UPSC 2020 Indian Economy Questions with Answers

Explanation

In a report "Changing Structure of Rural Economy of India: Implications for Employment and Growth 2017," published by NITI Aayog, following observations were made:

Statement 1 is incorrect: Both rural and urban regions have seen an improvement in worker productivity as well as the absolute level of income per worker. For rural areas, it was Rs. 37273 in 2004 -05 and Rs. 101755 in 2011 -12, while for urban areas it was Rs. 120419 in 2004 -05 and Rs. 282515 in 2011 -12.

Statement 2 is incorrect: As per the 2011 Census, 68.8% of India’s population and 72.4% of the workforce resided in rural areas. However, the steady transition to urbanisation over the years has led to a decline in the rural share of the workforce, from 77.8% in 1993 -94 to 70.9% in 2011 -12.

Statement 3 is correct: About two-thirds of rural income is now generated in non -agricultural activities. Non-farm economy has increased in rural areas. The share of agriculture in the rural economy has decreased from 57% in 1993 -94 to 39% in 2011 -12.

Statement 4 is correct: After 2004 -05, the rural areas have witnessed negative growth in employment in spite of high growth in output. The growth rate of rural employment was 1.45% during

1994 -2005, which fell to -0.28% between 2005 -12.

Explanation

Factors/Policies affecting the Price of Rice in recent past are:

Minimum Support Price: MSP is a type of market intervention that the government uses to protect farmers against a sudden drop in farm prices. Rice is included in MSP and thus the government announces MSP for rice, ensuring farmers receive a minimum price for their produce. A high MSP leads to increased procurement costs and can push up market prices. Government Trading: The government imports or exports rice through agencies like the Food Corporation of India (FCI). Restrictions or encouragement in exports/imports can affect domestic rice prices. Government’s Stockpiling: The government maintains buffer stocks under the Public Distribution System (PDS) and food security programs. Large stockpiling can reduce market supply, influencing prices. Consumer Subsidies: The government provides subsidized rice through schemes like the National Food Security Act (NFSA) and PDS. While subsidies help consumers, they can distort market demand and affect pricing trends.

Explanation

Statement 1 is incorrect: The Union Government provides subsidies on fertilizers to ensure their affordability for farmers and to maintain agricultural self-sufficiency. As a result, fertilizer prices in India are regulated by the government. For example, the retail price of urea is directly controlled, while non-urea fertilizers fall under the Nutrient-Based Subsidy (NBS) scheme, where prices have some market influence but still receive government support.

Statement 2 is correct: Ammonia (NH₃) is a key raw material for making urea. It is produced by reacting natural gas (CH) with steam to extract hydrogen, which then combines with nitrogen from the air to form ammonia in the Haber-Bosch process.

Statement 3 is correct: Sulphur is a key ingredient in the production of phosphoric acid, which is used to make phosphatic fertilizers (e.g., DAP - Di-Ammonium Phosphate). It is obtained as a by-product from oil refineries and natural gas processing plants.

Explanation

Public Investment is the investment by the State (Central, state and local governments or through publicly owned companies) to build the nation’s capital stock by devoting resources to the basic physical infrastructure (such as roads, bridges, rail lines, airports, and water distribution), research and development, etc. that leads to increased output and/or living standards. The following can be considered as Public Investment in Agriculture:

Option 2 is correct: Computerization of Primary Agricultural Credit Societies will enhance productivity in the agricultural sector, as there will be easy and timely access of credit. This improves efficiency, transparency, and accessibility of credit for farmers, contributing to agricultural development.

Option 3 is correct: Investing in the development of social capital for farmers fosters a network of support and knowledge-sharing, which can significantly enhance the adoption of new agricultural technologies and practices.

Option 6 is correct: Setting up cold storage facilities by the governments will enhance productivity in the agricultural sector as agricultural products are generally perishable in nature and the facility of cold storage may help in increasing the shelf life of the products. Options 1, 4 and 5 are incorrect:

MSP is a price support mechanism rather than an investment. It ensures farmers get a minimum price for their crops but does not involve creating infrastructure or long-term agricultural improvements. Free electricity supply to farmers reduces costs for farmers, it is a subsidy rather than an investment in long-term infrastructure. Loan waivers offer quick financial relief to farmers burdened with debt, but they do not aid in the improvement of agricultural infrastructure or services. Similar to subsidies, they serve as financial assistance rather than investments aimed at fostering growth or enhancing efficiency.

Explanation

Announced in the 1998-1999 budget, the Kisan Credit Card Scheme aims to provide farmers with the institutional credit they need to meet their financial needs at various phases of farming. It is implemented by all public sector banks, regional rural banks, and cooperative banks across the nation. Options 1, 3 and 4 are correct: Under the Kisan Credit Card scheme, short-term credit support is given to farmers for the following purposes:

The Kisan Credit Card (KCC) scheme provides credit for working capital requirements, including maintaining and repairing farm assets like equipment, machinery, and other resources. KCC also provides credit for the consumption requirements of the farmer’s family, such as food, fuel, and other basic household needs. Post Harvest Expenses: The scheme provides support for expenses related to post-harvest activities, such as packaging, storage, and transportation. Other than these the Kisan Credit Cards are issued to the farmers so that they may use them to purchase agriculture inputs such as seeds, fertilizers, pesticides etc. and draw cash for their production needs. Options 2 and 5 are incorrect:

The KCC scheme is not intended for funding non-agricultural investments like constructing a family house or setting up a cold storage facility, which are typically covered under other rural development or infrastructure schemes. Purchase of combine harvesters, tractors and mini trucks which is not a short term investment. It needs heavy capital and is not possible with short-term credit support provided under KCC.

Explanation

The MSP is recommended by the Commission for Agricultural Costs and Prices and is announced by the Cabinet Committee on Economic Affairs. The main objectives of establishing the MSP are:

To protect farmers from distress sales To procure food grains for the public distribution system (PDS).

Statement 1 is incorrect: While the government does ensure procurement at MSP for certain crops, the procurement is not unlimited. There are limits to the amount that can be procured at MSP, and these limits are determined by the government’s procurement policies and the capacity of procurement agencies like the Food Corporation of India (FCI). The government may also limit procurement based on market conditions, storage capacity, and other factors.

Statement 2 is incorrect: MSP is the minimum price at which the government purchases crops, but it does not ensure that the market price will never surpass the MSP. Market prices can exceed the MSP due to factors like demand, supply, and overall market conditions. While MSP affects market prices, it is not the only factor determining them.

Explanation

West Texas Intermediate (WTI) is a grade of crude oil that serves as a major benchmark for oil prices globally. WTI is a high-quality, light, and sweet crude oil. It is called "light" because it has a low density, and "sweet" because it contains low sulfur content. These characteristics make it ideal for refining into gasoline and other high-demand petroleum products. It is one of the three major benchmarks for crude oil prices, alongside Brent Crude (from the North Sea) and Dubai Crude. It is widely used as a reference price for oil in the Americas. WTI prices often make headlines because they reflect global oil market trends and have significant implications for energy costs, economic stability, and geopolitical dynamics.

Explanation

TRIMs (Trade-Related Investment Measures) are WTO rules governing investment measures that impact trade in goods. They aim to eliminate trade distortions by prohibiting practices like local content requirements, trade balancing, and quantitative restrictions. TRIMs promote free and non-discriminatory trade, ensuring compliance with GATT principles. Its focus on trade-related regulations rather than directly regulating foreign investments, fostering a fair and open international trading environment.

Statement 1 is correct: The Trade-Related Investment Measures (TRIMS) Agreement of the World Trade Organization (WTO) explicitly prohibits measures that require foreign investors to meet certain performance requirements, such as quantitative restrictions on imports. These restrictions are considered trade-distorting and are not allowed under the TRIMS Agreement.

Statement 2 is incorrect: The TRIMS Agreement only applies to investment measures related to trade in goods, not services. It focuses on ensuring that investment measures do not distort or restrict trade in goods. Trade in services is covered under the General Agreement on Trade in Services (GATS), which is separate from TRIMS.

Statement 3 is correct: The TRIMS Agreement is not concerned with the regulation of foreign investment itself. It focuses on ensuring that investment measures do not create trade distortions or restrictions. It does not regulate how countries manage foreign investment in terms of entry, ownership, or operational conditions.

Explanation

Statement 1 is correct: In India, food items make up a significant portion of the CPI, around 45%, reflecting the price changes consumers experience. In contrast, the WPI, which tracks wholesale prices, assigns a smaller share to food items, approximately 25-30%. The CPI measures the average change in prices paid by consumers for a basket of goods and services. Food is a significant component of household budgets, especially in developing economies, so it has a substantial weight in the CPI. The WPI, on the other hand, tracks the prices of goods at the wholesale level (i.e., prices received by producers or wholesalers).

Statement 2 is correct: The WPI focuses on measuring price changes in goods at the wholesale level and excludes services. While CPI includes both goods and services, such as healthcare, transportation, and education, which is a major difference between the two indices.

Statement 3 is incorrect: The RBI has not adopted the WPI as its key measure of inflation. The RBI uses the Consumer Price Index (CPI) as its primary gauge of inflation for monetary policy decisions. The CPI is considered a better indicator of the price pressures faced by consumers, which is what the RBI is most concerned about when setting interest rates.

Explanation

Statement 1 is correct: Short-term foreign debt is a major vulnerability during a financial crisis. When global confidence deteriorates, investors can pull their short-term funds out of emerging markets very quickly. This sudden outflow of capital can cause a currency crisis, sharp interest rate increases, and severe economic disruption. A lower reliance on such borrowings provides greater resilience.

Statement 2 is incorrect: Opening up to more foreign banks would lead to enhanced exposure to the global economy. While foreign banks can introduce advanced practices and enhance capital availability, they also increase India’s exposure to global financial shocks. During crises these banks often prioritize their home markets, reducing support to Indian operations and exacerbating credit shortages. Greater foreign bank presence may foster interconnectedness but does not guarantee immunity, potentially heightening India’s vulnerability to external disruptions.

Statement 3 is incorrect: Capital account convertibility means no restriction on the amount one can convert into foreign currency to enable one to acquire any foreign assets and vice versa. In case of a financial crisis it can create a situation of "Capital flight" where a foreign investor can withdraw all his money at once.