Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

The Special Economic Zones (SEZ) Act, 2005 was enacted to boost economic growth by creating designated zones with special incentives for businesses.

Statement 1 is correct: One of the key objectives of the SEZ Act is to develop world-class infrastructure facilities within these zones. This includes roads, power, water supply, and other utilities to attract businesses and promote industrial growth.

Statement 2 is correct: The SEZ Act aims to attract foreign direct investment (FDI) by offering tax incentives, simplified regulations, and a business-friendly environment. This helps in bringing in capital and technology from abroad.

Statement 3 is incorrect: The SEZ Act is not limited to promoting exports of services only. It aims to promote both goods and services exports. SEZs are designed to boost over-all export-oriented production, including manufacturing, IT services, and other sectors.

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.

Explanation

The National Investment Fund (NIF) was created in India to receive the proceeds from the disinvestment of public sector undertakings (PSUs). The idea was to use these funds strategically for social sector development and investment.

Statement 1 is incorrect: the NIF’s assets were managed by selected public sector mutual funds, namely UTI Asset Management Company Ltd., SBI Funds Management Private Ltd., and LIC Mutual Fund Asset Management Company Ltd., not directly by the Union Ministry of Finance.

Statement 2 is incorrect: The NIF was kept outside the Consolidated Fund of India. This was done to ensure that the disinvestment proceeds were used for their intended purpose (social sector development) and not simply absorbed into general government expenditure.

Statement 3 is correct: The Government appoints Asset Management Companies (AMCs) from the public sector to manage the fund.

Statement 4 is correct: 75% of the annual income from NIF is allocated to social sector schemes (education, health, employment). 25% is used for capital investment in profitable/ revivable CPSEs to support their expansion and diversification.

Explanation

India receives significant FDI from Mauritius primarily due to the Double Taxation Avoidance Agreement (DTAA) between the two countries. DTAA is a tax treaty that prevents individuals/entities from being taxed twice on the same income. It promotes cross-border investments by offering tax relief. Historically, this agreement allowed Mauritius-based investors to route investments into India with tax benefits, leading to higher FDI flows compared to countries like the UK and France. India has DTAA with several countries, including Mauritius, Singapore, USA, UK, Germany, Japan, Canada, France, Australia, Netherlands, China, and Bangladesh. India does not have DTAA with Afghanistan, Iraq, and Pakistan.

Explanation

The CRR is the percentage of a bank’s total deposits that it must keep as reserves with the RBI in the form of cash. This is a monetary policy tool used by the RBI to control liquidity in the economy. This amount cannot be used for lending or investment by banks. When the RBI increases the CRR, banks are required to keep a higher proportion of their deposits as reserves. This reduces the amount of money available with banks for lending to businesses and individuals.

Option (b) is incorrect: RBI does not lend money to the public or businesses. It only regulates the money supply through tools like CRR.

Option (c) is incorrect: The Union Government’s borrowing and lending activities are separate from the RBI’s monetary policy tools like CRR.

Option (d) is incorrect: An increase in CRR reduces (not increases) the amount of money available for lending by commercial banks.

Explanation

The share of excise duty in gross tax revenue saw a significant decline in the five years leading up to 2010. This was primarily due to the shift toward service tax and the rationalization of indirect taxes. The reduction in excise duty rates for essential goods, introduction of exemptions, and gradual steps toward the Goods and Services Tax (GST) framework also contributed to this trend. According to the Economic Survey 2009-10, excise duty collections as a percentage of total revenue declined as the government focused on reducing cascading effects in indirect taxation to promote industrial growth and exports. This shift in taxation policy marked the transition of India’s indirect tax structure to a more consumption-based taxation system. Note: If this question were asked today, excise duty has been largely replaced by GST for most goods, further reducing its contribution to tax revenue.

Explanation

The State Finance Commission (SFC) is the authority responsible for making recommendations to the Governor of a State regarding the principles for determining the taxes, duties, tolls, and fees that may be assigned to or appropriated by the Panchayats (local self-governments) in that State. It is constituted under Article 243-I of the Indian Constitution by the Governor of each state. It makes recommendations regarding the distribution of financial resources between the State Government and the Panchayati Raj Institutions (PRIs), including the principles for:

1. Determining taxes, duties, tolls, and fees to be assigned or appropriated by Panchayats.

2. Grants-in-aid to the Panchayats from the state’s consolidated fund.

3. Measures to improve the financial position of Panchayats.

Explanation

A fiscal stimulus refers to government measures aimed at boosting economic activity during periods of recession or economic downturn. These measures typically involve either increasing government spending, reducing taxes, or both, to enhance aggregate demand and mitigate the effects of a recession.

Statement 1 is correct: Reducing tax rates increases disposable income for individuals and businesses, encouraging higher consumption and investment. This surge in spending can stimulate economic activity.

Statement 2 is correct: Increasing government expenditures directly injects money into the economy, leading to increased demand for goods and services. This can result in job creation and heightened economic output.

Statement 3 is incorrect: Abolishing subsidies can lead to higher prices for certain goods and services, potentially reducing consumer spending. During a recession, this could further suppress demand, counteracting stimulative efforts.