Practice Test: Indian Economy - 1 - UPSC MCQ

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Economic activities, in a very simple way, are all activities where money is involved. And wherever money comes into question, there comes the economic motive or gain. 
Several examples can be taken of it like  

• getting a job, giving a job,
• buying and selling something,
• doing a business, and so on and so forth.

 Visiting religious places for prayer is clearly not an economic activity, but giving alms to  beggars there or putting some money in the places of worship are economic activities. 

Pair 1 is correct: There are many ways to categorize poverty. In one such way, people who are always poor and those who are usually poor but who may sometimes have a little more money are grouped together as the chronic poor.  
Pair 2 is incorrect: Another group are the churning poor who regularly move in and out  of poverty. 
Pair 3 is incorrect:  Occasionally poor who are rich most of the time but may sometimes  have a patch of bad luck. Churning poor and Occasionally poor together are called the  transient poor. And then there are those who are never poor, and they are the non-poor.

Global Multidimensional Poverty Index: The index is a key international resource that  measures acute multidimensional poverty across more than 100 developing countries. 

• Statement 1 is correct:  MPI was first launched in 2010 by the Oxford Poverty and Human Development Initiative and the United Nations Development Programme. It uses different factors beyond income-based lists to determine poverty.  
• Statement 2 is incorrect: The index uses the same three dimensions as the Human Development Index. Those are Health, Education and standard of living and are measured using ten Indicators. (Refer to the figure given below). 
• Statement 3 is incorrect: A person is multi dimensionally poor if he is deprived in one third or more of the weighted indicators out of The 10 indicators.

Statement 1 is correct: The HDI offers a comprehensive measure of human development by considering key dimensions, namely health (life expectancy at birth), education (mean years of schooling and expected years of schooling), and standard of living (Gross National Income per capita). 

Statement 2 is incorrect: The HDI employs a geometric mean to aggregate the normalized indices for its three dimensions, not a simple arithmetic mean. This geometric mean reflects the idea that a balanced development across these dimensions is more desirable than skewed development. 

Statement 3 is incorrect: The HDI, while valuable in assessing human development, does not directly account for factors like inequality, poverty, or human security. It focuses primarily on the three core dimensions of human development (health, education, and standard of living).  

Statement 4 is incorrect: The HDI uses the logarithm of income as an adjustment to reflect the diminishing importance of income with increasing GNI. This adjustment is in line with the concept that as a country's income increases, additional income contributes less to overall well-being, and thus the logarithmic function is used to incorporate this into the HDI calculation.

• Pair 1 is correct: Ad-valorem tax is levied as a percentage of the value of the item it is imposed on, and not on the item's quantity, size, weight or other such factor. 
• Pair 2 is correct: Specific tax is the tax which is fixed as per each unit of good or service rather than based on its value. 
• Pair 3 is incorrect: Regressive Taxes are the taxes where the Tax percentage decreases with an increase in income. 
• Pair 4 is incorrect: Progressive Taxes are the taxes where the Tax percentage increases with an increase in income.

In pre-independent India, Dadabhai Naoroji was the first to discuss the concept of a Poverty Line.  

• He used the menu for a prisoner and used appropriate prevailing prices to arrive at what may be called ‘jail cost of living’.
• However, only adults stay in jail whereas, in an actual society, there are children too. He,
•  appropriately adjusted this cost of living to arrive at the poverty line. 
• For this adjustment, he assumed that one-third population consisted of children and half of them consumed very little while the other half consumed half of the adult diet.
• The weighted average of consumption of the three segments gives the average poverty line, which comes out to be three-fourth of the adult jail cost of living

Poverty is a state or situation in which a person or a group of people don't have enough money or the basic things they need to live.  
Poverty Line: It is the required level of income to fulfil the basic necessities of life.  lt can be represented in terms of either per capita calorie intake or per capita consumption expenditure required to attain a minimum living condition. 
It may vary from one country to another. It may also vary from one state to another in India due to different price levels prevailing in the country. This difference could be due to factors such as the cost of living, economic conditions, and other regional variations.  According to the United Nations, India has witnessed a remarkable achievement in poverty reduction, with a staggering 415 million individuals transitioning out of poverty within  a relatively short span of 15 years, from 2005/2006 to 2019/2021. 
Hence, Both Statement-I and Statement-II are correct and Statement-II is the correct  explanation for Statement-I.

The gap in income between the rich and the poor is referred to as inequality. In other words, it indicates the disparity in the distribution of economic assets and income.

• Option 1 is incorrect: Inflation can disproportionately affect lower-income individuals and households, as they often spend a larger portion of their income on basic necessities like food, housing, and healthcare. When the prices of these essential goods and services rise significantly, it can lead to a reduction in the real income of lower-income groups, thereby exacerbating income inequality.
• Option 2 is correct: Capital-intensive production methods often require significant investments in machinery and technology, which can lead to a concentration of wealth and income among those who own and control these capital assets. This can result in a wider income gap between capital owners and labourers, contributing to income inequality.
• Option 3 is correct: Urban bias in private investment: An urban bias in private investment means that more investment is directed towards urban areas and industries, neglecting rural or less-developed regions. This can lead to unequal economic development, with urban areas benefiting more from economic growth and job opportunities while rural areas experience slower growth and fewer employment prospects. This regional disparity can contribute to income inequality.

Statement 1 is correct:  
Non-tax Revenue Receipts:  This includes all money earned by the government from sources other than taxes. In India, they are:

• Profits and dividends which the government gets from its public sector undertakings (PSUs).  
• Interests received by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). It means this income might be in both domestic and foreign currencies.  
• Fiscal services also generate incomes for the government, i.e., currency printing, stamp printing, coinage and medals minting, etc. 
• General Services also earn money for the government as the power distribution, irrigation, banking, insurance, community services, etc.  
• Fees, Penalties and Fines received by the government.  
• Grants which the governments receives—  it is always external in the case of the Central Government and internal in the case of state  governments 

Statement 2 is incorrect: Revenue Account Expenditure includes but is not limited to, interest payments, defence, subsidies, public administration, and financial grants to states. In conventional terms, it includes maintenance  and consumption expenditure, as well as welfare expenditure. It does not create assets  directly. 
Statement 3 is correct: All non-revenue receipts of a government are known as capital  receipts. Such receipts are for investment purposes and supposed to be spent on plan development by the government. Capital Account Receipts involve recoveries of loans,  receipts from asset sales, and fresh borrowings from inside and outside the country, both debt and non-debt.

Goods and Services Tax (GST) subsumed various central indirect taxes including the central excise duty, additional excise duties, service tax, additional customs duty and special additional duty of customs, etc. It also subsumed State Value Added Tax (VAT )/sales tax, central sales tax, entertainment tax, octroi and entry tax, purchase tax and luxury tax, etc.  However, Alcohol, Petrol, Diesel, Aviation Turbine Fuel and Natural Gas do not come under GST.

The Kuznets curve is a hypothetical curve that graphs economic inequality against per capita income over the course of economic development. Simon Kuznets hypothesized that as an economy develops, market forces first increase then decrease the overall economic inequality of society, which is illustrated by the inverted U-shape of the Kuznets curve.

• Laffer curve- A curve devised by the economist Arthur Laffer in 1974 which links average tax rates to total tax revenue. It suggests that higher tax rates initially increase revenue but after a point further increases in tax rates cause revenue to fall. Phillips curve - It is a graphic curve which advocates a relationship between inflation and unemployment in an economy. The curve suggests that lower the inflation, higher the unemployment and higher the inflation, lower the unemployment.
• Lorenz curve- A graph showing the degree of inequality in income and wealth in a given population or an economy. It is a rigorous way to measure income inequality. In this method (for example), personal incomes in an economy are arranged in increasing order; the cumulative share of total income is then plotted against the cumulative share of the population.

Statement 1 is incorrect: In India, social sector expenditures, including education, labor welfare, health, contributions to agriculture, and social security under government flagship schemes, are considered part of revenue expenditure. Excess of these expenditures contribute to the Revenue Deficit.

Statement 2 is incorrect: The Fiscal Responsibility and Budget Management (FRBM) Act is to provide for the responsibility of the Central Government to ensure intergenerational equity in fiscal management and long-term macro-economic stability by removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government borrowings, debt and deficits, greater operations of the Central Government and conducting fiscal policy. The Main highlight of the FRBMA, 2003 was that the Gol was to take measures to reduce fiscal and revenue deficit so as to eliminate revenue deficit by March 31, 2008 and thereafter build up adequate revenue surplus.

National Sample Survey Office (NSSO): It became National Statistical Office (NSO) in 2019 after merging with Central Statistical Office (CSO). It was done to streamline the efforts of both of these organisations. NSO is headed by the Ministry of Statistics and Programme Implementation (MOSPI). 
Considering the importance of the availability of labour force data at more frequent time intervals, National Sample Survey Office (NSSO) launched Periodic Labour Force Survey (PLFS) in April 2017. 
The objective of PLFS is primarily twofold: 

• to estimate the key employment and unemployment indicators (viz. Worker Population Ratio, Labour Force Participation Rate, Unemployment Rate) in the short time interval of three months for the urban areas only in the ‘Current Weekly Status’ (CWS).
• To estimate employment and unemployment indicators in both ‘Usual Status’ (ps+ss) and CWS in both rural and urban areas annually. The National Sample Survey Office (NSSO)  headed by a Director General is responsible for conduct of large scale sample surveys in diverse fields on All India basis

Primarily data are collected through nation-wide household surveys on various socio-economic subjects, Annual Survey of Industries (ASI), etc. Besides these surveys, NSSO collects data on rural and urban prices and plays a significant role in the improvement of crop statistics through supervision of the area enumeration and crop estimation surveys of the State agencies. It also maintains a frame of urban area units for use in sample surveys in urban areas.

Statement 1 is correct: Labour force is the total number of people employed or seeking employment in a country or region. One is classified as ‘not in labor force’, if he or she was engaged in a relatively longer period in any one of the non-gainful activities. It refers to the number of persons actually working or willing to work. It is not related to the wage rate. It is measured in terms of number of persons (not in terms of man-days or persondays). 
Statement 2 is correct: Workforce refers to only those persons who are actually working. It does not take into account those who are willing to work (but not working). The Worker participation rate is defined as the percentage of total workers (main and 
marginal) to the total population. 
Work participation rate = (Total Workers / Total Population) X 100
 

Statement 1 is incorrect: Angel tax is levied when an unlisted company issues shares to an investor at a price higher than its fair market value. Earlier, it was imposed only on investments made by a resident investor. However, the Finance Act 2023 proposed to extend angel tax even to non-resident investors. It was first introduced in 2012 to deter the generation and use of unaccounted money through the subscription of shares of a closely held company at a value that is higher than the fair market value of the firm’s shares. 
Statement 2 is incorrect: A windfall tax is a tax levied by governments against certain industries when economic conditions allow those industries to experience significantly above-average profits. Windfall taxes are primarily levied on companies in the targeted industry that have benefited the most from the economic windfall, most often commodity based businesses.

The State of Inequality in India Report has been written by the Institute for Competitiveness and presents a holistic analysis of the depth and nature of inequality in India. The report compiles information on inequities across sectors of health, education, household characteristics and the labour market. As the report presents, inequities in these sectors make the population more vulnerable and trigger a descent into multidimensional poverty.

Statement 1 is correct: When the balance of the government’s total receipts (i.e., revenue + capital receipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit. The situation of fiscal deficit indicates that the government is spending beyond its means. Fiscal deficit may be shown in the quantitative form (i.e., the total currency value of the deficit) or in the percentage form of the GDP for that particular year (percentage of GDP).

Statement 2 is incorrect: Budget Deficit is the difference between total budgeted expenditure and receipts that include the money borrowed from the market by the RBI by floating government securities. The concept was discarded in 1997 as it led to accounting distortions.

Statement 3 is correct: Monetized deficit is the monetary support the Reserve Bank of India (RBI) extends to the Centre as part of the government's borrowing programme. In other words, the term refers to the purchase of government bonds by the central bank to finance the government. spending needs of the Also known as debt monetisation, the exercise leads to an increase in total money supply in the system, and hence inflation, as RBI creates fresh money to purchase the bonds. The same bonds are later used to bring down inflation as they are sold in the open market. This helps RBI suck excess money out of the market and rein in rising prices.

Statement 1 is correct: While GDP includes the production within a country by all producers-citizens as well as foreign multinational corporations, GNP captures all that is produced by the citizens of a country, whether within the geography of the country or abroad. In other words, GDP is a geography-related concept, while GNP is citizen-related. 
GDP focuses on where the output is produced, while GNP shows who produced it. 

Statement 2 is incorrect: China's GDP was much more than its GNP until the last decade, as many foreign MNCs were operating  in China. However, with China's Belt and Road Initiative gaining ground, the nation's GNP is catching up with its GDP. If MNCs relocate out of China due to trade tensions with the US, its GDP will diminish even more relative to its GNP. 

Gross Primary Deficit is Gross Fiscal Deficit less interest payments. Net Primary Deficit is Net Fiscal Deficit minus net interest payments. The concept of primary deficit plays a pivotal role in evaluating the government's fiscal prowess by dissecting the fiscal deficit from interest payments. It signifies the current fiscal control efforts, excluding the burden of historical interest payments. As a new government is scrutinized for its fiscal performance, the primary deficit serves as a key metric, allowing a focused assessment of its ability to rationalize the fiscal deficit. The aspiration of achieving a primary surplus underscores the government's potential to borrow less than interest payments, paving the way for future fiscal prudence. In this trajectory, a distant yet transformative future sees interest payments funded exclusively from budgetary revenues, marking the zenith of fiscal responsibility.

Correct Answer: B [When the prices of particular stock’s) rises or falls by a specified amount in specified time]

Notes:
Circuit breakers are pre-defined values in percentage terms, which trigger an automatic check when there is a runaway move in any security or index. It may involve Halting of trade in a security or index for a certain period or Halting of trade in a security or index for the entire trading day.

(c) 
In News : The Indian Stock Market recently introduced the T+0 settlement cycle, marking a significant 
shift from the existing T+1 settlement cycle. 
Statement 1 is correct: 
● T+0 Settlement Cycle: The trades involving shares are settled on the same day they occur in the T+0 
system. It means shares are transferred to the buyer’s account and funds are deposited in the 
seller’s account on the same day of the trade.  It is a departure from the current T+1 cycle, where trades are settled by the next day. 

Statement 2 is not correct: 
● The T+0 settlement cycle will be executed in two phases. 
First Phase: Trades executed up to 1:30 pm will be considered for settlement, which must be 
completed by 4:30 pm.
Second Phase: It extends trading time till 3:30 pm, discontinuing the first phase.

● The T+0 settlement will be optional for 25 stocks and will be applicable only for trades executed between 9:15 a.m. and 1:30 p.m.

Statement 1 is correct: Deficit financing means generating funds to finance the deficit, which results from excess expenditure over revenue. The gap is being covered by borrowing from the public by the sale of bonds or by printing new money. The need for deficit financing: 

• For developing countries like India, higher economic growth is a priority. A higher economic growth requires finances. With the private sector being shy of making huge expenditures, the responsibility of drawing financial resources rests on the government. 
• Often both the tax and non-tax revenues fail to mobilise enough resources. The deficit is often funded through borrowings or printing new currency notes. 

Statement 2 is correct: In deficit financing, the Reserve Bank of India prints money and  supplies credit, resulting in an increase in highpowered money or reserve money.

On 1st July 1955, the State Bank of India was constituted under the provisions of the State Bank of India Act 1955, for the purpose of taking over the undertaking and business of the Imperial Bank of India. The Imperial Bank of India was founded in 1921.  The Bank transacts general banking description  business of every including, foreign exchange, merchant banking and mutual funds. After successful experimentation in the partial nationalizations the government decided to go for complete nationalization. With the help of the Banking Nationalization Act of 1969, the government nationalized a total number of 20 private banks.

• 14 banks with deposits were more than Rs. 50 crore of nationalized in July 1969, and
• 6 banks with deposits were more than Rs. 200 crore nationalized in April 1980.

On the basis of the recommendations of both the Gadgil Study Group and Banker's Committee (Nariman Committee) Reserve Bank of India introduced the "Lead Bank Scheme" in December of 1969. The Regional Rural Banks (RRBs) were— first set up on October 2, 1975 (only 5 in number) with the aim to take banking services to the doorsteps of the rural masses, especially in remote areas with no access to banking services.

(D)
Statement 1 is correct: Credit Information Companies, also called credit bureaus, are organizations that 
collect, analyze, and maintain credit data on borrowers, businesses, and organizations. 

• CIBIL is the oldest and most well-known credit information company in India. The top four credit  information companies in India are: 
  • Credit Information Bureau (India) Limited (CIBIL) 
  • Equifax 
  • Experian 
  • CRIF Highmark 

Statement 2 and 3 are not correct: They are licensed by the Reserve Bank of India. 

• Credit reports can only be provided to the following people or authorities upon request: 
  • Borrower’s employer 
  • Borrower’s landlords 
  • Utility service providers 
  • Government of India 
  • Lenders, banks, financial institutions 
  • Any third party (only after the written request from the borrower). 

(b)
In News : Recently, it was found that the Price of Robusta coffee has spiked due to drastic fall in traditional growing regions like Vietnam and Indonesia. Statement 1 is correct:

● Coffee Board of India: It was established through Coffee Act VII of 1942.
Thus It is a statutory body.
● Administrative Control: The Ministry of Commerce and Industry.

Statement 2 is correct:
● Its head office is situated in Bengaluru in Karnataka
● The Board has a Market Intelligence Unit (MIU) functioning from its head office at Bangalore. ○ It undertakes various activities related to market information & intelligence, market research studies, crop forecasting and coffee economics aspects.

(c)

The Gini index is a measure of the distribution of income across a population.
● A higher Gini index indicates greater inequality, with high-income individuals receiving much larger percentages of the population’s total income.
● Global inequality, as measured by the Gini index, has steadily increased over the past few centuries and spiked during the COVID-19 pandemic.

The Bureau of Indian Standards (BIS) is the National Standard Body of India established under the BIS Act 2016 for the harmonious development standardisation, marking and quality certification of goods. To protect the interest of 
consumers as well as the industry, BIS is involved in various activities as follows: 

• Standards Formulation
• Product Certification Scheme
• Compulsory Registration Scheme
• Foreign Manufacturers Certification Scheme
• Hall Marking Scheme
• Laboratory Services
• Laboratory Recognition Scheme
• Sale of Indian Standards
• Consumer Affairs Activities
• Promotional Activities
• Training Services at National & International level
• Information Services

The BBB was declared an incompetent authority by the Delhi High Court when a general manager at state-owned National Insurance Company challenged the appointment of a person junior to him for Director’s position by the BBB.  
The Banks Board Bureau (BBB) had to be struck down, and a new body, namely, FSIB had to be put in place via approval from the Appointments Committee of the Cabinet, headed by the prime minister. The Financial Services Institutions Bureau (FSIB) is a government body set up under the Department of Financial Services. The board will be entrusted with making recommendations for the appointment of full-time directors and non-executive chairman of state-run financial services institutions. FSIB would be headed by a chairman, a central government nominee. The board would comprise the Secretaries of the DFS, the chairman of IRDAI, and a deputy governor of the RBI. Additionally, it will have three part-time members who are experts in banking and three more from the insurance sector.

Statement 1 is incorrect: Structural Inflation persists for a longer period due to deficiencies existing in the economy, such as 
Backward agricultural sector (poor productivity). Inefficient distribution and storage facilities, and many more. Hence, statement 2 is correct.

• Backward technology
• Infrastructural bottlenecks
• Supply chain breakdowns
• Greenflation is due to carbon tax.

These deficiencies in the economy lead to shortages, which in turn cause inflation. It is also termed as Bottleneck Inflation, and the government faces a tough time tackling this particular type of inflation. It can be handled through major structural reforms.

Statement 1 is incorrect: The Regional Rural Banks (RRBs) were established under the provisions of an ordinance passed in 1975 and the RRB Act 1976. Kelkar Committee was formed to study the extant Public Private Partnership Model in India.  
Statement 2 is correct: The main goal of establishing RRBs was to provide credit and other banking facilities to small and marginal farmers, agricultural labourers, and small artisans, which are a significant part of the rural economy. 
Statement 3 is correct: The RRBs are jointly owned by the Central Government, the State Government, and a sponsor bank. The equity is held by the Central Government, the concerned State Government, and the Sponsor Bank in the proportion of 50:15:35, respectively