Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. In what categories can an applicant seek registration as an AIF? Applicants can seek registration as an AIF in one of the following categories, and in sub-categories thereof, as may be applicable:

Category I AIF:

Venture capital funds (Including Angel Funds) SME Funds o Social Venture Funds Infrastructure funds Category II AIF Category III AIF Venture Capital: Venture capital funds invest in startups and emerging companies and are classified as Alternative Investment Funds under Indian regulations. What are Category I AIFs? AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified. What are Category II AIFs? AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs. Hedge Funds: Hedge funds fall under the category of Alternative Investment Funds. They pool capital from investors and use complex strategies including leverage, derivatives, and short selling, which differ from traditional investments. What are Category III AIFs? AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs. Stocks: Stocks or equity shares represent ownership in companies and are considered traditional investments, not AIFs. Bonds: Bonds are considered traditional investment instruments and are not categorized as Alternative Investment Funds. They are debt securities issued by governments or corporations.

Explanation

The Reserve Bank of India is the central bank of the country. It earns income primarily through monetary operations, management of currency, and foreign exchange transactions

Statement 1 is correct: The RBI conducts open market operations involving the buying and selling of government securities (bonds). It earns income through interest receipts and capital gains on these transactions.

Statement 2 is correct: The RBI manages India’s foreign exchange reserves and intervenes in forex markets to stabilize the rupee. Gains from currency transactions contribute to its income.

Statement 3 is incorrect: RBI does not manage pensions for citizens or the government. Pension Fund Regulatory and Development Authority (PFRDA) governs pension systems like NPS. RBI only manages government accounts and public debt, not pension

Statement 4 is incorrect: The RBI does not lend directly to private companies. It lends to commercial banks and financial institutions as part of monetary policy and financial regulation, but lending to private companies is not a source of income.

Statement 5 is correct: RBI has the sole right to print and issue currency notes in India. It earns income through seigniorage, the profit made from issuing currency notes, which is the difference between the face value and the cost of printing. Seigniorage = Face value of currency - cost of printing it. For example, printing a 100 note may cost 3, giving a profit of 97.

Explanation

Statement 1 is incorrect: The Reserve Bank of India (RBI) does not mandate the submission of the Business Responsibility and Sustainability Report (BRSR). Instead, the Securities and Exchange Board of India (SEBI) mandates this requirement. Since 2022, SEBI has required the top 1,000 listed companies by market capitalization to submit BRSR as part of their annual reporting to improve transparency on ESG (Environmental, Social, and Governance) matters.

Statement 2 is correct: BRSR disclosures primarily involve non-financial information related to a company’s social responsibility, sustainability initiatives, environmental impact, governance, and stakeholder engagement. It complements financial reports by providing stakeholders with a broader understanding of a company’s impact and sustainable practices.

Explanation

Statement I is incorrect: Under Section 10(1) of the Income Tax Act, only agricultural income is exempt. Allied activities like poultry farming, dairy, or wool rearing do not fall under the definition of agricultural income. Hence, they are taxable under normal income tax provisions even in rural areas.

Statement II is correct: Under Section 2(14) of the Income Tax Act, 1961, rural agricultural land is specifically excluded from the definition of a capital asset. This means that capital gains tax is not applicable on the transfer of rural agricultural land. However, this exclusion applies only to land situated in rural areas and used for agricultural purposes.

Explanation

Statement I is correct: In corporate finance and investing, bonds (debt investments) are typically viewed as safer and less volatile than stocks (equity investments). Bondholders have more certainty in their returns as they receive fixed interest payments and return of principal at maturity, whereas stockholders’ returns (dividends and share price appreciation) are uncertain and variable and depend on the company’s performance. In the event of financial trouble or bankruptcy, bond investors are among the first to be paid, whereas common stockholders often receive later, this safety net further reduces the risk for bondholders. In sum, stocks are inherently riskier than bonds, so bondholders face lower risk relative to stockholders, which is why they also often expect lower returns than equity investors as compensation for that lower risk.

Statement II is correct: Bondholders lend money to the company by purchasing its bonds, making them debtholders. Stockholders (shareholders) are owners of the company’s equity. In other words, buying a bond means one effectively acts as a lender to the firm, entitled to interest and principal repayment, whereas buying stock means you purchase a share of ownership in the firm, with claim to its residual profits.

Statement III is correct: In a company’s capital structure, bondholders have priority over stockholders when it comes to repayment, especially in distress or liquidation scenarios.

Statement II and Statement III are correct and both of them explain Statement I: Bondholders are lenders to the company while stockholders are owners (Statement II), and bondholders have rights and claims on their investments compared to owners. Consequently, bondholders have more security: the company must meet its debt obligations to bondholders (or face default), and bondholders get priority in any repayment or liquidation (Statement III). These factors greatly reduce the risk to bond investors relative to equity investors. Stockholders, on the other hand, are residual claimants who are paid last and only after all obligations are met, they have no guaranteed returns. Because of this structure, investing in a company’s bonds is generally less risky than investing in its stock.

Explanation

Statement 1 is correct: India has emerged as a dominant player in the global equity options market. In 2023, Indian exchanges accounted for approximately 78% of global equity options trading volume, with 84.3 billion contracts traded, marking a 153% increase from the previous year. By April 2024, the combined volume of equity derivatives on the NSE and BSE constituted nearly 81% of global turnover. This surge reflects a significant boom in India’s equity options trading activity

Statement 2 is correct: India’s stock market has experienced substantial growth in recent years. On January 22, 2024, the combined market capitalization of Indian exchanges reached $4.33 trillion, surpassing Hong Kong’s $4.29 trillion, thereby making India the world’s fourth-largest stock market by market capitalization. This milestone underscores the rapid expansion and investor confidence in India’s equity markets.

Statement 3 is incorrect: India has strong regulatory bodies like the Securities and Exchange Board of India (SEBI) which actively regulate the securities market, including derivatives trading. SEBI issues guidelines, warnings, and investor education campaigns on the risks of options trading. It also takes action against unregistered financial advisors and fraudulent activities to protect retail investors.

Explanation

Statement 1 is correct: Capital receipts are receipts that either create a liability for the government (such as borrowings) or lead to a reduction in assets (such as recovery of loans or disinvestment proceeds). They are distinguished from revenue receipts, which are the income earned from the government’s normal operations.

Statement 2 is correct: Borrowings (loans taken by the government) and disinvestment proceeds are classified as capital receipts. Borrowings increase the government’s liabilities, while disinvestment reduces government ownership in public sector undertakings (thus reducing assets).

Statement 3 is incorrect: Interest received on loans given by the government is a non tax revenue receipt, not a capital receipt or liability. Interest payment by the government, on the other hand, is an expenditure. Interest received on loans is income for the government. It’s revenue generated from money it has lent out.

Explanation

Statement 1 is correct: The Rashtriya Gokul Mission (RGM) is crucial for upliftment of rural poor as more than 80% low producing indigenous animals are with small and marginal farmers and landless labourers. The scheme is important in enhancing milk production and productivity of bovines to meet growing demand of milk and making dairying more remunerative to the rural farmers of the country.

Statement 2 is correct: The Rashtriya Gokul Mission was launched to promote the rearing and conservation of indigenous cattle and buffalo breeds in a scientific and holistic manner. The mission aims to enhance the productivity of native breeds, preserve their genetic diversity, and improve rural livelihoods. It focuses on the development of high-genetic merit animals through modern breeding technologies, establishment of Gokul Grams (cattle care centers), and support for traditional animal husbandry practices.

Explanation

Statement 1 is incorrect: The National Rail Plan aims to create a ‘future ready’ railway system by 2030, not 2028. The objective of the Plan is to create capacity ahead of demand, which in turn would also cater to future growth in demand right up to 2050 and also increase the modal share of Railways to 45% in freight traffic and to continue to sustain it.

Statement 2 is incorrect: ‘Kavach’ is an indigenously developed Automatic Train Protection (ATP) system by Indian Railways, not in collaboration with Germany. The name "Kavach," meaning "shield" in Hindi, reflects its purpose of delivering robust protection and upholding top safety standards in railway operations. With its certification at the highly regarded Safety Integrity Level 4 (SIL-4), Kavach demonstrates outstanding reliability.

Statement 3 is correct: Radio Frequency Identification (RFID) tags are placed throughout the entire track length to enable the Kavach system to track train positions and detect any potential safety issues along the route.

Explanation

Statement 1 is incorrect: Under Section 15 of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act), State Governments do have the power to make rules for regulating the grant of mineral concessions in respect of minor minerals within their territories. This includes framing rules for mining leases, quarry leases, and other concessions.

Statement 2 is correct: The Central Government has the authority to declare a mineral as a ‘minor mineral’ by notification in the Official Gazette as per Section 3(e) of the Mines and Minerals (Development and Regulation) Act, 1957 (MMDR Act).