Q. What is the importance of the term “Interest Coverage Ratio” of a firm in India?

  1. It helps in understanding the present risk of a firm that a bank is going to give a loan to.
  2. It helps in evaluating the emerging risk of a firm that a bank is going to give a loan to.
  3. The higher a borrowing firm’s level of Interest Coverage Ratio, the worse is its ability to service its debt.

Select the correct answer using the code given below:

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

Answer: (a) 1 and 2 only

Interest Coverage Ratio
  • The Interest Coverage Ratio (ICR) is a financial ratio that is used to determine how well a company can pay the interest on its outstanding debts.
  • The ICR is commonly used by lenders, creditors, and investors to determine the riskiness of lending capital to a company. The interest coverage ratio is also called the “times interest earned” ratio.
  • The Interest Coverage Ratio (ICR) of a firm is a measure of its ability to pay its interest expenses on outstanding debt.
  • It is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its interest expenses.
  • A higher ICR indicates that a company is generating sufficient earnings to meet its interest obligations, while a lower ICR suggests that the company may have difficulty servicing its debt.
    • The lower the interest coverage ratio, the greater the company’s debt and the possibility of bankruptcy. Intuitively, a lower ratio indicates that less operating profits are available to meet interest payments and that the company is more vulnerable to volatile interest rates.
    • Therefore, a higher interest coverage ratio indicates stronger financial health – the company is more capable of meeting interest obligations.
Interest Coverage Ratio Formula
  • Primary Uses of Interest Coverage Ratio:
    • ICR is used to determine the ability of a company to pay its interest expense on outstanding debt.
    • ICR is used by lenders, creditors, and investors to determine the riskiness of lending money to the company.
    • ICR is used to determine company stability – a declining ICR is an indication that a company may be unable to meet its debt obligations in the future.
    • ICR is used to determine the short-term financial health of a company.
    • Trend analysis of ICR gives a clear picture of the stability of a company in regard to interest payments.
Debt-Service Coverage Ratio (DSCR)
  • The Debt Service Coverage Ratio (sometimes called DSC or DSCR) is a credit metric used to understand how easily a company’s operating cash flow can cover its annual interest and principal obligations.
  • Because the Debt Service Coverage Ratio also includes principal obligations in the denominator, it’s considered a very useful metric when a corporate borrower has reducing term debt in its capital structure (meaning monthly or annual principal repayments).
  • A higher DSC ratio is better than a lower one, with a typical minimum requirement of 1.25x.
Debt Service Coverage Ratio

Q. Which of the following factors/policies were affecting the price of rice in India in the recent past?

(1) Minimum Support Price
(2) Government’s trading
(3) Government’s stockpiling
(4) Consumer subsidies

Select the correct answer using the code given below:

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

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

  • All the factors/policies mentioned have been affecting the price of rice in India in recent times.
  • The Minimum Support Price (MSP) is the price at which the government purchases crops from farmers.
    • The higher MSP would also dent Indian exporters’ competitiveness in the global markets, which have turned to be a buyers’ market.
  • The government’s trading and stockpiling policies also have an impact on rice prices. When the government procures rice from the market and maintains large stockpiles, it can lead to a increase in prices. Similarly, when the government releases stockpiles into the market, it can lead to a decrease in prices.
    • The government typically buys more than a third of the country’s rice output at a fixed price, which also has a direct impact on prices paid by traders. With this price rise, the exports will become expensive.
    • Stockpiling usually occurs at times of an actual or expected shortage of a product or in anticipation of a price rise.
  • Consumer subsidies also have an impact on prices since they can reduce demand and thus prices. The impact of the consumer subsidy is to lower prices for consumers but to increase the price received by producers.

Q. Under the Kisan Credit Card scheme, short-term credit support is given to farmers for which of the following purposes ?

(1) Working capital for maintenance of farm assets harvesters,
(2) Purchase of combine tractors and mini trucks requirements of farm
(3) Consumption households
(4) Post-harvest expenses
(5) Construction of family house and setting up of village cold storage facility

Select the correct answer using the code given below:

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

Answer: (b) 1, 3 and 4 only

Kisan Credit Cards Scheme
  • Kisan Credit Cards scheme was introduced in 1998 for providing adequate and timely credit support from the banking system, under a single window with flexible and simplified procedure to the farmers for their cultivation and other needs like purchase of agriculture inputs such as seeds, fertilizers, pesticides etc. and draw cash for their production needs.
  • The scheme was further extended for the investment credit requirement of farmers viz. allied and non-farm activities in the year 2004.
  • In the Budget-2018-19, government announced the extension of the facility of Kisan Credit Card (KCC) to fisheries and animal husbandry farmers to help them to meet their working capital needs.
  • Implementing Agencies:
    • Commercial Banks
    • Regional Rural Banks (RRBs)
    • Small Finance Banks
    • Cooperatives
  • Features:
    • The scheme comes with an ATM-enabled RuPay debit card with facilities for one-time documentation, built-in cost escalation in the limit, and any number of drawals within the limit.
    • Besides ensuring saturation, banks will also be taking steps to link Aadhaar immediately as no interest subvention will be given if the Aadhaar numbers are not seeded to KCC accounts.
    • Also, the government has taken several initiatives for KCC saturation which include adding farmers engaged in animal husbandry and fisheries, no processing fee of loan under KCC and raising the limit of collateral free agriculture loan from Rs. 1 lakh to Rs.1.6 lakh.
    • The KCC facility will help fisheries and animal husbandry farmers to meet their short-term credit requirements of rearing of animals, poultry birds, fish, shrimp, other aquatic organisms and capture of fish.
  • Objectives:
    • To meet the short term credit requirements for cultivation of crops.
    • Post-harvest expenses.
    • Produce marketing loan.
    • Consumption requirements of farmer households.
    • Working capital for maintenance of farm assets and activities allied to agriculture.
    • Investment credit requirement for agriculture and allied activities.
  • Financial Provisions:
    • To ensure availability of agricultural credit at a reasonable cost of 7% per annum to formers:
      • Government of India implements an interest subvention scheme of 2% for short term crop loans up to Rs. 3 lakh.
      • In addition, the GOI provides interest subvention of 2% and prompt repayment incentive of 3% to the farmers.
  • Eligibility
    • Farmers – individual/joint borrowers who are owner cultivators;
    • Tenant farmers, oral lessees & share croppers;
    • Self Help Groups (SHGs) or Joint Liability Groups (JLGs) of farmers including tenant farmers, share croppers etc
  • Delivery Channels:
    • Withdrawal through ATMs / Micro ATM
    • Withdrawal through BCs using smart cards.
    • PoS machine through input dealers
    • Mobile Banking with IMPS capabilities / IVR
    • Aadhaar enabled Cards

Q. Consider the following statements :

(1) The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
(2) The WPI does not capture changes in the prices of services, which CPI does.
(3) The Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.

Which of the statements given above is/are correct?

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

Answer: (a) 1 and 2 only

Wholesale Price Index
  • The Wholesale Price Index represents the price of a basket of wholesale goods. WPI focuses on the price of goods that are traded between corporations.
    • It does not concentrate on goods purchased by the consumers.
  • The Wholesale Price Index (WPI) measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses.
  • The Office of the Economic Adviser in the Department of Industrial Policy and Promotion, Ministry of Commerce & Industry is responsible for compiling WPI and releasing it.
  • The main objective of WPI is monitoring price drifts that reflect demand and supply in manufacturing, construction and industry.
  • WPI helps in assessing the macroeconomic as well as microeconomic conditions of an economy.
  • It is the most widely used inflation indicator in India.
  • Major criticism for this index is that the general public does not buy products at wholesale price.
  • The base year of All-India WPI has been revised from 2004-05 to 2011-12 in 2017.
Consumer Price Index
  • It measures price changes from the perspective of a retail buyer. 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.
  • Four types of CPI are as follows:
    • CPI for Industrial Workers (IW).
    • CPI for Agricultural Labourer (AL).
    • CPI for Rural Labourer (RL).
    • CPI (Rural/Urban/Combined).
    • Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and Employment. Fourth is compiled by the NSO in the Ministry of Statistics and Programme Implementation.
  • Base Year for CPI is 2012.
    • Recently, the Ministry of Labour and Employment released the new series of Consumer Price Index for Industrial Worker (CPI-IW) with base year 2016.
  • The Monetary Policy Committee (MPC) uses CPI data to control inflation. In April 2014, the Reserve Bank of India (RBI) had adopted the CPI as its key measure of inflation.
Difference between CPI and WPI
  • WPI tracks inflation at the producer level and CPI captures changes in prices levels at the consumer level.
  • WPI does not capture changes in the prices of services, which CPI does.
  • In WPI, more weightage is given to manufactured goods, while in CPI, more weightage is given to food items.
Difference between CPI and WPI

Q. In India, which of the following can be considered as public investment in agriculture?

(1) Fixing Minimum Support Price for agricultural produce of all crops
(2) Computerization of Primary Agricultural Credit Societies
(3) Social Capital development
(4) Free electricity supply to farmers
(5) Waiver of agricultural loans by the banking system
(6) Setting up of cold storage facilities by the governments.

Select the correct answer using the code given below:

(a) 1, 2 and 5 only
(b) 1, 3, 4 and 5 only
(c) 2, 3 and 6 only
(d) 1, 2, 3, 4, 5 and 6

Answer: (c) 2, 3 and 6 only

  • Public investment in agriculture refers to the government’s expenditure on various agricultural projects and programs aimed at improving the agricultural productivity and income of farmers.
    • Public expenditures on agriculture include short-term costs as well as long-term investments.
  • Investment in agriculture and forestry includes government expenditures directed to agricultural infrastructure, research and development and education and training.
  • Fixing Minimum Support Price for Agriculture for agricultural products of all crops and free electricity supply to farmers are subsidies, hence they are not categorized as public investment in agriculture.
  • The waiver of agricultural loans by the banking system is a concession or indirect support. hence it is not considered as public investment in agriculture.
  • Subsidies and incentives are not considered as public investment.
Primary Agricultural Credit Societies (PACS)
  • PACS are village level cooperative credit societies that serve as the last link in a three-tier cooperative credit structure headed by the State Cooperative Banks (SCB) at the state level.
    • Credit from the SCBs is transferred to the District Central Cooperative Banks (DCCBs), that operate at the district level. The DCCBs work with PACS, which deal directly with farmers.
  • PACSs provide short-term, and medium-term agricultural loans to the farmers for the various agricultural and farming activities.
  • PACs deal directly with the rural (agricultural) borrowers, give those loans and collect repayments of loans given, and also undertake distribution and marketing functions.
  • It serves as the final link between the ultimate borrowers on the one hand and the higher financing agencies, namely the Scheduled Commercial Banks, and the RBI/NABARD on the other hand.
  • The first PACS was formed in 1904.
  • Significance of PACS:
    • Access to Credit:
      • PACS provide small farmers with access to credit, which they can use to purchase seeds, fertilizers, and other inputs for their farms. This helps them to improve their production and increase their income.
    • Financial Inclusion:
      • PACS help to increase financial inclusion in rural areas, where access to formal financial services is limited. They provide basic banking services, such as savings and loan accounts, to farmers who may not have access to formal banking services.
    • Convenient Services:
      • PACS are often located in rural areas, which makes it convenient for farmers to access their services. This is important because many farmers are unable to travel to banks in urban areas to access financial services.
      • PACS have the capacity to extend credit with minimal paperwork within a short time.
    • Promoting Savings Culture:
      • PACS encourage farmers to save money, which can be used to improve their livelihoods and invest in their farms.
    • Enhancing Credit Discipline:
      • PACS promote credit discipline among farmers by requiring them to repay their loans on time. This helps to reduce the risk of default, which can be a major challenge in the rural financial sector.
Primary Agricultural Credit Societies

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

(1) Commercial Paper is a short-term unsecured promissory note.
(2) Certificate of Deposit is a long-term Instrument issued by RBI to a corporation.
(3) ‘Call Money’ is short-term finance used for interbank transactions.
(4) “Zero-Coupon Bonds’ are the interest-bearing short-term bonds issued by the Scheduled Commercial Banks to corporations.

Which of the statements given above is/are correct?

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

Answer: (c) 1 and 3 only

  • Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note and held in a materialized form through any of the depositories approved by and registered with SEBI.
  • Certificates of Deposits are fixed-income financial instruments generally issued by commercial banks to individuals/ other lenders.
  • Call money is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately whenever the lender demands it.
    • Call money deals with day to day cash requirement of banks.
      • Participants in the call money market are banks and related entities specified by the RBI.
    • Notice money deals with loans for 2-14 days to banks, it is also a short-term financial instrument.
  • Zero-coupon bond (Also known as Pure Discount Bond or Accrual Bond) refers to those bonds that are issued at a discount to its par value and make no periodic interest payment (noninterest-bearing), unlike a normal coupon-bearing bond. Zero Coupon Bonds are not interest-bearing instead they are issued at deep discounts and redeemable at par on a future date.
Money Market & Capital Market
  • The money market is the centre for dealing mainly of short character, in monetary assets; it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders.
    • Money market deals in financial assets whose period of maturity is up to one year.
    • Short term financial instruments are –
      • Call money, Notice Money
      • Treasury Bill
      • Commercial Paper
      • Deposit Certificates
      • Trade bill
  • The capital market is the market for medium and long-term funds.
    • Capital Market deals in financial assets whose period of maturity more than one year.
    • Long term financial instruments are-
      • Security Market– Equity, Debt, IPOs, Commodity Markets etc.
      • Non-Securit Market – Mutual Funds, Fixed Deposits, Saving Deposits etc.

Q. With reference to the international trade of India at present, which of the following statements is/are correct?

(1) India’s merchandise exports are less than its merchandise imports.
(2) India’s imports of iron and steel, chemicals, fertilisers and machinery have decreased in recent years.
(3) India’s exports of services are more than its imports of services.
(4) India suffers from an overall trade/current account deficit.

Select the correct answer using the code given below:

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

Answer: (d) 1, 3 and 4 only


This Question was cancelled by UPSC.

  • India is a net exporter in services. Observing the recent trends, there was a surplus of $6.84 billion in June, with exports standing at $16.48 billion and imports at $9.64 billion.
  • As per RBI’s data, India’s merchandise exports during April-August 2019-20 was 133 bn USD as compared to 210 bn of imports during the same period.
  • India suffers from an overall trade deficit. For instance-
Trade Balance (in USD bn)-117.3-108.9-158.6-182.3-153.5
  • India’s trade deficit narrowed sharply to USD 6.77 billion in August of 2020 from USD 13.86 billion in the same month last year.
  • In 2018, major countries to which India Exported include the United States, United Arab Emirates, China, Hong Kong and Singapore.
  • Export of iron and steel products witnessed a sharp rise of more than 100% in June 2020.
  • Chemicals include dyes and dye intermediates, organic chemicals, inorganic chemicals, agro-chemicals, cosmetics & toiletries, and castor oil.
    • From April 2019 to January 2020, the export of dyes increased by 9.12% y-o-y to US$ 2.27 billion. Cosmetics and toiletries increased by 5.62%.

Q. In the context of the Indian economy, non-financial debt includes which of the following?

(1) Housing loans owed by households
(2) Amounts outstanding on credit cards
(3) Treasury bills

Select the correct answer using the code given below :

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

Answer: (d) 1, 2 and 3

  • Debts are contractual obligations to repay monetary loans, often with related interest expenses.
  • Financial debt refers to the borrowing of money from financial institutions, such as banks or bondholders, with the aim of raising capital to finance business activities.
    • Financial debt typically involves the payment of interest and principal over a specific period, with the expectation that the borrower will generate sufficient cash flows to cover the payments.
    • Examples of financial debt include loans, bonds, and other forms of debt securities.
  • On the other hand, non-financial debt refers to debts that arise from non-financial transactions, such as trade credit, deferred payments, and leasing arrangements. Non-financial debt is typically used to finance purchases of goods and services, rather than to raise capital for business activities. Non-financial debt may or may not involve the payment of interest and principal over a specific period, depending on the terms of the transaction.
    • It consists of credit instruments issued by governmental entities, households and businesses that are not included in the financial sector.
    • It includes industrial or commercial loans, Treasury bills and credit card balances.
    • They share most of the same characteristics with financial debt, except the issuers are non-financial.

Q. With reference to Trade-Related Investment Measures (TRIMS), which of the following statements is/are correct?

(1) Quantitative restrictions on imports by foreign investors are prohibited.
(2) They apply to investment measures related to trade in both goods and services.
(3) They are not concerned with the regulation of foreign investment.

Select the correct answer using the code given below:

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

Answer: (c) 1 and 3 only

Agreement on Trade-Related Investment Measures (TRIMs)
  • The Agreement on Trade-Related Investment Measures (TRIMs) are rules that are applicable to the domestic regulations a country applies to foreign investors, often as part of an industrial policy.
    • The agreement, concluded in 1994, was negotiated under the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), and came into force in 1995.
    • The agreement was agreed upon by all members of the World Trade Organization.
    • Trade-Related Investment Measures is one of the four principal legal agreements of the WTO trade treaty.
  • TRIMs are rules that restrict preference of domestic firms and thereby enable international firms to operate more easily within foreign markets.
    • Policies such as local content requirements and trade balancing rules that have traditionally been used to both promote the interests of domestic industries and combat restrictive business practices are now banned.
  • Objectives of Trade-Related Investment Measures
    • TRIMs believe that there is a strong connection between trade and investment. The goal of trade-related investments measures is to give fair treatment to all investing members across the world.
    • As the TRIMs deal says, members have to inform the World Trade Organization (WTO) council to buy and sell various services and goods of their current TRIMs that are incompatible with the agreement.
  • Main Features of TRIMs
    • It only applies to investment measures related to goods trade.
    • This doesn’t apply to service trade.
    • It doesn’t regulate the entry of foreign industry or investment.
    • It is about the discriminatory treatment of imported/exported products.
    • Concern measures were applied to both foreign & domestic firms.
    • A transition period of 2 years in the case of developed countries, 5 years in the case of developing countries and 7 years in the case of LDCs, from the date this agreement came into effect, which is 1st January 1995.
  • The main obligation contained in this agreement is that members shall not apply any trade-related investment major that is inconsistent with Article III (national treatment) or Article XI (general elimination of quantitative restrictions) of the GATT.

Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?

(1) Cut and optimize the Statutory Liquidity Ratio
(2) Increase the Marginal Standing Facility Rate
(3) Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

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

Answer: (b) 2 only

Expansionary Monetary Policy
  • An expansionary monetary policy is focused on expanding (increasing) the money supply in an economy. This is also known as Easy Monetary Policy.
    • It is implemented by lowering key interest rates thus increasing market liquidity (money supply). High market liquidity usually encourages more economic activity.
    • When RBI adopts Expansionary Monetary Policy, it decreases Policy Rates (Interest Rates) like Repo, Reverse Repo, MSF, Bank Rate etc.
  • Implications:
    • Causes an increase in bond prices and a reduction in interest rates.
    • Lower interest rates lead to higher levels of capital investment.
    • The lower interest rates make domestic bonds less attractive, so the demand for domestic bonds falls and the demand for foreign bonds rises.
    • The demand for domestic currency falls and the demand for foreign currency rises, causing a decrease in the exchange rate. (The value of the domestic currency is now lower relative to foreign currencies)
    • A lower exchange rate causes exports to increase, imports to decrease and the balance of trade to increase.
Contractionary Monetary Policy
  • A contractionary monetary policy is focused on contracting (decreasing) the money supply in an economy. This is also known as Tight Monetary Policy.
    • A contractionary monetary policy is implemented by increasing key interest rates thus reducing market liquidity (money supply). Low market liquidity usually negatively affects production and consumption. This may also have a negative effect on economic growth.
    • When RBI adopts a contractionary monetary policy, it increases Policy Rates (Interest Rates) like Repo, Reverse Repo, MSF, Bank Rate etc.
  • Implications:
    • Contractionary monetary policy causes a decrease in bond prices and an increase in interest rates.
    • Higher interest rates lead to lower levels of capital investment.
    • The higher interest rates make domestic bonds more attractive, so the demand for domestic bonds rises and the demand for foreign bonds falls.
    • The demand for domestic currency rises and the demand for foreign currency falls, causing an increase in the exchange rate. (The value of the domestic currency is now higher relative to foreign currencies)
    • A higher exchange rate causes exports to decrease, imports to increase and the balance of trade to decrease.
Marginal Standing Facility
  • Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency when inter-bank liquidity dries up completely.
    • The Marginal standing facility is a scheme launched by RBI while reforming the monetary policy in 2011-12.
    • MSF rate or Marginal Standing Facility rate is the interest rate at which the Reserve Bank of India provides money to the scheduled commercial banks who are facing acute shortage of liquidity.
    • It is a penal rate at which banks can borrow money from RBI when they are completely exhausted of all borrowing assistance. The Marginal Standing facility allows banks to borrow money with an interest rate above the repo rate and can be termed as the Marginal standing facility rate.
    • The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
    • Under MSF, banks can borrow funds up to one per cent of their net demand and time liabilities (NDTL).
    • Banks can borrow through MSF on all working days except Saturdays.
    • The minimum amount for which RBI receives application is Rs.1 Crore, and afterwards in multiples of Rs.1 Crore.
    • MSF provides a safety valve against unexpected liquidity shocks to the banking system.
    • If RBI decided to adopt an expansionist monetary policy, it will not increase the MSF rate.
  • Differences between Repo Rate and MSF
    • Repo rate is the rate at which RBI lends money to commercial banks, while MSF is a rate at which RBI lends money to scheduled banks.
    • The repo rate is given to banks that are looking to meet their short-term financial needs. While, the MSF is meant for lending overnight to banks.
    • Lending at repo rates involves a repurchase agreement of securities. While it is not so in MSF.
    • Under MSF, banks are also allowed to use the securities that come under Statutory Liquidity Ratio (SLR) in the process of availing loans from RBI.
      • Under SLR, commercial banks are mandated by RBI to maintain a stipulated proportion of their deposits in the form of liquid assets like cash, gold and unencumbered (free from debt) securities.

Q. With reference to the Indian economy after the 1991 economic liberalization, consider the following statements :

(1) Worker productivity (Rs per worker at 2004-05 prices) increased in urban areas while it decreased in rural areas.
(2) The percentage share of rural areas in the workforce steadily increased.
(3) In rural areas, the growth in the non-farm economy increased.
(4) The growth rate in rural employment decreased.

Which of the statements given above is/are correct?

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

Answer: (b) 3 and 4 only

  • Productivity is a measure of the efficiency with which resources, both human and material, are converted into goods and services. There is wide disparity in worker productivity between rural and urban areas. India’s labour productivity grew by over 14 per cent every year. But between financial years of 2011 and 2015, this rate fell to just half of that (7.4 per cent) and continued its deceleration to just 3.7 per cent between financial years of 2016 and 2018.
  • The rate of growth in population and workforce during the last four decade in rural areas have always been lower than of the urban areas.
  • After the 1991 economic liberalization, non-farm economy (industries and services not related to agriculture) in rural areas did see substantial growth, as it provided alternative employment opportunities to the rural workforce.
    • Rural non-farm economy, in recent times, is considered as an effectual strategy for decentralization of economic activities to rural India.
    • The Economic Census of India estimates that around 41.89 million rural people are employed in non-agricultural establishments which registered a growth rate of 4.56 % during 1998-2005.
  • As per the 2011 Census, 68.8 per cent of country’s population and 72.4 per cent of workforce resided in rural areas. However, steady transition to urbanization over the years is leading to the decline in the rural share in population, workforce and GDP of the country.

Q. Consider the following statements:

(1) In terms of short-term credit delivery to the agriculture sector, District Central Cooperative Banks (DCCBs) deliver more credit in comparison to Scheduled Commercial Banks and Regional Rural Banks.

(2) One of the most important functions of DCCBs is to provide funds to the Primary Agricultural Credit Societies.

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

  • Cooperative bank is an institution established on the cooperative basis and dealing in ordinary banking business.
  • In rural India, there exists a 3-tier rural cooperative structure.
    • Tier-I: It includes state cooperative banks (StCBs) at the state level;
    • Tier-II: It includes central cooperative banks (CCBs) at the district level; and
    • Tier-III: It includes primary agricultural credit societies (PACSs).
  • According to a report of the RBI, in 2016-17, scheduled commercial banks contributed the major share (78- 80%) in agricultural and allied credit. Cooperative institutions also play a significant role in extending agricultural credit and the share of all cooperative banks/institutions (i.e. StCBs, DCCBs and PACSs put together) constituted 15-16%. The RRBs contributed the remaining 5% of the agricultural credit.
  • The most significant function of the district central cooperative bank (DCCB) is to provide financial support to the Primary Agricultural Credit Societies (PACS) that are affiliated to it in the district.
Primary Agricultural Credit Societies

Q. If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?

(1) Not depending on short-term foreign borrowings
(2) Opening up to more foreign banks
(3) Maintaining full capital account convertibility

Select the correct answer using the code given below :

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

Answer: (a) 1 only

  • Both international creditors and the debtor nations suffer significant hardships due to a global financial crisis and are forced into default.
    • Both economic and political considerations leave it difficult to resist coming to the aid of a distressed nation or region.
    • So, India should not depend on short-term foreign borrowings. It will surely provide immunity to India.
  • Opening up to More Foreign Banks can have benefits in terms of bringing in more capital and potentially more efficient banking services, it does not necessarily provide immunity against a global financial crisis. In fact, it could increase vulnerability in some cases. Foreign banks may quickly repatriate capital in times of global stress, exacerbating liquidity issues in the domestic market.
    • The financial crisis will most likely increase the NPA (Non-performing Assets) burden on banks making the banks inefficient in NPA recovery and declaring themselves insolvent in near future.
    • So, opening up to more foreign banks would be a huge risk for India.
  • Capital account convertibility means the freedom to conduct investment transactions without any constraints.
    • Typically, it would mean no restrictions on the amount you can convert into foreign currency to enable you to acquire any foreign asset and vice versa.
    • While it can encourage foreign investment and economic integration with global markets, full capital account convertibility also increases vulnerability to global financial shocks. It can lead to rapid and large-scale capital outflows during times of global financial stress, destabilizing the domestic financial system.
    • During a financial crisis, it will be a huge failure and mistake.

Q. If you withdraw 1,00,000 in cash from your Demand Deposit Account at your bank, the immediate effect on aggregate money supply in the economy will be

(a) to reduce it by 1,00,000

(b) to increase it by 1,00,000

(c) to increase it by more than 1,00,000

(d) to leave it unchanged

Answer: (d) to leave it unchanged

Aggregate money supply
  • The aggregate money supply in an economy is typically considered to include both physical currency (cash) in circulation and Demand Deposits (balances in bank accounts that can be accessed on-demand) and Time Deposits with commercial banks.
  • When you withdraw ₹1,00,000 in cash from your Demand Deposit Account, you are essentially converting one form of money (bank deposits) into another form of money (physical currency).
  • The total amount of money in the economy (the sum of physical currency and demand deposits) does not change due to this transaction. You have simply changed the composition of the money supply, not the total amount.
  • Therefore, the immediate effect on the aggregate money supply in the economy is to leave it unchanged.
Money Supply
  • The money supply is the total amount of money used by the general public at a given point in time. 
    • It should be emphasized that total money supply and total money stock are two different things.
    • Only that part of the overall stock of money with the public at any given time is considered the money supply.
    • Currency, printed notes, money in bank accounts, and other liquid assets make up circulating money.
  • Narrow money is also known as M1 and M2. Broad money means M3 and M4. The liquidity of these grades is decreasing. M1 is the most liquid and makes transactions the easiest, while M4 is the least liquid. 
    • The most commonly used indicator of the money supply is M3. It is also known as the total amount of financial resources.
  • Reserve Money (M0): Other names include High-Powered Money, Financial Base, Base Money, etc. M0 is calculated as follows: Money in circulation + Bankers’ deposits + Other deposits with RBI. It is the economic foundation’s currency.
  • Narrow Money (M1): M1 equals money in circulation plus demand deposits in the banking system (current and savings accounts) plus additional deposits with the Reserve Bank of India (RBI).
  • Narrow Money (M2): Post Office Savings, Bank Savings Deposits added to M1 equals M2.
  • Broad Money (M3): M3 equals M1 plus time deposits made with banks.
  • Broad Money (M4): M4 is equal to M3 plus any deposits made at post office savings banks.