Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

Capital formation refers to the accumulation of physical assets like machinery, tools, and infrastructure, which are expected to boost production.

Option (d) is correct: Even in a high-saving economy, if the capital-output ratio is high, it means that a large amount of capital is required to produce a small increase in output. This indicates inefficient use of capital or diminishing returns on investment, leading to limited growth in output despite increased savings and investments. Options (a), (b) and (c) are incorrect: While weak administration, illiteracy, and high population density can slow economic growth by affecting governance, workforce skills, and resource allocation, they don’t directly influence how efficiently invested capital is converted into output--this efficiency is specifically measured by the capital-output ratio.

Explanation

Opportunity cost: refers to the value of the next best alternative foregone when a choice is made. Even if a commodity is provided "free" to the public, resources (such as government funds, labor, or infrastructure) are still required for its provision.

Option (c) is correct: If a commodity is provided free to the public by the Government, then the opportunity cost is transferred from the consumers of the product to the tax-paying public. As per microeconomics, the opportunity cost is zero for free goods such as air and common goods such as fish/grazing land. For public goods such as street lights and defence, the opportunity cost is involved (The government could have spent that much money on street lights rather than on the military). So, the opportunity cost is not zero.

Explanation

Statement 1 is incorrect: India’s agriculture sector has shown a gradual decline in contribution to the Indian economy post-reform. India’s traditional occupation, agriculture, currently makes up only 15% of the GDP, down from 29% in 1991.

Statement 2 is correct: India is seen as a successful exporter of IT software, auto parts, textiles, and engineering goods in the reform period. Thus, the share of India’s exports in world trade increased after its liberalisation of economic policies in 1991. India’s share in world exports was around 0.5% in 1990 and increased to approximately 1.85% by 2023 (PwC report).

Statement 3 is correct: The Foreign investments including FDI and FII have increased from about US $ 100 million in 1990-91 to US $ 467 billion in 2012-13.

Statement 4 is correct: The opening up of the economy has led to rapid increase in foreign exchange reserves. In 1991, India had only $5.8 billion in forex reserves, which were insufficient to cover imports for even three weeks. As of 2012-13, forex re-serves had grown to over $292 billion (RBI data).The trend has continued, and as of January 2024, forex reserves are over $620 billion. The increase is due to higher exports, remittances, FDI inflows, and better economic management post-liberalization.

Explanation

Statement 1 is correct: National Agriculture Market (NAM) is a pan-India electronic trading portal, launched by the Ministry of Agriculture and Farmers Welfare. The NAM networks the existing APMC mandis to create a unified national market for agricultural commodities.

Statement 2 is correct: NAM promises more options for sale. The scheme facilitates farmers’ access to a wider market, which can help them get better prices based on the quality of their produce. It eliminates intermediaries and allows farmers to directly connect with buyers.

Explanation

The National Payments Corporation of India (NPCI) is an umbrella organization established by the Reserve Bank of In-dia (RBI) and the Indian Banks’ Association (IBA) under the Payment and Settlement Systems Act, 2007, to create a robust payment and settlement infrastructure in India.

Statement 1 is correct: National Payments Corporation of India (NPCI) helps in promoting financial inclusion in the country by providing affordable and accessible digital payment solutions to all sections of society including rural and under-served areas. It supports initiatives like the Unified Payments Interface (UPI), Aadhaar Enabled Payment System (AEPS) and RuPay which enable seamless and low-cost digital transactions.

Statement 2 is correct: NPCI launched RuPay as India’s first domestic card payment network to reduce dependency on international card networks like Visa and Mastercard. RuPay is widely used in debit cards, credit cards and prepaid cards issued by Indian banks and it supports financial inclusion by offering low-cost payment solutions. The alliances with international network partners (Discover Financial Services, Japan Credit Bureau and China Union Pay) provide valuable access to a global acceptance footprint and offer world-class payment solutions to RuPay cardholders.

Explanation

The Scheme for Sustainable Structuring of Stressed Assets (S4A) is a framework designed to address the issue of stressed assets in the corporate sector, particularly large accounts with significant debt facing genuine difficulties. It was introduced by the RBI in 2016 to tackle non-performing assets (NPAs) in Indian banks. The scheme aims to restructure the financial obligations of companies allowing them to continue operations while ensuring that lenders (banks and financial institutions) can recover their dues in a structured manner. Key Features of S4A:

The S4A scheme divides a company’s debt into sustainable (50%) and unsustainable portions based on cash flows. The sustainable part is serviced under existing terms, while the unsustainable portion can be converted into equity or quasi-equity instruments like optionally convertible debentures. To be eligible a company must be operational with lender exposure exceeding 500 crore. The debt must be sustainable, meaning the company can service the sustainable portion with its current cash flows. The Overseeing Committee (OC), formed by the IBA in consultation with the RBI, reviews and approves lenders’ resolution plans to ensure transparency and compliance. Options (a), (c) and (d) are incorrect:

S4A is not a related procedure for considering ecological costs of developmental schemes formulated by the Government. S4A is not a disinvestment plan. It is a debt resolution framework for private and public corporate entities, not specifically for Central Public Sector Undertakings (CPSUs) S4A is not part of the Insolvency and Bankruptcy Code (IBC). While both aim to resolve stressed assets, S4A is a separate RBI-led initiative that operates outside the IBC framework

Explanation

UPI allows direct bank-to-bank transfers without the need for intermediary wallets. This has led to a decline in mobile wallet transactions, as users and merchants prefer UPI for its seamless and direct approach. Options (b), (c) and (d) are incorrect:

While UPI has accelerated the adoption of digital payments but it is uncertain when or if physical cash will completely disappear. Cash is still widely used, and a full transition to digital payments would depend on many economic and social factors beyond just UPI’s impact. UPI enhances domestic digital transactions but its direct impact on a significant rise in FDI lacks strong evidence. UPI impact is limited as many beneficiaries withdraw DBT funds in cash soon after receiving them.

Explanation

The Small Finance Banks (SFBs) were established by the Reserve Bank of India (RBI) to further financial inclusion by providing essential banking services to underserved and un-served segments of the population.

Statement 1 is correct: Small Finance Banks (SFBs) focus on extending credit to micro and small enterprises, thereby supporting entrepreneurship and economic growth at the grassroots level.

Statement 2 is correct: SFBs aim to meet the unique needs of small and marginal farmers by offering tailored financial products and services which enhances agricultural productivity and rural development.

Statement 3 is incorrect: Though SFBs support small business units and micro-entrepreneurs but the specific emphasis on "young entrepreneurs" is not explicitly stated in the RBI’s guidelines.

Explanation

Statement 1 is correct: The primary function of the MPC is to determine the policy repo rate, which is the benchmark interest rate at which commercial banks borrow money from the RBI. This rate influences other interest rates in the economy

Statement 2 is incorrect: The MPC is a 6-member body consisting of: 3 members from the RBI, including the Governor (who acts as the chairperson). 3 external members nominated by the Government of India. Members are appointed for a four-year term

Statement 3 is incorrect: The MPC functions under the chairmanship of the Governor of the RBI, not the Union Finance Minister.

Explanation

Statement 1 is correct: One of the primary objectives of the Goods and Services Tax (GST) is to replace multiple indirect taxes like VAT, service tax, excise duty, etc., that were levied by both the central and state governments. By creating a uniform tax structure, GST promotes the creation of a single national market, eliminating the cascading effect of taxes and simplifying the tax system.

Statement 2 is incorrect: GST is a domestic tax reform aimed at simplifying the indirect tax structure within India. It primarily affects internal trade and taxation and does not have a direct impact on the Current Account Deficit (CAD), which is influenced by factors like imports, exports, remittances, and foreign investments. While improved efficiency might contribute indirectly to exports, the effect on CAD would not be drastic.

Statement 3 is incorrect: While GST is expected to boost economic growth by improving tax compliance, reducing logistics costs, and promoting ease of doing business, claiming that it will enormously grow the economy to the extent that India will over-take China in the near future seems exaggerated and unrealistic. Goods and Services Tax (GST) Definition It is a comprehensive tax levied on the manufacture, sale, and consumption of goods and services. Established By the 101st Constitutional Amendment Act, on the lines of "One Nation One Tax". Powers The Parliament and the state legislatures have concurrent powers to implement GST Features Applicable on supply side Destination based Taxation Dual GST(Centre and the States simultaneously levying tax on a common base.) GST rates to be mutually decided(CGST, SGST & IGST) Multiple Rates Merged Taxes Central Value Added Tax, Additional Customs Duty, Special Additional Duty of Customs, Central Sales Tax, Service Tax, State VAT (Sales tax) Tax Slabs 5%, 12%, 18% and 28%. 3-Tiers of GST Centre levies the CENTRAL GST (CGST) State levies STATE GST (SGST) Centre levies INTEGRATED GST (IGST) on transactions IGST When the commodity is produced in one state and is traded to another state (interstate trade). In this case, the share of SGST should go to the consuming state (as the GST is a destination-based tax). Compensation Parliament will compensate for any loss faced by the state As per the GST Act, states are guaranteed compensation for any revenue shortfall below 14% growth (base year 2015-16) for the first five years ending 2022. GST compensation is paid using funds specifically collected as compensation cess- is levied on products considered to be sin or luxury goods. Input Tax Credit It is a mechanism to avoid cascading of taxes. It means at the time of paying tax on output, one can reduce the tax one has already paid on inputs and just pay the balance amount. Cross utilisation of input tax credit is available Reverse Charge Mechanism The receiver becomes liable to pay the tax, i.e., the chargeability gets reversed. Self-invoicing is to be done when you have purchased from an unregistered supplier and such purchase of goods or services falls under reverse charge. E-Way Bill System It is an electronic way bill for movement of goods which can be generated on the e-Way Bill Portal Objective:

Facilitate faster movement of goods.

Improve the turnaround time of vehicles.

It helps track intra-state as well as inter-state movements of goods of value exceeding Rs 50,000, for sales beyond 10 km in the Goods and Services Tax (GST) regime. Commodities Outside GST Alcohol for human consumption, Petroleum products, Electricity, The supply of goods to the SEZ, Supply of goods that come under zero rate Fresh vegetables, fresh milk, cereal, meat etc. Raw materials. NOTE: Lottery, Gambling and Betting are also taxable under the Goods and Services Tax (GST) Act, 2017 Advantages Disadvantages Lesser compliance (returns, maintaining books of record, issuance of invoices). A limited territory of business. Limited tax liability. No Input Tax Credit available to composition dealers High liquidity as taxes are at a lower rate. The taxpayer will not be eligible to supply non-taxable goods under GST such as alcohol and goods through an e-commerce portal.