UPSC 2022 Indian Economy Questions with Answers

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.

Explanation

Statement 1 is correct: When a company uses its funds to acquire or upgrade physical assets, it is called Capital Expenditure (CapEx). These assets can include property, plants, buildings, technology, or equipment. CapEx is intended to provide long-term benefits to the organization.

Statement 2 is incorrect: When a company borrows money to be paid back at a future date with interestit is known as debt financing. It is not a capital expenditure. Equity financingis the process of raising capital through the sale of shares.It is an example of non-debt capital receipts, not revenue expenditure.

Explanation

Statement 1 is correct: In India, people save through various financial options, including bank deposits, pension funds, insurance schemes, and government securities. Some of these savings are invested in government bonds and securities, helping the government fund its expenditures and manage its budget shortfall. Thus a portion of household financial savings is used to support government borrowing.

Statement 2 is correct: The Indian government raises money by issuing dated securities, which are long-term bonds with a fixed maturity date. Their interest rates are decided by market demand and supply. The government sells these securities through auctions, where banks, financial institutions, and investors place bids. These bonds make up a large part of the government’s internal debt, which is the money it owes to lenders with-in the country. The share of marketable securities in internal debt is at 76.4 per cent at end-March 2023 which is slightly moderate relative to 76.9 per cent at end-March 2022. The share of dated securities in public debt stood at 66.3 per cent at end-March 2023.

Outstanding Marketable Dated Securities (₹ crore, actuals at end-March)

Explanation

Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF) are instruments of the International Monetary Fund (IMF) which provides financial assistance to the countries in need. Rapid Financing Instrument (RFI): The Rapid Financing Instrument (RFI) provides rapid financial assistance, which is available to any IMF member countries facing an urgent balance of payment needs. The RFI was created as part of a broader reform to make the IMF’s financial support more flexible to address the diverse needs of member countries. It is one of the facilities under the General Resources Account (GRA) that provide financial support to countries, including in times of crisis. Rapid Credit Facility (RCF): The Rapid Credit Facility (RCF) provides rapid concessional financial assistance to low-income countries (LICs) facing an urgent Balance of Payments (BoP) need with no ex post conditionality where a full-fledged economic program is neither necessary nor feasible. The RCF was created under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Fund’s financial support more flexible and better tailored to the diverse needs of LICs, including in times of crisis.

Explanation

Statement 1 is correct: The Nominal Effective Ex-change Rate (NEER) is an unadjusted weighted average rate at which a country’s currency exchanges for a basket of multiple foreign currencies. An increase in NEER signifies that the domestic currency has strengthened or appreciated relative to the selected basket of foreign currencies. An increase in NEER means that, on average, the rupee has become more valuable relative to those other currencies. It takes more of the foreign currencies to buy one unit of the rupee.

Statement 2 is incorrect: Real Effective Exchange Rate (REER) is a measure of a country’s currency value relative to a basket of other currencies adjusted for inflation differentials. An increase in REER implies that the domestic currency has appreciated in real terms, making exports more expensive and im-ports cheaper. Consequently, a higher REER indicates a loss in trade competitiveness, not an improvement.

Statement 3 is correct: If domestic inflation is higher than inflation in other countries, the REER will appreciate (be-come more expensive) even if the NEER remains constant or depreciates. This divergence occurs because the REER calculation accounts for inflation differentials. The higher domestic inflation makes a country’s goods less competitive, even if nominal exchange rates don’t reflect that.