Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

Statement 1 is correct: When the central bank buys government securities (like bonds) from the public it injects money into the economy. The sellers of these securities receive cash, increasing the money supply. This is a key tool of monetary policy known as open market operations.

Statement 2 is incorrect: When the public deposits currency into commercial banks, it doesn’t increase the overall money supply. It simply changes the form of money. Currency in circulation decreases but bank deposits increase by the same amount. These deposits can then be used by banks to create credit. Thus the initial act of depositing cash is neutral with respect to the money supply.

Statement 3 is correct: When the government borrows directly from the central bank, it often leads to an increase in the money supply. The central bank essentially creates new money to lend to the government. This is sometimes referred to as "monetizing the debt."

Statement 4 is incorrect: When the Central Bank sells government securities to the public, it effectively reduces the amount of money circulating in the economy. The public (individuals or financial institutions) buys these securities by paying money to the Central Bank. This payment transfers money from the public’s hands to the Central Bank, which essentially "locks away" this cash. This tool is part of Open Market Operations (OMO) aimed at controlling inflation or overheating of the economy.

Explanation

The Lead Bank Scheme (LBS) was introduced by the Reserve Bank of India (RBI) in 1969 following the recommendations of the Gadgil Study Group (1969). The primary objective of the scheme is to promote banking penetration, credit flow, and financial inclusion in rural areas by assigning a specific bank to act as the lead bank for a district. This lead bank is responsible for coordinating banking activities and ensuring that credit reaches priority sectors like agriculture, MSMEs, and weaker sections. Key Features of Lead Bank Scheme (LBS):

1. Each district is assigned a Lead Bank (mostly a public sector or large private bank).

2. Lead Bank is responsible for coordinating financial institutions, monitoring credit flow, and improving banking services in its district.

3. Priority Sector Lending (PSL) is a major focus, ensuring credit to agriculture, MSMEs, and weaker sections.

4. District Credit Plans (DCPs) are formulated to set targets for bank credit expansion in the region.

5. SLBC (State Level Bankers’ Committee) and DLCC (District Level Coordination Committees) ensure implementation of the scheme.

Explanation

A teaser loan is a loan with an initially low-interest rate for a fixed period, after which the rate increases gradually. They are commonly used in home loans, credit cards, and other financing schemes to attract borrowers. State Bank of India (SBI) introduced teaser loans in 2009 for home loans in India. Subprime lending is the practice of lending to borrowers with a low credit rating that may be exposed to the risk of default in future.

Statement 1 is correct: Teaser loans are often linked with subprime lending practices, where loans are extended to borrowers with lower creditworthiness. The low initial rates can lure borrowers who may struggle to repay when the rates increase, leading to a higher risk of defaults in the future. After the initial low-rate period ends, borrowers may face significantly higher payments. If they are unable to meet these higher payments, defaults can occur. This puts financial institutions at risk and can contribute to broader economic instability.

Statement 2 is incorrect: Teaser loans in India are not primarily given to inexperienced entrepreneurs for setting up manufacturing or export units. They are mostly offered in the housing loan segment to attract homebuyers with lower initial EMIs.

Explanation

Statement 1 is incorrect: An increase in sales of a product typically results in revenue or business profits, not capital gains. Capital gains arise from the sale of an asset at a price higher than its purchase price, not from the regular sale of products.

Statement 2 is correct: Capital gains can arise when the value of an asset, such as property, appreciates over time. If the property is sold at a higher price than the original purchase price, the difference is considered a capital gain.

Statement 3 is correct: If the value of an asset, such as a painting, increases due to factors like popularity, and you sell it for a higher price than what you paid, the difference is considered a capital gain.

Explanation

Foreign Direct Investment (FDI) refers to an investment made by an individual or entity from one country into business interests located in another country, with the intent of establishing a lasting interest. This typically involves acquiring a significant degree of influence or control over the foreign company’s operations. In the context of India, FDI includes:

Subsidiaries of Foreign Companies in India are companies incorporated in India that are wholly or majority-owned by foreign parent companies. Majority Foreign Equity Holding in Indian Companies occurs when foreign investors hold more than 50% equity in an Indian company, granting them significant control over its operations. Companies Exclusively Financed by Foreign Companies are entities in India that receive all their capital from foreign investors or parent companies, leading to substantial foreign control. On the other hand, Portfolio Investment refers to investments in a country’s financial assets, such as stocks and bonds, without the intent of controlling or managing the companies. Such investments are typically short-term and speculative in nature. Therefore, Portfolio Investment is not considered a form of FDI.

Explanation

Statement 1 is incorrect: The World Bank does not determine currency exchange rates; these are influenced by market forces and economic indicators. The World Bank is important to the source of financial and technical assistance to developing countries around the world.

Statement 2 is correct: A major factor influencing a currency’s value is the demand for the goods and services that a country offers. If there’s high global demand for a country’s ex-ports, there will be a higher demand for its currency to purchase those exports. This increased demand will generally push the currency’s value up. On the contrary if demand for a country’s goods and services is low, demand for its currency will be low, putting downward pressure on its value.

Statement 3 is correct: Political stability fosters investor confidence, attracting foreign investment and strengthening the currency. Political instability can lead to capital flight and currency depreciation.

Statement 4 is incorrect: While the economic potential of a country (e.g., growth prospects, productivity, and innovation) can influence long-term currency trends, it is not a direct factor in the day-to-day determination of exchange rates.

Explanation

Statement 1 is incorrect: The National Rural Livelihood Mission (NRLM) does not focus on setting up new manufacturing industries or agribusiness centers directly. Its primary focus is on promoting self-employment and organization of the rural poor through self-help groups (SHGs).

Statement 2 is correct: NRLM aims to strengthen self-help groups (SHGs) and provide skill development to enhance the livelihood options of the rural poor.

Statement 3 is incorrect: NRLM does not involve the free distribution of agricultural inputs like seeds, fertilizers, or irrigation equipment. These activities are covered under different agricultural schemes.

Explanation

Accredited Social Health Activists (ASHAs) are community health workers under the National Rural Health Mission (NRHM), trained to promote maternal and child health, facilitate access to healthcare services, and provide basic health education on nutrition, immunisation, and hygiene.

Statement 1 is correct: ASHAs assist women in accessing healthcare facilities for antenatal check-ups, delivery, and post-natal care.

Statement 2 is correct: ASHAs are trained to use pregnancy test kits for early detection and guiding women accordingly.

Statement 3 is correct: One of the core responsibilities of ASHAs is to educate the community about nutrition, immunisation, family planning, and hygiene.

Statement 4 is incorrect: ASHAs are not trained to conduct deliveries. They are responsible for facilitating access to skilled birth attendants and institutional deliveries but do not perform the deliveries themselves.

Explanation

Janani Suraksha Yojana (JSY) is a safe motherhood intervention under the National Rural Health Mission (NRHM).

Statement 1 is correct: The primary goal of Janani Suraksha Yojana (JSY) is to reduce maternal and infant mortality by encouraging pregnant women to opt for institutional deliveries in healthcare facilities, ensuring safe childbirth under professional supervision.

Statement 2 is correct: JSY is a centrally sponsored scheme, which integrates cash assistance with delivery and post-de-livery care to help cover expenses related to childbirth, making institutional deliveries more accessible.

Statement 3 is incorrect: JSY does not compensate for wage loss during pregnancy or confinement. Its focus is on promoting safe deliveries through financial support for delivery costs, not income replacement.

Explanation

The Employees’ State Insurance (ESI) Scheme is a social security and health insurance program for Indian workers, managed by the Employees’ State Insurance Corporation (ESIC) under the Ministry of Labour and Employment. Launched in 1952 under the ESI Act, 1948, it provides financial protection to employees against sickness, maternity, disability, and work-related injuries. This Act applies, in the first instance, to non-seasonal factories employing 10 or more persons. Statements 1, 2, 3 and 4 are correct: The ESI Scheme initially covered factories but has expanded to include hotels and restaurants, motor transport undertakings, newspaper establishments, private medical institutions, shops, cinemas, educational institutions, and more. It applies to establishments with 10 or more employees (20 in some states) and covers employees earning up to 21,000/month (25,000 for persons with disabilities).