Important Concepts in Economy: UPSC Previous Year Questions (Indian Economy)

Explanation

A ‘stimulus’ is an attempt by policymakers of a coun-try to kickstart a sluggish economy through a package of measures. The central bank will use a monetary stimulus to boost consumer spending by increasing the money supply or lowering interest rates. A fiscal stimulus is when the government increases spending out of its own funds or lowers tax rates. Consumer spending increases as a result of stimulus measures, which boosts demand and growth. It’s common to refer to a stimulus as "priming the pump" or "pump priming."

Explanation

The "base effect" refers to how unusually high or low inflation in the previous period can affect the calculation and interpretation of the inflation rate in the current period. It’s a statistical phenomenon, not a real economic event. Low Base Effect: If inflation was very low or even negative in the previous year (the "base" period), even a moderate increase in prices in the current year can appear as a high inflation rate simply because the comparison is being made against a very low base. This can give the impression of a rapid acceleration of inflation, even if the price increases are not exceptionally large in absolute terms. High Base Effect: Conversely, if inflation was very high in the previous year, even a substantial increase in prices in the current year might appear as a low inflation rate because the comparison is being made against a high base. This can mask the true extent of current price increases.

Explanation

Option (b) is correct: According to United Nations Population Fund (UNFPA), demographic dividend means, "the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population (15 to 64) is larger than the non-work-ing-age share of the population (14 and younger, and 65 and older)".

Explanation

Closed Economy Does not have economic relations with the rest of the world. Activities taking place outside the territory do not affect the economic activities. There is no difference b/w national income and domestic income. It is an imaginary economy. A closed economy is completely self-sufficient, which means that no imports enter and no exports leave the country. Open Economy An open economy has economic relations with other countries. Economic activities of such an economy are affected by international fluctuations. The size of national income may be greater or smaller than the domestic income. It is a realistic economy. Eg: USA, Singapore, Finland, etc.

Explanation

Statutory Liquidity Ratio (SLR) refers to the minimum percentage of a commercial bank’s net demand and time liabilities (NDTL) that it must maintain in the form of liquid assets such as government securities (G-Secs), cash, or gold before offering credit to customers. Commercial banks are required by the Reserve Bank of India (RBI) to maintain this percentage to ensure liquidity and stability in the financial system. Since banks invest in government securities to meet their SLR requirements, it effectively becomes a source of credit to the government, as the government raises funds through the issuance of bonds and securities. Options (a), (b) and (c) are incorrect:

Cash Credit Ratio (CRR) is the percentage of NDTL that banks must keep with the RBI in cash. Unlike SLR, CRR does not directly help in providing credit to the government because it is meant to control liquidity in the economy and not to finance government debt. Debt Service Obligation (DSO) refers to the government’s or an entity’s obligation to repay debt, including principal and interest. It is a measure of a borrower’s ability to repay loans but is not a mechanism used by banks to provide credit to the government. Liquidity Adjustment Facility (LAF) is a tool used by the RBI to manage liquidity in the banking system through repo and reverse repo operations. It is not specifically meant for providing credit to the government but rather for controlling short-term liquidity in the economy.

Explanation

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 that provides banking services without holding a banking license. It is regulated by the RBI under the RBI Act, 1934. It engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit fund business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. Difference Between NBFCs and Banks Feature NBFCs Banks Regulator RBI (Non-Banking Financial Companies Division) RBI (Banking Regulation Act) Accepts Demand Deposits (Savings & Current Accounts)? No Yes Part of Payment and Settlement System? No Yes Can Issue Cheques? No Yes Lending Activities? Yes Yes

Statement 1 is incorrect: NBFCs can engage in the acquisition of government securities. Many NBFCs invest in government securities as part of their portfolio management and liquidity management strategies. The RBI allows NBFCs to invest in government securities, subject to certain regulations.

Statement 2 is correct: NBFCs are not allowed to accept demand deposits. They can only accept fixed deposits (FDs) with specific regulatory approvals from the Reserve Bank of India (RBI).

Explanation

In financial terminology, a "bear" refers to an investor who anticipates that the price of a particular security or the overall market will decline. Acting on this belief, such investors may engage in strategies like short selling, where they sell securities they do not currently own with the intention of re-purchasing them later at a lower price, thereby securing a profit. Options (b), (c) and (d) are incorrect:

An investor who expects prices to rise is called a bull, not a bear. Bulls are optimistic about the market and buy securities with the expectation of selling them at higher prices in the future. A shareholder or bondholder is simply an investor who owns shares or bonds, regardless of their market outlook. A lender or bondholder is not necessarily a bear. A bear is specifically an investor with a pessimistic outlook on the market or a security.

Explanation

In India, the interest rates on savings accounts were de-regulated by the Reserve Bank of India (RBI) in 2011. This deregulation allowed individual banks to set their own interest rates on savings deposits. At the time when question was asked they were fixed by RBI, which now stands deregulated.

Explanation

The Banking Ombudsman Scheme in India was established to provide an expeditious and cost-free forum for bank customers to resolve complaints relating to certain services rendered by banks. The scheme has undergone several revisions, with the most recent being the Reserve Bank - Integrated Ombudsman Scheme 2021 which integrates previous ombudsman schemes to streamline the grievance redressal process.

Option (a) is correct: The Reserve Bank of India (RBI) appoints the Banking Ombudsman to address customer grievances against banks.

Option (b) is correct: The Banking Ombudsman Scheme allows Non-Resident Indians (NRIs) with accounts in India to file complaints. NRIs can lodge complaints related to their banking transactions in India.

Option (c) is incorrect: The orders passed by the Banking Ombudsman are not final and binding. If either party (the complainant or the bank) is dissatisfied with the Ombudsman’s decision, they can appeal to the Appellate Authority (the Deputy Governor of the RBI) within 30 days of the order.

Option (d) is correct: The Banking Ombudsman Scheme provides a free and transparent mechanism for resolving complaints. Customers do not have to pay any fee to file a complaint.

Explanation

"Commercial Banks refer to both scheduled and non-scheduled commercial banks which are regulated under Banking Regulation Act, 1949." Commercial banks operate on a ‘for-profit’ basis. They primarily engage in the acceptance of deposit and extend loans to the general public, businesses and the government.

Statement 1 is correct: Commercial banks often have tie-ups with brokerage firms or have their own investment wings to assist customers in buying and selling shares and securities. This service falls under the category of investment and wealth management services. Banks like SBI, ICICI, and HDFC Bank provide these services through demat accounts and trading platforms.

Statement 2 is correct: Many commercial banks have specialized departments to act as executors and trustees for the wills of their customers. In this role, banks manage the estate of deceased individuals and ensure that assets are distributed according to the terms of the will. Examples include RBI-autho-rized banks offering trust services.