Economy 2018 MCQs

Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.

• This statement is correct. CAR refers to the minimum capital as a percentage of risk-weighted assets that banks are required to hold. It is set by the Reserve Bank of India (RBI).
• CAR ensures that banks have sufficient capital buffers to absorb potential losses from their lending and investing activities without becoming insolvent.
• The capital acts as a cushion against credit, market and operational risks. If account holders default on their loans, resulting in losses for the bank, the capital helps absorb these losses so banks can continue functioning.

CAR is decided by each individual bank.

• This statement is incorrect. CAR is not determined by individual banks.
• RBI sets the CAR requirements that apply uniformly to all commercial banks. It is currently mandated at 9%.
• Banks do not have autonomy in deciding their own CAR. They have to comply with RBI regulations and maintain the prescribed CAR or face supervisory action.

Debt to GDP Ratio Recommendation by FRBM Review Committee:

• The Fiscal Responsibility and Budget Management (FRBM) Review Committee, led by N.K. Singh, indeed recommended a combined debt to GDP ratio of 60% for the general (combined) government by 2023, which includes 40% for the Central Government and 20% for the State Governments.
• This target was set to ensure fiscal consolidation and to anchor fiscal policy in India towards long-term sustainability.
• The committee's recommendations are intended to guide India's fiscal discipline efforts by setting specific targets for debt and deficits, ensuring that fiscal policies are conducted within prudent limits​​​​.

Central Government vs. State Governments' Domestic Liabilities:

• The correct distribution, as recommended, is a 40% debt to GDP ratio for the Central Government and 20% for the State Governments, not 21% and 49% respectively.
• This was part of the committee's broader recommendations for achieving fiscal sustainability and reducing the overall debt burden of the country​​.

Mandatory Central Government Consent for State Borrowing:

•  According to Article 293(3) of the Constitution, a state cannot raise any loan without the consent of the Government of India if there is still outstanding any part of a loan made to the state by the Government of India or in respect of which a guarantee has been given by the Government of India.​

It is introduced as a part of the Income Tax Act.

• This statement is incorrect. The equalization levy was introduced in Budget 2016 as a separate, standalone chapter in the Finance Act, not as part of the Income Tax Act.

Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.

• This statement is also incorrect. The equalization levy is not covered under Double Taxation Avoidance Agreements that India has with other countries. Therefore, foreign companies cannot claim a tax credit for this levy in their home country.

Merchant Discount Rate (MDR) refers to the fee charged to a merchant by a bank for providing debit and credit card payment facilities. It is usually a percentage of the transaction amount that the merchant pays the bank.

A) The incentive given by a bank to a merchant for accepting payments through debit cards pertaining to that bank. (Incorrect)

• As per RBI, Merchant Discount Rate (MDR) is a charge, not an incentive to the merchants.

B) The amount paid back by banks to their customers when they use debit cards for financial transactions for purchasing goods or services. (Incorrect)

• Banks do not pay any amount back to customers specifically for using debit cards for purchases as per RBI.

C) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.

• As per RBI notification, MDR is a fee charged to merchants by the bank for providing debit/credit card payment facility when customers use cards to make purchases.

D) The incentive given by the Government to merchants for promoting digital payments by their customers through Point of Sale (PoS) machines and debit cards. (Incorrect)

• MDR is not an incentive by the Government. It is charged by banks.

Cereal grains hulled - Hulled cereal grains are exempt from GST, indicating that basic food grains that have undergone minimal processing to remove the outer husk or shell without further processing are not subject to GST​​​​.

Chicken eggs cooked - While specific details on "cooked" chicken eggs are not mentioned in the exemption lists directly, fresh eggs and other primary food products are typically exempt from GST. The exemption generally applies to unprocessed or minimally processed food items​​. The Third Schedule of exemption Notification covers "all types of eggs".

Fish processed and canned - Processed and canned fish do not specifically appear on the exemption lists; exemptions are more common for fresh or unprocessed food items. Processed foods, including canned items, usually attract GST at various rates depending on the processing involved​​. "Fish processed, cured/ frozen/ packed" attract 5% GST.

Newspapers containing advertising material - Newspapers, even those containing advertising material, are exempt from GST. This exemption supports the dissemination of information and encourages reading and literacy​​.

Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.

• It is incorrect. As per RBI reports on Trends and Progress of Banking in India, the capital infusion into public sector banks has fluctuated year-on-year based on capital and regulatory requirements. It has not seen a steady increase.

To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.

• It is correct. As per RBI notifications, the merger of 5 associates and Bharatiya Mahila Bank with SBI was effected in 2017 to consolidate the banking operations and improve efficiency.

The Cabinet Committee on Economic Affairs (CCEA) has approved the Minimum Support Price (MSP) for several crops for both the Rabi and Kharif seasons for the years 2023-24 and 2024-25.

For the Rabi season 2024-25, MSPs have been approved for the following crops:

• Wheat
• Barley
• Gram
• Lentil (Masur)
• Rapeseed & Mustard
• Safflower​​.

For the Kharif season 2023-24, MSPs have been approved for these crops:

• Paddy (Common and Grade A)
• Jowar (Hybrid and Maldandi)
• Bajra
• Ragi
• Maize
• Tur (Arhar)
• Moong
• Urad
• Groundnut
• Sunflower Seed
• Soybean (Yellow)
• Sesamum
• Nigerseed
• Cotton (Medium Staple and Long Staple)​

The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.

• This statement is incorrect.
• The RBI indeed manages and services both Central and State Government securities.
• The RBI, as an agent of the Government, manages and services these securities through its public debt offices located in various places.
• Additionally, it's specified that the RBI undertakes receipts and payments for the Central Government and manages the public debt of the Union, including transactions for State Governments under agreements with them.
• This includes issuing both treasury bills and bonds or dated securities on behalf of the Central Government while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs)​​​​.

Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.

• This statement is correct.
• Treasury bills, as short-term debt instruments, are issued exclusively by the Government of India. They are utilized to meet short-term liquidity needs of the government and are not issued by State Governments.
• Treasury bills are issued in three tenors: 91 days, 182 days, and 364 days, and they are zero-coupon securities, meaning they pay no interest but are issued at a discount and redeemed at face value at maturity​​.

Treasury bills are issued at a discount from the par value.

• This statement is correct.
• Treasury bills are indeed issued at a discount to their face value and are redeemed at the face value upon maturity. The difference between the issue price and the face value represents the earnings for the investors. This method of issuing at a discount effectively makes treasury bills a zero-coupon security​

• Weak administrative machinery and illiteracy can indeed impede economic growth and capital formation efficiency, but they do not directly relate to the capital-output ratio's role in mediating the relationship between capital formation and output increase.
• High population density could lead to various economic challenges, including pressure on resources and infrastructure, but its direct impact on capital formation translating into output is more complex and involves factors such as labor market dynamics, which is not specifically about the capital-output ratio.
• High capital-output ratio directly pertains to the efficiency of converting capital into output. A high capital-output ratio signifies that a significant amount of capital is needed to produce a small increase in output, which can result in lower returns on investment and potentially slower economic growth, as it indicates that investments are not being efficiently translated into additional output​.

Human capital formation refers to the process of improving the qualifications, attributes, skills, knowledge, and health of the labor force, which enhances its productivity and thus contributes to the economic growth of a country. Let's analyze the statements based on this understanding:

• Individuals of a country to accumulate more capital: This statement not correct in the context of human capital formation. The accumulation of more capital typically refers to physical or financial capital rather than human capital. Human capital formation is more about enhancing the capabilities and productivity of individuals rather than directly increasing capital in its traditional sense.
• Increasing the knowledge, skill levels, and capacities of the people of the country: This statement is correct about the concept of human capital formation. It involves investing in education, training, and health care to improve the workforce's overall productivity and efficiency.
• Accumulation of tangible wealth: Tangible wealth, like land, buildings, or machinery, is not directly related to human capital formation. While investments in human capital can lead to broader economic growth and potentially increase tangible wealth indirectly.
• Accumulation of intangible wealth: This statement is correct. Intangible wealth, such as knowledge, skills, and health, directly results from investments in education, training, and healthcare, which are key components of human capital.

Agricultural growth slower than industry:

• This, by itself, does not negate the benefits of GDP growth in raising incomes and living standards. It is a natural outcome of industrialization.

Industrial growth slower than agriculture:

• This can constrain advance of manufacturing sector which provides more income growth opportunities. But overall GDP and income growth can still improve living standards.

Poverty and unemployment increase:

• As per Amartya Sen's and other economists' works, if GDP growth is accompanied by rise in poverty and joblessness, it clearly does NOT signify improvement in economic development and human capabilities.

Imports outgrowing exports:

• While some imports are essential for growth, if net exports are highly negative it indicates weak domestic production systems to meet local demand. This reduces income flows within the economy.

The opportunity cost is zero.

• This option is incorrect because even if a service is provided for free by the government, there are still costs associated with producing and delivering that service.
• These costs represent the alternative uses of the government's resources that are foregone in order to provide the service​​​​.

The opportunity cost is ignored.

• While it may seem that the opportunity cost is ignored in decision-making processes, it is not accurate.
• Governments consider the benefits and costs of different allocations of resources, including the opportunity costs of public projects​​.

The opportunity cost is transferred from the consumers of the product to the tax-paying public.

• This option is correct because when the government provides a service for free, it uses tax revenue to cover the costs.
• The resources used for the service could have been used for other purposes, representing an opportunity cost borne by the tax-paying public, not the direct consumers of the service​​​​.

The opportunity cost is transferred from the consumers of the product to the Government.

• This option is incorrect because while the government bears the immediate financial cost of providing the service, the broader opportunity cost is ultimately borne by the society or tax-paying public through the use of public funds that could have been allocated elsewhere​​​​.