Inflation: UPSC Previous Year Questions (Indian Economy)

Explanation

Pair 1 is correctly matched: A meltdown, typically triggered by a black swan event, leads to a rapid loss of financial asset value and liquidity crises, as seen in India’s Sensex drop from 20,000 in 2008 to 10,000 in 2009.

Pair 2 is incorrectly matched: A recession is a broader economic phenomenon characterized by a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. While a fall in the growth rate can be a precursor to or associated with a recession, it’s not the definition of a recession itself. A fall in the growth rate means the economy is still growing, but at a slower pace.

Pair 3 is incorrectly matched: An economic slowdown refers to a period of slower economic growth, but not necessarily a decline in GDP. GDP is still increasing (positive growth), but at a reduced rate. A "fall" in GDP signifies a contraction in the economy, which is closer to the definition of a recession.

Explanation

Statement 1 is incorrect: During 2010 (but correct at present, January 2025) the Wholesale Price Index (WPI) was on a monthly basis and on a weekly basis for primary and fuel items. However, the Cabinet Committee on Economic Affairs (CCEA) in 2012 decided to discontinue weekly data on primary and fuel items. These changes were on the recommendation of Abhijit Sen committee’s proposals in 2004-05. The current base year for WPI is 2011-12.

Statement 2 is correct: The WPI which is published by the Office of Economic Adviser, Ministry of Commerce and Indus-try, gives less weight to food articles (24.38%) as compared to the Consumer Price Index for Industrial Workers (CPI IW), which assigns a higher weight (39.17%) to food items in the new series with base year 2016. The WPI and CPI have different weightages for various components. In the WPI, the weightage for food articles is relatively lower compared to the CPI for Indus-trial Workers (CPIIW). The CPIIW gives a higher weight to food and beverages because it reflects the consumption pattern of industrial workers, who spend a significant portion of their income on food. In contrast, the WPI covers a broader range of goods, including manufactured products, fuel, and power, and thus assigns a lower weight to food articles.

Explanation

Option (c) is correct: Deflation is a persistent fall in the general price level of goods and services. It is just the opposite of inflation which is continuous increase in the general price level of goods and services. As per the IMF "Deflation is defined as a sustained decline in an aggregate measure of prices, such as the consumer price index or the GDP deflator. " Options (a), (b) and (d) are incorrect:

A sudden fall in the value of a currency against other currencies is currency depreciation. A persistent recession in both the financial and real sectors of the economy may become Depression. A fall in the rate of inflation over a period of time may not lead to fall in general price level but just less inflation. This is also called disinflation.