going to replace ANTRIX which still exists and has similar functions. Hence statement 2 is not correct. o Antrix was incorporated as a private limited company owned by Government of India in 1992 as a Marketing arm of ISRO for promotion and commercial exploitation of space products, technical consultancy services and transfer of technologies developed by Indian Space Research Organisation (ISRO).

• NSIL will work with IN-SPACe and enable industry consortia to take on some of the activities of ISRO.

  • IN-SPACe (Indian Space Promotion and Authorisation Centre) is a new organisation to ensure greater private participation in India’s space activities under the administrative control of the Department of Space.

  • It will assess the needs and demands of private players, including educational and research institutions, and, explore ways to accommodate these requirements in consultation with ISRO.

• Major business areas of NSIL are Launch vehicle production, Production and marketing of space-based services, Building satellites, Transfer of technology etc.

• Viability Gap Funding (VGF) means a grant one-time or deferred, provided to support infrastructure projects that are economically justified but fall short of financial viability. Hence statement 1 is correct.

• The lack of financial viability usually arises from long gestation periods and the inability to increase user charges to commercial levels. Infrastructure projects also involve externalities that are not adequately captured in the direct financial returns to the project sponsor.

• Viability Gap Funding is provided to infrastructure projects that are to be undertaken through Public-Private Partnerships.

• It is administered by the Ministry of Finance with suitable budgetary provisions.

• The quantum of VGF provided under this scheme is in the form of a capital grant at the stage of project construction. The amount of VGF will be equivalent to the lowest bid for a capital subsidy, but subject to a maximum of 20% of the total project cost. In case the sponsoring Ministry/State Government/ statutory entity proposes to provide any assistance over and above the said VGF, it will be restricted to a further 20% of the total project cost. Hence statement 2 is not correct. Social infrastructure projects suffer from poor viability and that the government will enhance the quantum of VGF up to 30 percent each of the total project cost.

• Support under this scheme is available only for infrastructure projects where private sector sponsors are selected through a process of competitive bidding.

• The lead financial institution for the project is responsible for regular monitoring and periodic evaluation of project compliance with agreed milestones and performance levels, particularly for the purpose of grant disbursement.

• VGF is disbursed only after the private sector company has subscribed and expended the equity contribution required for the project.

• Glyphosate is an Herbicide, developed in 1970. Its scientific name is N-(phosphonomethyl) glycine under the International Union of Pure and Applied Chemistry (IUPAC) system of nomenclature. Glyphosate was highly accepted by the tea planters in the past two decades. It has a very good market size in the tea sector of West Bengal and Assam. Presently, its consumption is highest in Maharashtra as it is becoming a key herbicide in sugarcane, maize and many fruit crops. Hence, both statement 1 and statement 2 are correct.

• Health impacts of glyphosate range from cancer, reproductive and developmental toxicity to neurotoxicity and immunotoxicity. Symptoms include irritation, swelling, burning of the skin, oral and nasal discomfort, unpleasant taste and blurred vision.

• Some 35 countries have banned or restricted the use of glyphosate: These include Sri Lanka, Netherlands, France, Colombia, Canada, Israel and Argentina. The Ministry of Agriculture and Farmers Welfare has also recently restricted the use of glyphosate, a widely used herbicide, citing health hazards for humans and animals. Hence, statement 3 is not correct.

• India Brand Equity Foundation (IBEF) is a Trust established in 1996 by the Department of Commerce, Ministry of Commerce and Industry, Government of India as an Investment Promotion Agency for creating the “brand India”.

• IBEF's primary objective is to promote and create international awareness about the Made in India label in overseas markets and to facilitate dissemination of knowledge of Indian products and services. Hence, statement 1 is correct.

• IBEF is fully funded, owned, and controlled by the Union Government, unlike Invest India which is a private company. Hence, statement 2 is correct.

• IBEF collects, collates, and disseminates comprehensive information on India. It has been developed as a single-window resource for in-depth information and insight on India. It also produces a wide range of well-researched publications focused on India's economic and business advantages.

• Thus it is basically a knowledge center for global investors, international policy-makers, and world media who seek updated, accurate and comprehensive information on the Indian economy, states, and sectors. IBEF regularly tracks government announcements in policy, foreign investment, macroeconomic indicators, and business trends.

• IBEF works with a network of stakeholders – domestic and international – to promote Brand India.

• IBEF is registered as the Investment Promotion Agency of India with the World Association of Investment Promotion Agencies (WAIPA).

• However, IBEF functions more like a trade promotion body as it is more focused on the trade side rather than on the investment side. As understood, the actual investment advice and consultancy are provided through Invest India.

• Inflation is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Thus it indicates a decrease in the purchasing power of a nation’s currency.

• As inflation in country A is greater than country B, the purchasing power of the currency of country A is less than that of country B.

• Initially we assumed that the prices of basket is same in both the countries. But as inflation in country A is greater than country B, the price of basket in country A would become greater than country B. Therefore, prices of goods and services of country A tends to be higher than that of country B.

• In this situation, the exports from country B to country A will go up resulting in improvement or surplus trade balance for B. But due to higher price in country A, its imports will increase from country B and it will lead to a deficit in the trade balance for country A.

Hence, option (b) is correct.

• Statement 1 is correct: India’s exchange rate policy has evolved in line with international and domestic developments. Post-independence, in view of the prevailing Bretton Woods system, the Indian rupee was pegged to the pound sterling due to its historic links with Britain. A major development was the devaluation of the rupee by 36.5 per cent in June, 1966. With the breakdown of the Bretton Woods system, and also the declining share of UK in India’s trade, the rupee was delinked from the pound sterling in September 1975. During the period between 1975 to 1992, the exchange rate of the rupee was officially determined by the Reserve Bank within a nominal band of plus or minus 5 per cent of the weighted basket of currencies of India’s major trading partners.

•  Statement 2 is correct: At present, India follows a managed floating exchange rate system, also known as a dirty floating system, where the central bank allows the exchange rate to be determined by market forces but intervenes occasionally to influence the rate. This system is a combination of a flexible exchange rate (the floating part) and fixed rate elements (the managed part). Under this system, the Reserve Bank of India intervenes in the foreign exchange market to moderate exchange rate fluctuations as deemed necessary. Since 1993, India has been adhering to this managed floating exchange rate system.

It is defined as follows:

• GNP = GDP + Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy.

• Hence, GNP = GDP + Net factor income from abroad (Net factor income from abroad = Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy).

• The Medicines Patent Pool (MPP) is a United Nations-backed public health organisation working to increase access to, and facilitate the development of, life-saving medicines for low- and middle- income countries.

• Through its innovative business model, MPP partners with civil society, governments, international organisations, industry, patient groups and other stakeholders, to prioritise and license needed medicines and pool intellectual property to encourage generic manufacture and the development of new formulations.

• It has facilitated the development of generic drugs for HIV, tuberculosis, and hepatitis C, allowing them to be sold at an affordable price.

• To date, MPP has signed agreements with ten patent holders for thirteen HIV antiretrovirals, one HIV technology platform, three hepatitis C direct-acting antivirals and a tuberculosis treatment. MPP was founded by Unitaid, which serves as sole funder for MPP’s activities in HIV, hepatitis C and tuberculosis.

Hence both the statements are correct.

• The e-National Agriculture Market (NAM) is envisaged as a pan-India electronic trading portal which seeks to network the existing Agricultural Produce Market Committees (APMCs) mandis and other market yards to create a unified national market for agricultural commodities. NAM is a “virtual” market but it has a physical market (mandi) at the back end. Hence, statement 1 is correct.

• NAM will be implemented as a Central Sector Scheme through Agri-Tech Infrastructure Fund (ATIF). Hence, statement 2 is correct.

• The Department of Agriculture & Cooperation (DAC), Ministry of Agriculture will set it up through the Small Farmers Agribusiness Consortium (SFAC).

• The Scheme is applicable on All-India basis. There is no State-wise allocation under the Scheme. However, desirous States would be required to meet the pre-requisites in terms of carrying out necessary agri-marketing reforms. For integration with the e-platform, the States/UTs will need to undertake prior reforms in respect of

  • a single license to be valid across the State

  • single point levy of market fee and

  • provision for electronic auction as a mode for price discovery.

• Benefits of NAM:

  • For the farmers, NAM promises more options for sale. It would increase his access to markets through warehouse based sales and thus obviate the need to transport his produce to the mandi.

  • The gradual integration of all the major mandis in the States into NAM will ensure common procedures for issue of licences, levy of fee and movement of produce.

  • The farmer may choose to accept either the local offer or the online offer. In either case the transaction will be on the books of the local mandi and they will continue to earn the market fee.

  • For the local trader in the mandi/market, NAM offers the opportunity to access a larger national market for secondary trading.

  • Bulk buyers, processors, exporters etc. benefit from being able to participate directly in trading at the local mandi/market level through the NAM platform, thereby reducing their intermediation costs.

• The process of moving from self-employment and regular salaried employment to casual wage work is called as casualization of the workforce. Casual workers are defined as those who work for others in farm or non-farm enterprises and are paid wages that are daily or periodic in nature. All daily wage-earning employees and some categories of contract employees are casual labourers. Hence, option (b) is correct.

• The wage-paid labour is largely non-unionised due to casual and seasonal nature of employment and the scattered location of enterprises. This sector is marked by low incomes, unstable and irregular employment, and lack of protection either from legislation or trade unions.

• Formalisation of workforce refers to the situation wherein there is a continuous increase in the percentage of the workforce in the formal sector and a simultaneous decline in the percentage of the workforce in the informal sector. Around 90 per cent workforce in India is in the ―unregulated informal sector.

• The feminization of work refers to the processes through which the composition of occupation changes such that the proportion of women exceeds the proportion of men.

• A derivative is a financial security with a value that is reliant upon or derived from, an underlying asset or group of assets—a benchmark. The derivative itself is a contract between two or more parties, and the derivative derives its price from fluctuations in the underlying asset. Hence, statement 1 is correct.

• The framework for regulating derivative transactions is provided in the various Acts of Government of India such as Securities Contracts (Regulation) Act, 1956, Reserve Bank of India Act, 1934, Forward Contracts (Regulation) Act 1952.

• Derivatives instruments in India are regulated by the Reserve Bank of India, Securities, and Exchange Board of India (SEBI) and Forward Markets Commission (FMC). Subsequent to the passing of the Finance Act 2015, FMC was merged with SEBI with effect from 29 September 2015. Hence, statement 2 is correct.

• Broadly, RBI is empowered to regulate the interest rate derivatives, foreign currency derivatives and credit derivatives. While SEBI regulates other derivatives of equity, commodity and stock indexes.

• The derivatives can be Forwards or Futures or Options or Warrants:

  • Forward & Future Contract: A forward contract is a customized contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today. Futures contracts are special types of forwarding contracts in the sense that they are standardized exchange-traded contracts, such as futures of the Nifty index.

  • Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.

  • Options are of two types – Calls and Puts options.

    • ‘Calls’ give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.

    • ‘Puts’ give the buyer the right, but not the obligation to sell a given quantity of an underlying asset at a given price on or before a given future date.

• Options generally have maturity of up to one year. The majority of options traded on exchanges have a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

• Option (d) is the correct answer: Ricardian equivalence was a theory put forward by David Ricardo in the early 19th century and later was elaborated upon by Harvard professor Robert Barro. For this reason, Ricardian equivalence is also known as the Barro-Ricardo equivalence proposition.

• It is an economic theory that argues that attempts to stimulate an economy by increasing debt- financed government spending are doomed to fail because the demand remains unchanged.

• This is because consumers anticipate the future so if they receive a tax cut financed by government borrowing they anticipate future taxes will rise. Therefore, their lifetime income remains unchanged and so consumer spending remains unchanged.

• It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure. When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase today.

• The paradox of thrift: It is an economic theory which stipulates that personal savings are a net drag on the economy during a recession. It assumes that an increase in autonomous saving leads to a decrease in aggregate demand and thus a decrease in gross output which will, in turn, lower total saving.

• The Solow Growth Model is an exogenous model of economic growth that analyzes changes in the level of output in an economy over time as a result of changes in the population growth rate, the savings rate, and the rate of technological progress.

• Kuznets' inverted-U hypothesis implies that economic growth worsens income inequality first and improves it later at a higher stage of economic development.

• The content moderation-driven approach to disinformation by all major social media platforms is a red herring designed to distract from the far larger problem of amplified distribution of disinformation as part of business models. Hence, statement 1 is correct.

• Social media platforms are increasingly becoming the primary ground for public discourse over which a handful of individuals have inordinate control. The Election Commission does not regulate the media. It has, however, the responsibility to enforce the provisions of law or Court directions, which might have linkages with media or certain aspects of media functioning. Hence, statement 2 is not correct.

• Hydrocarbon Exploration and Licensing Policy (HELP) is a new policy adopted for the award of hydrocarbon acreages towards exploration and production (E&P). It was done to enhance domestic oil and gas production, enhance transparency, bring substantial investment and to reduce administrative discretion.

• HELP replaces the present policy regime for the exploration and production of oil and gas, known as the New Exploration Licensing Policy (NELP), which has been in existence for 18 years.

• Four main aspects of HELP are:

  • Uniform License: It provides for a uniform licensing system to cover all hydrocarbons such as oil, gas, coal bed methane etc. under a single licensing framework, instead of the present system of issuing separate licenses for each kind of hydrocarbons. Hence option 1 is not correct.

  • Open Acreages: It gives the option to a hydrocarbon company to select the exploration blocks throughout the year without waiting for the formal bid round from the Government. Hence option 3 is correct.

  • Revenue Sharing Model: Present fiscal system of production sharing contract (PSC) is replaced by an easy to administer “revenue sharing model”. The earlier contracts were based on the concept of profit sharing where profits are shared between the Government and the contractor after recovery of cost. Under the new regime, the Government will not be concerned with the cost incurred and will receive a share of the gross revenue from the sale of oil, gas etc.

  • Bidders will be required to quote revenue share in their bids and this will be a key parameter for selecting the winning bid. They will quote a different share at two levels of revenue called “lower revenue point” and “higher revenue point”. Revenue share for intermediate points will be calculated by linear interpolation. The bidder giving the highest net present value of revenue share to the Government, as per transparent methodology, will get the maximum marks under this parameter. Hence option 2 is not correct.

    • Marketing and Pricing Freedom has been granted, subject to a ceiling price limit, for new gas production from Deepwater, Ultra-Deepwater and High Pressure-High Temperature Areas.

• Borrowing requirement of the government includes interest obligations on the accumulated debt.

• To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to deduct these interest obligations on accumulated debt from the total deficit of the government, which gives the Primary deficit of the government. Primary deficit is measured to know the amount of borrowing that the government can utilize, excluding the interest payments. Hence, statement 1 is correct.

• It is simply the fiscal deficit minus the interest payments. Hence statement 2 is not correct.

• Primary deficit = Fiscal deficit – net interest liabilities.

• Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.

• A decrease in primary deficit shows progress towards fiscal health. Hence, when the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.

• In macroeconomics and finance, a transfer payment is a redistribution of income and wealth by means of the government making a payment, without goods or services being received in return. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output.

• 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. Hence option (a) is the correct answer.

• Allowances, pensions etc to people such as pensioners, widows, sick or unemployed people are examples of transfer payments.

• A deficit is an amount by which the expenditures in a budget exceed the income. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. This deficit provides an indication of the financial health of the economy. To reduce the deficit or the gap between the expenditures and income, the government may take several steps.

• Steps to reduce deficits of government include raising taxes to increase the tax revenues, divesting from nonessential services, disinvestment in public sector enterprise, rationalizing subsidies to reduce expenditures, etc., Hence option(c) is the correct answer.

• The government may also resort to borrowings to finance its deficits.

• Deficit financing is defined as “borrowings from the Reserve Bank of India against the issue of Treasury Bills and running down of accumulated cash balances”. When the government borrows from the Reserve Bank of India, it merely transfers its securities to the Bank. On the basis of these securities the bank issues more currency and puts them into circulation on behalf of the government. This amounts to the creation of money. The rationale for Deficit Financing is that sometimes the government fails to mobilize adequate resources. In this situation, the option of deficit financing is required to meet fiscal deficit targets. If the option of deficit financing is not utilized the government ends up compromising on growth targets. So, it is a way of financing the deficit, not reducing the deficit.