UPSC 2019 Indian Economy Questions with Answers

Explanation

A bank’s assets are what it owns and what generates income for the bank. They represent how the bank uses the funds it has mobilized. A bank’s liabilities are what it owes to others. They represent the sources of funds that the bank uses to acquire assets and conduct its business. A commercial bank’s balance sheet, assets and liabilities are categorized as follows:

Assets:

Advances: These are loans and credits extended to customers, generating interest income for the bank. Investments: Holdings in government securities, bonds, and other approved securities that earn returns. Money at Call and Short Notice: Short-term funds lent to other banks or financial institutions, typically repayable on demand or within a short period. Liabilities:

Deposits: Funds accepted from the public, including savings, current, and fixed deposits, which the bank is obligated to repay. Hence, option (b) is correct.

Explanation

Option (d) is correct: P-Notes, short for Participatory Notes, are financial instruments that let foreign investors indirectly invest in the Indian stock market without registering with the market regulator Securities and Exchange Board of India (SEBI). P-Notes act like a substitute for underlying Indian company shares. Essentially, P-Notes act as a proxy for direct investment. The overseas investor buys a P-Note from the FPI, and the FPI invests the underlying funds in Indian securities on behalf of the P-Note holder. Benefits for foreign investors include avoiding the hassle of registering with SEBI and offering anonymity. Options (a), (b) and (c) are incorrect:

Certificate of Deposits (CDs) are short-term debt instruments issued by banks to raise funds. They are not related to foreign investment in the stock market. Commercial Paper is also a short-term debt instrument issued by companies to raise working capital. It is also not directly used for foreign investment in the stock market. Promissory Note is a written promise to pay a specific sum of money at a certain date. While it can be used in various financial transactions, it’s not the instrument used for indirect foreign investment in the stock market through FPIs

Explanation

An expansionary monetary policy may lead to lower interest rates and thus flight of foreign capital from India (which would get better returns abroad). Also, such a policy may fuel inflation and higher imports through higher government spending and further cause a slide of the rupee. Options (a), (b) and (c) are incorrect: As these include the likely measures the Government/ RBI would take to stop the slide of the Indian rupee:

Curbing imports of nonessential goods-and promoting exports would help control imports and thus the depreciation of the rupee. Masala bonds were brought in to curb the slide of rupee since the borrowing is rupee-dominated and does not put pressure on our currency through borrowing dollars. Easing external commercial borrowing (ECBs) will lead to higher borrowing abroad and would temporarily bridge the deficit of forex in India preventing the slide of rupee.

Explanation

Statement 1 is correct: As of 2023 the Asian Infrastructure Investment Bank (AIIB) had 105 member’s. As of January 2025 the AIIB boasts 110 approved members worldwide which indicates its extensive global reach.

Statement 2 is incorrect: India is the second-largest shareholder in AIIB and holds 7.5% of the voting shares. The largest shareholder is China with 26.5% of the voting shares.

Statement 3 is incorrect: The AIIB’s membership extends beyond Asia and includes countries from Europe, Africa and the Americas. For instance nations like Canada, Egypt, and France are members and reflects the bank’s global appeal.

Explanation

A currency crisis occurs when a country’s currency faces a sudden and sharp depreciation, often due to speculative attacks or a loss of confidence in the economy. Several factors can contribute to reducing the risk of such a crisis:

Statement 1 is correct: India’s Information Technology (IT) sector is a major exporter of services, earning substantial foreign exchange. These earnings increase the supply of foreign currency in the country, strengthening the Indian rupee and mitigating the risk of a currency crisis.

Statement 2 is incorrect: While government spending is crucial for economic growth, excessive expenditure can lead to higher fiscal deficits. This may result in increased borrowing, potential inflationary pressures, and could negatively affect investor confidence, thereby increasing the risk of a currency crisis.

Statement 3 is correct: Remittances are funds sent by Indians working overseas back to India. These inflows add to the coun-try’s foreign exchange reserves, providing a buffer against currency volatility and reducing the risk of a currency crisis.

Explanation

Statement 1 is incorrect: While the government does hold a portion of India’s external debt, the majority of it is owed by non-governmental entities, primarily corporations. As of end-March 2023, India’s total external debt stood at approximately USD 624.7 billion. Of this, the government’s external debt was about USD 130.8 billion, accounting for roughly 20.9% of the total external debt. The remaining 79.1% is owed by non-governmental entities, including private sector corporations and financial institutions.

Statement 2 is incorrect: While a significant portion of In-dia’s external debt is indeed denominated in US dollars, it’s not all in US dollars. Indian entities also borrow in other currencies, such as Euros, Japanese Yen, and British Pounds, among others. Diversification of currency exposure is a com-mon practice in debt management. India’s external debt is de-nominated in various currencies. As of end-March 2023, 53.1% of the debt was in US dollars, 31.1% in Indian rupees, 5.7% in Japanese yen, 3.5% in Special Drawing Rights (SDRs), 2.9% in euros, and the remaining 3.7% in other currencies.

Explanation

Statement 1 is correct: PPP is an economic concept that compares the value of currencies by examining the cost of a standard "basket of goods" across different countries. It determines the exchange rate required for one currency to buy the same quantity of goods and services as it would in another country.

Statement 2 is incorrect: As of the latest available data, India ranks as the third-largest economy globally in terms of GDP based on PPP. According to the International Monetary Fund’s World Economic Outlook, India’s GDP (PPP) is approximately $13.17 trillion, placing it behind China and the United States.

Explanation

According to the World Bank, Poverty is pronounced deprivation in well-being and comprises many dimensions. It includes low incomes and the inability to acquire the basic goods and services necessary for survival with dignity. The new extreme poverty line of $2.15 per person per day, which replaces the $1.90 poverty line, is based on 2017 PPPs

Option (b) is correct: The official poverty line in India is determined based on the minimum income required to meet basic consumption needs, primarily food, adjusted for other essentials like housing, education, and healthcare. Since the cost of living and price levels differ across states due to factors like inflation, regional disparities, and market conditions, the poverty line is higher in states where the price levels are higher. For instance, states with higher urbanization or living costs like Maharashtra or Delhi might have a higher poverty line compared to states with lower living costs like Bihar or Odisha.