Economy 2019 MCQs

The proportion of literates in the population.

• It relates more closely to human capital, which encompasses the skills, knowledge, and experience possessed by individuals, rather than social capital which is about relationships and trust within a society.

The stock of its buildings, other infrastructure, and machines

• It represents physical capital. Physical capital consists of tangible, man-made objects that facilitate economic production.

The size of the population in the working age group

• It could be considered a component of demographic or human capital, focusing on the potential labor force, rather than the social and relational aspects that define social capital.

The level of mutual trust and harmony in the society

• It directly correlates with the concept of social capital. Social capital revolves around interconnected networks of relationships, levels of trust, and resources or benefits gained and transferred through social ties and participation. High levels of trust among network participants foster a sense of mutual obligation and allow them to be more effective in pursuing shared objectives​​.

Social capital is of significant importance for societal well-being, influencing employment levels in communities, academic performance, physical health, economic growth, and rates of crime in communities. It is enhanced through both formal social participation, like political or religious involvement, and informal social ties, such as interactions with family, friends, and neighbors​​.

Social capital is vital for the smooth functioning and overall well-being of a society, highlighting the importance of mutual trust and harmony as its core elements.

Transportation cost only:

• Transportation is only one component of economic cost to FCI. As per the FCI Annual Report, it also incurs costs on storage, handling, interest etc.

Interest cost only:

• While interest cost is part of economic costs, FCI also incurs major operational expenditures like handling, storage and distribution where substantial public resources are utilized.

Procurement incidentals and distribution costs:

• As per the latest FCI Annual Report, after MSP its major expenditures are on procurement incidentals and distribution costs like loading, unloading, packaging etc. These reflect key operational costs.

Procurement incidentals and godown charges:

• Godown/storage charges are separate from incidentals as per FCI expenditure accounting norms.

The World Bank's 'Ease of Doing Business Index' does not include a sub-index for "Maintenance of law and order".

The index captures regulations that impact business activity in a country across 10 key indicators:

1. Starting a business
2. Dealing with construction permits
3. Getting electricity
4. Registering property
5. Getting credit
6. Protecting minority investors
7. Paying taxes
8. Trading across borders
9. Enforcing contracts
10. Resolving insolvency

While law and order impacts business environment, it is not a specific regulatory measure. The existing indicators directly measure aspects of business regulation.

• The Banks Board Bureau (BBB) is an autonomous body of the Government of India.
• One of the key functions of the BBB is to recommend selection and appointment of Chairman and Managing Directors of public sector banks.
• The BBB recommends names to the Appointments Committee of the Cabinet (ACC) which takes the final decision.

Banks Board Bureau (BBB):

As mentioned earlier, the BBB recommends names of candidates to the ACC for appointment of PSB Chairmen. This has been its mandate since its establishment in 2016 for PSB reforms.

Reserve Bank of India (RBI):

• RBI is the central bank and banking regulator. It does not directly appoint the chairpersons of public sector banks.

Union Finance Ministry:

• While the Finance Ministry oversees functioning of PSBs, appointments are based on BBB recommendations as part of autonomous process.

Management of the concerned bank:

• The bank management does not select its own chairman. Appointments follow due selection process via BBB.

The Inter-Creditor Agreement (ICA) framework was introduced by the Reserve Bank of India in 2018 to streamline the resolution process for stressed assets.

Key points regarding the ICA framework:

1. It aimed to resolve stressed loans of Rs 50 crore or above under a consortium lending arrangement.
2. It tried to speed up the resolution process through a majority decision among lenders instead of requiring 100% approval.
3. The goal was to resolve huge bad loans and recover capital locked in non-performing assets.

Formation:

• AIIB was founded in 2016 to support infrastructure development in Asia.

Members:

• It has 103 approved members globally from within and outside Asia. Major members include China, India, Russia, South Korea, UK, Germany etc.

Shareholding:

• China holds highest share of 26.61%, making it the largest shareholder.
• India has 7.60% voting shares, and is the 2nd biggest shareholder.

Headquarters:

• Located in Beijing, China.

Focus Areas:

• Sustainable infrastructure like transport, energy, urban development etc.
• Connectivity and regional integration among Asian economies.

Total Funds:

• Has $100 billion in capital to fund infrastructure projects.

Statement 1:

• The 2nd Five Year Plan focused on heavy and basic industries like steel, chemicals, machinery.
• The aim was to substitute imports and build indigenous industrial capacity through state intervention.
• It marked a shift from consumer goods of 1st Plan, indicating the "determined thrust".

Statement 2:

• The 4th Plan document stated its goal was to "attack economic and social inequality".
• It recognized the unequal distribution of incomes was a serious issue needing redressal.
• Policies included land reforms, curb on monopolies and more rural spending.

Statement 3:

• The nationalization of major banks took place in 1969 and banking reforms were added in 4th and subsequent Plans.
• Hence financial sector was NOT included for the first time in the 5th Plan. It was already an element of prior Plans too.

Certificate of Deposit:

• A debt instrument issued by banks and financial institutions to raise funds for short term. Does not allow stock market participation.

Commercial Paper:

• An unsecured money market instrument issued by firms to meet short term credit needs. Not related to stock market investment.

Promissory Note:

• A financial instrument involving an unconditional promise by one party to another for payment of a definite sum. Does not facilitate stock investment.

Participatory Note:

As per SEBI, these are "Offshore Derivative Instruments" issued by registered foreign portfolio investors (FPIs) to overseas investors to facilitate participation in Indian stocks/derivatives without direct registration.

IT Sector Earnings:

• India's IT service exports have steadily risen to around $150 billion per year. This provides a large stream of USD and other foreign currency into the economy.
• It reduces the dependence on volatile foreign portfolio flows that are riskier from a currency stability perspective.
• The increased forex reserves from IT export earnings make India less susceptible to the risk of a potential currency crash.

Government Expenditure:

• Higher fiscal spending by the government drives up imports, widens current account deficit (CAD) and leads to depletion of forex reserves, which precipitate a currency crash.
• As fiscal deficit rises, foreign investors often withdraw capital from India wary of depreciation risks. This compounds currency crash risks.

Remittances from Abroad:

• India receives over $80 billion in worker remittances annually from Indians residing overseas.
• This leads to a positive impact on India's balance of payment position and forex reserves, reducing dependence on volatile FPI inflows.
• It provides a buffer against sudden capital outflows that make the rupee more resilient when global risk sentiment worsens.

Advances:

• These refer to the loans and credit facilities sanctioned and disbursed to the bank's customers. For example - home loans, business loans, credit cards etc.
• It represents the bank's core asset that earns interest income over the tenure of the loans. Hence it's a key income-generating asset on the balance sheet.

Deposits:

• These represent the deposits like saving accounts, current accounts, fixed deposits etc maintained by customers at the bank.
• The bank owes this money to depositors. Hence, it's a financial obligation or liability - not an asset earning income for the bank.

Investments:

• This includes investments made by the bank in securities, bonds, shares, debentures and other financial market instruments from its capital and deposits.
• These earn interest, dividend or trading gains for the bank. Hence, it's an asset.

Money at Call/Short Notice:

• This refers to short term lending by the bank to other banks for tenures like overnight borrowing.
• The borrowing bank pays interest on such lending. So, it's an earning asset for the lending bank.

Most of India’s external debt is owed by governmental entities.

• According to the Reserve Bank of India, the government and central bank portion of the external debt is a significant but not the majority part of the total external debt.
• The government debt and central bank debt as distinct segments, with a considerable portion of the external debt also attributed to non-governmental sectors such as deposit-taking corporations (excluding the central bank), other financial and non-financial corporations, and direct intercompany lending​​​​.
• This indicates that while the government is a major borrower, the majority of external debt is also significantly contributed by non-government entities.

All of India’s external debt is denominated in US dollars.

• India's external debt is not exclusively in US dollars; it is held in a mix of currencies.
• The diversification across different currencies like the US dollar, Indian rupee, Japanese yen, Special Drawing Rights (SDRs), and Euros is a strategic approach to mitigate currency exchange risks.
• The US dollar does constitute a significant portion of the external debt, but a substantial part is also in other currencies​​.

Increase in the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR):

• Both CRR and SLR are regulatory tools used by central banks to control the amount of funds that banks can lend.
• An increase in either ratio requires banks to hold more funds as reserves, thereby reducing the portion of deposits that can be lent out.
• This decrease the money multiplier because it limits the banking sector's capacity to create additional money through lending​​​​.

Increase in the Banking Habit of the Population:

• When more people choose to deposit their money in banks rather than holding it in cash, the base for banks to lend and create additional money increases.
• This behavior can lead to an increase in the money multiplier because it enhances the capacity of banks to lend more, thus potentially increasing the overall money supply in the economy​​.

Increase in the Population of the Country:

• While not directly influencing the money multiplier, an increase in the population could indirectly affect it if the growing population leads to increased deposits in the banking system.
• However, the direct relationship is more nuanced and depends on other factors such as the banking habits of the population, economic policies, and the regulatory environment​​.

Curbing Imports/Promoting Exports:

• RBI directly intervenes in forex market to reduce volatility in rupee's value in line with trade fundamentals.
• Curbing non-essential imports and promoting exports improves trade balance and rupee stability.

Encouraging Rupee Denominated Masala Bonds:

• RBI takes steps to allow Indian firms to raise overseas funds through masala bonds denominated in rupees instead of dollars, reducing dollar demand.

Easing ECB Norms:

• RBI periodically eases external commercial borrowing guidelines to enable higher forex inflows to boost liquidity and reduce volatility.

Expansionary Monetary Policy:

• As per RBI intervention framework, this type of policy which often weakens currency is NOT used to defend a sliding rupee.

Statement 1 is correct. Purchasing power parity exchange rates are calculated by comparing prices of a standardized basket of commonly consumed goods across countries. This helps generate parity benchmarks to compare real income levels.

Statement 2 is Incorrect. As per latest World Bank data, India has become the 3rd largest economy in terms of Gross Domestic Product measured through purchasing power parity valuation of country currencies.

Poverty Rates:

• Poverty rates refer to the percentage of population living below the predefined poverty line in that state.
• Poverty rates themselves do not determine the poverty lines. They are the outcome based on the benchmark.
• Hence, variation in poverty rates does not define state-level differences in poverty thresholds.

Price Levels:

• Differing price levels of commodities across states determine the local costs faced by representative low consumption households specific to those states.
• State-specific price indices shape differences in minimum living standards and expenditure abilities. This is the primary factor causing differential poverty line benchmarks.

Gross State Product:

• While GSP does indicate varying development levels, poverty lines rely directly on household consumption patterns, not aggregate income metrics like GSP.
• So GSDP itself does not directly necessitate separate state-level poverty lines.

Public Distribution System:

• Quality, efficiency and scope of PDS also does not alter methodology for calculating benchmark poverty thresholds across states.

The ceiling laws were aimed at family holdings and not individual holdings:

• Ceiling laws, part of the land reform efforts, were designed to limit the maximum amount of land that could be owned by individuals or families.
• These laws aimed to redistribute surplus land above the ceiling to landless and marginal farmers.
• The implementation varied across states, with some focusing on individual limits while others considered family holdings as the unit for applying ceilings​​​​.

The major aim of land reforms was providing agricultural land to all the landless:

• This is one of the key objectives of land reforms, which was to redistribute land to the landless and marginal farmers to ensure equitable access to land resources.
• The aim was to address rural poverty and improve socio-economic conditions for the rural poor​​​​.

It resulted in cultivation of cash crops as a predominant form of cultivation:

• While land reforms aimed to redistribute land and improve agricultural productivity, they were not specifically designed to promote the cultivation of cash crops.
• The impact on the type of crops cultivated would vary based on multiple factors, including regional agricultural practices and market demands​​.

Land reforms permitted no exemptions to the ceiling limits:

• In practice, there were exemptions and variations in how ceiling laws were implemented across different states.
• Some types of land or uses were exempt from these ceilings, and enforcement varied, which sometimes allowed landowners to retain or legally reclassify land to avoid redistribution​​​​.