Indian Economy: UPSC Previous Year Questions (Prelims)

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.

Explanation

The Index of Eight Core Industries (ICI) is a monthly production index that measures the performance of eight crucial sectors of the Indian economy. These industries collectively account for 40.27% of the weight of items included in the Index of Industrial Production (IIP) as of September 2024. The eight core industries and their respective weights in the ICI are as follows:

Refinery Products: 28.04% Electricity: 19.85% Steel: 17.92% Coal: 10.33% Crude Oil: 8.98% Natural Gas: 6.88% Cement: 5.37% Fertilizers: 2.63%

Explanation

Option (a) is incorrect: While inclusive growth and poverty reduction were important goals, they were not the main objective of the 12th Five-Year Plan. The plan emphasized faster and sustainable growth in addition to inclusivity.

Option (b) is incorrect: This option misses the "faster" aspect, which was a key focus of the 12th Plan. The plan aimed to accelerate economic growth while making it sustainable and inclusive.

Option (c) is incorrect: While reducing unemployment was an important goal, it was not explicitly stated in the main objective of 12th FYP.

Option (d) is correct: The Twelfth Five Year Plan (2012-2017) was launched with the objective of faster, sustainable, and more inclusive growth. It was the last five-year plan. Its growth rate target was 8%. Later, the government dissolved the Planning Commission with the creation of NITI Aayog. Major objectives of the Twelfth Five-Year Plan:

To remove gender and social gaps in school enrolment. To enhance access to higher education. To reduce malnutrition among children aged 0-3 years. To provide electricity to all villages. Create new job opportunities in non-agricultural sectors.

Explanation

Venture capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. The majority of venture capital is often provided by wealthy individuals, investment banks, and other financial organisations. They often provide mentorship and strategic guidance in addition to funds. Investors take on higher risks with the expectation of high returns if the business succeeds. In India, firms such as Sequoia Capital, Accel Partners, and Indian Angel Network are well-known VC providers. Sectors like technology, e-commerce, and fintech have seen significant VC investments.

Explanation

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility(LAF). The MSF rate is pegged 100 basis points or 1 percentage point above the repo rate. Under MSF banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL). Demand Liabilities Demand Liabilities of a bank are liabilities which are pay-able on demand. These include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, cash certificates and cumulative/ recurring deposits, Demand Drafts (DDs), unclaimed deposits, credit balances in the Cash Credit account etc. Time Liabilities Time Liabilities of a bank are those which are payable otherwise than on demand. These include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits etc. The difference between a bank’s total demand and time liabilities (deposits) and its deposits in the form of assets held by another bank is represented by the term "Net Demand and Time Liabilities".

Explanation

Banking Correspondents (BCs) also known as Bank Saathis are individuals or entities hired by banks in India (including commercial banks, Regional Rural Banks (RRBs), and Local Area Banks (LABs)) to provide banking services in areas with limited or no banking access. A BC acts as an agent for the bank, serving as a substitute for the bank’s physical branch.

Statement 1 is correct: The Reserve Bank of India (RBI) launched the Business Correspondent (BC) Model in 2006 to improve financial inclusion in India. BCs play a critical role in disbursing direct benefit transfers (DBT), including subsidies and social security payments, to beneficiaries in rural areas. This eliminates the need for beneficiaries to travel long distances to a bank branch to collect their payments.

Statement 2 is correct: BCs offer a range of basic banking services, including accepting deposits, facilitating withdrawals, and enabling other small transactions. This brings basic banking services to people who previously had limited or no access.

Explanation

Statutory Reserve Requirements, such as the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are regulatory tools employed by the Reserve Bank of India (RBI) to ensure the stability and liquidity of the banking system. These requirements mandate that commercial banks maintain a certain percentage of their net demand and time liabilities (NDTL) in the form of liquid asset

Statement 1 is correct: When the central bank wants to increase the money supply in the economy, it lowers the reserve ratio. Hence it enables the Central Bank to control the amount of advances the banks can create.

Statement 2 is correct: RBI requires commercial banks to keep reserves in order to ensure that banks have sufficient assets to draw on when account holders want to be paid.

Statement 3 is incorrect: Reserve requirements are de-signed as "precautionary measures" to control the economy and not to stop banks from making "excessive" profit.

Statement 4 is incorrect: Vault cash (cash held by banks in their vaults) is separate from CRR. CRR is the cash banks must hold with the RBI, not in their own vaults. While banks need sufficient vault cash for daily operations, this is a separate operational requirement, not directly enforced by the SRR.

Explanation

Planned expenditures are defined as the expenditure on the programmes that are mentioned in our country’s current five-year plan. For example, electricity, water, communication, transportation, agriculture and other activities, social services, etc. In simple terms, the Expenditure Report shows the expenditures made by Central Aid for state and federal needs and items under the Central Plan. In the context of the Union Budget of India, Non-Plan Expenditure refers to all expenditures of the government that are not part of the Five-Year Plans. This classification was used prior to 2017, after which the distinction between Plan and Non-Plan Expenditure was removed. Non-Plan Expenditure includes both developmental and non-developmental spending and is of-ten obligatory in nature. The major components of Non-Plan Expenditure are:

1. Defence Expenditure: This includes spending on the armed forces, procurement of defense equipment, and other related activities.

2. Interest Payments: These are payments made by the government to service its debt, both domestic and foreign.

3. Salaries and Pensions: This covers the salaries of government employees and pensions for retired personnel.

4. Subsidies: Financial support provided by the government to various sectors, including food, fertilizers, and petroleum, to keep prices low for consumers.

Explanation

The balance of payment(BoP) is a record of all monetary transactions made between the residents of one country and the rest of the world. A balance of payments deficit means the nation imports more than it exports. The current account and capital account are the two components that constitute the balance of payments.

Option (c) is correct: The Current Account of a country’s Balance of Payments (BoP) records the transactions of goods, services, income, and current transfers between residents and non-residents. It comprises the following components:

Balance of Trade (Goods): This is the difference between the value of a country’s exports and imports of tangible goods. Balance of Invisibles:

Services: Transactions involving services such as tourism, banking, and consulting. Income: Earnings from investments abroad (like interest and dividends) minus payments made to foreign investors. Foreign assets are part of the Financial Account, which records investments in financial instruments and assets between countries. SDRs are international reserve assets created by the Inter-national Monetary Fund (IMF) and are recorded in the Financial Account of the BoP.

Explanation

The World Economic Outlook (WEO) is a report by the International Monetary Fund (IMF) that analyses key parts of the IMF’s surveillance of economic developments and policies in its member countries. The World Economic Outlook (WEO) presents the IMF’s analysis and projections of global economic developments and classifies their analysis by region and stage of economic development. It is published twice a year in April and October, with updates in January and July. Other Report published by IMF: Global Financial Stability Report