Q. Consider the following statements:

Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.

Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

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

(a) Both Statement-1 and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement-I is correct, but Statement-II is incorrect

(d) Statement-I is incorrect, but Statement-II is correct

Answer: (a) Both Statement-1 and Statement-II are correct and Statement-II explains Statement-I

Notes:
  • In the event of a default, the U.S. government would fail to meet its debt obligations.
    • Holders of U.S. Treasury bonds have claims on the government to be paid principal and interest.
    • However, in the event of a default, they might not be able to exercise these claims immediately, since the government wouldn’t have the funds to meet its obligations, leading to bondholders being denied their claims.
  • U.S. government debt (like U.S. Treasury bonds) is not directly backed by hard assets like gold or real estate.
    • Instead, it is backed by the “full faith and credit” of the U.S. government.
    • This means the U.S. government promises to repay the debt based on its ability to tax, borrow, and print money.
    • It is true that there are no hard assets backing this debt—just the government’s ability to generate revenue.
  • Statement-II highlights that U.S. government debt is not backed by any tangible collateral (like gold reserves or assets) but rather by trust in the government’s financial system.
    • Since there is no collateral to fall back on, the debt relies solely on the government’s ability to repay, and if that ability collapses (as it would in a default), bondholders are left without any physical recourse for repayment.

Q. Consider the following statements:

Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders.

Statement-II: The syndicated loan can be fixed amount/lump sum of funds, but cannot be a credit line.

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

(a) Both Statement-I and Statement-II are correct and Statement-I Statement-II explains

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain 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

Notes:
  • The purpose of syndication is to spread the risk of lending a large sum of money across multiple financial institutions.
    • Syndicated lending refers to a loan that is provided by a group of lenders (called a syndicate) and is organized by one or more lead banks.
    • This way, no single lender is exposed to the full risk if the borrower defaults because syndicated lending is specifically designed to distribute risk among multiple lenders.
  • The syndicated loan can be a fixed amount/lump sum of funds and a credit line.
    • A syndicated loan can indeed be a fixed amount or lump sum, which is commonly referred to as a “term loan” in a syndicated deal.
    • In fact, syndicated loans can take various forms, including revolving credit facilities (which are essentially credit lines) where the borrower can draw down funds as needed up to a specified limit and repay them over time.

Q. Consider the following statements in respect of the digital rupee:

  1. It is a sovereign currency issued by the Reserve Bank of India (RBI) alignment with its monetary policy.
  2. It appears as a liability on the RBI’s balance sheet.
  3. It is insured against inflation by its very design.
  4. It is freely convertible against commercial bank money and cash.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 1 and 3 only

(c) 2 and 4 only

(d) 1, 2 and 4

Answer: (d) 1, 2 and 4

Digital Rupee or e₹
  • Digital Rupee or e₹, is India’s Central Bank Digital Currency (CBDC). It is legal tender and is the liability of Reserve Bank of India (as per Section 26 of the Reserve Bank of India Act, 1934).
  • It is the digital form of India’s physical currency, the Rupee (₹). e₹ is issued by the Reserve Bank of India (RBI) in digital form and offers features similar to physical cash like convenience of use, guarantee of RBI, finality of settlement, etc.
  • e₹ is stored in the user’s digital wallet and can be used to receive / send money, and / or make payment for transactions, just like any physical ₹ note.
  • e₹ can be held and transacted through e₹ wallets offered by banks and non-banks for person-to-person payments or person-to-merchant transactions.
    • One can start using the e₹ wallet by downloading the e₹ app from the Play Store or the App Store and by following the App instructions. Detailed instructions on using the e₹ wallet can be checked with the banks and non-banks providing the wallet. Payments to merchants can be made by scanning either the CBDC QR code or the UPI QR code available at the respective merchant location.
  • The digital rupee itself is not inherently protected against inflation. Its value can fluctuate depending on various economic factors, just like physical rupees.
  • Wholesale Central Bank Digital Currency (e₹-W):
    • Wholesale Central Bank Digital Currency (e₹-W) is designed for use by financial institutions and intermediaries, primarily to streamline interbank settlements and large-value transactions.
    • It operates within a restricted ecosystem and enhances the efficiency, speed, and security of wholesale payment systems by using the functionalities of programming and smart contracts.
    • Wholesale CBDC focuses on improving the financial system’s infrastructure and reducing settlement risks, retail CBDC aims to enhance accessibility, financial inclusion, and convenience for individuals / businesses. Retail CBDC is intended for the general public and is used for everyday transactions, much like physical cash but in digital form.
    • There are two ongoing use cases of e₹-W, (i) funds settlement of secondary market transactions in Government Securities, and (ii) settlement of inter-bank lending and borrowing in call money market. Settlement in central bank money is expected to reduce transaction costs by pre-empting the need for settlement guarantee infrastructure or for collateral to mitigate settlement risk and benefitting from the programmability and smart contracts functionalities of e₹-W.
Central Bank Digital Currency (CBDC):
  • CBDCs 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.
  • 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.
  • Types of CBDCs:
    • Wholesale CBDCs: Used among banks and other licensed financial institutions for interbank payments and securities transactions.
    • Retail CBDC: It is available to general public via digital wallets, smartphone apps, etc. Two models of retail CBDC:
      • Token-based CBDCs: Enables anonymous transactions through private and public key authentication.
      • Account-based CBDCs: Requires user digital identification for account access. e.g., DCash of Eastern Caribbean.
  • Global Trends:
    • Bahamas has been the first economy to launch its nationwide CBDC — Sand Dollar in 2020.
    • Nigeria is another country to have roll out eNaira in 2020.
    • China became the world’s first major economy to pilot a digital currency e-CNY in April 2020.

Q. Consider the following statements:

  1. India is a member of the International Grains Council.
  2. A country needs to be a member of the International Grains Council for exporting or importing rice and wheat.

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: (a) 1 only

International Grain Council
  • The International Grains Council (IGC) is an intergovernmental organization established in 1949 and headquartered in London, United Kingdom.
    • It was established in 1949 as the International Wheat Council, and its present name was adopted in 1995.
  • IGC includes all parties to the Grain Trade Convention, 1995. There are currently 30 member countries. Each member is classified as either an importer or exporter based on their average trade in grains, rice, and oilseeds. India is a member of the International Grains Council.
  • Nodal Agency: The Department of Food & Public Distribution under the Ministry of Consumer Affairs, Food & Public Distribution acts as the nodal agency on behalf of the Government of India in the International Grains Council.
  • Governance: The Chairperson and Vice-Chairperson of the IGC are elected annually by the council members.
  • Council Sessions: The IGC convenes two regular Council Sessions each year. These sessions are held either in London or in member countries by invitation.
  • Objectives: To promote international cooperation in the area of grains trade, provide an international platform for discussion and coordination of grain policies, and enhance world food security.
  • Grains covered: The IGC monitors and reports on the global markets for wheat, maize (corn), rice, and other coarse grains like barley, sorghum, and oats.
  • Functions: Its main functions include collecting and disseminating information on grain production, consumption, stocks, trade, and prices, as well as analyzing and forecasting market trends.
  • Publications: The IGC publishes several regular reports, including the “Grain Market Report” which provides detailed assessments of global grain supply and demand, as well as projections for the current and upcoming marketing years.
  • Grain Trade Convention: The IGC also administers the Grains Trade Convention, an international agreement that aims to promote international cooperation in grains trade and to further market stability.

Q. Consider the following statements:

Statement-I: India does not import apples from the United States of America.

Statement-II: In India, the law prohibits the import of Genetically Modified food without the approval of the competent authority.

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 explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain 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:
  • The U.S. is one of the significant suppliers of apples to India, and there have been various trade agreements and negotiations around this topic.
  • India has strict regulations regarding genetically modified (GM) foods.The import, production, and sale of GM foods in India are highly regulated and generally require approval from the Genetic Engineering Appraisal Committee (GEAC) under the Ministry of Environment, Forest and Climate Change.

Q. Consider the following airports :

  1. Donyi Polo Airport
  2. Kushinagar International Airport
  3. Vijayawada International Airport

In the recent past, which of the above have been constructed as Greenfield Projects?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Answer: (a) 1 and 2 only

Greenfield Projects:
  • Greenfield projects refer to initiatives where new facilities or infrastructure are built from scratch on previously undeveloped land.
  • These projects are termed “greenfield” because they start with a clean slate, much like an untouched green field.
  • Greenfield projects are common in various sectors, including industrial development, manufacturing, real estate, and technology.
  • Key Characteristics of Greenfield Projects:
    • Starting from Scratch: Greenfield projects involve developing something entirely new without constraints imposed by prior work. This contrasts with “brownfield” projects, which involve modifying or upgrading existing structures.
    • Location: They are typically located in undeveloped or rural areas where there is little to no existing infrastructure.
    • Flexibility in Design: Developers have the freedom to plan and design the project to meet current standards and requirements without the need to integrate or modify existing structures.
    • Higher Initial Costs: These projects often involve higher initial costs due to the need to build infrastructure from the ground up, including roads, utilities, and other necessary facilities.
    • Longer Time Frames: Because they start from scratch, greenfield projects can take longer to complete compared to projects that renovate or expand existing facilities.
  • Examples of Greenfield Projects:
    • Industrial Parks: Development of new industrial parks or manufacturing facilities in previously undeveloped areas.
    • Technology Campuses: Establishing new technology or business campuses, such as a new corporate headquarters or research and development centers.
    • Infrastructure Development: Building new airports, highways, or railway lines in undeveloped regions.
    • Real Estate: Construction of new residential or commercial buildings in areas where there were previously no structures.
  • Advantages:
    • Customization: Full control over the design and development to meet specific needs and modern standards.
    • Efficiency: Implementation of the latest technologies and infrastructure without dealing with legacy systems.
    • Environmental and Regulatory Compliance: Easier to meet current environmental and regulatory standards from the outset.
  • Disadvantages:
    • High Costs: Initial investment is often higher due to the need to develop basic infrastructure.
    • Time-Consuming: Longer development periods compared to modifying existing facilities.
    • Uncertain Risks: Potential risks related to land acquisition, environmental impact assessments, and local regulations.

Greenfield airports Operational in India are:

  • Donyi Polo Airport, Arunachal Pradesh
    • Donyi Polo Airport, Itanagar is the first greenfield airport in Arunachal Pradesh, has been developed in an area of over 690 acres, at a cost of more than Rs. 640 crores. It was inaugurated by PM Modi in 2022.
  • Kushinagar International Airport, Uttar Pradesh.
    • Kushinagar International Airport, is a greenfield airport, was inaugurated by Prime Minister Narendra Modi in October 2021.
  • Shirdi Airport, Maharastra
  • Kannur International Airport, Kerala
  • Pakyong Airport, Sikkim
  • Kazi nazrul islam Airport, West Bengal

Q. The total fertility rate in an economy is defined as :

(a) the number of children born per 1000 People in the Population in a year.

(b) the number of children born to couple in their lifetime in a given population.

(c) the birth rate minus death rate.

(d) the average number of live births a woman would have by the end of her child-bearing age.

Answer: (d) the average number of live births a woman would have by the end of her child-bearing age.

Notes:
  • Total Fertility Rate (TFR): The Total Fertility Rate is a demographic measure used to estimate the average number of children a woman would have over her lifetime, assuming she experiences the current age-specific fertility rates throughout her childbearing years (typically ages 15-49).
  • The crude birth rate is the number of live births occurring during a year per 1,000 people in the population at midyear.
  • The number of children born to a couple in their lifetime in a given population: This is not a standard demographic measure. While related to fertility, it does not accurately describe the Total Fertility Rate, which focuses on individual women rather than couples.
  • The birth rate minus death rate: This describes the natural increase rate, which is the difference between the crude birth rate and the crude death rate. It indicates how fast the population is growing or declining but does not measure fertility specifically.

Q. Consider the following statements :

  1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India.
  2. In India, Foreign Institutional Investors can hold the Government Securities (G-Secs).
  3. In India, Stock Exchanges can offer separate trading platforms for debts.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 3 only

(c) 1, 2 and 3

(d) 2 and 3 only

Answer: (d) 2 and 3 only

Notes:
  • Non-Banking Financial Companies (NBFCs) in India do not have direct access to the Liquidity Adjustment Facility (LAF) window of the Reserve Bank of India (RBI). The LAF is primarily used by banks to manage their day-to-day liquidity mismatches.
  • Foreign Institutional Investors (FIIs) are permitted to invest in Government Securities (G-Secs) within the limits prescribed by the RBI and SEBI. This is part of efforts to attract foreign investment into India’s debt market.
  • Indian stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have established separate trading platforms for debt instruments, facilitating the trading of corporate bonds, government securities, and other debt instruments.
Liquidity Adjustment Facility:
  • Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs.
  • On a given day, if the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity is said to be in deficit. If the banking system is a net lender to the RBI, the liquidity is said to be in surplus.
  • A LAF is a monetary policy tool used in India by the RBI through which it injects or absorbs liquidity into or from the banking system.
  • It was introduced as a part of the outcome of the Narasimham Committee on Banking Sector Reforms of 1998.
  • LAF has two components – repo (repurchase agreement) and reverse repo. When banks need liquidity to meet its daily requirement, they borrow from RBI through repo. The rate at which they borrow fund is called the repo rate. When banks are flush with fund, they park with RBI through the reverse repo mechanism at reverse repo rate.
  • It can manage inflation in the economy by increasing and reducing the money supply.
  • LAF is used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control.
  • Various banks use eligible securities as collateral through a repo agreement and use the funds to alleviate their short-term requirements, thus remaining stable.
  • The facilities are implemented on a day-to-day basis as banks and other financial institutions ensure they have enough capital in the overnight market.
  • The transacting of liquidity adjustment facilities takes place via an auction at a set time of the day.
Tools under the Monetary Policy:
  • Cash Reserve Ratio (CRR).
  • Statutory Liquidity Ratio (SLR).
  • Bank Rate.
  • Standing Deposit Facility (SDF).
  • Marginal Standing Facility (MSF).
  • Cash Reserve Ratio (CRR).
Non-Banking Financial Company (NBFC):
  • A NBFC is a company registered under the Companies Act, 1956, engaged in the business of loans and advances, the acquisition of shares/stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.
  • It does not include any institution whose principal business is that of agriculture activity, industrial activity, the purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. 
  • A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions, or in any other manner, is also a NBFC (Residuary non-banking company).
  • Generally, these institutions are not allowed to take traditional demand deposits from the public. They can only accept time deposits, and they do not provide savings or current account facilities.
    • They cannot accept deposits for a period less than 12 months and more than 60 months.
    • NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum.
  • NBFCs also provide a wide range of monetary advice like chit-reserves and advances.
  • NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences as given below:
    • NBFCs do not have a banking license;
    • NBFCs cannot accept demand deposits;
    • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
    • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not availableto depositors of NBFCs, unlike in the case of banks.
    • Unlike banks, NBFCs are not subjected to stringent and substantial regulations. 
  • Regulation:
    • The functions of the NBFCs are managed by both the Ministry of Corporate Affairs and the RBI.
    • The RBI has the authority to issue licenses to NBFCs, regulate their operations, and ensure that they adhere to the established norms and regulations.
  • NBFCs are categorized
    • In terms of the types of liabilities into Deposit and Non-Deposit accepting NBFCs,
    • Non-deposit taking NBFCs by their size into systemically importantand other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
    • By the kind of activity, they conduct.
  • What are systemically important NBFCs?
    • NBFCs whose asset size is ₹ 500 crore or more as per the last audited balance sheet are considered systemically important NBFCs.
    • The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.
  • Examples of NBFCs include investment banks, mortgage lenders, money market funds, insurance companies, equipment leasing companies, infrastructure finance companies, hedge funds, private equity funds, and P2P lenders.

Q. In India, which of the following can trade in Corporate Bonds and Government Securities?

  1. Insurance Companies
  2. Pension Funds
  3. Retail Investors

Select the correct answer using the code given below :

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Answer: (d) 1, 2 and 3

Notes:
  • All three categories listed (Insurance Companies, Pension Funds and Retail Investors) can trade in corporate bonds and government securities in India.
  • Insurance Companies: Insurance companies are major players in the Indian bond market. They invest a significant portion of the premiums they collect from policyholders into fixed-income instruments like corporate bonds and government securities.
  • Pension Funds: Pension funds also invest in corporate bonds and government securities to generate returns and ensure stability for the pension payouts. Pension funds are permitted to invest in corporate bonds or securities rated ‘A’ or higher, or their equivalent on the relevant rating scale. However, investments in bonds rated between ‘A’ and ‘AA-‘ are limited to 10% of the pension fund’s total corporate bond portfolio.
  • Retail Investors: In recent years, the Indian government has made efforts to increase retail investor participation in the bond market. Retail investors can now invest in both corporate bonds and government securities directly or indirectly.
Corporate Bonds and Government Securities

Q. Consider the following :

  1. Exchange-Traded Funds (ETF)
  2. Motor vehicles
  3. Currency swap

Which of the above is/are considered financial instruments?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 3

(d) 1 and 3 only

Answer: (d) 1 and 3 only

Financial instruments:
  • Financial instruments are contracts or documents that act as a financial asset to one organisation and a liability to another.
  • The types of financial instruments are debentures and bonds, receivables, cash deposits, bank balances, swaps, caps, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, and more.
Types of Financial Instruments in India

a) Derivatives

  • The underlying asset, such as resources, currency, bonds, stocks, indexes, and so on, determines the value of derivative instruments. The underlying assets determine the performance of derivatives instruments.
  • The most popular types of derivative instruments are as follows: 
    • Forward Contract – It is a personalized arrangement. It involves the exchange of an underlying asset between two parties at a certain exchange during a specific time period. 
    • Future – A derivative contract involving the exchange of derivatives at a predetermined exchange rate on a future date.
    • Options: An option is a kind of derivative contract between two parties. The buyer obtains the right to buy or sell the underlying asset at a set price for a set length of time. However, there is no need to use the right. 
    • SAFE (Synthetic Agreement for Foreign Exchange): This arrangement takes place in the over-the-counter (OTC) market. It ensures a specific exchange rate for a set length of time. 
    • Interest Rate Swap: This is a two-party derivative arrangement. It entails the exchange of interest rates in which one party promises to pay the interest rate on the other party’s loans in various currencies.

b) Cash Instruments

  • Cash instruments are easily transferable and marketable. Furthermore, market conditions have a direct impact on the value of these financial instruments. There are two kinds of cash instruments: 
    • Securities are monetary financial instruments that trade on the stock market. When you buy a security (share), you are buying a piece of a publicly traded corporation on the stock exchange. 
    • Deposits and loans are both cash instruments because they reflect monetary assets and bind both parties to a contract. 

c) Foreign Exchange Financial Market Instruments

  • Overseas exchange instruments, which include currency agreements and derivatives, are traded in overseas markets. These are the world’s most liquid and major trading volume markets. The trade volume ranges from billions to trillions of dollars.
  • Since the forex market is open 24 hours a day, seven days a week, many financial institutions, brokers, and banks deal with these instruments. 

d) Mutual Funds

  • A mutual fund is a fund that is created via the contributions of several investors. The funds are subsequently invested in marketable securities such as shares, bonds, money market instruments, and other securities.
  • It provides investors with the chance to participate in diversified and professionally managed assets at a cheap cost. You have the option of having these funds handled by qualified and professional portfolio managers who will conduct extensive studies before investing your money.

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

Economic activity Sector
1.Storage of agricultural produce Secondary
2.Dairy farmPrimary
3.Mineral exploration Tertiary
4.Weaving cloth Secondary

How many of the Pairs given above are correctly matched?

(a) Only one

(b) Only two

(c) Only three

(d) All four

Answer: (c) Only three

  • The Indian economy is broadly divided into three sectors: primary, secondary, and tertiary.
  • The primary sector involves agriculture, mining, and fishing; the secondary sector includes manufacturing; and the tertiary sector encompasses services like IT, banking, and healthcare.
    • Storage of agricultural produce falls under the tertiary sector because it involves services related to storage, logistics, and distribution.
    • A dairy farm is part of the primary sector, which includes activities related to agriculture and animal husbandry.
    • Mineral exploration is part of the tertiary sector as it involves the exploration of natural resources.
    • Weaving cloth is part of the secondary sector, which involves manufacturing and industrial activities.
sectors of the Indian economy
Primary Sector:
  • In Primary sector of economy, activities are undertaken by directly using natural resources. Agriculture, Mining, Fishing, Forestry, Dairy etc. are some examples of this sector.
  • It is called so because it forms the base for all other products. Since most of the natural products we get are from agriculture, dairy, forestry, fishing, it is also called Agriculture and allied sector.
  • People engaged in primary activities are called red-collar workers due to the outdoor nature of their work.
Secondary Sector:
  • It includes the industries where finished products are made from natural materials produced in the primary sector. Industrial production, cotton fabric, sugar cane production etc. activities comes under this sector.
  • Hence its the part of a country’s economy that manufactures goods, rather than producing raw materials
  • Since this sector is associated with different kinds of industries, it is also called industrial sector.
  • People engaged in secondary activities are called blue collar workers.
  • Examples of manufacturing sector:
    • Small workshops producing pots, artisan production.
    • Mills producing textiles,
    • Factories producing steel, chemicals, plastic, car.
    • Food production such as brewing plants, and food processing.
    • Oil refinery.
Tertiary Sector/Service Sector:
  • This sector’s activities help in the development of the primary and secondary sectors. By itself, economic activities in tertiary sector do not produce a goods but they are an aid or a support for the production.
  • Goods transported by trucks or trains, banking, insurance, finance etc. come under the sector. It provides the value addition to a product same as secondary sector.
  • This sector jobs are called white collar jobs.

Q. With reference to physical capital in Indian economy, consider the following pairs :

Items  Category
1. Farmer’s plough Working capital
2. Computer Fixed capital
3.Yarn used by the weaver Fixed capital
4. Petrol Working capital

How many of the above pairs are correctly matched?

(a) Only one

(b) Only two

(c) Only three

(d) All four

Answer: (b) Only two

  • A farmer’s plough is considered fixed capital because it is a long-term asset used over many planting seasons.
  • A computer is considered fixed capital because it is a durable good used in the production process over several years.
  • Yarn used by the weaver is considered working capital because it is used up in the production process to make fabrics.
  • Petrol is considered working capital because it is consumed in the production process and needs to be replenished regularly.
Fixed Capital
  • Fixed capital refers to long-term investments that help businesses generate revenue over time.
  • These assets are not consumed or sold within the operating cycle but are essential for business operations. Companies allocate fixed capital for acquiring physical assets, upgrading infrastructure, or implementing advanced technology that provides long-term value.
  • Examples of Fixed Capital:
    • Manufacturing Equipment: A car manufacturing company investing in automated robotic arms and conveyor belts to improve efficiency and production speed.
    • Real Estate: A retail chain purchasing commercial properties for stores or warehouses to expand operations and ensure long-term stability.
    • Technology Infrastructure: A software company investing in high-performance servers, cloud computing systems, and cybersecurity measures to enhance operational efficiency.
    • Vehicles: A logistics company purchasing a fleet of delivery trucks to streamline supply chain management and reduce transportation costs.
  • Key Characteristics of Fixed Capital:
    • Long-term Investment – Fixed capital is allocated for durable assets that contribute to business growth over several years.
    • Depreciation Applies – Fixed assets lose value over time due to wear and tear, requiring companies to account for depreciation in financial statements.
    • Not Easily Liquidated – These assets cannot be quickly converted into cash, making fixed capital a long-term commitment.
Working Capital
  • Working capital is the capital needed for day-to-day business operations.
  • It represents the difference between a company’s current assets (cash, accounts receivable, inventory) and current liabilities (short-term debt, accounts payable). A healthy working capital ensures smooth business operations, timely payments to vendors and employees, and sufficient cash flow to handle unexpected expenses.
  • Examples of Working Capital:
    • Raw Materials: A clothing brand purchasing high-quality fabric and dyes to manufacture garments, ensuring continuous production.
    • Salaries: Monthly payroll payments to employees, ensuring workforce motivation and productivity.
    • Utility Bills: Covering electricity, internet, and water bills required for business operations, maintaining seamless workflow.
    • Short-term Debt Payments: Repaying business loans or credit lines that finance immediate operational needs and prevent financial bottlenecks.
  • Key Characteristics of Working Capital:
    • Short-term in Nature – Working capital is used to cover immediate expenses and keep the business running efficiently.
    • Highly Liquid – Unlike fixed capital, working capital consists of assets that can be quickly converted into cash.
    • Directly Impacts Cash Flow – A positive working capital ensures smooth operations, while a deficit can lead to financial distress.
Fixed Capital vs. Working Capital
FeatureFixed CapitalWorking Capital
DefinitionLong-term investment in business assetsFunds used for daily operations
TimeframeUsed over several yearsUsed within a short-term cycle
LiquidityLow liquidityHigh liquidity
ExamplesMachinery, land, office buildingsSalaries, rent, raw materials
Financial ImpactSupports business growth and expansionEnsures smooth day-to-day operations

Q. With the reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:

  1. There is no minimum capital requirement for wholly owned banking subsidiaries in India.
  2. For wholly Owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.

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

Wholly Owned Banking Subsidiaries
  • Wholly owned banking subsidiaries are companies that are fully owned and controlled by a parent bank, with the parent holding 100% of the subsidiary’s shares. These subsidiaries can take various forms and may operate independently of the parent bank, providing a variety of financial services.
  • The setting up of a wholly-owned banking subsidiary (WOS) in India should have the approval of the home country regulator.
  • The minimum start-up capital requirement for a WOS would be Rs. 3 billion and the WOS shall be required to maintain a capital adequacy ratio of 10 per cent or as may be prescribed from time to time on a continuous basis, from the commencement of its operations.
  • The parent foreign bank will continue to hold 100 per cent equity in the Indian subsidiary for a minimum prescribed period of operation.
  • The composition of the Board of directors should meet the following requirements:
    • Not less than 50 per cent of the directors should be Indian nationals resident in India.
    • Not less than 50 per cent of the Directors should be non-executive directors
    • A minimum of one-third of the directors should be totally independent of the management of the subsidiary in India, its parent or associates.
    • The directors shall conform to the ‘Fit and Proper’ criteria as laid down in RBI’s extant guidelines dated June 25, 2004.
    • RBI’s approval for the directors may be obtained as per the procedure adopted in the case of the erstwhile Local Advisory Boards of foreign bank branches.
  • The banking subsidiary will be governed by the provisions of the Companies Act, 1956, Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, other relevant statutes and the directives, prudential regulations and other guidelines/instructions issued by RBI and other regulators from time to time.
  • Permission for conversion of existing branches of a foreign bank into a WOS will inter alia be guided by the manner in which the affairs of the branches of the bank are conducted, compliance with the statutory and other prudential requirements and the over all supervisory comfort of the Reserve Bank.
    • The minimum net worth of the WOS on conversion would not be less than Rs. 3 billion and the WOS will be required to maintain a minimum capital adequacy ratio of 10 per cent of the risk weighted assets or as may be prescribed from time to time on a continuous basis.

Q. With reference to Corporate Social Responsibility (CSR) rules in India, consider the following statements :

  1. CSR rules specify that expenditures that benefit the company directly or its employees will not be considered as CSR activities.
  2. CSR rules do not specify minimum spending on CSR activities.

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: (a) 1 only

Corporate Social Responsibility (CSR)
  • Corporate Social Responsibility (CSR) is a business model where companies voluntarily integrate social, environmental, and ethical considerations into their operations and interactions with stakeholders.
    • CSR aims to make businesses accountable for their impact on society beyond just profit, focusing on sustainable development, community welfare, and ethical practices. 
  • CSR under the Companies Act, 2013:
    • CSR provisions under Section 135 of the Companies Act, 2013, became effective from April 1, 2014. 
    • These provisions reflect India’s commitment to inclusive growth by mandating corporate contributions towards social, environmental, and human development. 
    • CSR provisions apply to companies meeting any of the following criteria in the preceding financial year:
      • Net worth: More than INR ₹500 crore. 
      • Turnover: More than INR ₹1,000 crore. 
      • Net profit: More than INR ₹5 crore. 
      • Such companies must spend a minimum of 2% of their net profit over the last 3 years on CSR activities. 
  • Penal Provisions: If a company fails to meet CSR obligations, it faces fines ranging from ₹50,000 to ₹25 lakh. Responsible officers may face imprisonment (up to three years), fines between ₹50,000-₹5 lakh, or both.
    • 2019 Amendment:
      • Prior to 2019, unspent CSR funds could be carried forward to the next fiscal.
      • Post-amendment, unspent funds must be transferred to a specified Schedule VII fund by the end of the fiscal year and utilized within three years, failing which, they must be deposited in a government-specified fund.
CSR Activities

Q. With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of :

(a) Bond market

(b) Forex market

(c) Money market

(d) Stock market

Answer: (c) Money market

Collateral Borrowing and Lending Obligations (CBLOs)
  • Collateral Borrowing and Lending Obligations (CBLOs) are money market instruments in India used for short-term borrowing and lending against collateral, typically government securities.
  • They provide a way for financial institutions to manage liquidity and short-term funding needs, particularly for those not part of the interbank call money market.
  • A CBLO is much like a Treasury bill or very short term market instrument; the primary difference is a CBLO entails collateral in the transaction.
  • CBLOs are offered in electronic book entry form with maturity periods ranging from 1 to 19 days, and can be traded in both a continuous market and an auction market.
  • The Clearing Corporation of India Ltd. (CCIL) launched CBLOs in 2003 to address shortcomings in the money market.
  • CBLOs are essentially an obligation for the borrower to repay borrowed funds at a specified future date, along with an authority for the lender to receive the money on that date, which can be transferred.
  • CBLOs are traded in the market, and can be transferred to another person. CBLOs are often tradable in the secondary market, which adds to their liquidity. Investors who hold CBLOs can buy or sell them before their maturity date, allowing them to manage their investments more effectively based on changing market conditions.
  • The CCIL guarantees the repayment of loans, and all borrowings are fully collateralized.
  • CBLOs are primarily designed for institutional participants, and individual investors typically do not directly participate in CBLO transactions. They are more commonly used by financial institutions and organizations to manage their short-term funding and investment needs.
money market instruments
  • Bond market: The bond market involves the issuance and trading of debt securities, typically long-term instruments such as government bonds, corporate bonds, and municipal bonds.
    • While bonds can be used as collateral in CBLO transactions, CBLO itself is a money market instrument rather than a bond market instrument.
    • The bond market deals with instruments that have a longer maturity compared to the short-term nature of money market instruments like CBLO.
  • Forex market: The forex (foreign exchange) market is the global marketplace for trading national currencies against one another.
    • It deals with currency pairs and exchange rates and involves the buying and selling of currencies.
    • CBLO does not pertain to the exchange of foreign currencies or the management of exchange rates, making it unrelated to the forex market.
  • Stock market: The stock market is where shares of publicly held companies are issued, bought, and sold.
    • It deals with equity instruments and involves the trading of company stocks.
    • CBLO does not involve equity trading or stock market transactions; instead, it is focused on short-term borrowing and lending within the money market.