UPSC Prelims Research: Indian Economy 2015

Q. The substitution of steel for wooden ploughs in agricultural production is an example

(a) labour-augmenting technological progress

(b) capital-augmenting technological progress

(c) capital-reducing technological progress

(d) None of the above

Answer: (b) capital-augmenting technological progress

Notes:

• Capital-augmenting technological progress refers to the use of technology that increases the productivity of capital inputs in the production process.
  • Substitution of steel can be considered as the substitution of a lesser machine by a better machine.
  • In this case, replacement of wooden by steel, increases the productivity of plough. Steel is costlier than wood and steel also support mechanisation there by reducing the requirement of labor. This encourages steel production. Hence it is a capital-augmenting technological progress.
• Labor augmenting is technology that increases skills and productivity of existing labor.

Q. Which one of the following best describes the main objective of Seed Village Concept?

(a) Encouraging the farmers to use their own farm seeds and discouraging them to buy the seeds from others

(b) Involving the farmers for training in quality seed production and thereby to make available quality seeds to others at appropriate time and affordable cost

(c) Earmarking some villages exclusively for the production of certified seeds

(d) Identifying the entrepreneurs in villages and providing them technology and finance to set up seed companies

Answer: (b) Involving the farmers for training in quality seed production and thereby to make available quality seeds to others at appropriate time and affordable cost

Beej Gram Yojana (Seed Village Program):

• The Ministry of Agriculture & Farmers Welfare is implementing Beej Gram Yojana (Seed Village Programme) since 2014-15 to upgrade the quality of farmer’s saved seeds.
• Key Objective: To upgrade the quality of farmer-saved seed, which is about 80-85% of the total seed used for crop production. Key Objectives of the Seed Village Program are-
  • Increasing the seed production,
  • Increasing the seed replacement rate,
  • Organizing seed production in cluster/compact areas, replacing existing local varieties with new high yielding varieties,
  • Self-sufficiency and self-reliance of the village in terms of quality seed production
  • To meet the local demand and timely supply of quality seeds.
• Financial assistance for distribution of foundation/certified seeds is available for up to one acre per farmer, These seeds are distributed at
  • a) 50% of seed cost for cereal crops and
  • b) 60% for pulses, oilseeds, fodder and green manure crops.
• The assistance will also be given to train the farmers on seed production and seed technology @ Rs. 15000/- for a group of 50-150 farmers.
• To the encourage farmers to develop storage capacity of appropriate quality,
  • Assistance @ 33% subject to a maximum of Rs. 3000/- for SC/ST farmers and @ 25% subject to maximum of Rs. 2000/- for other farmers for procuring seeds storage bin of 20 qtl. capacity
  • Assistance @ 33% subject to maximum of Rs. 1500/- to SC/ST farmers and @ 25% subject to maximum of Rs. 1000/- for other farmers for making seeds storage bin of 10 qtl. capacity in the seed villages where seed village scheme is being implemented.
• Implementing agencies: 
  • State Departments of Agriculture, State Agriculture Universities, KVKs, State Seeds Corporation, National Seeds Corporation, State Farms Corporation of India, State Seeds Certification Agencies, Dept. of Seed Certification.
  • One implementing agency will be identified for the area/locality and is to be authorized by the State Government.
• Monitoring of the Beej Gram Yojana:
  • The Seed Village Program will be monitored by the Seeds Division of the Department of Agriculture and Cooperation.
    • The implementing agencies will be required to send quarterly progress to the Seeds Division of the Department of Agriculture and Cooperation.
• Benefits offered:
  • Seed is available at the doorsteps of farms at an appropriate time.
  • Seeds are available at affordable costs even lesser than the market price.
  • It has increased the confidence among the farmers about the quality because of known sources of production.
  • It facilitates the fast spread of new cultivars of different kinds.

Q. The Fair and Remunerative Price (FRP) of sugarcane is approved by the

(a) Cabinet Committee on Economic Affairs

(b) Commission for Agricultural Costs and Prices

(c) Directorate of Marketing and Inspection, Ministry of Agriculture

(d) Agricultural Produce Marketing Committee

Answer: (a) Cabinet Committee on Economic Affairs

Fair and Remunerative Price (FRP):

• Fair and Remunerative Price (FRP) is the price declared by the government, which mills are legally bound to pay to farmers for the cane procured from them.
  • Mills have the option of signing an agreement with farmers, which would allow them to pay the FRP in installments.
  • Delays in payment can attract an interest up to 15% per annum, and the sugar commissioner can recover unpaid FRP as dues in revenue recovery by attaching properties of the mills.
• The payment of FRP across the country is governed by the Sugarcane Control order, 1966 issued under the Essential Commodities Act (ECA), 1955 which mandates payment within 14 days of the date of delivery of the cane.
• It has been determined on the recommendation of the Commission for Agricultural Costs and Prices (CACP) and announced by the Cabinet Committee on Economic Affairs (CCEA).
  • CACP is an attached office of the Ministry of Agriculture and Farmers Welfare. It is an advisory body whose recommendations are not binding on the Government.
  • CCEA is chaired by the Prime Minister of India.
• The FRP is based on the Rangarajan Committee report on reorganizing the sugarcane industry.
• Which Factors are considered for announcing FRP?
  • Cost of production of sugarcane
  • Return to the growers from alternative crops and the general trend of prices of agricultural commodities
  • Availability of sugar to consumers at a fair price
  • Price at which sugar produced from sugarcane is sold by sugar producers
  • Recovery of sugar from sugarcane
  • The realization made from the sale of by-products viz. molasses, bagasse and press mud or their imputed value
  • Reasonable margins for the growers of sugarcane on account of risk and profits
• How is FRP Paid?
  • The FRP is based on the recovery of sugar from the cane.
    • FRP has been fixed at Rs 2,900/tonne at a base recovery of 10% for the sugar season of 2021-22.
  • Sugar recovery is the ratio between sugar produced versus cane crushed, expressed as a percentage.
  • The higher the recovery, the higher is the FRP, and higher is the sugar produced.

Sugarcane

• Temperature: Between 21-27°C with hot and humid climate.
• Rainfall: Around 75-100 cm.
• Soil Type: Deep rich loamy soil.
• Top Sugarcane Producing States: Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, Bihar.
• India is the second largest producer of sugarcane after Brazil.
• It can be grown on all varieties of soils ranging from sandy loam to clay loam given these soils should be well drained.
• It needs manual labour from sowing to harvesting.
• It is the main source of sugar, gur (jaggery), khandsari and molasses.
• Scheme for Extending Financial Assistance to Sugar Undertakings (SEFASU) and National Policy on Biofuels are two of the government initiatives to support sugarcane production and the sugar industry.

Q. In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight?

(a) Coal production

(b) Electricity generation

(c) Fertilizer production

(d) Steel production

Answer: (b) Electricity generation

Notes:

• The Core sectors of an economy are the primary or important industries. Eight core sectors in India are considered key sectors.
• The Core Sector of India includes Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement, and Electricity.
• It comprises 40.27 percent of the weight of items included in the Index of Industrial Production (IIP).
• The Office of the Economic Adviser (OEA), Department of Industrial Policy and Promotion (DIPP), and Ministry of Commerce and Industry compile and publish the index.
• The Index of Key Industries evaluates the performance of the eight core industries of coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, and power in aggregate and individual production terms. These industries serve as the foundation for all other industries.
• The current year’s production of these industries is computed using the 2011-2012 base year.

Weight of Core Industries in IIP

• The Eight Core Industries accounts for 40.27 percent of the products in the Index of Industrial Production (IIP).
• The eight Core Industries in decreasing order of their weightage: Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural gas> Cement> Fertilizers.

Sector	Description	Weightage
Coal	Coal production, excluding Coking coal.	10.33 %
Electricity	generation of thermal, nuclear, hydro	19.85 %
Crude Oil	Total crude oil production.	8.98 %
Cement	Production in large plants and mini plants.	5.37 %
Natural Gas	Total production of natural gas.	6.88 %
Steel	Production of alloy and non-alloy steel only.	17.92 %
Refinery Products	Total refinery production.	28.04 %
Fertilizer	Urea, ammonium sulfate, calcium ammonium nitrate, complex grade fertilizer, and single superphosphate, among others.	2.63 %

Index of Industrial Production (IIP)

• IIP is an indicator that measures the changes in the volume of production of industrial products during a given period.
• It is compiled and published monthly by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation.
• It is a composite indicator that measures the growth rate of industry groups classified under:
  • Broad sectors, namely, Mining, Manufacturing, and Electricity.
  • Use-based sectors, namely Basic Goods, Capital Goods, and Intermediate Goods.
• Base Year for IIP is 2011-2012.
• Significance of IIP:
  • It is used by government agencies including the Ministry of Finance, the Reserve Bank of India, etc, for policy-making purposes.
  • IIP remains extremely relevant for the calculation of the quarterly and advance GDP (Gross Domestic Product) estimates.
• IIP is an important economic indicator for the manufacturing industry.

Q. Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers?

(a) The Reserve Bank of India

(b) The Department of Economic Affairs

(c) The Labour Bureau

(d) The Department of Personnel and Training

Answer: (c) The Labour Bureau

Consumer Price Index

• Retail inflation, also known as Consumer Price Index (CPI) inflation, tracks the change in retail prices of goods and services which households purchase for their daily consumption.
  • It measures price changes from the perspective of a retail buyer. 
• CPI is calculated for a fixed basket of goods and services that may or may not be altered by the government from time to time.
• The change in the price index over a period of time is referred to as CPI-based inflation, or retail inflation.
• It is released by the National Statistical Office (NSO).
• The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics etc, which Indian consumers buy for use.
• The CPI has several sub-groups including food and beverages, fuel and light, housing and clothing, bedding and footwear.
• The CPI uses a base year set at 2011-2012.
• The CPI is published on a monthly basis.
• At present, India has five consumer price indexes (CPIs), three of which are working-class specific. These are:
  • CPI for Industrial Workers (IW).
  • CPI for Agricultural Labourer (AL).
  • CPI for Rural Labourer (RL).
    • These three indexes are compiled by the Labour Bureau in the Ministry of Labour and Employment.
    • CPIs AL and RL are used to fix minimum wages of agricultural labourers and rural unskilled employees.
    • The Labour Bureau is also expected to bring out the new series of the CPI- AL/RL, which currently has the base year of 1986-87 by August 2021.
• The other two are CPI-Urban and CPI Rural. 
  • These two indexes are compiled by the National Statistical Office (NSO) in the Ministry of Statistics and Programme Implementation.
  • The combined rise in retail prices is captured by CPI Combined.
• A committee set up by the National Statistical Commission (NSC) in 2005 under the recommendation of Dr C Rangarajan Commission, has suggested that CPI-Rural and CPI-Urban could be a substitute for CPI-AL/RL and CPI-IW, respectively.

CPI for Industrial Workers (CPI-IW)

• It attempts to quantify changes in the pricing of a fixed basket of products and services used by Industrial Workers over time.
• A typical working-class family from any of these seven economic sectors, ranging from industries, mines, plantations, motor transport, port, railways, and energy generation and distribution, would be the target demographic.
• The Labour Bureau compiles this list.
• This functions under the Ministry of Labour and Employment.

CPI for Agricultural Laborers (CPI-AL)

• The Labor Bureau compiles this data to help revise minimum wages for agricultural labor in different States.

CPI for Rural Labourer (CPI-RL)

• The Labour Bureau compiles this list.
• This functions under the Ministry of Labour and Employment.

CPI (Urban Non-Manual Employees) (CPI-UNME)

• This information is compiled by the Central Statistics Office (CSO), which is now known as the National Statistical Office (NSO).
  • The Ministry of Statistics and Program Implementation oversees the NSO.

Q. Which one of the following issues the ‘Global Economic Prospects’ report periodically?

(a) The Asian Development Bank

(b) The European Bank for Reconstruction and Development

(c) The US Federal Reserve Bank

(d) The World Bank

Answer: (d) The World Bank

Notes:

• The World Bank produces the Global Economic Prospects (GEP) twice a year, in January and June, as part of its in-depth analysis of key global macroeconomic developments and their impact on member countries.
• The GEP provides intelligence in support of achieving development goals and is a trusted resource for member countries, stakeholders, civil organizations and researchers.

World Bank

• It was created in 1944, as the International Bank for Reconstruction and Development (IBRD) along with the IMF. The IBRD later became the World Bank.
• The World Bank Group is a unique global partnership of five institutions working for sustainable solutions that reduce poverty and build shared prosperity in developing countries.
• The World Bank is one of the United Nations‘ specialized agencies.
• Members:
  • It has 189 member countries.
  • India is also a member country.
• Major Reports:
  • Human Capital Index.
  • World Development Report.
• Its Five Development Institutions:
  • International Bank for Reconstruction and Development (IBRD)
  • International Development Association (IDA)
  • International Finance Corporation (IFC).
  • Multilateral Guarantee Agency (MIGA)
  • International Centre for the Settlement of Investment Disputes (ICSID)
    • India is not a member of ICSID.

Q. The terms ‘Agreement on Agriculture’, ‘Agreement on the Application of Sanitary and Phyto-sanitary Measures’ and ‘Peace Clause’ appear in the news frequently in the context of affairs of the

(a) Food and Agriculture Organization

(b) United Nations Framework Conference on Climate Change

(c) World Trade Organization

(d) United Nations Environment Programme

Answer: (c) World Trade Organization

Agreement on Agriculture:

• The Agriculture Agreement (AoA) is a World Trade Organisation treaty aimed at lowering agricultural support and subsidies provided by countries to domestic producers. This agreement focuses on countries lowering agricultural support and subsidies to native producers.
• Within the WTO, it is one of the most contentious agreements.
• The Agreement on Agriculture (AoA) is a World Trade Organisation (WTO) treaty that was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) and ratified in Marrakesh, Morocco, in 1994. In 1995, the AoA came into operation.
• Its rules required developing countries to meet their reduction commitments by the year 2000, and developing countries by the year 2004.
• No reductions were required of the Least Developed Countries.
• The agreement covers agricultural products, with the exception of forestry and fishing products, as well as rubber, sisal, jute, coir, and abaca.
• The AoA’s main goal is to get rid of so-called “trade-distorting” agricultural subsidies.
• The Agreement’s overall goal, according to the World Trade Organisation, is to “create a fairer trading system that will promote market access and improve the livelihoods of farmers around the world.”
• Three pillars of Agreement on Agriculture:
  • Domestic Support: It calls for reduction in domestic subsidies that distorts free trade and fair price.
    • Under this provision, the Aggregate Measurement of Support (AMS) is to be reduced by 20% over a period of 6 years by developed countries and 13% over a period of 10 years by developing countries.
    • Under this, Subsidies are categorized into: Green Box, Amber Box, and Blue Box
  • Market Access: Market access for goods in the WTO means the conditions, tariff and non-tariff measures, agreed by members for the entry of specific goods into their markets.
    • Market access requires that tariffs fixed (like custom duties) by individual countries be cut progressively to allow free trade. It also required countries to remove non-tariff barriers and convert them to Tariff duties.
  • Export Subsidy: Subsidy on inputs of agriculture, making export cheaper or other incentives for exports such as import duty remission etc are included under export subsidies.
    • These can result in dumping of highly subsidized (and cheap) products in other countries and damage the domestic agriculture sector of other countries.

Agreement on the Application of Sanitary and Phytosanitary Measures

• The Agreement on the Application of Sanitary and Phytosanitary Measures, also known as the SPS Agreement or just SPS, is an international treaty of the World Trade Organization (WTO).
• It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), and entered into force with the establishment of the WTO at the beginning of 1995.
• Broadly, the sanitary and phytosanitary (“SPS”) measures covered by the agreement are those aimed at the protection of human, animal or plant life or health from certain risks.
• Under the SPS agreement, the WTO sets constraints on member-states’ policies relating to food safety (bacterial contaminants, pesticides, inspection and labelling) as well as animal and plant health (phytosanitation) with respect to imported pests and diseases.
  • There are 3 standards organizations who set standards that WTO members should base their SPS methodologies on. As provided for in Article 3, they are the Codex Alimentarius Commission (Codex), World Organization for Animal Health (OIE) and the Secretariat of the International Plant Protection Convention (IPPC).
• The SPS agreement is closely linked to the Agreement on Technical Barriers to Trade, which was signed in the same year and has similar goals. The TBT Emerged from the Tokyo Round of WTO negotiations and was negotiated with the aim of ensuring non-discrimination in the adoption and implementation of technical regulations and standards.

Peace Clause

• It was agreed to at the WTO’s Bali Ministerial meeting in December 2013 that allowed developing countries to breach subsidy limits on food crops subject to certain conditions being met related to notifications on the PSH programmes and food security.
• The peace clause allows developing countries to breach the subsidy ceiling without being dragged into dispute by members, for rice. However, it comes with tough notification requirements and conditions, all of which are difficult to follow.
• Under the Peace Clause, WTO members agreed to refrain from challenging any breach in prescribed ceiling by a developing nation at the dispute settlement forum of the WTO.
• This clause will stay till a permanent solution is found to the food stockpiling issue.

Q. ‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to

(a) develop national strategies for the conservation and sustainable use of biological diversity

(b) improve banking sector’s ability to deal with financial and economic stress and improve risk management

(c) reduce the greenhouse gas emissions but places a heavier burden on developed countries

(d) transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals

Answer: (b) improve banking sector’s ability to deal with financial and economic stress and improve risk management

Basel Norms:

• Basel norms or Basel accords are the international banking regulations issued by the Basel Committee on Banking Supervision.
• The Basel norms is an effort to coordinate banking regulations across the globe, with the goal of strengthening the international banking system.
• It is the set of the agreement by the Basel committee of Banking Supervision which focuses on the risks to banks and the financial system.

Basel committee on Banking Supervision

• The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters for the central banks of different countries.
• It was established by the Central Bank governors of the Group of Ten countries in 1974.
• The committee expanded its membership in 2009 and then again in 2014. The BCBS now has 45 members from 28 Jurisdictions, consisting of Central Banks and authorities with responsibility of banking regulation.
• It provides a forum for regular cooperation on banking supervisory matters.
• Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide.
• The Basel Committee has issued three sets of regulations which are known as Basel-I, II, and III.

Basel III Norms

• Basel III is the regulatory norms for setting common standards for banks across different countries. The motive of Basel III norms is to enhance the regulation, supervision, and risk management in the banking industry.
• The Basel III norms seek to improve the ability of banks to handle stress. The norms specify leverage ratios and capital requirements to regulate the working of banks.
• Basel III norms were introduced in 2009 post the credit crisis of 2008. The first version of Basel III was published in late 2009. It gave a window period of three years to meet the Basel III requirements.
• Basel III norms have introduced strong capital ratios by increasing the minimum Tier 1 capital from 4% to 6%, and minimum Common Equity Tier 1 capital from 4% to 4.5%.
  • Bank’s regulatory capital is divided into Tier 1 and Tier 2. Tier 1 capital is subdivided into Common Equity Tier 1 and additional Tier 1 capital. There is the highest level of subordination in security instruments of Tier 1 capital.
• The new standards will come into effect on January 2023
• Risk-based capital requirements (RWAs) and interest rate risk were introduced for the first time.
• The new standards aim at increasing capital requirements, it introduces requirements on liquid asset holdings and funding stability
• Key difference between the Basel II and Basel III: Basel III framework prescribes more of common equity, creation of capital buffer, introduction of Leverage Ratio, Introduction of Liquidity coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
  • Leverage Ratio: The leverage ratio is calculated by dividing Tier 1 capital by the bank’s average total consolidated assets. Banks are expected to maintain a leverage ratio in excess of 3% under Basel III
  • Liquidity Coverage Ratio: The liquidity coverage ratio (LCR) denotes to highly liquid assets held by financial institutions to meet short-term obligations. The LCR is a requirement under Basel III for a bank to hold high-quality liquid assets (HQLAs) sufficient to cover 100% of its stressed net cash requirements over 30 days. The LCR is calculated as: LCR = HQLAs / Net cash outflows.
  • Net stable funding (NSF): The net stable funding is to ensure that banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities.

Q. Convertibility of rupee implies:

(a) being able to convert rupee notes into gold

(b) allowing the value of rupee to be fixed by market forces

(c) freely permitting the conversion of rupee to other currencies and vice versa

(d) developing an international market for currencies in India

Answer: (c) freely permitting the conversion of rupee to other currencies and vice versa

Notes:

• Convertibility of rupee means freely permitting the conversion of rupee to other currencies and vice versa.
• Indian currency is fully convertible in the Current Account and partially convertible in the Capital Account.
  • Current Account convertibility means freedom to convert domestic currency into foreign currency and vice-versa, for trade in goods and services.
  • On the other hand, Capital Account convertibility means freedom of currency conversion related to capital inflows and outflows.

Convertibility of Currency

• Prior to the First World War the whole world was having gold standard under which the currency in circulation was allowed to get converted either in gold or other currencies based on the gold standard. 
• But after the failure of Bretton woods system in 1971 this system changed. Presently convertibility of money implies a system where a country’s currency becomes convertible in foreign exchange and vice versa.
• After the collapse of Breton Woods’s system in 1971, the various countries switched over to the floating foreign exchange rate system. Under the floating or flexible exchange rate system, exchange rates between different national currencies are allowed to be determined through market demand for and supply of the same.
• Since 1994, Indian rupee has been made fully convertible in current account transactions.

Q. The problem of international liquidity is related to the non-availability of

(a) goods and services

(b) gold and silver

(c) dollars and other hard currencies

(d) exportable surplus

Answer: (c) dollars and other hard currencies

Notes:

• International liquidity refers to the settling imbalances in international payments. These payments arise out of international trade in goods and services and also in connection with capital movements between one country and another.
  • International liquidity in the broad sense consists of resources available to monetary authorities for the purpose of financing balance of payments deficits.
• It relates to international reserves of particular country who participates in world monetary and trading system.
• It is linked with international payments which appears from international trade. Since Dollar being the commander of international currency dominating across the world in forex, the problems related with international liquidity concerns with non-availability of dollar and other related currencies.

Q. With reference to the Fourteenth Finance Commission, which of the following statements is/are correct?

1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent.
2. It has made recommendations concerning sector-specific grants.

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: (a) 1 only

14th Finance Commission:

• The 14th Finance Commission’s recommendations transformed India’s fiscal landscape by increasing the states’ share of central taxes to 42%, empowering them with greater financial autonomy. This bolstered state budgets, enabling investments in crucial sectors and enhancing fiscal management. The decentralized approach aimed to address regional disparities and foster overall economic development.
  • However, it did not make recommendations concerning sector-specific grants.
    • The 15th Finance Commission has made recommendations concerning sector-specific grants.
• The 14^th Finance Commission enabled the States to improve their fiscal position in the following ways:
  • Share in Centre’s Divisible Pool: The commission recommended an increase in the share of States in the Center’s divisible tax pool to 42% from 32% at present. This will enhance the states autonomy in deciding their expenditure priorities.
  • Centrally Sponsored Schemes: The Commission also recommended eight centrally sponsored schemes (CSS) to be delinked from support from the Centre. Thus, States will be sharing a higher fiscal responsibility and autonomy to implement development initiatives.
  • Taxation: The Commission has recommended that tax devolution should be the primary source of transfer of funds to States. This would increase the flow of unconditional transfers and give States more flexibility in their spending
  • Grants: Transfers were proposed including grants to rural and urban local bodies, a performance grant along with grants for disaster relief and revenue deficit. These transfers total to approximately 5.3 lakh crore for the period 2015-20.
  • Compensation: The commission recommended compensating States fully for three years in case of revenue loss after GST implementation. The Commission suggested that 100% compensation be paid to the States in the first, second and third years, 75% compensation in the fourth year and 50% compensation in the fifth and final year. It also recommended the creation of an autonomous and independent GST compensation fund through legislative actions

Q. With reference to Indian economy, consider the following statements:

1. The rate of growth of Real Gross Domestic Product has steadily increased in the last decade.
2. The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither1 nor 2

Answer: (b) 2 only

Notes:

• Gross Domestic Product (GDP) is the monetary value of all the final goods and services produced within a country’s borders in a specific time period, generally 1 year. It is a broad measurement of a nation’s overall economic activity.
• Real Gross Domestic Product is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year, expressed in base-year prices.
• The rate of growth of Real Gross Domestic Product had declined due to the recession in 2008 and other reasons for the next few years from 8-9% to 5-6%. 
  • A surge in capital inflows, an inflationary explosion in global commodity prices, the global financial meltdown, and the collapse of international trade are the major challenges of India for the decline of the rate of growth of Real Gross Domestic Product.
• The GDP at market prices of India has steadily increased in the last decade from around 900 billion USD in 2005 to 2.1 trillion USD in 2015. As of 2020 India’s GDP is 2.63 trillion USD.

Q. A decrease in tax to GDP ratio of a country indicates which of the following?

1. Slowing economic growth rate
2. Less equitable distribution of national income

Select the correct answer using the code given below.

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither1 nor 2

Answer: (a) 1 only

Tax-to-GDP Ratio:

• The tax-to-GDP ratio measures a nation’s tax revenue relative to the size of its economy.
• This ratio is used with other metrics to determine how well a nation’s government directs its economic resources via taxation.
• Developed nations typically have higher tax-to-GDP ratios than developing nations.
• Higher tax revenues mean a country can spend more on improving infrastructure, health, and education—keys to the long-term prospects for a country’s economy and people.
• According to the World Bank, tax revenues above 15% of a country’s gross domestic product (GDP) are a key ingredient for economic growth and poverty reduction.
• The tax-to-GDP ratio is used to compare tax receipts from year to year. As taxes are related to economic activity, the ratio should stay relatively consistent. When the gross domestic product (GDP) grows, tax revenue should increase as well.
• Economic slowdown results in lower rates of growth, where unemployment usually rises, and consumer spending decreases. As a result, the tax-to-GDP ratio declines.
• The less equitable distribution of national income is not directly related to decrease in tax to GDP ratio. Equal distribution of national income and resource allocation generally depends upon the economic planning of a country.

GDP:

• The GDP measures the monetary measure of all “final” goods and services— those that are bought by the final user— produced in a country in a given period.
• Four Key “Engines of GDP Growth”:
  • All the money Indians spent for their private consumption (that is, Private Final Consumption Expenditure or PFCE)
  • All the money the government spent on its current consumption, such as salaries [Government Final Consumption Expenditure or GFCE]
  • All the money spent towards investments to boost the productive capacity of the economy. This includes business firms investing in factories or the governments building roads and bridges [Gross Fixed Capital Expenditure]
  • The net effect of exports (what foreigners spent on our goods) and imports (what Indians spent on foreign goods) [Net Exports or NX].
• Calculation of GDP:
  • GDP = private consumption + gross investment + government investment + government spending + (exports-imports)

Q. With reference to ‘Pradhan Mantri Fasal Bima Yojana’, consider the following statements:

1. Under this scheme, farmers will have to pay a uniform premium of two percent for any crop they cultivate in any season of the year.
2. This scheme covers post-harvest losses arising out of cyclones and unseasonal rains.

Which of the statements given above is/ are correct?

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

Answer: (b) 2 only

Pradhan Mantri Fasal Bima Yojana:

• It was launched in 2016 and replaced all the prevailing yield insurance schemes in India. 
• This scheme is being administered by the Department of Agriculture, Cooperation and Farmers’ Welfare under the Ministry of Agriculture, along with empanelled general insurance companies.
• Aim: To support production in agriculture by providing affordable crop insurance to ensure comprehensive risk cover for crops of farmers against all non-preventable natural risks.
• The scheme provides coverage for the entire cropping cycle, from pre-sowing to post-harvest and midseason adversities.
• Objectives:
  • Providing financial support to farmers suffering crop loss/damage arising out of unforeseen events;
  • Stabilizing the income of farmers to ensure their continuance in farming;
  • Encouraging farmers to adopt innovative and modern agricultural practices;
  • Ensuring flow of credit to the agriculture sector, which will contribute to food security, crop diversification and enhancing growth and competitiveness of the agriculture sector besides protecting farmers from production risks;
• Eligibility criteria:
  • The scheme is compulsory for loanee farmers availing Crop Loan /KCC account for notified crops.
  • The Scheme would be optional for non-loanee farmers.
• Insurance Coverage:
  • Under this scheme, the insurance cover is limited to specific crops and agricultural risks related to crop yield.
  • The list of notified crops includes food crops (i.e., cereals, millets, and pulses), oilseeds, annual commercial crops, and annual horticultural crops.
• General Exclusions: 
  • Losses arising out of war and nuclear risks, malicious damage and other preventable risks shall be excluded.
• Premiums:
  • There will be a uniform premium of only 2% to be paid by farmers for all Kharif crops and 1.5% for all Rabi crops.
  • In the case of annual commercial and horticultural crops, the premium to be paid by farmers will be only 5%.
  • 95-98.5% actuarial premium is fulfilled by the state and central governments and shared on a 1:1 ratio.

Q. Pradhan Mantri Jan-Dhan Yojana’ has been launched for

(a) providing housing loan to poor people at cheaper interest rates

(b) promoting women’s Self-Help Groups in backward areas

(c) promoting financial inclusion in the country

(d) providing financial help to the marginalized communities

Answer: (c) promoting financial inclusion in the country

Pradhan Mantri Jan Dhan Yojana (PMJDY):

• PMJDY is a National Mission for Financial Inclusion launched in August 2014 to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance and Pension, in an affordable manner.
• It envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension.
• The plan also envisages channeling all Government benefits (from Centre / State / Local Body) to the beneficiary’s accounts and pushing the Direct Benefits Transfer (DBT) scheme of the Union Government.
• Eligibility:
  • The applicant should be an Indian National.
  • The applicant should be aged between 18 and 59 years.
  • If minors above ten years apply, they will require support from their legal guardians to administer their PMJDY account.
• Jan Dhan Account:
  • An individual can consider opening an account under this scheme with any bank branch or Business Correspondent (Bank Mitr) outlet. 
  • Further, accounts opened under PMJDY can be opened with zero balance.
  • However, if the account holder wishes to get a chequebook, he/she will have to fulfill the minimum balance criteria. 
  • The account holders under this scheme will be given a RuPay debit card which can be used across all ATMs for cash withdrawal.
• Individuals opening a Jan Dhan account are subject to be recipients of certain benefits. They are
  • Accidental Insurance Cover:
    • It provides accidental insurance of ₹1,00,000 to the holders of non-premium cards, while those with premium cards can avail up to ₹2,00,000.
    • People holding a RuPay Debit Card under PMJDY will be eligible for this insurance.
  • Life Cover Insurance:
    • The holders of a RuPay Debit Card under the scheme can also receive life cover insurance up to ₹30,000.
    • It will only apply to people opening bank accounts for the first time under Jan Dhan Yojana with a debit card.
    • The person should also be the head of the family or a major earning member.
    • This scheme will be liable to a single payment of ₹30,000 upon the death of a beneficiary.
    • State or Central Government employees, public sector employees, and people with taxable income will not be eligible for life cover insurance under Jan Dhan Yojana.
  • Overdraft Facility: Beneficiaries can avail of an overdraft facility for up to ₹10,000. However, this is only available against one account per household.
  • This scheme also provides loans of up to ₹5,000 to beneficiaries after completing six months of account transactions.
• Significance:
  • Promoting Equitable Growth: PMJDY fosters Financial Inclusion (FI), leading to inclusive growth through the provision of affordable financial services to low-income and disadvantaged segments of the population.
    • The Jan Dhan–Aadhaar–Mobile (JAM) architecture has enabled seamless transfer of government benefits to common citizens’ accounts.
  • Bringing Savings to Formal Systems: PMJDY has brought the savings of the poor into the formal financial system, freeing them from usurious money lenders.
  • Empowering Women: Approximately 55.5% of Jan Dhan accounts belong to women, promoting financial empowerment.
    • Overdraft is available in only one account per household, preferably lady of the household.

Q. Consider the following statements:

1. The Accelerated Irrigation Benefits Programme was launched during 1996-97 to provide loan assistance to poor farmers.
2. The Command Area Development Programme was launched in 1974-75 for the development of water-use efficiency,

Which of the statements given above is/ are correct?

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

Answer: (b) 2 only

Accelerated Irrigation Benefits Programme:

• Accelerated Irrigation Benefits Programme (AIBP) was launched in 1996-97 by the Government of India (GOI) to accelerate the creation of irrigation potential by providing financial assistance to the State Governments to ensure early completion of ongoing multipurpose and irrigation projects  which were costing Rs.1000 crore or above and were in advanced stage of completion.
• Subsequently the criteria for inclusion of irrigation projects under AIBP were changed from time to time so as to include all categories of projects i.e. major, medium and minor (surface irrigation) projects to bring regional balance.
• Important features of guidelines for release of central assistance to states under AIBP are as under:-
  • Major/medium projects including Extension Renovation & Modernization projects benefiting drought prone/tribal areas and flood prone areas are eligible for 90% grant assistance.
  • Major/medium projects in the Special Category States and projects in undivided Karaput, Bolangir and Kalahandi districts of Orissa are also eligible for 90% grant assistance.
  • Other major/medium projects are eligible for 25% grant assistance under AIBP.
  • Surface MI schemes fulfilling criteria specified in the guidelines of the Special Category States are eligible for 90% grant assistance and surface MI schemes of the non special category states fulfilling eligibility criteria and benefiting drought prone/tribal areas are also eligible for 90% grant assistance.
  • Maximum time allowed for completion of major/medium projects under AIBP is 4 years excluding the year of inclusion of the project under AIBP.
  • The Maximum time allowed for completion of surface MI schemes under AIBP is 2 years excluding the year of inclusion of the scheme under AIBP.
  • The state governments are required to enter into an MOU with the Ministry of Water Resources for timely completion of the project specifying year wise targets of potential creation under AIBP.
  • A new major/medium project may be included in AIBP only on completion of an ongoing project under AIBP on one to one basis. However, projects benefiting drought prone/tribal areas, projects in the states having irrigation development below national average and projects included in the Prime Minister’s package for agrarian distressed districts of the Andhra Pradesh, Karnataka, Kerala and Maharashtra may be included in AIBP in relaxation to one to one criterion.

Command Area Development Programme

• The Command Area Development Programme was launched in 1974-75 with the set objectives of improving the utilization of created irrigation potential and optimizing agriculture production and productivity from irrigated agriculture through a multidisciplinary team under an Area Development Authority. It is about the command areas of the major and medium irrigation projects in the country.
  • The programme was restructured and termed as “Command Area Development and Water Management (CADWM) Programme” from 1 April 2004.
  • This programme was initially introduced in 60 major and minor projects including the Indira Gandhi Canal Command Area in 1974.
  • Subsequently, the Command Area Development Programme has spread 110 districts in 13 states, covering about 15 million hectares of irrigated agricultural land.
• The CADP is underpinned by a multitude of objectives, each aiming to optimise the use of water resources and promote sustainable agriculture.
  • Improving Irrigation Efficiency: The primary goal of the CADP is to augment the efficiency of irrigation systems. This is achieved by reducing water wastage and ensuring a more uniform distribution of water across the command area.
  • Increasing Agricultural Productivity: By ensuring optimal irrigation, the CADP aims to significantly enhance agricultural productivity. This increase in yield can drastically improve the economic prospects of farming communities.
  • Socio-Economic Upliftment: The ultimate goal of the CADP is to foster socio-economic development. By improving farm productivity and income, the CADP seeks to uplift farming communities and contribute to overall national economic growth.

Q. In India, markets in agricultural products are regulated under the

(a) Essential Commodities Act, 1955

(b) Agricultural Produce Market Committee Act enacted by States

(c) Agricultural Produce (Grading and Marking) Act, 1937

(d) Food Products Order, 1956 and Meat and Food Products Order, 1973

Answer: (b) Agricultural Produce Market Committee Act enacted by States

Notes:

• Agricultural Produce Market Committees (APMC) are marketing boards set up by state governments to eliminate farmer exploitation by intermediaries, in which farmers are forced to sell their produce at extremely low prices.
• Because agricultural marketing is a state subject, the Agricultural Produce Market Committee (APMC) is a system that operates under the State Government.
• The APMC has Yards/Mandis in the market area that regulate the notified agricultural produce and livestock.
• The goal of implementing APMC was to reduce the number of Distress Sales made by farmers who were being pressured and exploited by creditors and other intermediaries.
• APMC ensures that farmers are paid fairly and on time for their produce.
• APMC is also in charge of regulating agricultural trading practices. This has several advantages, including:
  • Unnecessary intermediaries are eliminated.
  • Reduced market charges improved market efficiency.
  • The producer-seller relationship is well protected.

Objectives of APMC Act

• The APMC committee was established to protect farmers from creditors and other intermediaries.
• These committees were also expected to ensure that the farm-to-retail price did not rise excessively and that farmers were paid on time via the APMC auctions.
• Farmers were also required to use APMCs for storage, such as go-downs and the like.
• Farmers were also supposed to be able to sell their produce directly to consumers through APMCs.
• Price fluctuations were also managed with the help of APMCs.
• Developing an efficient marketing system.
• Agriculture processing and export promotion.
• Develop procedures and systems for establishing an efficient infrastructure for agricultural produce marketing.

Essential Commodities Act of 1955

• The ECA Act 1955 was legislated at a time when the country was facing a scarcity of foodstuffs due to persistent low levels of foodgrains production.
• The country was dependent on imports and assistance (such as wheat import from the US under PL-480) to feed the population.
• To prevent hoarding and black marketing of foodstuffs, the Essential Commodities Act was enacted in 1955.
• Implementing Agency: 
  • The Ministry of Consumer Affairs, Food and Public Distribution, implements the Act.
• Essential Commodity:
  • There is no specific definition of essential commodities in the Essential Commodities Act, 1955.
  • Section 2(A) of the Act states that an “essential commodity” means a commodity specified in the Schedule of the Act.
• Legal Jurisdiction:
  • The Act gives powers to the central government to add or remove a commodity in the Schedule.
  • The Centre, if it is satisfied that it is necessary to do so in the public interest, can notify an item as essential, in consultation with state governments.
• Objective:
  • The ECA 1955 is used to curb inflation by allowing the Centre to enable control by state governments of trade in a wide variety of commodities.
• Impact:
  • By declaring a commodity as essential, the government can control the production, supply, and distribution of that commodity, and impose a stock limit.

Q. The Government of India has established NITI Aayog to replace the

(a) Human Rights Commission

(b) Finance Commission

(c) Law Commission

(d) Planning Commission

Answer: (d) Planning Commission

NITI Aayog:

• NITI Aayog is a premiere policy think tank of the Government of India. It was established with the aim to achieve sustainable development goals by active involvement of state government in the planning process
  • This premiere policy think tank was established in 2015 via an executive resolution by replacing the Planning Commission of India
• Features of NITI Aayog:
  • Increased access to and sharing of information
  • Diminished role for centralized planning
  • Governance, across the public and private domains
  • To formulate credible plans at the village level and aggregate these progressively at higher levels of government.
  • Continuing partnership with the states
  • To provide advice and encourage partnerships between key stakeholders and national and international like-minded Think Tanks
  • Platforms for resolution of issues
  • Governance involves everyone
  • Mechanisms to evolve credible plans at the village level, evolve a shared vision
• Objectives of NITI Aayog
  • To evolve a shared vision for the development of national priorities, strategies, and sectors with the active involvement of the States.
  • To develop mechanisms at the village level to formulate credible plans and to aggregate these mechanisms progressively at the higher levels of government.
  • To foster cooperative federalism with the help of structured support mechanisms and initiatives on a continuous basis with the States, recognizing that strong States help in building a strong nation.
  • To pay special attention to those sections of our society which may be at risk of not being adequately benefitted from the economic progress
  • To ensure that the interests of national security are incorporated into economic policy and strategy.
  • To design strategic, long term policy and program initiatives and frameworks, and monitor their efficacy and progress. The lessons learned through feedback and monitoring will be utilized in making innovative improvements that will include essential mid-course corrections.
  • To provide advice and encourage partnership between key stakeholders and the national and international like-minded think tanks including the educational and research institutions.
  • To offer a platform for resolving inter-sectoral and inter­-departmental issues to stimulate development performance.
  • To develop innovation, knowledge, and entrepreneurial support system through a national and international expert’s collaborative community, practitioners, and other partners.
  • To maintain a state-of-the-art Resource Centre, and to be a repository of research on good governance and best practices in equitable and sustainable development along with helping the stake-holders with their dissemination.
  • To actively evaluate and monitor the implementation of initiatives and programs that comprises identification of the resources needed to strengthen the success probability and scope of delivery.
  • To focus on capacity building and technology up-gradation for implementing programs and initiatives.
  • To undertake such other activities as may be necessary to execute further the agenda of the national development, and the objectives mentioned above.

Structure of NITI Aayog:

• The National Institution for Transforming India Aayog (NITI Aayog) has a well-defined structure, involving various stakeholders and specialized hubs. The structure includes
  • Chairperson:
    • The Prime Minister of India serves as the Chairperson of NITI Aayog, providing leadership and direction to the institution.
  • Governing Council:
    • The Governing Council includes Chief Ministers of all States and Union Territories, along with Lieutenant Governors of Union Territories and special invitees. This structure resembles the erstwhile National Development Council (NDC), which is no longer in operation.
  • Organizational Framework:
    • The full-time organizational framework of NITI Aayog includes:
      • Vice-Chairperson: Assists in the overall functioning of NITI Aayog.
      • Members (Full-time): Engaged in the day-to-day operations and decision-making.
      • Part-time Members (Rotational): Up to two members from leading universities, research organizations, and relevant institutions, serving in an ex-officio capacity.
      • Ex Officio Members: Up to four members of the Union Council of Ministers, nominated by the Prime Minister.
      • Special Invitees (Union Council of Ministers): Additional members appointed by invitation.
      • Regional Councils: Formed for specific tenures to address issues impacting more than one state or region. Chaired by the Chairperson of NITI Aayog or a nominee, comprising Chief Ministers and Lieutenant Governors of the respective region.
      • Experts and Specialists: Special invitees nominated by the Prime Minister based on their domain knowledge.
      • Chief Executive Officer: Appointed by the Prime Minister for a fixed tenure.
  • Hubs:
    • Two core hubs form the basis of NITI Aayog’s creation:
      • Team India Hub: Leads the engagement of states with the Central government, fostering collaboration and coordination.
      • Knowledge and Innovation Hub: Focuses on building NITI Aayog’s think tank capabilities, emphasizing research, innovation, and knowledge generation.
• The creation of regional councils, the inclusion of experts, and the establishment of hubs highlight NITI Aayog’s emphasis on collaboration, inclusivity, and the integration of diverse perspectives in its policy-making and advisory roles. The institution is designed to adapt to the changing economic and developmental landscape of India, aligning with the principles of federalism and promoting a more dynamic approach to planning.

Q. When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points which of the following is likely to happen?

(a) India’s GDP growth rate increases drastically

(b) Foreign Institutional Investors may bring more capital into our country

(c) Scheduled Commercial Banks may cut their lending rates

(d) It may drastically reduce the liquidity to the banking system

Answer: (c) Scheduled Commercial Banks may cut their lending rates

Notes:

• Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits (ie. Net Demand and Time Liabilities (NDTL)) that a commercial bank must keep with itself.
• SLR is the percentage of deposits that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities.
• The Reserve Bank of India is authorized to set SLR and change it with changing macroeconomic conditions.
• To keep bank credit under control, the Reserve Bank of India raises the SLR as inflation rises. During a recession, the RBI lowers the SLR to promote bank credit.
• A reduction in SLR frees up liquidity for banks, enabling them to lend more to borrowers. As a result, banks may lower their lending rates, making loans more affordable for businesses and individuals.
• The CRR (Cash Reserve Ratio) and SLR (Stock Liquidity Ratio) have long been used by central banks to limit credit growth, liquidity flow, and inflation in the economy.
• A bank is liable to pay a penalty to the Reserve Bank of India if it fails to maintain the prescribed SLR. On the deficient amount for that particular day, the defaulter bank must pay a penalty of 3% above the bank rate.
• The 2007 amendment to the Banking Regulation Act of 1949 removed the lower ceiling of SLR which implied it can be sr between 0-40% of NDTL of the banks.
• As of December 2021, the SLR is at 18.00% of the NDTL of the banks.

Difference between SLR and CRR

Parameter	Statutory Liquidity Ratio	Cash Reserve Ratio
Meaning	Statutory Liquidity Ratio (SLR) is the minimum percentage of deposits (NDTL) that a commercial bank must keep with itself.	The Cash Reserve Ratio (CRR) is the percentage of deposits (NDTL) that a commercial bank is required to retain as cash reserves with the RBI.
Reserves in the form of	Liquid cash, gold, or other securities	Cash Only
Maintained with	Respective Banks	Reserve Bank of India
Effect	Controls excess money flow in the economy.	Helps meet short term liquidity requirements by trading excess securities.
Interest on Reserve	Banks earns interest based on the portfolio of SLR chosen.	Banks don’t earn any interest on the CRR deposited with RBI

Q. With reference to Indian economy, consider the following:

1. Bank rate
2. Open market operations
3. Public debt
4. Public Revenue

Which of the above is/are component/components of Monetary Policy?

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

Answer: (c) 1 and 2

Monetary Policy:

• Monetary policy refers to the set of actions and measures implemented by a country’s central bank to regulate and control the money supply, credit availability, and interest rates in the economy.
• The primary goal of monetary policy is to achieve specific macroeconomic objectives, such as maintaining price stability, promoting economic growth, and ensuring financial stability.
  • Interest rate changes and adjustments to bank reserve requirements are examples of monetary policy strategies.
• It is the demand side economic policy used to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.
• Monetary policy in India:
  • In India, the monetary policy of the RBI is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
    • For example, liquidity is crucial to stimulate growth for an economy. The RBI depends on monetary policy to maintain liquidity.
  • The RBI implements the monetary policy through open market operations (OMOs), bank rate policy, reserve system, credit control policy, moral persuasion, etc.
    • For example, the RBI introduces the money in the economy and cuts the interest rate by buying bonds through OMOs.
  • The use of any of these tools will result in adjustments in interest rate or the money supply in the economy.
• Classification of Monetary Policy:
  • Monetary policy can be classified as expansionary (or accommodative) and contractionary (or tight) in nature.
  • Accommodative monetary policy is triggered to encourage more spending from consumers and businesses by increasing money supply and reducing interest rates.
    • When firms can easily borrow money, they have more funds to expand operations and hire more workers, resulting in a lower unemployment rate.
    • On the other hand, if the money supply is loosened over an extended period of time, there will be too much money chasing too few goods and services, resulting in inflation.
  • To avoid inflation, most central banks rotate between accommodating and tight monetary policy (decreasing the money supply and raising interest rates) to varied degrees in order to promote growth while keeping inflation under control.

Instruments of Monetary Policy:

• Liquidity Adjustment Facility (LAF): It allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements.
• Repo Rate: The repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs.
• Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity from banks against the collateral of eligible government securities under the LAF.
• Statutory Liquidity Ratio (SLR): It is the minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.
• Marginal Standing Facility (MSF) Rate: It is the penal rate at which banks can borrow, on an overnight basis, from the RBI by dipping into their SLR portfolio.
• Bank Rate: The Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserve requirements (cash reserve ratio and statutory liquidity ratio).
• Cash Reserve Ratio (CRR): CRR is a percentage of total deposits that the banks have to maintain as liquid cash with the RBI.
• Open Market Operations (OMOs): These include outright purchase/sale of government securities by the RBI for injection/absorption of durable liquidity in the banking system.
• Corridor: The corridor for the daily movement in the weighted average call money rate is determined by the MSF rate and the reverse repo rate.
• Market Stabilisation Scheme (MSS):
  • Market Stabilisation Scheme (MSS) is a monetary management tool that was introduced in 2004.
  • Short-term government securities and treasury bills are sold to absorb longer-term surplus liquidity resulting from large capital inflows.
  • The money raised in this manner is kept in a separate government account of the Reserve Bank.

Q. With reference to inflation in India, which of the following statements is correct?

(a) Controlling the inflation in India is the responsibility of the Government of India only

(b) The Reserve Bank of India has no role in controlling the inflation

(c) Decreased money circulation helps in controlling the inflation

(d) Increased money circulation helps in controlling the inflation

Answer: (c) Decreased money circulation helps in controlling the inflation

Inflation:

• Inflation, as defined by the International Monetary Fund, is the rate of increase in prices over a given period, encompassing a broad measure of overall price increases or for specific goods and services.
  • It reflects the rising cost of living and indicates how much more expensive a set of goods and/or services has become over a specified period, usually a year.
    • In India, inflation’s impact is particularly significant due to economic disparities and a large population.
• Different Causes of Inflation:
  • Demand-Pull Inflation:
    • Demand Pull inflation occurs when the demand for goods and services exceeds their supply. When the overall demand in the economy is high, consumers are willing to pay more for the available goods and services, leading to a general rise in prices.
      • A booming economy with high consumer spending can create excess demand, putting upward pressure on prices.
  • Cost-Push Inflation:
    • Cost-push inflation is driven by an increase in the production costs for goods and services. This can be caused by factors such as increased incomes, increased costs of raw materials, or disruptions in the supply chain.
  • Built-In or Wage-Price Inflation:
    • This type of inflation is often described as a feedbackloop between wages and prices. When workers demand higher wages, businesses may raise prices to cover the increased labor costs. This, in turn, prompts workers to seek higher wages, and the cycle continues.
      • Collective bargaining by labor unions can result in higher wages, leading to increased production costs and subsequently higher prices for goods and services.

How To Control Inflation?

• There are broadly two ways of controlling inflation in an economy:
  • Monetary measures
  • Fiscal measures
• Monetary Measures
  • The most important and commonly used method to control inflation is monetary policy of the Central Bank. Most central banks use high interest rates as the traditional way to fight or prevent inflation.
  • Monetary measures used to control inflation include:
    • bank rate policy
    • cash reserve ratio and
    • open market operations.
  • Bank rate policy
    • Bank rate policy is used as the main instrument of monetary control during the period of inflation. When the central bank raises the bank rate, it is said to have adopted a dear money policy. The increase in bank rate increases the cost of borrowing which reduces commercial banks borrowing from the central bank. Consequently, the flow of money from the commercial banks to the public gets reduced. Therefore, inflation is controlled to the extent it is caused by the bank credit.
  • Cash Reserve Ratio (CRR)
    • To control inflation, the central bank raises the CRR which reduces the lending capacity of the commercial banks. Consequently, flow of money from commercial banks to the public decreases. In the process, it halts the rise in prices to the extent it is caused by banks’ credits to the public.
  • Open Market Operations:
    • Open market operations refer to sale and purchase of government securities and bonds by the central bank.
    • To control inflation, central bank sells the government securities to the public through the banks. This results in transfer of a part of bank deposits to central bank account and reduces credit creation capacity of the commercial banks.
• Fiscal Measures:
  • Fiscal measures to control inflation include taxation, government expenditure and public borrowings.
  • The government can also take some protectionist measures (such as banning the export of essential items such as pulses, cereals and oils to support domestic consumption, encouraging imports by lowering duties on import items etc.).
  • Supply Measurement Measures:
    • Supply Management Measures aims to increase the competitiveness and efficiency of the supply chain, putting downward pressure on long-term costs. 
    • Some of the supply management measures taken are-
      • Restricting exports of commodities in short supply and increasing their imports.
      • Effective implementation of the Essential Commodities Act, 1952 to prevent hoarding and speculation. 
      • Incentivizing the increase in production of commodities through tax concessions, subsidies, institutional support etc. 
      • Higher MSP has been announced to incentivize production and thereby enhance the availability of food items which may help moderate prices.
      •  Fixing the ceiling prices of the commodities and taking measures to control the black marketing of those goods. 
      • Reforming the supply chain through infrastructure development, foreign investments etc.

Q. With reference to the Indian Renewable Energy Development Agency Limited (IREDA), which of the following statements is/are correct?

1. It is a Public Limited Government Company.
2. It is a Non-Banking Financial Company.

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

IREDA:

• It is a Mini Ratna (Category–I) non-banking financial institution under the administrative control of Ministry of New and Renewable Energy (MNRE).
• It is a Public Limited Government Company established as a Non-Banking Financial Institution (NBFC) in 1987.
• REDA has been notified as a “Public Financial Institution” under section 4 ‘A’ of the Companies Act, 1956 and registered as NBFC with Reserve Bank of India (RBI).
• REDA is primarily engaged in promoting, developing and extending financial assistance for setting up projects relating to new and renewable sources of energy and energy efficiency/conservation.
• Motto: ENERGY FOR EVER
• Objectives:
  • To give financial support to specific projects and schemes for generating electricity and/ or energy through new and renewable sources and conserving energy through energy efficiency.
  • To maintain its position as a leading organization to provide efficient and effective financing in renewable energy and energy efficiency/ conservation projects.
  • To increase IREDA’s share in the renewable energy sector by way of innovative financing.
  • Improvement in the efficiency of services provided to customers through continual improvement of systems, processes and resources.
• Funding: IREDA generates its revenue through the interest and principal repayments from the projects it finances, as well as by raising funds from the market and through borrowings.