External Sector of India: UPSC Previous Year Questions (Indian Economy)

Explanation

The mentioned agreements and terms are related to global trade regulations under the World Trade Organization (WTO):

Agreement on Agriculture (AoA) is a WTO agreement that sets international rules for agricultural trade, subsidies, and market access. It aims to reduce trade barriers and promote fair competition in agriculture. Agreement on the Application of Sanitary and Phytosanitary (SPS) Measures: It establishes rules for food safety and animal and plant health standards in global trade. It ensures that countries do not use health measures as a disguised trade barrier. Peace Clause: It was introduced under the WTO’s Agreement on Agriculture. It temporarily protected agricultural subsidies from legal challenges under WTO rules. It was a major issue in India’s food security concerns at WTO negotiations.

Explanation

Statement 1 is incorrect: The rate of growth of Real Gross Domestic Product (GDP) in India has not steadily increased over the last decade (2005-2015). Instead, it has experienced fluctuations due to various factors such as global economic conditions, domestic policy changes, and structural reforms. For example: India experienced high GDP growth rates during the mid-2000s (around 9% in 2007-2008). The growth rate declined significantly during the global financial crisis of 2008-2009. Post-2010, growth rates recovered but remained volatile, with a slowdown in recent years due to factors like demonetization (2016) and the introduction of the Goods and Services Tax (GST) in 2017.

Statement 2 is correct: Gross domestic product at market prices is the sum of added values of all activities which produce goods and services, plus taxes and minus subsidies on products. When measured in nominal terms (i.e., at current market prices without adjusting for inflation), India’s GDP in rupees has shown a consistent upward trend over the past decade. This steady increase reflects the overall expansion of the economy in nominal terms.

Explanation

Statement 1 is correct: Budget deficit is used to define a status of financial health in which expenditures exceed revenue. Revenue Expenditure is the part of government spending that does not result in the production of assets such as Salaries, wages, pensions, subsidies, and interest payments etc. Reducing Revenue Expenditure involves cutting down on the government’s routine expenses, such as salaries, subsidies, and administrative costs. By streamlining operations and eliminating wasteful spending, the government can lower its revenue expenditure and reduce the budget deficit.

Statement 3 is correct: Rationalizing Subsidies entails reviewing and possibly reducing subsidies that are inefficient or benefit higher-income groups disproportionately. By targeting subsidies more effectively, the government can decrease un-necessary spending, aiding in deficit reduction. Statements 2 and 4 are incorrect:

Introducing New Welfare Schemes without corresponding revenue sources can increase government expenditure, potentially widening the budget deficit. Therefore, this action may not contribute to deficit reduction. Promoting industrial expansion can boost economic growth and over time increase government revenues through higher tax collections. However, the effects of such measures are typically long-term and may not provide immediate relief to a budget deficit.

Explanation

Convertibility of a currency means that it can be freely exchanged for other currencies and vice versa with-out restrictions. It essentially means that there are no limitations on the flow of the currency in and out of the coun-try. When a currency is convertible, individuals, businesses, and investors can easily convert it to other currencies to make payments abroad, invest in foreign assets, or engage in other inter-national transactions. Similarly, they can convert foreign currencies back into the domestic currency. India has current account convertibility, meaning that there are generally no restrictions on converting rupees for trade-related purposes. There are some regulations on capital account transactions, although these have been progressively liberalized over time.

Explanation

International liquidity refers to the availability of acceptable means of payment for international transactions. It’s essentially about having enough of the currencies that are widely used and accepted in global trade and finance. Historically, gold played this role, but in the modern era, "hard currencies," particularly the US dollar, have become the primary reserve currencies and mediums of exchange for international transactions. The "problem of international liquidity" arises when there is a shortage of these hard currencies. If countries don’t have enough dollars (or other widely accepted currencies) to pay for their imports, service their debts, or invest abroad, it can disrupt international trade and financial flows.