UPSC Prelims Research: Indian Economy 2023

Q. Consider the following statements:

Statement-I: Interest income from the deposits in Infrastructure Investment Trusts (InvITs) distributed to their investors is exempted from tax, but the dividend is taxable.
Statement-II: InviTs are recognized as borrowers under the ‘Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002’.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-1
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-1
(c) Statement-1 is correct but Statement-II is incorrect
(d) Statement-I is incorrect Statement-II is correct

Answer: (d) Statement-I is incorrect Statement-II is correct

Infrastructure Investment Trust (InvITs)

• An Infrastructure Investment Trust (InvITs) is Collective Investment Scheme similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return.
• They are designed to pool small sums of money from a number of investors to invest in assets that give cash flow over a period of time. Part of this cash flow would be distributed as dividend back to investors.
• The minimum investment amount in an InvIT Initial Public Offering (IPO) is Rs 10 lakh, therefore, InvITs are suitable for high networth individuals, institutional and non-institutional investors.
  • Some part of the investment is used by the InvIT as loan while other portion is used as capital. Hence, the unit holders receive returns in the form of Dividend and Interest. Both the dividend and interest are taxed.
    • If the investor receives profit upon selling his units, Capital gains tax is imposed on any such gain. 
• InvITs are listed on exchanges just like stocks — through IPOs. However, the Indian InvIT market is not yet mature and has supported the formation of 10 InvITs till date of which only two are listed.
• InvITs are regulated by the Securities and Exchange Board of India (SEBI) (Infrastructure Investment Trusts) Regulations, 2014.
  • As per the SEBI regulations, InvITs must invest at least 80% of their assets in projects that are completed and revenue-generating. This lowers the risk for investors as this reduces the typical risk associated with the infrastructure sector i.e. delay in completion, due to lack of regulatory approvals, poor project management etc.
• InvITs and REITs are recognised as borrowers under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act. This enables the investors, especially banks, to initiate action against the trustees of InvITs in case of any default.
• Structure of InvIT:
  • Like mutual funds, they have a trustee, sponsor(s), investment manager and project manager.
    • Trustee has the responsibility of inspecting the performance of an InvIT.
    • Sponsor(s) are promoters of the company that set up the InvIT.
    • Investment manager is entrusted with the task of supervising the assets and investments of the InvIT.
    • Project manager is responsible for the execution of the project.
• The InvITs listed on the stock exchange are IRB InvIT Fund and India Grid Trust.

NHAI InvIT

• It is the infrastructure investment trust sponsored by the National Highways Authority of India (NHAI) to support the government’s National Monetisation Pipeline (NMP).
• It is a Trust established by NHAI under the Indian Trusts Act, 1882 and SEBI (Security and Exchange Board of India) regulations.

Real Estate Investment Trust (REIT)

• REIT refers to an entity created with the sole purpose of channeling investible funds into operating, owning or financing income-producing real estate.
  • In simple language, it is a company that allows individuals to invest in large-scale, income-producing real estate. These may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans.
  • REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.
• REITs are modeled on the lines of mutual funds and provide investors with an extremely liquid way to get a stake in real estate.
• It is a type of security that provides all types of investors, big or small, with an outlet for regular income, portfolio diversification, and long-term capital appreciation. Like any other security, REITs can enlist themselves on a stock exchange.
• In India, the REIT were introduced by the SEBI in 2007.
• Taxation on REITs:
  • Income from sale of REIT units
    • Capital gains from sale of Indian REIT units are subject to Short-term capital gains tax at 15% if held for less than one year.
    • Units held for more than three years (36 months) are subject to (Long Term Capital gains Tax) LTCG tax at 10% if they result in an income over Rs.1 lakh.
  • Interest income from REITs is taxable. 
  • Dividend income from REITs is taxable depending on the REIT’s special tax concession status.
    1. If a special tax concession has been obtained, dividend income is taxable in the hands of the investor. 
    2. If not, dividend income is not taxable. 
  • Income from the amortization of Special Purpose Vehicle (SPV) debt is not taxable in the hands of the investor.

Q. Consider the following statements :

Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-1
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-1
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Answer: (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-1

Notes

• Many Central Banks worldwide had carried out interest rate hikes in the post-pandemic recent past. This is because they were concerned about the rising consumer prices.
  •  Interest rates are one of the main tools that Central Banks have to try to control inflation.
• Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means. This is because they can raise interest rates, which makes it more expensive for businesses to borrow money and invest. This, in turn, can lead to a slowdown in economic growth, which can help to bring down inflation.

Inflation and Interest Rates

• In simple terms, the price rise in everyday goods and services is known as inflation. Inflation decreases the purchasing power of money as it buys lesser goods that it could buy earlier. The rate at which the prices of goods and services rise is called the inflation rate.
  • Whereas, the interest rate is the price of borrowing money from the banks or the returns on savings.
• Inflation in the country is measured with the help of the Wholesale Price Index (WPI) and Consumer Price Index (CPI).
  • In WPI, prices are quoted from the wholesalers while in CPI, the prices are quoted from the retailers.
  • The WPI was used to measure inflation up to April 2014. Now the RBI uses CPI (combined) to measure inflation rates in the economy.
• Interest rates and inflation are inversely proportional. Low interest rates lead to people borrowing more from banks and saving less. This increases the supply of money in the economy and also the demand. As a result, prices of the commodities rise and cause inflation. In this scenario, the RBI tends to increase the interest rates to reduce the money supply. People, on the other hand, tend to borrow less and save more when interest rates are high. The result is a decline in money supply and demand for goods and services as well as a decrease in price. In this situation, the central bank decreases the interest rates through its monetary policies. This way, RBI tries to balance the money supply and interest rate to create a conducive environment for economic growth.
  • Interest rates tend to move in the same direction as inflation but with lags, because interest rates are the primary tool used by central banks to manage inflation. Higher interest rates are generally a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy.
• The RBI manages interest rates through the following monetary policy tools:
  • Bank rate: It is the interest rate at which the central bank lends to the commercial banks. When there is inflation, the RBI increases the bank rate to reduce the money supply in the economy. By doing this, the central bank ensures the commercial banks create less credit leading to reduce money supply. With less money, there is lesser demand and hence prices fall.
  • Open Market Operation (OMO): The purchase and sale of government securities by the RBI are known as OMO. During inflation, RBI sells government securities to suck out excess liquidity from the market. The buyer of the securities pays in the rupee which leads to less money supply in the economy.
  • Cash Reserve Ratio: The proportion of deposits that the banks are required to keep with the central bank in cash is called the Cash Reserve Ratio (CRR). So, if the central bank increases CRR, banks will have to keep more money that cannot be lent. As a result, the money supply will reduce causing inflation to come down.
  • Statutory Liquidity Ratio: Statutory Liquidity Ratio (SLR) is the percentage of deposits that the banks are required to keep in the form of liquid government securities or other approved securities. An increase in SLR means fewer funds to lend and reduced money supply.
  • Repo and reverse repo rates: The rate at which RBI lends to the banks is called the repo rate and the rate at which banks park their surplus money with the RBI is called the reverse repo rate. Repo and reverse repo rates come under the Liquidity Adjustment Facility tool and use to control the money supply. An increase in repo rate increases borrowing cost, thus reducing the money supply and helping control inflation.
  • Marginal Standing Facility: Marginal Standing Facility (MSF) is a penal rate at which banks borrow from RBI over and above the LAF. It helps manage volatility in overnight interest rates in inter-bank lending. This monetary policy tool also has an indirect impact on the interest rates and money supply in the economy.

Q. Consider the following statements:

Statement-I: Carbon markets are likely to be one of the most widespread tools in the fight against climate change.
Statement-II: Carbon markets transfer resources from the private sector to the State.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Answer: (c) Statement-I is correct but Statement-II is incorrect

Carbon Markets

• Carbon markets are considered one of the most widespread tools in the fight against climate change. In a nutshell, carbon markets are trading systems in which carbon credits are sold and bought.
  • Companies or individuals can use carbon markets to compensate for their greenhouse gas emissions by purchasing carbon credits from entities that remove or reduce greenhouse gas emissions.
• Carbon markets work on the principle of carbon pricing, which aims to put a financial value on carbon dioxide (CO2) emissions.
• The basic idea is to create a market for trading carbon credits or permits, where companies or entities that emit greenhouse gases can buy or sell these permits.
• The objective of carbon markets is to create economic incentives for reducing greenhouse gas emissions. Companies that can reduce their emissions more efficiently and at a lower cost can sell their excess permits to those who find it more expensive to reduce emissions.
• This creates a financial incentive for companies to adopt cleaner technologies, improve energy efficiency, and reduce their carbon footprint.
• Carbon markets provide a flexible and market-driven approach to emission reduction. By putting a price on carbon, they encourage the adoption of cleaner technologies, promote investments in renewable energy, and incentivize emission reduction measures across various sectors of the economy.
• It is not accurate to say that carbon markets transfer resources from the private sector to the State. In fact, carbon markets operate on the principle of creating a market-based mechanism where the private sector can participate in emissions trading and take responsibility for their carbon emissions.
• There are broadly two types of carbon markets: compliance and voluntary. 
  • Compliance markets are created as a result of any national, regional and/or international policy or regulatory requirement.
  • Voluntary carbon markets – national and international – refer to the issuance, buying and selling of carbon credits, on a voluntary basis.
    • The current supply of voluntary carbon credits comes mostly from private entities that develop carbon projects, or governments that develop programs certified by carbon standards that generate emission reductions and/or removals. 
      • Demand comes from private individuals that want to compensate for their carbon footprints, corporations with corporate sustainability targets, and other actors aiming to trade credits at a higher price to make a profit.

Q. Which one of the following activities of the Reserve Bank of India is considered to be part of ‘sterilization’?

(a) Conducting ‘Open Market Operations’

(b) Oversight of settlement and payment systems

(c) Debt and cash management for the Central and State Governments

(d) Regulating the functions of Non-banking Financial Institutions

Answer: (a) Conducting ‘Open Market Operations’

Sterilization

• Sterilization is an action taken by the Central Bank (such as RBI in India) to counterbalance the effects of foreign exchange interventions on domestic money supply and inflation. It is done to neutralize the impact of inflows or outflows of foreign exchange reserves on the domestic monetary system.
  • The sterilization process is used to manipulate the value of one domestic currency relative to another and is initiated in the foreign exchange market.
  • Example:
    • A U.S. investor looking to invest in India must use dollars to purchase rupees. If a lot of U.S. investors start buying up rupees, the rupee exchange rate will increase.
    • At this point, the Indian central bank can either let the fluctuation continue, which can drive up the price of Indian exports, or it can buy foreign currency with its reserves in order to drive down the exchange rate.
    • If the central bank decides to buy foreign currency, it can attempt to offset the increase of rupees in the market by selling rupee-denominated government bonds.
• Open Market Operations (OMOs) are one of the tools used by the RBI for sterilization. OMOs are the purchase or sale of government securities by the Central Bank in the open market in order to regulate the money supply in the economy. 
  • When the RBI buys government securities, it injects liquidity into the economy, while when it sells these securities, it absorbs liquidity from the economy.
• Through OMOs, the RBI can either inject or drain liquidity from the banking system in order to maintain price stability and promote economic growth. This is done to neutralize the inflationary or deflationary impact of foreign exchange interventions on the domestic economy.

Q. Consider the following markets:

1. Government Bond Market
2. Call Money Market
3. Treasury Bill Market
4. Stock Market

How many of the above are included in capital markets?

(a) Only one
(b) Only two
(c) Only three
(d) All four

Answer: (b) Only two

Capital Markets

• A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold.
  • Capital markets channel the wealth of savers to those who can put it to long-term productive use, such as companies or governments making long-term investments.
• The players in the capital market industry deal in capital market instruments like shares, bonds, ETFs, debentures, derivatives like futures, options, and swaps.
• The capital market intermediaries are stock exchanges like BSE, NSE, MCX (Commodity Exchange), banks, brokers, insurance companies, and other financial institutions.
  • It is through these intermediaries that capital markets mobilise savings to investments.
• Capital markets are mainly divided into 2 different types.
  • Primary Markets: The primary market is the part of the capital market that deals with the issuance and sale of securities to investors directly by the issuer. An investor buys securities that were never traded before. Primary markets create long term instruments through which corporate entities raise funds from the capital market.
  • Secondary Markets: The secondary market, also called the aftermarket and follow on public offering is the financial market in which previously issued financial instruments such as stock and bonds are bought and sold.
• Examples of capital markets:
  • Stock Market: A stock market, equity market or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses
  • Bond Market: The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities
  • Currency and Foreign Exchange Markets: The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency.
• Capital Market Instruments:
  • Bonds: Bonds are debt securities that trade on the stock exchange. Companies and firms issue bonds to raise money for the growth and expansion of the company. Bonds are debt instruments, hence bondholders receive interest. At the end of the maturity period, the company pays back the principal amount along with interest.
  • Stocks: Stocks represent ownership of a company. Each share is a part of the ownership of the company. Shares trade on the stock exchange, and the share price depends on market demand and supply. The person holding shares of a company is the shareholder. Shareholders receive dividends. Also, in the case of equity shares, they have voting powers and can vote for important decisions in the annual general meeting of the company. During liquidation, they get a share of the assets after the liabilities are paid off.

Money Market

• A market for securities that have a maturity of less than one year is a money market. The securities in the money market are short term in nature, highly liquid.
• A few of the money market instruments are treasury bills, repos, certificates of deposits, and banker’s acceptances.
• The primary function of the money market is to cater to the immediate cash needs of the economy. This is usually done by adjusting the cash positions of different players in the market. In other words, the money market caters to the liquidity needs of the economy.
• The interest rates of money market instruments serve as a benchmark for all other debt securities. Moreover, RBI and the government use money market interest rates to frame future monetary policy.
• The major players in the money market are RBI, banks, Non-Banking Financial Companies (NBFCs), and acceptance houses. Moreover, All India Financial Institutions and Mutual Fund houses can access call and notice money.
  • Individuals, companies, firms and other institutions can invest in treasury bills and other money market instruments.
• Types of Money Market Instruments:
  • Treasury Bills (T-Bills)
    • The Reserve Bank of India issues the Treasury Bills (T-Bills) on behalf of the central government to raise funds.
    • T-bills are short term financial instruments with a maximum maturity period of one year. There are 14 days, 91 days and 364 days T-bills.
    • They are issued at a discount and repaid at par on maturity.
  • Bills of Exchange or Commercial Bills
    • Businesses issue bills of exchange to meet their short term money requirements. The creditor can discount their bill of exchange with a broker or a bank. They are highly liquid instruments as they are transferable from one person to the other.
  • Commercial Papers (CP)
    • Large businesses and corporations issue Commercial Papers (CPs) to raise capital to meet their short-term business requirements. These corporations have high credit ratings, which acts as a security to the unsecured commercial papers.
    • CPs have a fixed maturity that ranges from 7 days to 270 days. Furthermore, investors can trade CPs in the secondary market.
  • Certificate of Deposits (CD)
    • Corporates, scheduled commercial banks, trusts, individuals issue Certificate of Deposits (CDs) that are negotiable term deposits. Commercial banks accept them and they work similarly to a promissory note.
    • The duration of a CD varies from 3 months to one year. While CDs issued by financial institutions have a longer duration that varies between one year to three years.
  • Repurchase Agreements
    • Repurchase Agreements, also known as repos, is a legal agreement between two parties. One party sells a security to another with the promise of purchasing it back from the buyer at a later date. The seller buys back the security at a prefixed date and amount.
    • The interest rate that the buyer charges is the repo rate. Repos are a quick way to raise short term capital requirements that also earn good returns for the buyer.
  • Banker’s Acceptance
    • Banker’s Acceptance is a financial instrument that an individual or a business creates in the name of a bank. The issuer has to pay the instrument bearer a specific sum on a specific date. It is usually anywhere between 30 and 180 days after the issue. As a commercial bank guarantees the payment, it is a safe financial instrument.
  • Call and Notice Money
    • In a Call Money scenario, the funds are borrowed for a period of one day. On the other hand, in a Notice Money market, the funds are lent up to a duration of 14 days.
      • Both the options do not have any collateral security.
    • Cooperative banks and commercial banks borrow and lend funds in call and notice money markets. Mutual funds and financial institutions are only lenders of funds.

Basis of Difference	Money Market	Capital Market
Purpose	To meet working Capital Requirments	Become part of the asset base of the firm.
Function	Short-term credit requirements	Long-term credit requirements
Nature of the Market	Informal	Formal and Regulated
Classification	No subdivision	Primary Market and Secondary Market
Instruments	T-Bills, Commercial Papers, CDs, etc.	Bonds and Stocks
Mode of Transaction	Over the Counter	Exchange
Liquidity	More liquid than capital market instruments.	Less liquid than money market instruments.
Maturity Period	1 day to 1 year	No stipulated time
Risk	Low risk	High Risk
Investment Duration	Short term	Long term
Returns	Stable Returns	Market Linked
Participants	Banks and Financial Institutions	Stockbrokers, MFs, retail investors, insurance companies, stock exchanges, underwriters, etc.
Relevance to Economy	Helps increasing liquidity	Helps mobilize savings

Q. Which one of the following best describes the concept of ‘Small Farmer Large Field’?

(a) Resettlement of a large number of people, uprooted from their countries due to war, by giving them a large cultivable land which they cultivate collectively and share the produce

(b) Many marginal farmers in an area organize themselves into groups and synchronize and harmonize selected agricultural operations

(c) Many marginal farmers in an area together make a contract with a corporate body and surrender their land to the corporate body for a fixed term for which the corporate body makes a payment of agreed amount to the farmers

(d) A company extends loans, technical knowledge and material inputs to a number of small farmers in an area so that they produce the agricultural commodity required by the company for its manufacturing process and commercial production

Answer: (b) Many marginal farmers in an area organize themselves into groups and synchronize and harmonize selected agricultural operations

Small Farmer Large Field Model

• The Small Farmer Large Field (SFLF) model was piloted in two villages of Odisha, an eastern Indian state, with 112 farmers who organized themselves into groups and synchronized their operations such as nursery bed management, transplanting, and harvesting collectively to achieve economies of scale.
• The SFLF farmers also purchased inputs (seed and fertilizer) and sold paddy as a group to increase their bargaining power in price negotiations. The results from this pilot study showed that the participating farmers almost doubled their profits.
• The SFLF concept was adapted from the Large Field Model (LFM) of Vietnam, which was also based on the principles of aggregation and achieving economies of scale, through strengthening backwards and forward integration along the supply chain and lowering costs by synchronising key agricultural operations from field preparation to harvest.

Q. Consider the following statements:

1. The Government of India provides Minimum Support Price for niger (Guizotia abyssinica) seeds.
2. Niger is cultivated as a Kharif crop.
3. Some tribal people in India use niger seed oil for cooking.

How many of the above statements are correct?

(a) Only one
(b) Only two
(c) All three
(d) None

Answer: (c) All three

Minimum Support Price (MSP)

• Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices.
  • The major objectives are to support the farmers from distress sales and to procure food grains for public distribution. In case the market price for the commodity falls below the announced minimum price due to bumper production and glut in the market, government agencies purchase the entire quantity offered by the farmers at the announced minimum price.
• The minimum support prices are announced by the Government of India at the beginning of the sowing season for certain crops on the basis of the recommendations of the Commission for Agricultural Costs and Prices (CACP).
  • CACP is an attached office of the Ministry of Agriculture and Farmers Welfare. It came into existence in January 1965.
• The Cabinet Committee on Economic Affairs (CCEA) chaired by the Prime Minister of India takes the final decision (approve) on the level of MSPs.
• The MSP is aimed at ensuring remunerative prices to growers for their produce and encouraging Crop Diversification.
• Crops Under MSP:
  • The CACP recommends MSPs for 22 mandated crops and fair and remunerative price (FRP) for sugarcane.
  • The mandated crops include 14 crops of the kharif season, 6 rabi crops and 2 other commercial crops.
  • In addition, the MSPs of toria and de-husked coconut are fixed on the basis of the MSPs of rapeseed/mustard and copra, respectively.
• The list of crops are as follows.
  • Cereals (7) – paddy, wheat, barley, jowar, bajra, maize and ragi
  • Pulses (5) – gram, arhar/tur, moong, urad and lentil
  • Oilseeds (8) – groundnut, rapeseed/mustard, toria, soyabean, sunflower seed, sesamum, safflower seed and niger seed
  • Raw cotton
  • Raw jute
  • Copra
  • De-husked coconut
  • Sugarcane (Fair and remunerative price)
  • Virginia flu cured (VFC) tobacco

Niger Seed (Guizotia abyssinica)

• Guizotia abyssinica is an erect, stout, branched annual herb, grown for its edible oil and seed.
• Its cultivation originated in the Eritrean and Ethiopian highlands, and has spread to other parts of Ethiopia.
  • Native to Ethiopia, Eritrea and Malawi, niger seeds are also grown in India. 
• Niger seeds resemble sunflower seeds in shape, but are smaller in size and black.
• Niger seed contains proteins, oil and soluble sugars.
• Commercial Niger seed is grown in Africa, India and other areas of southeast Asia, and the seed is imported around the world as a popular type of birdseed.
• Cultivation
  • Requiring moderate rainfall between 1,000 to 1,250 millimetres annually, niger seed needs moist soil to grow properly.
  • Niger should be grown in light black soils or brownish loam with sufficient depth but it also can be grown on well drained heavy soils or rocky laterite soils.
  • The crop can grow on denuded soil and its cultivation method is fairly basic: After the first rain when the soil is moist, farmers need to plough the field and sprinkle the seeds.
  • The crop neither requires much water nor fertilisers and pesticides.
  • Niger seed is a local food crop that is grown 100 per cent naturally in the country.
• Niger Seed and Oil
  • Niger seed yields about 30–35% of its weight in oil which is clear, slow-drying, and edible.
  • Niger seed oil is polyunsaturated semi-drying oil. It has a pale yellow or orange color with a nutty taste and sweet odor. The raw oil has a low acidity and can be used directly for cooking.
  • Normally, it has a poor shelf life and will become rancid when stored for a long period. It is used as a substitute for olive oil and can be mixed with linseed oil.
• Niger a Kharif MSP Crop
  • One of the 14 kharif crops for which the Centre releases a minimum support price (MSP) every year is an unlikely plant called niger or ramtil (Guizotia abyssinica).
  • Niger commands one of the highest MSPs, fixed on the basis of the cost of production and market demand.
  • The primary reason such a sparsely grown crop is part of the exclusive MSP list is because niger seed has traditionally been the lifeline of tribal agriculture and economy in several states across India.

Also Read: Crop Classification & Types of Crops in India

Q. Consider the investments in the following assets:

1. Brand recognition
2. Inventory
3. Intellectual property
4. Mailing list of clients

How many of the above are considered intangible investments?

(a) Only one
(b) Only two
(c) Only three
(d) All four

Answer: (c) Only three

Intangible Investments

• Intangible investments are assets that are not physical in nature, such as patents, trademarks, copyrights, and human capital. They are often associated with higher productivity and growth in companies, sectors, and economies. Intangible investments can be created or acquired by businesses, but they do not appear on the balance sheet unless they have been purchased.
• Among the four assets listed above, three are considered intangible investments: brand recognition, intellectual property, and mailing list of clients. These assets have no physical form, but they can generate value for the business by enhancing its reputation, innovation, and customer loyalty. Inventory, on the other hand, is a tangible asset that consists of physical goods that are ready to be sold or used in production.

Tangible Investments vs Intangible Investments

• Tangible investments are physical assets that can be seen, touched, and felt. Examples of tangible investments include real estate, machinery, and inventory. Tangible investments are often easier to value than intangible investments, and they can be used as collateral for loans.
• Intangible investments are non-physical assets that have value because of their intellectual property or potential to generate future revenue. Examples of intangible investments include patents, trademarks, copyrights, and brand recognition. Intangible investments can be more difficult to value than tangible investments, and they cannot be used as collateral for loans.
• Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory.

Q. In the context of finance, the term ‘beta’ refers to

(a) the process of simultaneous buying and selling of an asset from different platforms

(b) an investment strategy of a portfolio manager to balance risk versus reward

(c) a type of systemic risk that arises where perfect hedging is not possible

(d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market

Answer: (d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market

Beta

• Beta is a measure of a stock’s historical volatility in comparison with that of a market index such as the S&P 500. Stocks with a beta above 1 tend to be more volatile than their index, while stocks with lower betas tend to be less volatile.
• A beta above 1 means that the stock is more volatile than the market. This means that it will tend to move up and down more than the market. A beta below 1 means that the stock is less volatile than the market. This means that it will tend to move up and down less than the market.
  • Investors can use beta to decide how much risk they want to take on. If they are looking for high returns, they may be willing to invest in stocks with high betas. However, they should be aware that these stocks are also more likely to lose value. If investors are looking for more stability, they may prefer to invest in stocks with low betas.
• A high beta may be preferred by an investor in growth stocks but shunned by investors who seek steady returns and lower risk.

Smart beta

• Smart beta refers to investment in portfolios, being a combination of both passive and active investing.
• The smart beta approach is an arguably perfect intersection between traditional value investing and the efficient market hypothesis.

Alpha

• Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations.
• Alpha shows how well (or badly) a stock has performed in comparison to a benchmark index.
• An alpha of 1.0 means the investment outperformed its benchmark index by 1%. An alpha of -1.0 means the investment underperformed its benchmark index by 1%. If the alpha is zero, its return matched the benchmark.
• A high alpha is always good.

Q. Consider the following statements:

1. The Self-Help Group (SHG) programme was originally initiated by the State Bank of India by providing microcredit to the financially deprived.
2. In an SHG, all members of a group take responsibility for a loan that an individual member takes.
3. The Regional Rural Banks and Scheduled Commercial Banks support SHGs.

How many of the above statements are correct?

(a) Only one
(b) Only two
(c) All three
(d) None

Answer: (b) Only two

Self-Help Groups

• SHGs are voluntary associations of the economically poor, usually drawn from the same socio-economic background and who resolve to come together for a common purpose of solving their issues and problems through self-help and community action.
• Introduction of SHGs in India:
  • In 1984, the concept of social mobilization through the organizing of SHGs was introduced based on Prof. Yunus’s Grameen Bank model.
  • Initially, NABARD along with impaneled NGOs designed and developed the promotional ecosystem, including the SHGs-Bank linkage program.
  • In the year 1990, the RBI recognized SHGs as an alternate credit flow model.
• Functions:
  • It looks to build the functional capacity of the poor and the marginalized in the field of employment and income generating activities.
  • It resolves conflicts through collective leadership and mutual discussion.
  • It provides collateral free loan with terms decided by the group at the market driven rates.
  • Such groups work as a collective guarantee system for members who propose to borrow from organised sources. The poor collect their savings and save it in banks. In return they receive easy access to loans with a small rate of interest to start their micro unit enterprise.
  • Consequently, Self-Help Groups have emerged as the most effective mechanism for delivery of microfinance services to the poor.
• Self-Help Groups Examples in India:
  • Mahila Arthik Vikas Mahamandal (MAVIM): MAVIM is a women’s development corporation in Maharashtra. It works towards the economic empowerment of women through the formation of SHGs, providing them with training, credit facilities, and support for various income-generating activities.
  • SEWA (Self-Employed Women’s Association): SEWA is a trade union and women’s cooperative that aims to improve the economic and social conditions of self-employed women workers in the informal sector. It organizes women into SHGs, provides them with training, and helps them access financial services.
  • Kudumbashree: Kudumbashree is a poverty eradication and women empowerment program initiated by the Government of Kerala. It encourages the formation of neighborhood groups, which eventually come together to form SHGs. Kudumbashree focuses on various income-generating activities and capacity building of women.
  • Bandhan-Konnagar: Bandhan-Konnagar is a non-governmental organization (NGO) that works towards poverty alleviation through the formation of SHGs. It focuses on providing microfinance services, training, and livelihood support to women in marginalized communities.
  • Bhagini Nivedita Gramin Vigyan Niketan (BNGVN): BNGVN is a rural development organization that promotes women’s empowerment and sustainable livelihoods. It facilitates the formation of SHGs and provides training, financial services, and technical support to women for income-generating activities.

Q. Consider the following heavy industries:

1. Fertilizer plants
2. Oil refineries
3. Steel plants

Green hydrogen is expected to play a significant role in decarbonizing how many of the above industries?

(a) Only one
(b) Only two
(c) All three
(d) None

Answer: (c) All three

Green Hydrogen

• Green hydrogen is hydrogen produced by the electrolysis of water, using renewable electricity. Production of green hydrogen causes significantly lower greenhouse gas emissions than production of grey hydrogen, which is derived from fossil fuels without carbon capture.
• The primary focus for adoption of green hydrogen is likely to be oil refineries, fertilisers and chemical industry. Oil refineries using grey hydrogen for desulphurisation, ammonia production for fertilisers and chemicals industry, and treatment of basic metals are the leading market opportunities for green hydrogen in the short-medium term. 
  • Oil refineries, fertiliser companies and steel producers are likely to be asked to meet a compulsory green hydrogen purchase obligation (GHPO) in a planned national move to green energy.
• Reasons to Develop Green Hydrogen:
  • Reducing Greenhouse Gas Emissions: 
    • The primary reason for developing green hydrogen is to reduce greenhouse gas emissions and mitigate climate change. The use of fossil fuels for transportation and electricity generation is a major contributor to global emissions.
    • Green hydrogen, produced from renewable sources, emits zero greenhouse gases, making it a sustainable and environmentally friendly energy source.
  • Energy Security and Independence: 
    • Fossil fuels are a finite resource, and their prices can fluctuate due to global supply and demand. By developing renewable energy sources like green hydrogen, countries can become more energy-independent and less vulnerable to price shocks and supply disruptions.
  • Creating New Industries and Jobs: 
    • The development of green hydrogen can create new industries and jobs, particularly in the renewable energy sector. The production, storage, and distribution of green hydrogen require specialized expertise and infrastructure, which can generate employment opportunities. 
    • According to the International Renewable Energy Agency (IRENA), the renewable energy sector employed 11 million people worldwide in 2018 and is expected to create more than 42 million jobs by 2050.
  • Decarbonizing in Sectors which are Difficult-to-Decarbonize: 
    • The potential to substitute fossil fuels with green hydrogen is significant, especially in sectors that are difficult to decarbonize, such as heavy industry and aviation. These sectors contribute significantly to global emissions, and the use of green hydrogen can help reduce their carbon footprint.
  • Technological Advancements: 
    • The development of green hydrogen can drive technological advancements and innovations in various sectors. The production, storage, and distribution of green hydrogen require new technologies and infrastructure, which can spur the development of new materials, processes, and systems.
• Applications of Green Hydrogen:
  • Green Hydrogen as Replacement to Fossil Fuel in Agriculture:
    • Green hydrogen has the potential to replace traditional fertilizers in agriculture through the production of ammonia using renewable energy sources.
    • Ammonia is a key ingredient in the production of fertilizers, and the current production process relies on natural gas, which is a fossil fuel and contributes to greenhouse gas emissions.
    • Green ammonia produced with help of green hydrogen is carbon-free, green ammonia has other benefits over traditional fertilizers, including improved efficiency and reduced soil acidity.
    • However, the production of green ammonia at scale will require significant investment in infrastructure and the development of new technologies. Currently, the production of green ammonia is more expensive than traditional ammonia production, which may limit its adoption in the short term.
  • Green Hydrogen-Powered Farm Machinery: 
    • Farm machinery like tractors, harvesters, and irrigation systems require a lot of energy to operate. Green hydrogen-powered farm machinery can significantly reduce greenhouse gas emissions while still delivering the power required to carry out essential farm tasks.
    • Green Hydrogen for Water Management: 
    • Water is a precious resource, and managing it efficiently is critical for sustainable agriculture. Green hydrogen can be used to power desalination plants that convert saltwater into freshwater, reducing our reliance on scarce freshwater resources.
  • Hydrogen Fuel Cell:
    • A hydrogen fuel cell is a device that converts the chemical energy of hydrogen and oxygen into electricity, water and heat.
    • Hydrogen fuel cell vehicles produce zero emissions, making them an attractive alternative to gasoline and diesel-powered vehicles. They have a longer range than battery electric vehicles and can be refuelled in minutes, making them more convenient for long-distance travel.
    • Green hydrogen production can be done using waste materials like municipal solid waste and agricultural waste. This can help to reduce waste and promote sustainable development.
  • Increase in Energy Efficiency: 
    • Green hydrogen can be used to power fuel cells, which are more energy-efficient than traditional combustion engines. This can help to reduce energy consumption.

India’s Key Initiatives to Promote Green Hydrogen:

• National Hydrogen Mission: 
  • The mission was announced in the Union Budget 2021-22 and aims to make India a global hub for green hydrogen and its derivatives.
  • The mission will also facilitate demand creation, pilot projects, R&D, skill development, standards and regulations, and policy framework for green hydrogen.
• Green Hydrogen Consumption Obligations: 
  • The Ministry of New and Renewable Energy (MNRE) has proposed to introduce green hydrogen consumption obligations for fertilizer and the petroleum refining industry, like the renewable purchase obligations for electricity distribution companies.
    • The obligations will require these industries to consume a certain percentage of green hydrogen in their total hydrogen consumption.
• Green Hydrogen Hubs: 
  • The MNRE has identified regions that can support large scale production and/or utilization of green hydrogen and develop them as green hydrogen hubs.

Q. Consider, the following statements:

Statement-I: India accounts for 3.2% of global export of goods.
Statement-II: Many local companies and some foreign companies operating in India have taken advantage of India’s ‘Production-linked Incentive’ scheme.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I
(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I
(c) Statement-I is correct but Statement-II is incorrect
(d) Statement-I is incorrect but Statement-II is correct

Answer: (d) Statement-I is incorrect but Statement-II is correct

Notes

• As per the latest data available (Economic Survey 2022-23) India’s accounts for 1.8% of Global export of goods and 4% of global export of services.
• Production Linked Incentive (PLI) scheme is a form of Performance-linked incentive given to companies based on their incremental sales from products manufactured in domestic units. It is aimed at boosting the manufacturing sector and to reduce imports of India.
• PLI schemes can be availed by both domestic as well as foreign companies operating in India, thus it is true that many domestic and foreign companies operating in India have taken advantage of PLI schemes.

Production Linked Incentive Scheme (PLI)

• The PLI scheme was conceived to scale up domestic manufacturing capability, accompanied by higher import substitution and employment generation.
• Launched in March 2020, the scheme initially targeted three industries:
  • Mobile and allied Component Manufacturing
  • Electrical Component Manufacturing and
  • Medical Devices.
• Later, it was extended to 14 sectors.
  • The 14 sectors are: mobile manufacturing, manufacturing of medical devices, automobiles and auto components, pharmaceuticals, drugs, specialty steel, telecom & networking products, electronic products, white goods (ACs and LEDs), food products, textile products, solar PV modules, advanced chemistry cell (ACC) battery, and drones and drone components.
• In the PLI scheme, Domestic and Foreign companies receive financial rewards for manufacturing in India, based on a percentage of their revenue over up to five years.
• Incentives Under the Scheme:
  • The incentives given, are calculated on the basis of incremental sales.
    • In some sectors such as advanced chemistry cell batteries, textile products and the drone industry, the incentive to be given will be calculated on the basis of sales, performance and local value addition done over the period of five years.
  • The emphasis on R&D investment will also help the industry keep up with global trends and remain competitive in the international market.

Q. Consider the following statements with reference to India :

1. According to the ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, the ‘medium enterprises’ are those with investments in plant and machinery between `15 crore and `25 crore.
2. All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector.

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

Notes

• Micro, Small, Medium Enterprises (MSMEs) are entities that are involved in the production, manufacturing and processing of goods and commodities.
• The concept of MSME was first introduced by the government of India through the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006.
• MSME’s are classified as per their turnover and investment. After 14 years since the MSME Development Act came into existence in 2006, a revision in MSME definition was announced in the Atmnirbhar Bharat package on 13th May, 2020.
  • As per this announcement, the definition of Micro manufacturing and services units was increased to Rs. 1 Crore of investment and Rs. 5 Crore of turnover.
  • The limit of small unit was increased to Rs. 10 Crore of investment and Rs 50 Crore of turnover.
  • Similarly, the limit of medium unit was increased to Rs. 20 Crore of investment and Rs. 100 Crore of turnover. The Government of India on 01.06.2020 decided for further upward revision of the MSME Definition. For medium Enterprises, now it will be Rs. 50 Crore of investment and Rs. 250 Crore of turnover.

Size of the Enterprise	Investment and Annual Turnover
Micro	Investment less than Rs. 1 crore Turnover less than Rs. 5 crore
Small	Investment less than Rs. 10 crore Turnover up to Rs. 50 crore
Medium	Investment less than Rs. 50 crore Turnover up to Rs. 250 crore

Q. With reference to Central Bank digital currencies, consider the following statements:

1. It is possible to make payments in a digital currency without using US dollar or SWIFT system.
2. A digital currency can be distributed with condition programmed into it such as a time-frame for spending it.

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: (c) Both 1 and 2

Central Bank Digital Currency (CBDC)

• CBDCs (e-Rupee) are a digital form of a paper currency and unlike cryptocurrencies that operate in a regulatory vacuum, these are legal tenders issued and backed by a central bank.
• It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency.
  • A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver.
• It will be an electronic version of cash. It will be primarily meant for retail transactions. 
• It will be potentially available for use by all which includes the private sector, non-financial consumers and businesses.
• It will be able to provide access to safe money for payment and settlement.
• It will be the direct liability of the central bank.
• The digital fiat currency or CBDC can be transacted using wallets backed by blockchain.
  • Though the concept of CBDCs was directly inspired by Bitcoin, it is different from decentralised virtual currencies and crypto assets, which are not issued by the state and lack the ‘legal tender’ status.
• Objectives:
  • The main objective is to mitigate the risks and trim costs in handling physical currency, costs of phasing out soiled notes, transportation, insurance and logistics.
  • It will also wean people away from cryptocurrencies as a means for money transfer.
• Significance of CBDC:
  • Cross-Border Transactions:
    • CBDCs possess unique attributes that can revolutionize cross-border transactions.
    • Instant settlement feature of CBDCs as a significant advantage, making cross-border payments cheaper, faster, and more secure.
      • Faster, cheaper, transparent, and inclusive cross-border payment services can yield substantial benefits for individuals and economies worldwide. These improvements can support economic growth, international trade, and financial inclusion on a global scale.
  • Traditional and Innovative:
    • CBDC can gradually bring a cultural shift towards virtual currency by reducing currency handling costs.
    • CBDC is envisaged to bring in the best of both worlds:
      • The convenience and security of digital forms like cryptocurrencies
      • The regulated, reserved-backed money circulation of the traditional banking system.
  • Financial Inclusion:
    • The increased use of CBDC could be explored for many other financial activities to push the informal economy into the formal zone to ensure better tax and regulatory compliance.
    • It can also pave the way for furthering financial inclusion.

Cryptocurrencies

• A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
• Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

Stablecoins

• They are cryptocurrencies whose value is pegged or tied to that of another currency, commodity, or financial instrument.
• Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC).
• Unlike cryptocurrencies like Bitcoin, stablecoins’ prices remain steady in accordance with whichever fiat currency backs them.
• E.g., USDC stablecoin is backed by dollar-denominated assets.