Indian Economy: UPSC Previous Year Questions (Prelims)

Explanation

Statement I is incorrect: Both interest and dividend income received from InvITs are taxable in the hands of investors. Interest income is treated as "income from other sources" under the Income Tax Act, 1961, and is subject to tax as per the applicable income tax slab rates. Dividends are taxable in the hands of investors, and the InvITs are required to deduct Tax Deducted at Source (TDS) before distributing dividends as of the current tax regime (post-2020).

Statement II is correct: InvITs are recognized as borrowers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(SARFAESI Act). This recognition allows InvITs to raise funds by issuing debt securities and provides a legal framework for lenders to enforce security interests in case of default. The SARFAESI Act is a critical legislation for the financial sector, enabling banks and financial institutions to recover non-performing assets (NPAs) efficiently.

Explanation

Capital markets are financial markets where long-term debt or equity-backed securities are bought and sold. They facilitate the raising of capital for businesses, governments, and other entities. Capital markets include:

Government Bond Market: Government bonds are long-term debt instruments issued by the government to finance its expenditures. They are part of the capital market because they have maturities typically longer than one year. Stock Market: The stock market is a quintessential part of the capital market, as it deals with the buying and selling of equity shares, which represent ownership in companies. Markets Not Included in Capital Markets:

Call money market is part of the money market, not the capital market. It deals with short-term funds (typically with maturities of 1 day to 14 days) used for interbank lending and borrowing. It is used to meet short-term liquidity requirements. Treasury bills (T-bills) are short-term debt instruments issued by the government with maturities of less than one year (usually 91 days, 182 days, or 364 days) which are part of the money market.

Explanation

In finance, beta is a numerical metric that gauges a stock’s volatility in relation to overall market fluctuations. It represents systematic risk, which stems from broader market movements, rather than company-specific factors. A benchmark index like the S&P 500 is assigned a beta value of 1.0 which serves as a reference point for evaluating individual stocks:

Beta > 1.0: The stock experiences greater volatility than the market. For instance, a beta of 1.3 implies that the stock is 30% more volatile than the market. Beta = 1.0: The stock moves in sync with the market. Beta < 1.0: The stock is less volatile compared to the market. Investors use beta to determine how a stock contributes to the overall risk of a diversified portfolio. A higher beta indicates greater risk but also the potential for higher returns, while a lower beta signifies reduced risk and lower expected returns. This concept plays a key role in the Capital Asset Pricing Model (CAPM) which estimates an asset’s expected return based on its beta and the anticipated market returns.

Explanation

Statement-I is correct: India’s public health system has historically been more focused on curative care (treating diseases after they occur) rather than preventive care (stopping diseases before they occur), promotive care (improving overall health and well-being), and rehabilitative care (helping patients recover after illness or injury). Statement-II is correct: India follows a decentralized approach to health care delivery. The responsibility for organizing and delivering health services lies primarily with the state governments. The central government plays a supportive role by providing policy guidance, funding, and technical assistance. The Constitution of India places health care under the State List (List II) which means states have the primary responsibility for health services. The central government’s role is largely limited to national health programs, policy formulation, and funding through schemes like the National Health Mission (NHM). Statement-II is not the correct explanation for Statement-I: The decentralized nature of health care delivery (Statement-II) does not inherently explain why the system focuses more on curative care (Statement-I). The focus on curative care is more related to historical priorities, resource allocation, and systemic challenges rather than the decentralized structure.

Explanation

Statement 1 is incorrect: Under India’s Foreign Direct Investment (FDI) policy, foreign-owned e-commerce firms operating as marketplace models (e.g., Amazon, Flipkart) can-not sell their own goods. They are only allowed to provide a platform for third-party sellers.

Statement 2 is correct: The FDI policy limits the degree to which foreign-owned e-commerce firms can own or control sellers on their platforms. For example, a single seller cannot account for more than 25% of the total sales on the platform(as per FDI policy).

Explanation

Statement 1 is incorrect: When inflation is higher than the RBI aims to reduce liquidity in the market. Buying government securities injects money into the economy by increasing liquidity, which would worsen inflation. On the contrary the RBI is more likely to sell government securities to absorb excess liquidity.

Statement 2 is correct: When the rupee depreciates rapidly its value falls relative to the U.S. dollar. This means more rupees are required to purchase one dollar, indicating a weakening rupee. To stabilize the rupee and prevent excessive depreciation, the Reserve Bank of India (RBI) can intervene in the foreign exchange market by selling dollars from its reserves. When the RBI sells dollars in the market, it increases the available supply of dollars in the foreign exchange market. Market participants (importers, banks, and investors) exchange rupees to buy these newly available dollars. This increases the demand for rupees. As demand for rupees rises, the pressure on the rupee to depreciate reduces. This can help stabilize or even strengthen the rupee.

Statement 3 is correct: A fall in US or EU interest rates makes Indian assets more attractive, prompting foreign investors to seek higher returns in India. This increases demand for the rupee, causing it to appreciate. A stronger rupee can hurt exports by making Indian goods more expensive globally. To stabilize the currency and protect export competitiveness, the RBI may intervene by buying dollars, increasing forex reserves and preventing excessive rupee appreciation.

Explanation

Credit Rating is assessment of the creditworthiness of a borrower. Individuals are given ‘credit scores’, while corporations and governments receive ‘credit ratings’.

Statement 1 is incorrect: Credit rating agencies in India are regulated by the Securities and Exchange Board of In-dia (SEBI) under SEBI (Credit Rating Agencies) Regulations, 1999, not the Reserve Bank of India (RBI).

Statement 2 is correct: ICRA (Investment Information and Credit Rating Agency of India Ltd.) was set up in 1991 by IFCI, LIC, SBI and select banks as well as financial institutions to rate debt instruments. The ICRA consists of a group of Companies including its subsidiaries. ICRA Limited is a public limited company listed on stock exchanges.

Statement 3 is correct: In India credit rating agencies registered under Securities and Exchange Board of India (SEBI) are CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings. Globally, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) control approximately 95% of ratings business.

Explanation

The Banks Board Bureau (BBB) was formed on the recommendations of ‘P. J. Nayak Committee to Review Governance of Boards of Banks.

Statement 1 is incorrect: The Banks Board Bureau (BBB) was headed by a prominent professional or former senior government official, rather than the Governor of the Re-serve Bank of India (RBI). Notably, its first Chairman was Shri Vinod Rai, who previously served as the Comptroller and Auditor General of India.

Statement 2 is correct: Its primary role was to recommend appointments for senior positions in Public Sector Banks (PSBs), Financial Institutions (FIs), and Public Sector Insurance Companies. In 2022, the BBB was replaced by the Financial Services Institutions Bureau (FSIB), which continues to carry out similar functions.

Statement 3 is correct: The BBB advises PSBs on various strategic matters such as: Business strategies, Capital raising plans, Governance reforms, etc. It also assists banks in addressing issues related to non-performing assets (NPAs) and improving operational efficiency.

Explanation

The Reserve Bank of India (RBI) is primarily responsible for maintaining price stability and controlling inflation in India. It does this through its monetary policy framework, which includes tools like the repo rate, reverse repo rate, open market operations, and cash reserve ratio (CRR). Under the Monetary Policy Framework Agreement (2016), the RBI, in collaboration with the Government of India has a mandate to maintain inflation at 4% (with a tolerance band of ±2%), i.e., between 2% to 6%.

Explanation

The term "Indirect Transfers" in the Indian context refers to situations where a foreign entity transfers shares, and those shares derive significant value from assets located in India. This concept gained prominence due to high-profile tax cases such as Vodafone and Cairn Energy. Case Study: In 2007, Vodafone International Holdings BV acquired shares of a Cayman Islands-based company which indirectly owned a majority stake in Indian telecom operator Hutchi-son Essar Limited. Although this transaction took place outside India between two foreign entities, India’s tax authorities argued that it involved the indirect transfer of Indian assets and demanded capital gains tax. Vodafone challenged this tax demand and the Supreme Court of India (2012) ruled in Vodafone’s favor, stating that indirect transfers were not taxable under Indian law at the time. The Indian government later amended tax laws retroactively, reinforcing its authority to tax such transactions. This led to international arbitration, which again ruled in Vodafone’s favor, citing unfair taxation practices.