UPSC Prelims Research: Indian Economy 2014

Q. Which of the following organizations brings out the publication known as ‘World Economic Outlook’?

(a) The International Monetary Fund

(b) The United Nations Development Programme

(c) The World Economic Forum

(d) The World Bank

Answer: (a) The International Monetary Fund

IMF:

• The IMF is an international organization that promotes global economic growth and financial stability, encourages international trade, and reduces poverty.
  • It was set up in 1945 out of the Bretton Woods conference.
• Originally, the primary goal of the IMF was to bring about international economic coordination to prevent competing currency devaluation by countries trying to promote their own exports.
  • Eventually, it evolved to be a lender of last resort to governments of countries that had to deal with severe currency crises.
• Reports by IMF:
  • Global Financial Stability Report.
  • World Economic Outlook.
    • It is a survey by the IMF that is usually published twice a year in the months of April and October.
    • It analyzes and predicts global economic developments during the near and medium term.
    • In response to the growing demand for more frequent forecast updates, the WEO Update is published in January and July, between the two main WEO publications released usually in April and October.

Q. Which of the following are associated with ‘Planning’ in India?

1. The Finance Commission
2. The National Development Council
3. The Union Ministry of Rural Development
4. The Union Ministry of Urban Development
5. The Parliament

Select the correct answer using the code given below.

(a) 1, 2 and 5 only
(b) 1, 3 and 4 only
(c) 2 and 5 only
(d) 1, 2, 3, 4 and 5

Answer: (c) 2 and 5 only

Notes:

• The Finance Commission
  • It is constituted by the President under article 280 of the Constitution to give its recommendations on the distribution of tax revenues between the Union and the States.
• The National Development Council
  • It is presided over by the Prime Minister. It is an executive body established in August 1952.
  • This body is neither a constitutional nor a statutory body.
  • It is the apex body to take decisions on matters related to approval of five-year plans of the country.
  • This council has been proposed to be abolished.
• The Union Ministry of Rural Development
  • It is entrusted with the task of accelerating the socio-economic development of rural India.
• The Union Ministry of Urban Development
  • This Ministry is known as the Ministry of Housing and Urban Affairs.
  • It is entrusted with the formulation and administration of the rules and regulations and laws relating to the housing and urban development in India.
• The Parliament
  • It is the supreme legislative body of the Republic of India.
  • The is directly responsible to make laws for the welfare of the society.
• Out of the given options, The Parliament and the NDC are related to “planning” in India.

Q. The main objective of the 12th Five-Year Plan is

(a) inclusive growth and poverty reduction

(b) inclusive growth and sustainable growth

(c) sustainable and inclusive growth to reduce unemployment

(d) faster, sustainable and more inclusive growth

Answer: (d) faster, sustainable and more inclusive growth

Twelfth Five Year Plan (2012-2017):

• The Twelfth Five Year Plan began on April 1, 2012, and will last for five years, from 2012 to 2017. The Twelfth Plan’s slogan is “Faster, Sustainable, and More Inclusive Growth.” 
  • It means that the Twelfth Plan aims for faster growth that can be sustained over time, with the benefits of growth reaching the masses.
• The Government of India’s Twelfth Five-Year Plan was set to reach a growth rate of 9%, but the National Development Council (NDC) accepted an 8% growth rate for the Twelfth Plan on December 27, 2012.
• During the 12th Five-Year Plan, the government aims to reduce poverty by 10%.
• The plan intends to improve the nation’s infrastructure projects while preventing bottlenecks of any kind.
• The paper provided by the planning commission aims to attract private investments of up to $1 trillion in infrastructure growth in the 12th five-year plan, as well as a reduction in the government’s subsidy burden to 1.5 percent of GDP from 2%. (gross domestic product).
  • The UID (Unique Identification Number) will act as a platform for cash transfer of the subsidies in the plan.
• Objectives:
  • Economic growth
    • The real GDP is growing at an annual rate of 8%.
    • Agriculture is growing at a rate of 4%.
    • Manufacturing is growing at a 10% rate.
    • Every state must achieve a faster rate of growth than that of the 11th plan.
  • Poverty and Employment
    • The poverty rate will be lowered by 10% compared to the end of the 11th plan.
    • In the non-farm sector, there are 5 million new job openings and skill certifications
  • Education
    • The average number of years spent in school will rise to seven.
    • In higher education, there are 20 lakh seats available for each age group.
    • End the gender and social disparities in school enrollment.
  • Health
    • Increase the Child Sex Ratio to 950 by lowering the IMR to 25 and the MMR to 1.
    • Total Fertility Rate (TFR) should be reduced to 2.1.
    • Reduce child malnutrition in the 0-3 age range to half of the NFHS-3 level.
  • Infrastructure
    • Infrastructure investment accounts for 9% of GDP (gross irrigated area). 103 million hectares of land (from 90 million hectare)
    • All communities will have electricity, and AT&C losses will be reduced by 20%.
    • All-Weather Roads Connect Villages
    • National and state highways must have a minimum of two lanes.
    • Dedicated Freight Corridors on both the east and west coasts.
    • Teledensity in rural areas has reached 70%.
    • 50 percent of the rural population will have access to 40 litres of drinking water per day, and 50 percent of all Gram Panchayats will have Nirmal Gram status.
  • Environment and Sustainability
    • Every year, increase green cover by 1 million hectares.
    • Over a five-year period, 30,000 MW of renewable energy will be generated.
    • By 2020, the GDP emission intensity will be decreased to 20-25 percent of 2005 levels.
  • Service Delivery
    • 90 percent of Indian households have access to banking services.
    • Subsidies and welfare payments will be made through the Aadhar-based Direct Cash Transfer Scheme.

Q. If the interest rate is decreased in an economy, it will

(a) decrease the consumption expenditure in the economy

(b) increase the tax collection of the Government

(c) increase the investment expenditure in the economy

(d) increase the total savings in the economy

Answer: (c) increase the investment expenditure in the economy

Notes:

• If the interest rate is decreased in an economy, people will deposit less money in the banks since they would not get high returns and borrow more money with a low-interest rate, hence money supply in the economy will increase.
• Decrease in interest rate in an economy will increase the money supply, thus increasing the investment expenditure. With low interest rates, the banks will have more leverage to lend money to businesses and to citizens to purchase household items or to invest in productive things.

Q. What does venture capital mean?

(a) A short-term capital provided to industries

(b) A long-term start-up capital provided to new entrepreneurs

(c) Funds provided to industries at times of incurring losses

(d) Funds provided for replacement and renovation of industries

Answer: (b) A long-term start-up capital provided to new entrepreneurs

Venture Capital:

• Venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.
• Venture capital generally comes from well-off investors, investment banks and any other financial institutions.
• It provides necessary funding resources for startups that do not have access to capital markets, bank loans, or other debt instruments due to their newness, small size, or lack of tangible assets.
• Venture capital investment is often risky but offers the potential for above-average returns, which attracts investors.
• How Venture Capital Works?
  • Fundraising: Venture capital funds raise money from various investors to create a pool of funds.
  • Investment: They then identify and invest in startups and early-stage companies with high growth potential. The investment is not just monetary; venture capitalists also provide mentorship, strategic advice, and networking opportunities.
  • Growth Stage: With the infusion of capital, these companies ideally grow and expand. During this phase, venture capitalists may provide additional rounds of funding.
  • Exit: The ultimate goal of a venture capital investment is to exit the investment at a significantly higher valuation than the entry point. Exits are typically achieved through an initial public offering (IPO) or by selling the company to a larger one (acquisition).
• Types of Venture Capital:
  • Seed Capital: Very early investment to prove a new idea, often before the startup has fully formed its product or business model.
  • Early Stage Financing: Investments given for product development and initial marketing. This can include Series A and Series B rounds.
  • Expansion Financing: Also known as growth financing, this is capital provided to expand market reach, make significant R&D investments, or increase working capital.
  • Late Stage Financing: Funding provided to companies that have reached a certain level of maturity right before IPO.

Q. The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in news, are used in relation to

(a) banking operations

(b) communication networking

(c) military strategies

(d) supply and demand of agricultural products

Answer: (a) banking operations

Marginal Standing Facility (MSF):

• Marginal Standing Facility (MSF) refers to the rate at which banks can borrow overnight funds from the RBI in exchange for authorized government securities.
• This is applicable in emergency situations such as the inter-bank liquidity dries up completely and results in volatility in the overnight inter-bank rate.
• This was introduced by the RBI in its credit policy of May 2011.
• The banks have to exchange the securities with the RBI to avail of the overnight credit through MSF.
• The maximum credit a bank can avail through MSF is 3% of its total deposits (NDTL).
• The banks can use the securities under the SLR quota without paying a penalty as it is an emergency situation.
• This will shield the banks from the volatility of overnight inter-bank interest rates.
• Objectives of MSF:
  • To reduce the volatility of the overnight inter-bank interest rates.
  • To aid the banks in case of emergencies like drying up of inter-bank liquidity.

Difference between MSF and Repo Rate:

Marginal Standing Facility (MSF)	Repo Rate
The MSF is intended for overnight lending to banks.	The repo rate is applied to loans made to banks in order to meet their short-term financial requirements.
The MSF rate is the rate at which the RBI lends money to scheduled banks.	The repo rate is the rate at which the RBI lends money to commercial banks
Loans at MSF rates require the provision of government securities as collateral.	Lending at repo rates entails selling bank securities as collateral to the RBI and entering into a repurchase agreement.

Difference between LAF and MSF:

Parameter	Liquidity Adjustment Facility (LAF)	Marginal Standing Facility (MSF)
Minimum amount to borrow	Minimum bidding amount is 5 crore.	Minimum bidding amount is 1 crore and multiples of 1 crore.
Eligibility	All commercial banks are eligible to bid.	Only scheduled commercial banks can bid.
Usage of SLR Quota	Bank cannot use securities part of bank’s SLR quota.	Bank can use the securities from its SLR quota to RBI.
Maximum amount to borrow	Bank can borrow any amount of money as long as it has the securities to sell to the RBI.	Bank can maximum borrow upto 3% of its NDTL.

Net Demand and Time Liabilities

• The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.
• Bank’s NDTL = Demand and time liabilities (deposits) – deposits with other banks
  • Suppose a bank has deposited 5000 with the other bank and its total demand and time liabilities (including the other bank deposit) is 10,000. Then the net demand and time liabilities will be 5,000 (10,000-5,000).
• Demand Liabilities: The demand liabilities include all those liabilities of a bank which are payable on demand. Such as current deposits, cash certificates and cumulative/recurring deposits, outstanding telegraphic transfers, Demand drafts, margins against the letter of credit/guarantees, credit balance in cash credit account, etc., all are paid on demand.
• Time Liabilities: Time liabilities are those liabilities of a bank which are payable otherwise on demand. These include fixed deposits, cash certificates, staff security deposits, time liabilities portion of saving deposits account, margin held against the letter of credit (if not payable on demand), gold deposits, etc.
• Other Demand and Time Liabilities: These include all those miscellaneous liabilities which are not covered in above two types of liabilities. Such as interest accrued on deposits, unpaid dividend, suspense account balances showing the amount due to other banks or public, participation certificates issued to other banks, cash collaterals, etc.

Q. What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas?

1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.
2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (c) Both 1 and 2

Bank Sathi:

• Bank Sathi or Business Correspondent scheme was started to extend Financial Inclusion enabling the poor to do banking even in places there is no bank branch. These are mainly rural areas. In India, there are about 6 lakh villages.
• Business Correspondents are bank representatives linked to some branch. They help villagers to open accounts. It will provide basic services like deposits, withdrawals, Kisan Credit Card, etc.
• BCs are known as Bank Saathi or Bank Friend as Saathi means Friend or someone who is with you in case of need.
• Besides providing basic banking, BC also enables the collection of government subsidies, social security benefits to be directly credited to the accounts of the beneficiaries, enabling them to draw money from the Bank Saathi in the village itself.
• The Deposits made through Bank Saathi gets Deposit Insurance Cover like other deposits in the banks made directly.
• Business Correspondents get commission from bank for every new account opening, every transaction made via them, every loan-application processed etc.
  • The Business Correspondent carries a mobile device and helps villagers in banking transactions. (Deposit money, take money out of savings account, loans etc.).
  • The villager gives his thumb impression or electronic signature, and gets the money.

Eligibility to become a Business Correspondent

• As per the RBI guidelines, the following entities are eligible for appointment of Business Correspondents (BCS) for banks:
  • NGOs/MFls set up under Societies/Trust Acts
  • Societies registered under Mutually Aided Cooperative Societies Acts or the Cooperative Societies Acts of States
  • Section 25 companies that are stand alone entities or in which NBFCs, banks, telecom companies and other corporate entities or their holding companies did not have equity holdings in excess of 10 per cent
  • Post offices
  • Retired bank employees,
  • Ex-servicemen
  • Retired government employees.
  • Individual kirana / medical / fair price shop owners Individual Public Call Office (PCO) operators
  • Agents of Small Savings Schemes of Government of India/Insurance Companies Individuals who own petrol pumps
  • Retired teachers
  • Authorised functionaries of well run Self Help Groups (SHGs) linked to banks Non deposit taking NBFCs (non-banking finance companies) in the nature of loan companies whose micro finance portfolio is not less than 80 per cent of their loan outstanding in the financially excluded districts as identified by the Committee on Financial Inclusion.
  • RBI has now permitted banks to engage any individual, including those operating Common Service Centres (CSCs) as BC, subject to banks’ comfort level and their carrying out suitable due diligence as also instituting additional safeguards as may be considered appropriate to minimise the agency risks.

Q. In the context of Indian economy, which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?

1. To enable the Central Bank to control the amount of advances the banks can create
2. To make the people’s deposits with banks safe and liquid
3. To prevent the commercial banks from making excessive profits
4. To force the banks to have sufficient vault-cash to meet their day-to-day requirements

Select the correct answer using the code given below.

(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

Answer: (a) 1 only

Statutory Reserve:

• Statutory Reserve is the amount of money, securities, or assets that need to be set aside as a legal requirement by insurance companies and financial institutions to cover claims or obligations due shortly. It is a mandatory reserve since the Government does not want to take chances if an insurance company fails to make payments for the insured peril.
• It is a legal reserve that must be maintained by the standards set by the regulating body for the sector, which may vary from country to country. The primary aim of maintaining a statutory reserve is for the organization to meet its obligations promised to its customers even if it is running into losses.

Statutory Liquidity Ratio (SLR)

• Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits that a commercial bank must keep in liquid cash, gold, or other securities. It’s essentially the reserve requirement that banks must meet before they may extend credit to customers.
  • Section 24 (2A) of the Banking Regulation Act of 1949 established the Statutory Liquidity Ratio (SLR).
• This asset can be in the form of the following:
  • Cash
  • Gold valued at a price not exceeding the current price
  • Government securities and Treasury Bills
• Objectives of Statutory Liquidity Ratio
  • To control bank credit, changing SLR would change the bank credit availability.
  • In the case of the solvency of commercial banks, it will help in repaying stakeholders.
  • Changing SLR indicates the macroeconomic conditions and what to expect from other instruments of monetary policy.
  • By making banks invest in government securities the government has enough financial resources.

Q. The sales tax you pay while purchasing a toothpaste is a

(a) tax imposed by the Central Government

(b) tax imposed by the Central Government but collected by the State Government

(c) tax imposed by the State Government but collected by the Central Government

(d) tax imposed and collected by the State Government

Answer: (d) tax imposed and collected by the State Government

Notes:

• A sales tax is a consumption tax imposed by the government on the sale of goods and services. A conventional sales tax is levied at the point of sale, collected by the retailer, and passed on to the government. In India it was the tax imposed and collected by the State Government.
• Taxes on toothpaste come under CST Act, which is administered by the State Government.
• Sales Tax is paid to the Sales Tax Authority in the state from where the goods are moved.
• Now the taxes on toothpaste comes under GST.

Q. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account?

1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3
(c) 1 and 3
(d) 1, 2 and 4

Answer: (c) 1 and 3

Balance of Payments (BOP):

• Balance of Payment (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
• The BoP record the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.
• It indicates whether the country has a surplus or a deficit on trade.
  • When exports exceed imports, there is a trade surplus and when imports exceed exports there is a trade deficit.
• Purposes of calculation of BoP:
  • Reveals the financial and economic status of a country.
  • Can be used as an indicator to determine whether the country’s currency value is appreciating or depreciating.
  • Helps the Government to decide on fiscal and trade policies.
  • Provides important information to analyze and understand the economic dealings of a country with other countries.
• BoP follows the Double Entry System to record transactions with the rest of the world and has two sides – Credit side and Debit side.
• Accounts in the BoP includes
  1. Current account
  2. Capital account

Current Account

• It is the record of trade in goods and services and transfer payments.
• It records all the transactions that relate to the actual receipts and payments of the visible items, invisible items, and unilateral transfers during a specific period of time.
• Components of Current Account includes
  1. Trade in goods (Visible Trade or Merchandise Transactions) – It includes exports and imports of goods.
  2. Trade in services (Invisible Trade) – It includes factor income and non-factor income transactions.
     • Factor income – Includes net international earnings on factors of production (like labour, land and capital).
     • Non-factor income – It is net sale of service products like shipping, banking, tourism, software services, etc.
  3. Transfer payments – They are the receipts which the residents get for free without having to provide any goods or services in return. They consist of gifts, remittances and grants.
  4. Income receipts and payments to and from abroad – It involves investment income in the form of rent, profits, and interest.

Capital Account

• It includes those transactions, which cause a change in the assets or liabilities of a country’s residents or its government.
• Components of Capital Account includes
  1. Borrowings and Lendings to and from abroad – Includes all the transactions related to borrowings from abroad by the government, private sector, etc.
  2. Investments to and from abroad – Includes all the investments by the rest of the world in shares of Indian companies, real estate, etc. The investments to and from abroad are:
     • Foreign Direct Investment – FDI consists of the purchase of an asset, which gives direct control to the buyer over the asset. For example, purchase of land, building, etc.
     • Portfolio Investment – It is the cross-border transactions and positions involving equity or debt securities, other than direct investment or reserve assets. Ex – FII (Foreign Institutional Investment).
  3. Change in Foreign Exchange Reserves – The financial assets of the government held in the central bank are Foreign Exchange Reserves.

Q. With reference to Union Budget, which of the following is/are covered under Non-Plan Expenditure?

1. Defence expenditure
2. Interest payments
3. Salaries and pensions
4. Subsidies

Select the correct answer using the code given below.

(a) 1 only
(b) 2 and 3 only
(c) 1, 2, 3 and 4
(d) None

Answer: (c) 1, 2, 3 and 4

Plan Expenditure: Asset Creation for Development

• Plan Expenditure was earmarked for activities focused on creating assets, including physical, human, and social capital. This category aimed at fostering development and enhancing the country’s infrastructure.
• Asset Creation Examples:
  • Projects such as building dams, roads, power plants, and investments in social and human capital were categorized as Plan Expenditure. The goal was to contribute to long-term development objectives.
• Perverse Effects:
  • Despite the positive intent, the classification led to unintended consequences. Asset maintenance, crucial for the sustainability of infrastructure, was designated as Non-plan Expenditure. This led to neglect of maintenance activities, creating a false perception of skewed spending priorities.

Non-plan Expenditure: Maintenance and Upkeep

• Non-plan Expenditure covered maintenance activities and the upkeep of existing assets. This included routine expenditures to ensure the functionality and longevity of previously created infrastructure.
• A major part of the Non-Plan Expenditure is obligatory in nature, like interest payments, pensions, statutory transfers to States and Union Territories governments.
• Non-Plan Expenditure constitutes the biggest proportion of the of the government’s total expenditure. The biggest items of Non-Plan Expenditure are interest payments and debt servicing, defence expenditure and subsidies. For defence services, both revenue and capital expenditure are incurred.
• Maintenance Neglect:
  • The negative perception associated with Non-plan Expenditure resulted in a neglect of maintenance activities. The public viewed higher spending on maintenance as a diversion from capital formation, even though it was essential for the sustainability of assets.