Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

An expansionary monetary policy may lead to lower interest rates and thus flight of foreign capital from India (which would get better returns abroad). Also, such a policy may fuel inflation and higher imports through higher government spending and further cause a slide of the rupee. Options (a), (b) and (c) are incorrect: As these include the likely measures the Government/ RBI would take to stop the slide of the Indian rupee:

Curbing imports of nonessential goods-and promoting exports would help control imports and thus the depreciation of the rupee. Masala bonds were brought in to curb the slide of rupee since the borrowing is rupee-dominated and does not put pressure on our currency through borrowing dollars. Easing external commercial borrowing (ECBs) will lead to higher borrowing abroad and would temporarily bridge the deficit of forex in India preventing the slide of rupee.

Explanation

Statement 1 is correct: As of 2023 the Asian Infrastructure Investment Bank (AIIB) had 105 member’s. As of January 2025 the AIIB boasts 110 approved members worldwide which indicates its extensive global reach.

Statement 2 is incorrect: India is the second-largest shareholder in AIIB and holds 7.5% of the voting shares. The largest shareholder is China with 26.5% of the voting shares.

Statement 3 is incorrect: The AIIB’s membership extends beyond Asia and includes countries from Europe, Africa and the Americas. For instance nations like Canada, Egypt, and France are members and reflects the bank’s global appeal.

Explanation

A currency crisis occurs when a country’s currency faces a sudden and sharp depreciation, often due to speculative attacks or a loss of confidence in the economy. Several factors can contribute to reducing the risk of such a crisis:

Statement 1 is correct: India’s Information Technology (IT) sector is a major exporter of services, earning substantial foreign exchange. These earnings increase the supply of foreign currency in the country, strengthening the Indian rupee and mitigating the risk of a currency crisis.

Statement 2 is incorrect: While government spending is crucial for economic growth, excessive expenditure can lead to higher fiscal deficits. This may result in increased borrowing, potential inflationary pressures, and could negatively affect investor confidence, thereby increasing the risk of a currency crisis.

Statement 3 is correct: Remittances are funds sent by Indians working overseas back to India. These inflows add to the coun-try’s foreign exchange reserves, providing a buffer against currency volatility and reducing the risk of a currency crisis.

Explanation

Statement 1 is incorrect: While the government does hold a portion of India’s external debt, the majority of it is owed by non-governmental entities, primarily corporations. As of end-March 2023, India’s total external debt stood at approximately USD 624.7 billion. Of this, the government’s external debt was about USD 130.8 billion, accounting for roughly 20.9% of the total external debt. The remaining 79.1% is owed by non-governmental entities, including private sector corporations and financial institutions.

Statement 2 is incorrect: While a significant portion of In-dia’s external debt is indeed denominated in US dollars, it’s not all in US dollars. Indian entities also borrow in other currencies, such as Euros, Japanese Yen, and British Pounds, among others. Diversification of currency exposure is a com-mon practice in debt management. India’s external debt is de-nominated in various currencies. As of end-March 2023, 53.1% of the debt was in US dollars, 31.1% in Indian rupees, 5.7% in Japanese yen, 3.5% in Special Drawing Rights (SDRs), 2.9% in euros, and the remaining 3.7% in other currencies.

Explanation

Statement 1 is correct: PPP is an economic concept that compares the value of currencies by examining the cost of a standard "basket of goods" across different countries. It determines the exchange rate required for one currency to buy the same quantity of goods and services as it would in another country.

Statement 2 is incorrect: As of the latest available data, India ranks as the third-largest economy globally in terms of GDP based on PPP. According to the International Monetary Fund’s World Economic Outlook, India’s GDP (PPP) is approximately $13.17 trillion, placing it behind China and the United States.

Explanation

According to the World Bank, Poverty is pronounced deprivation in well-being and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity. The new extreme poverty line of $2.15 per person per day, which replaces the $1.90 poverty line, is based on 2017 PPPs

Option (b) is correct: The official poverty line in India is determined based on the minimum income required to meet basic consumption needs, primarily food, adjusted for other essentials like housing, education, and healthcare. Since the cost of living and price levels differ across states due to factors like inflation, regional disparities, and market conditions, the poverty line is higher in states where the price levels are higher. For instance, states with higher urbanization or living costs like Maharashtra or Delhi might have a higher poverty line compared to states with lower living costs like Bihar or Odisha.

Explanation

Option (a) is incorrect: If industrial growth lags behind agriculture, job creation slows, leading to underemployment and lower productivity. However, it doesn’t hinder development un-less stagnation sets in. For instance, the Green Revolution initially saw agriculture outpace industry but still spurred economic development, improving food security and livelihoods.

Option (b) is incorrect: Slower agricultural growth can lead to food shortages and rural distress, especially in agrarian economies. However, in modern economies, a shift from agriculture to industry, like in South Korea, can drive economic development through job creation and higher incomes.

Option (c) is correct: Economic development is a broader concept than economic growth. While an increase in absolute and per capita real Gross National Product (GNP) indicates economic growth, true development includes improvements in living standards, employment opportunities, and poverty reduction. If poverty and unemployment increase despite GNP growth, it suggests that the benefits of growth are not being equitably distributed, leading to an absence of real economic development.

Option (d) is incorrect: A trade imbalance doesn’t always signal poor development. If imports rise for capital goods or technology, it can boost future growth. For example, China’s imports of advanced machinery in the 1990s aided in its economic development. However, a persistent trade deficit without export growth, like in some developing nations, can strain reserves, financial stability and thus stall economic development.

Explanation

India holds a significant position in the global oilseeds industry, contributing about 10% to the world’s total production. However, the demand for edible oils (including those derived from oilseeds, aside from palm oil) greatly exceeds domestic production, resulting in a reliance on imports for nearly 60% of the required supply.

Statement 1 is correct: With respect to the year 2018, Over the past five years, India’s edible oil imports have consistently surpassed domestic production, highlighting a significant dependence on foreign sources to meet consumption needs. This rising trend in imports persisted through 2023-24, reaching approximately 15.96 MMT. Meanwhile, domestic production has remained largely stagnant, accounting for only about 40% of the country’s total edible oil consumption. This imbalance highlights the widening gap between supply and demand, making large-scale imports essential to meet national requirements.

Statement 2 is incorrect: The Indian government may impose customs duties on imported edible oils, adjusting rates to balance consumer interests and support domestic farmers. For instance, effective from September 14, 2024, a 20% basic customs duty was imposed on crude palm oil, crude soybean oil, and crude sunflower oil to support local oilseed farmers.

Explanation

The Minimum Support Price (MSP) is a government-set price for crops. It helps prevent distress sales when market prices fall below this level. The Commission for Agricultural Costs and Prices (CACP) makes recommendations on MSP. The Cabinet Committee on Economic Affairs (CCEA) announces the MSP based on these recommendations. MSP ensures that farmers receive a fair income.

Option (b) is correct: The government announces minimum support prices (MSPs) for 22 mandated crops and fair and remunerative price (FRP) for sugarcane. Amongst the above, Barley, Finger millet, Groundnut, Sesamum are part of MSP crop list. Options (a), (c) and (d) are incorrect: Areca nut, coffee, and turmeric being commercial crops, are typically not covered under MSP.

Explanation

Statement 1 is correct: The BHIM (Bharat Interface for Money) app allows users to transfer money to anyone with a UPI (Unified Payments Interface)-enabled bank account. This is achieved through a UPI ID, mobile number, or QR code which makes it a seamless and widely accessible digital payment solution. It is a government-backed app designed to facilitate digital payments which promoting interoperability among various banks.

Statement 2 is incorrect: Both systems adhere to the Reserve Bank of India’s (RBI) mandate for two-factor authentication to enhance the security of digital transactions. Chip-PIN Debit Card typically employs two-factor authentication (2FA) not four-factor:

Possession Factor: The physical debit card.

Knowledge Factor: The Personal Identification Number (PIN) known to the user. BHIM App also utilizes two-factor authentication:

Possession Factor: The mobile device registered with the user’s bank account. Knowledge Factor: The UPI PIN set by the user.