Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

The preparation and presentation of the Union Budget to the Parliament is primarily handled by the Budget Division within the Department of Economic Affairs (DEA), which operates under the Ministry of Finance. The DEA is the nodal agency responsible for formulating and monitoring the country’s economic policies and programs. A principal responsibility of this department is the preparation and presentation of the Union Budget to the Parliament. Options (a), (c), and (d) are incorrect:

Department of Revenue administers taxes (both direct and indirect) and provides tax revenue estimates for the budget. Department of Financial Services deals with financial institutions, banking, insurance, and pension reforms and provides sector-specific information for the budget. Department of Expenditure manages government expenditure, budgeting, and accounts and helps in implementing expenditure control mechanisms.

Explanation

Fiscal deficit refers to the gap between the government’s total expenditure and its total revenue, excluding money from borrowings.

Statement 1 is incorrect: FDI involves investment from foreign entities into domestic businesses and assets. While FDI can stimulate economic growth, enhance infrastructure, and create jobs, it does not directly impact the fiscal deficit. This is because FDI pertains to the private sector and doesn’t directly alter government revenues or expenditures.

Statement 2 is incorrect: Privatization of higher educational institutions may reduce the government’s expenditure on education but it is not a direct or widely accepted measure to control fiscal deficit.

Statement 3 is correct: Reducing the size of the bureaucracy directly cuts government expenditure on salaries, pensions, and administrative costs. This is a valid measure to control fiscal deficit as it reduces the government’s recurring expenditure.

Statement 4 is correct: Selling or offloading shares of PSUs (disinvestment) is a direct measure to increase government revenue. The proceeds from disinvestment are used to bridge the fiscal deficit.

Explanation

The International Development Association (IDA) is administered by the International Bank for Reconstruction and Development (IBRD), which is part of the World Bank Group. IDA provides concessional loans and grants to the world’s poorest countries to promote economic growth and reduce poverty. It complements the efforts of IBRD, which primarily supports middle-income nations. Options (b), (c), and (d) are incorrect:

International Fund for Agricultural Devel-opment (IFAD): IFAD is a specialized UN agency that focuses on transforming agriculture, rural economies, and food systems. It provides funding to smallholder farmers and vulnerable rural populations to improve food security and sustainable farming practices. Unlike IDA, IFAD does not administer large-scale concessional lending programs for broad economic reforms. United Nations Development Programme (UNDP): UNDP works on global development goals, including poverty eradication, governance, and climate action. While UNDP and IDA both support developing countries, UNDP does not administer financial assistance through concessional loans. United Nations Industrial Development Organization (UNIDO): UNIDO promotes industrial growth, technology adoption, and economic diversification in developing nations. It provides technical assistance and policy support but does not manage concessional lending like IDA.

Explanation

As of the latest updates, the Securities Transaction Tax (STT) in India remains a significant source of revenue for the government. Introduced in 2004, STT is a direct tax levied on the purchase and sale of securities listed on recognized stock ex-changes.

Option (a) is correct: In India, taxes on stock exchange and futures market transactions fall under the Securities Trans-action Tax (STT), which is levied by the Union Government under the Securities Transaction Tax Act, 2004. The tax is imposed on the purchase or sale of listed securities, including equities and derivatives.

Statement 1 is correct: The Union Government levies and collects the STT, as per the provisions of the Finance Act (2004).

Statement 2 is incorrect: State governments do not collect STT. Instead, stamp duties on share transfers are collected by states, but not the transaction tax.

Explanation

Financial inclusion refers to providing affordable and accessible financial services, such as savings accounts, credit, and insurance, to all segments of society, especially the underprivileged and rural populations.

Statement 1 is correct: In 1969 and 1980, the Government of India nationalized several major commercial banks. This move aimed to shift the focus from "class banking" to "mass banking," thereby extending banking services to the underprivileged and rural sectors. Post-nationalization, these banks expanded their branch networks into rural areas, providing financial services to previously unbanked populations.

Statement 2 is correct: RRBs were established under the Regional Rural Banks Act of 1976 to develop the rural economy by providing credit and other facilities to small and marginal farmers, agricultural laborers, artisans, and small entrepreneurs. The primary objective was to bridge the credit gap in rural areas and integrate them into the formal banking system, thereby promoting financial inclusion.

Statement 3 is correct: The Lead Bank Scheme, introduced by the Reserve Bank of India, assigned specific banks the responsibility of acting as a consortium leader in particular districts. These lead banks were tasked with adopting villages to ensure the provision of banking services and credit facilities. This initiative aimed to promote financial inclusion by fostering a banking relationship with rural communities and addressing their specific financial needs.

Explanation

Option (c) is correct: Special Drawing Rights (SDR) is considered artificial currency as it is not a physical currency but a reserve asset created by the International Monetary Fund (IMF). It serves as a unit of account for IMF member countries and is used for international transactions and reserve management. The value of SDR is determined based on a basket of five major currencies: US Dollar, Euro, Chinese Yuan, Japanese Yen, and British Pound. Options (a), (b) and (d) are incorrect: ADR (American Depository Receipts) and GDR (Global Depository Receipts) are not currencies but financial instruments used by companies to raise capital from foreign markets. ADRs are financial instruments that represent shares of a foreign company, but they are traded on U.S. stock exchanges (like NYSE or NASDAQ). They allow U.S. investors to invest in non-U.S. companies without dealing with foreign markets or currencies. Example: An Indian company like Infosys can issue ADRs to let American investors buy its shares in the U.S. GDRs are similar to ADRs but are traded on multiple international markets, such as the London or Luxembourg stock exchanges. They help companies raise capital from investors worldwide, not limited to the U.S. Example:

Reliance Industries might issue GDRs to attract investors from Europe, Asia, or other regions.

Explanation

Statutory Liquidity Ratio (SLR) refers to the minimum percentage of a commercial bank’s net demand and time liabilities (NDTL) that it must maintain in the form of liquid assets such as government securities (G-Secs), cash, or gold before offering credit to customers. Commercial banks are required by the Reserve Bank of India (RBI) to maintain this percentage to ensure liquidity and stability in the financial system. Since banks invest in government securities to meet their SLR requirements, it effectively becomes a source of credit to the government, as the government raises funds through the issuance of bonds and securities. Options (a), (b) and (c) are incorrect:

Cash Credit Ratio (CRR) is the percentage of NDTL that banks must keep with the RBI in cash. Unlike SLR, CRR does not directly help in providing credit to the government because it is meant to control liquidity in the economy and not to finance government debt. Debt Service Obligation (DSO) refers to the government’s or an entity’s obligation to repay debt, including principal and interest. It is a measure of a borrower’s ability to repay loans but is not a mechanism used by banks to provide credit to the government. Liquidity Adjustment Facility (LAF) is a tool used by the RBI to manage liquidity in the banking system through repo and reverse repo operations. It is not specifically meant for providing credit to the government but rather for controlling short-term liquidity in the economy.

Explanation

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 that provides banking services without holding a banking license. It is regulated by the RBI under the RBI Act, 1934. It engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit fund business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. Difference Between NBFCs and Banks Feature NBFCs Banks Regulator RBI (Non-Banking Financial Companies Division) RBI (Banking Regulation Act) Accepts Demand Deposits (Savings & Current Accounts)? No Yes Part of Payment and Settlement System? No Yes Can Issue Cheques? No Yes Lending Activities? Yes Yes

Statement 1 is incorrect: NBFCs can engage in the acquisition of government securities. Many NBFCs invest in government securities as part of their portfolio management and liquidity management strategies. The RBI allows NBFCs to invest in government securities, subject to certain regulations.

Statement 2 is correct: NBFCs are not allowed to accept demand deposits. They can only accept fixed deposits (FDs) with specific regulatory approvals from the Reserve Bank of India (RBI).

Explanation

In financial terminology, a "bear" refers to an investor who anticipates that the price of a particular security or the overall market will decline. Acting on this belief, such investors may engage in strategies like short selling, where they sell securities they do not currently own with the intention of re-purchasing them later at a lower price, thereby securing a profit. Options (b), (c) and (d) are incorrect:

An investor who expects prices to rise is called a bull, not a bear. Bulls are optimistic about the market and buy securities with the expectation of selling them at higher prices in the future. A shareholder or bondholder is simply an investor who owns shares or bonds, regardless of their market outlook. A lender or bondholder is not necessarily a bear. A bear is specifically an investor with a pessimistic outlook on the market or a security.

Explanation

In India, the interest rates on savings accounts were de-regulated by the Reserve Bank of India (RBI) in 2011. This deregulation allowed individual banks to set their own interest rates on savings deposits. At the time when question was asked they were fixed by RBI, which now stands deregulated.