Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

Physical capital refers to tangible, man-made assets that businesses purchase or invest in to produce goods or services. It is part of one of the three factors of production, alongside land (natural resources) and labor (human resources). Physical capital includes assets like machines, vehicles, computers, and buildings. It is categorized into two types:

Fixed capital consists of long-term physical investments used repeatedly in production over multiple accounting periods. These assets, such as buildings and machinery, are not consumed during production but have a long-term value that may depreciate over time. Examples include a farmer’s plough, a computer etc. Working capital refers to liquid assets like cash, inventory, or materials that can be quickly converted into currency. It is utilized during the production process to create the final product. Yarn used by a weaver, petrol etc are examples.

Pair 1 is incorrectly matched: A farmer’s plough is a long-term asset used repeatedly over many years in the production process. It is classified as fixed capital, not working capital.

Pair 2 is correctly matched: A computer is a durable asset used in production over a long period, making it part of fixed capital.

Pair 3 is incorrectly matched: Yarn is a raw material consumed during production, so ishoul be classified as working capital, not fixed capital.

Pair 4 is correctly matched: Petrol is consumed in the production process and needs regular replenishment, making it part of working capital. 6 Indian Economy

Explanation

Statement 1 is correct: The Digital India Land Records Modernization Programme (formerly the National Land Record Modernization Programme) was revamped into a Central Sector Scheme from April 1, 2016, with full funding (100 %) provided by the Central Government for its implementation.

Statement 2 is correct: A major objective of DILRMP is the dig-itization of cadastral maps to improve land record transparency. Cadastral maps show land boundaries and ownership details at a detailed level and are crucial for modern land administration.

Statement 3 is correct: To address linguistic barriers, the government, with technical support from C-DAC Pune, has initiated the transliteration of land records into any of the 22 languages listed in Schedule VIII of the Constitution. As of February 2025, 17 States and Union Territories have adopted transliteration tools for their land records under the Digital India Land Records Modernisation Programme (DILRMP).

Explanation

Statement 1 is correct: According to the Companies Act, 2013, CSR activities must benefit society at large and not be directed toward the company’s employees or their families. Activities that serve the company’s business interests or are part of its normal operations are also excluded from being considered CSR.

Statement 2 is incorrect: The CSR rules mandate that eligible companies spend at least 2% of their average net profits from the preceding three financial years on CSR activities. This is a clearly defined minimum spending requirement under Section 135 of the Companies Act, 2013.

Explanation

Collateralized Borrowing and Lending Obligations (CBLO) are short-term money market instruments used for borrowing and lending funds. They are primarily used by financial institutions such as banks, mutual funds, and insurance companies to manage liquidity. CBLO transactions are collateralized, meaning they require securities (such as government bonds) as collateral, reducing credit risk. The instrument was introduced by the Clearing Corporation of India Ltd. (CCIL) to facilitate secure and efficient borrowing and lending of funds in the money market. CBLOs facilitate borrowing and lending transactions that are fully collateralized, typically using government securities as collateral. CBLOs are primarily used by financial institutions to man-age liquidity and funding needs over short durations, ranging from overnight to one year.

Explanation

The Central Bank Digital Currency (CBDC), or Digital Rupee (e), is the Reserve Bank of India’s official digital currency, interchangeable one-to-one with fiat currency and recognized as legal tender. It can be used by individuals, businesses, and government entities for transactions without needing a bank account, especially in the case of retail CBDC, which works like digital cash. CBDCs help reduce the costs of printing, transporting, and storing physical currency while improving transaction efficiency by minimizing intermediaries and enabling faster payments.

Statement 1 is correct: The Digital Rupee (e) is issued by the RBI as Central Bank Digital Currency (CBDC) and functions as legal tender, just like physical cash. Its issuance is aligned with monetary policy objectives, including promoting financial inclusion and reducing dependency on cash.

Statement 2 is correct: Since the Digital Rupee is an obligation of the central bank, it is recorded as a liability on RBI’s balance sheet, similar to physical currency notes issued by the central bank.

Statement 3 is incorrect: The Digital Rupee, like any fiat currency, is not inherently protected against inflation. Its value depends on broader economic factors, including monetary policy, demand-supply conditions, and RBI’s inflation management strategies.

Statement 4 is correct: The digital rupee can be exchanged for physical cash or commercial bank money at par value without any restrictions. CBDC is freely convertible into cash and money from commercial banks.

Explanation

Statement 1 is incorrect: The Reserve Bank of India (RBI) mandates a minimum capital requirement for wholly owned subsidiaries (WOS) of foreign banks operating in India. As per current regulations, the minimum paid-up equity capital required is 500 crore to ensure financial stability and a strong capital base. The WOS was to be treated on par with the existing branches of foreign banks for branch expansion with branches in a year and preference for branch expansion in under-banked areas.

Statement 2 is incorrect: According to RBI guidelines, the board of directors of a Wholly Owned Subsidiary (WOS) of a foreign bank must follow these rules:

At least 51% of the board members must meet the qualifications specified under Section 10A of the Banking Regulation Act, 1949. At least two-thirds of the directors must be non-executive, meaning they are not involved in the day-to-day operations. At least one-third of the directors must be independent, with no ties to the subsidiary, its parent bank, or any related entity. At least 50% of the directors must be Indian nationals, NRIs (Non-Resident Indians), or PIOs (Persons of Indian Origin), with at least one-third being Indian nationals residing in India. The WOS must have a Part-time Chairman and a full-time CEO. Under the scheme for establishing wholly owned subsidiaries of foreign banks in India, at least 50% of the directors must be either Indian nationals, Non-Resident Indians (NRIs), or Persons of Indian Origin (PIOs). Additionally, one-third of the directors must be Indian nationals residing in India. However, since PIOs are not necessarily classified as Indian nationals, the requirement of having at least 50% Indian nationals is not mandatory.

Explanation

Statement 1 is incorrect: Liquidity Adjustment Facility(LAF) is monetary policy tool of RBI to inject or absorb liquidity. Under the LAF Scheme, the Reserve Bank will continue to have the discretion to conduct overnight repo or longer term repo auctions at fixed rate or at variable rates depending on market conditions and other relevant factors. NBFCs generally do not have direct access to the LAF window of the RBI. The LAF is primarily available to scheduled commercial banks and primary dealers. While NBFCs can indirectly benefit through banks accessing LAF, they cannot access it directly. Primary Dealers (PDs) are eligible to access the Liquidity Adjustment Facility (LAF) of the Reserve Bank of India (RBI). According to RBI guidelines, a non-bank entity intending to operate as a Primary Dealer must first register as a Non-Banking Financial Company (NBFC) under Section 45-IA of the RBI Act, 1934. Thus, while NBFCs generally do not have direct access to the LAF, those meeting specific regulatory requirements may be granted access under certain conditions.

Statement 2 is correct: FIIs are allowed to invest in G-Secs within prescribed limits set by the RBI and the government. These limits have been periodically increased to encourage foreign investment in India’s debt market. The Reserve Bank of India (RBI) on April 26, 2024 kept the investment limit by Foreign Portfolio Investors (FPI) in government securities unchanged at 6 percent of the outstanding securities stocks for 2024-25. The RBI has announced that it would maintain the FPI limits for investment in state government securities and corporate bonds at 2 percent and 15 percent, respectively, of the outstanding securities stocks for FY25.

Statement 3 is correct: Stock exchanges in India, such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), can offer separate trading platforms for debt instruments. For instance, the NSE operates the NDS-OM (Negotiated Dealing System-Order Matching) platform for government securities, facilitating real-time trading among institutional investors.

Explanation

Statement I is correct: In syndicated lending, multiple lenders share the loan amount, which reduces the exposure of any single lender to default risk. If the borrower faces financial trouble, the loss is distributed among multiple lenders, rather than falling entirely on one institution. This mechanism enhances financial stability and ensures that large borrowers can still access capital.

Statement II is incorrect: The loan can involve a fixed amount of funds, a credit line, or a combination of the two. Thus, syndicate lending offers flexibility of structuring and customization of the loan according to the specific needs of the borrower.

Explanation

Option 1 is correct: Insurance companies in India can trade in both Corporate Bonds and Government Securities (G-Secs). The Insurance Regulatory and Development Authority of India (IRDAI) allows insurance companies to invest in Government Bonds, Corporate Bonds, and Infrastructure Bonds, subject to prescribed limits.

Option 2 is correct: Pension funds are allowed to invest in both government securities (G-Secs) and corporate bonds. For example, the Pension Fund Regulatory and Development Authority (PFRDA) permits pension funds under the National Pension System (NPS) to invest in Government Bonds, State Development Loans (SDLs), and Corporate Debt. Since pension funds focus on long-term stability, they often prefer G-Secs, which offer secure and steady returns for retirement benefits.

Option 3 is correct: Retail investors can trade in both corporate bonds and government securities. The RBI’s Retail Direct Scheme enables individuals to directly buy and sell government securities. Corporate bonds are available for trading on the debt segments of BSE and NSE, and retail investors can access them through debt mutual funds, bond markets, and stock exchanges.

Explanation

A financial instrument is a contractual agreement that creates a financial asset for one party and a corresponding financial liability or equity instrument for another party. Options 1 and 3 are correct:

Exchange-Traded Funds (ETF) are considered financial instruments as they represent a portfolio of assets (stocks, bonds, or commodities) and are traded on stock exchanges. They are intangible assets that provide claims to future cash flows or ownership interests. A currency swap is a financial instrument used in international finance. It involves the exchange of principal and interest payments in different currencies between two parties, helping manage foreign exchange risks. Option 2 is incorrect: Motor vehicles are not financial instruments. They are physical assets used for transportation and do not represent any contractual claim to future cash flows or monetary value in financial markets.