Economy 2020 MCQs

Short-term Credit Delivery to the Agriculture Sector:

• The role of District Central Cooperative Banks (DCCBs) in delivering short-term credit to the agriculture sector is significant within the cooperative banking structure.
• DCCBs, along with State Cooperative Banks (StCBs) and Primary Agricultural Credit Societies (PACS), form a three-tier structure that plays a crucial role in providing agricultural credit.
• The cooperative sector, including DCCBs, is integral to agricultural financing, but quantitatively stating that DCCBs deliver more credit compared to others without specific data is not directly supported​​​​.

Funding Primary Agricultural Credit Societies (PACS):

• DCCBs are a critical part of the cooperative credit structure that provides funding to PACS.
• PACS operate at the grassroots level, directly interfacing with farmers and rural communities, and depend on the higher-tier financing provided by DCCBs (and StCBs, indirectly through DCCBs).
• The strengthening and diversification of PACS, as outlined by government initiatives, underscore the importance of DCCBs in supporting these societies​​​​.

Cutting Statutory Liquidity Ratio (SLR):

• The SLR is the minimum percentage of total deposits that banks have to maintain in liquid assets like cash, gold or approved securities
• As per the RBI Act, the floor SLR rate is 18%
• Cutting the SLR injects more liquidity into the banking system as it allows banks to lend out more of their deposit funds instead of parking them in liquid assets to fulfill SLR norms
• So lowering SLR rates enables more credit expansion and money supply - an expansionary measure

Source: https://rbi.org.in/Scripts/FAQView.aspx?Id=87

Increasing Marginal Standing Facility (MSF) Rate:

• The MSF is a credit facility banks can access overnight by pledging government securities
• It allows banks to borrow from the RBI at a penal rate of interest above the repo rate
• Increasing the MSF rate makes it more expensive for banks to borrow funds
• This tightens overall liquidity conditions as banks will borrow less - a contractionary measure

Source: https://rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10598

Cutting Repo Rate and Bank Rate:

• The repo rate is the key policy rate at which RBI lends short term funds to banks
• Cutting the repo rate reduces short term borrowing costs and allows easier availability of credit
• The bank rate is the long term lending rate at which RBI provides loans to commercial banks
• Reducing both rates injects more liquidity and stimulates demand and economic growth - expansionary measures

Sources: https://rbi.org.in/Scripts/FAQView.aspx?Id=104

https://rbi.org.in/Scripts/FAQView.aspx?Id=60

• Statement 1 is correct: Quantitative restrictions on imports by foreign investors are prohibited.

The TRIMS agreement explicitly "prohibits investment measures that restrict imports to an amount related to the level of local production". This includes "measures which restrict a firm's ability to import in relation to a certain amount of local content"

Source: https://www.wto.org/english/docs_e/legal_e/18-trims.pdf

• Statement 2 is incorrect: They apply to investment measures related to trade in both goods and services.

The TRIMS agreement applies only to trade in goods. As per the WTO, TRIMS:"does not apply to measures that concern services"

Source: https://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm

• Statement 3 is correct: They are not concerned with the regulation of foreign investment.

As per the WTO, "The TRIMS Agreement does not apply to measures that are not trade-related investment measures, such as general conditions for foreign direct investment"

Crude oil - According to the U.S. Energy Information Administration (EIA), "West Texas Intermediate (WTI) crude oil is of very high quality and is considered a sweet crude oil". It is a specific grade of crude oil used as a benchmark for oil pricing.

Source: https://www.eia.gov/energyexplained/oil-and-petroleum-products/prices-and-outlook.php

Bullion - Bullion refers to gold and silver in bar or ingot form. It does not refer to a type of oil. According to the EIA glossary, "Bullion refers to refined gold and silver in bar or ingot form."

Rare earth elements - Rare earth elements are 17 metallic elements used in various technologies. According to the US Geological Survey, "The rare earth elements are a group of 17 elements with unique chemical properties that are key ingredients in modern technologies." No relation to oil.

Source: https://www.usgs.gov/news/interior-releases-2018-s-final-list-35-minerals-deemed-critical-us-national-security-and

Uranium - Uranium is a heavy metal used as fuel in nuclear power plants. As per the EIA, "Uranium is a radioactive element used to produce fuel for nuclear power plants." It is not related to crude oil.

Source: https://www.eia.gov/energyexplained/nuclear/uss-nuclear-industry.php

It is the investment through capital instruments essentially in a listed company.

• FDI is allowed both in listed and unlisted companies in India.
• As per DPIIT's Consolidated FDI Policy guidelines, FDI is permitted under automatic route in most sectors without approval, for both listed and unlisted companies.

Source: https://www.makeinindia.com/sites/default/files/2020-06/D-sectors_l_0.pdf

It is a largely non-debt creating capital flow.

• As per DPIIT definition, FDI means investment by non-resident entity into Indian companies by way of equity instruments.
• It involves purchase of stakes and equities into companies and establishing a lasting interest.
• Hence it does not lead to creation of debt that requires repayment of principal or interest.

Source: https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020_0.pdf

It is the investment which involves debt-servicing.

• As explained above, FDI does not lead to creation of debt and hence does not involve debt-servicing obligations.

It is the investment made by foreign institutional investors in the Government securities.

• Foreign investments in Indian debt instruments like Government securities, corporate bonds etc. are called Foreign Portfolio Investments (FPI).
• FPIs involve only financial assets, whereas FDIs involve direct business interest and controlling ownership.

• Statement 1 is correct. Commercial Papers (CPs) are indeed short-term, unsecured promissory notes issued at a discount to face value, primarily by corporations to fund their short-term liabilities. They are issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue​​.
• Statement 2 is incorrect. Certificates of Deposit (CDs) are actually short-term, negotiable, and interest-bearing financial instruments issued by banks and financial institutions, not specifically by the RBI, and they can be issued to individuals, corporations, companies, trusts, funds, and associations. CDs have a fixed term and are typically intended to be held until maturity, offering higher interest rates than savings accounts​​.
• Statement 3 is correct. Call Money is indeed a form of short-term borrowing and lending among banks and financial institutions, where the funds are borrowed and lent on an overnight basis or for a short period. This is used to maintain liquidity and meet short-term mismatches in funds​​.
• Statement is incorrect. Zero-Coupon Bonds are issued at a discount and do not pay interest (coupon) during their life but are redeemed at their face value at maturity. They can be issued by various entities, not just Scheduled Commercial Banks, and are not limited to short-term maturities nor exclusively issued to corporations​​.

Source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12592

Statement 1 is incorrect.

• While the government does procure cereals, pulses, and oilseeds at MSP, the extent of procurement can vary significantly across different crops and states.
• The procurement is not "unlimited" but is influenced by various factors, including market prices, demand-supply dynamics, and the government's strategic stock requirements.
• The procurement is also concentrated in certain states, with significant variations in the quantity procured across the country.
• For instance, rice and wheat have historically seen higher levels of procurement compared to other crops, and procurement levels are notably higher in states like Punjab, Haryana, and Madhya Pradesh​​.

Source: https://prsindia.org/theprsblog/msp-and-public-procurement

Statement is incorrect.

• The MSP is intended to act as a safety net to protect farmers against excessive market price fluctuations, ensuring them a minimum profit for their harvest.
• However, the MSP is not designed to cap market prices or prevent them from rising above the MSP level.
• Market prices can and do rise above the MSP, influenced by market demand, supply constraints, and other economic factors. The government or its agencies undertake procurement at MSP primarily when market prices fall below the MSP to support farmers' incomes​​​​.

Source: https://www.myscheme.gov.in/schemes/pss

Statement 1 is correct.

• The CPI has a higher weightage for food items compared to the WPI.
• Specifically, food, beverages, and tobacco together have a significant weight in the CPI basket.
• For example, in the CPI-Combined, food items have a weightage of around 48.24%, whereas in the WPI, food articles have a lower weightage of 26.07%.
• This reflects the higher importance given to food items in the consumption basket of individuals, as captured by the CPI​​.

Source: https://www.rbi.org.in/SCRIPTS/PublicationsView.aspx?id=17450

Statement 2 is correct.

• The WPI primarily measures price changes at the wholesale level and focuses on goods only.
• It does not include services, which are a significant part of the consumer expenditure basket.
• On the other hand, the CPI captures the prices of both goods and services, reflecting the actual expenditure pattern of households.
• This is why a quarter of the CPI-combined consists of non-tradable items like services that are not included in the WPI​​.

Source: https://www.rbi.org.in/SCRIPTS/PublicationsView.aspx?id=17450

Statement 3 is incorrect.

• The RBI primarily uses the CPI as its measure of inflation for policy decisions, including the setting of key policy rates.
• The transition to using the CPI as the nominal anchor for monetary policy was formalized in an agreement between the Government of India and the RBI, recognizing CPI-combined inflation as the key measure.
• This shift emphasizes the RBI's focus on retail inflation in its monetary policy framework, reflecting the direct impact of inflation on consumers​​​​.

Source: https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=21343

Indo-Sri Lanka Trade:

• The trade between India and Sri Lanka has indeed increased over the years, demonstrating consistent growth.
• In 2021, India exported $4.87B to Sri Lanka, with the main exports including refined petroleum, semi-finished iron, and light rubberized knitted fabric.
• This growth in exports from India to Sri Lanka has been at an annualized rate of 10.1% over the last 26 years.
• Conversely, Sri Lanka exported $1B to India, with main exports including animal food, pepper, and special purpose ships, showing an annualized growth rate of 14.4% over the same period​​​​​​.

Source: https://oec.world/en/profile/bilateral-country/ind/partner/lka

https://www.adb.org/publications/deepening-economic-cooperation-between-india-and-sri-lanka

https://diplomatist.com/2020/03/03/india-sri-lanka-trade-relations/

India-Bangladesh Textile Trade:

• Textile and apparel sectors play a significant role in the trade relationship between India and Bangladesh.
• India specializes in the upstream segment, supplying intermediate inputs like silk, cotton, yarn, and fabrics to Bangladesh.
• Bangladesh then utilizes these inputs in its strong downstream final apparel segment, exporting finished goods worldwide, including to India.
• This relationship is bolstered by significant value chain linkages between the two countries, though tariffs, nontariff barriers, and industrial policies in India can inhibit the growth of these linkages​​​​.

Source: https://oec.world/en/profile/bilateral-country/ind/partner/bgd

https://openknowledge.worldbank.org/entities/publication/9bbc6705-0471-5ac4-929d-ab5f887cbc95

Nepal as India's Largest Trading Partner in South Asia:

• Bangladesh emerges as India's largest trading partner in South Asia, followed by Sri Lanka and Nepal.
• India's exports to Bangladesh were significantly higher than its imports, resulting in a substantial trade balance in favor of India.
• Specifically, India exported goods worth approximately $12,203.96 million to Bangladesh, against imports of $2,021.24 million, bringing the total trade to $14,225.17 million and a trade balance of $10,182.68 million in favor of India​​.

Source: https://commerce.gov.in/about-us/divisions/foreign-trade-territorial-division/foreign-trade-south-asia/

Minimum Support Price (MSP):

• The government sets MSP for various crops, including rice, to ensure farmers a minimum profit regardless of market fluctuations.
• This policy aims to encourage farming of certain crops and ensure food security.
• The government procures rice at MSP, influencing its market supply and price​​.

Government’s Trading and Stockpiling:

• The Food Corporation of India (FCI) conducts e-auctions of rice under the Open Market Sale Scheme (Domestic) as part of market intervention to control the price of rice and wheat.
• This action is aimed at checking inflationary trends in prevailing retail prices​​.
• Additionally, the Price Stabilization Fund (PSF) aims to maintain strategic buffer stocks of various commodities, including rice, to discourage hoarding and unscrupulous speculation, thus stabilizing prices​​

Consumer Subsidies:

• The government also provides rice at subsidized rates to consumers under various schemes.
• For instance, the distribution of fortified rice across Government Schemes like the Targeted Public Distribution System (TPDS), Integrated Child Development Services (ICDS), and others, is done to enhance nutrition and ensure affordability of rice to the vulnerable sections of society.
• The entire cost of rice fortification is borne by the Government of India as part of food subsidy​​.

Source: https://pib.gov.in/Pressreleaseshare.aspx?PRID=1814826

Statement 1 is correct.

• RBI states: "The interest coverage ratio gives an indication regarding the debt servicing capacity of the borrower with respect to payment of interest."
• The interest coverage ratio looks at current year earnings (EBIT) vs current year interest payments. This examines the present earnings cushion to service debt in the same period. A lower ratio indicates higher default risk in near term as earnings may be inadequate to cover interest dues.

Statement 2 is correct.

• RBI states: "A trend analysis of interest coverage ratio would also throw light on the stability or improvement/deterioration in debt servicing capacity over the years."
• Analyzing interest coverage ratio trend gives insight into debt repayment capacity strengthening or worsening over time. For instance, a declining ratio means business growth has not kept pace with rising interest obligations. This highlights intensifying risks going forward.

Statement 3 is incorrect.

• RBI states: "The higher the ratio, the better is the company’s ability to service its debt."
• A higher ratio signifies company's earnings are adequately covering or exceeding interest payments. This allows comfortable servicing of debt.

Source: https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9908#8

A loan system of the World Bank

• This option is incorrect. The Gold Tranche or Reserve Tranche is not related to the loan systems provided by the World Bank.

One of the operations of a Central Bank

• This option is also incorrect. The Gold Tranche has nothing to do with the operations or functions of a country's Central Bank.

A credit system granted by WTO to its members

• This option is incorrect. The WTO does not provide any credit system called Gold Tranche to its members.

A credit system granted by IMF to its members

• This option is correct. As per the IMF, the Gold Tranche refers to financial resources or credit that the IMF provides to its members.
• As per IMF: "Each member of the Fund is assigned a quota that determines its financial commitment and voting power. A member pays its subscription to the Fund equal to its quota with 25 percent paid in Special Drawing Rights or currencies chosen by the member, and 75 percent paid in its own currency."
• "The Reserve Tranche is the foreign currency component of a member's quota, minus Fund holdings of the member's currency in excess of this Reserve Tranche component."

Source: https://www.imf.org/external/np/exr/facts/gold.htm

To reduce it by Rs 1,00,000

• This option is incorrect. Withdrawal of cash from a demand deposit account does not directly reduce the aggregate money supply in the economy.

To increase it by Rs 1,00,000

• This option is also incorrect. Only the composition of money supply changes, it does not directly increase the overall money supply.

To increase it by more than Rs 1,00,000

• This option is incorrect as withdrawal does not increase overall money supply.

To leave it unchanged

• This option is correct as per RBI definition of money supply components.
• As per the RBI: "When cash is withdrawn from a bank account, there is a decrease in deposits (a component of money supply), but there is a corresponding increase in cash-in-hand (also a component of money supply)."
• So there is only a shift between deposit money and currency money. The total money supply remains unchanged.

Source: https://mospi.gov.in/102-monetary-and-financial-statistics

Not depending on short-term foreign borrowings:

• The Government of India and the Reserve Bank of India (RBI) have taken several measures to ensure financial stability and to mitigate the impact of external shocks.
• This includes focusing on maintaining adequate liquidity in the system, facilitating bank credit flows, and easing financial stress to enable the normal functioning of markets.
• By ensuring a robust financial system, these measures indirectly help in reducing reliance on short-term foreign borrowings by enhancing the domestic financial ecosystem's resilience​​.
• Over-dependence on short-term debt flows makes India susceptible to volatility/contagion. Hence the need to increase the proportion of stable long-term debt.

Opening up to more foreign banks:

• The regulatory environment and financial sector policies are designed to ensure financial stability, safeguard against vulnerabilities, and promote economic well-being.
• This includes a focused approach to reduce the compliance burden and ensure a streamlined and efficient regulatory environment​​.
• RBI says global financial firms amplify crisis risks. Building large domestic banks is a better option to withstand crises. So allowing more foreign banks may not help.

Maintaining full capital account convertibility:

• The government's focus has been more on ensuring macro-economic stability, promoting growth, and implementing supply-side reforms rather than specifically on maintaining full capital account convertibility.
• The economic strategies highlighted in the government's documents include a mix of demand and supply-side measures, fiscal support, and emphasis on supply-side reforms such as deregulation of sectors, simplification of processes, and removal of legacy issues like 'retrospective tax'.
• These measures are aimed at improving the resilience of the Indian economy and are part of a broader strategy to deal with economic uncertainties​​.

Source:

• https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1793826
• https://pib.gov.in/PressReleasePage.aspx?PRID=1615349
• https://m.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=630

As per the Controller of Certifying Authorities (CCA) in India the term "Public Key Infrastructure" (PKI) in India is used in the context of Digital security infrastructure.

PKI is crucial for the growth of e-commerce and e-governance by ensuring trust in electronic environments.

It achieves this through the use of digital signatures based on asymmetric key cryptography, providing authentication, integrity, and non-repudiation for electronic transactions.

The Information Technology Act, 2000, underpins the legal framework for digital signatures and PKI, recognizing digital signatures as having the same legal status as handwritten signatures.

The Act also establishes the CCA's role in licensing and regulating Certifying Authorities (CAs) that issue digital signature certificates​​​​​​.

Source: https://www.cca.gov.in/mutual_recognition.html