Poverty, Planning, Finance and Economic/Social Development (Part-II)

Total Questions: 50

11. The Multi-dimensional Poverty Index developed by Oxford Poverty and Human Development Initiative with UNDP support covers which of the following? [2012-1]

1. Deprivation of education, health, assets and services at household level

2. Purchasing power parity at national level

3. Extent of budget deficit and GDP growth rate at national level

Select the correct answer using the codes given below:

Correct Answer: (a) 1 only
Solution:Deprivation of education, health, assets and services at household level

MPI presents estimates for 107 developing countries (77% of the world total).

The MPI identifies overlapping deprivations that people experience across the same three dimensions i.e. health, education and standard of living (HDI).

12. Which of the following is/are among the noticeable features of the recommendations of the Thirteenth Finance Commission? [2012-1]

1. A design for the Goods and Services Tax, and a compensation package linked to adherence to the proposed design

2. A design for the creation of lakhs of jobs in the next ten years in consonance with India's demographic dividend

3. Devolution of a specified share of central taxes to local bodies as grants

Select the correct answer using the codes given below:

Correct Answer: (c) 1 & 3 only
Solution:The 13th finance commission has an elaborate design for the GST. Statement 1 is correct. Statement 2 is incorrect. Report basically discusses the improved implementation of the existing schemes. The third statement is correct. The report in its para 10.44 mentions: "Taking into account the demand of local bodies that they be allowed to benefit from the buoyancy of central taxes and the constitutional design of supplementing the resources of Panchayats and municipalities through grants-in-aid, we recommend that local bodies be transferred a percentage of the divisible pool of taxes cover and above the share of the states, as stipulated by us, after converting this share to grant-in-aid under Article 275."

13. Consider the following specific stages of demographic transition associated with economic development: [2012-1]

1. Low birthrate with low death rate

2. High birthrate with high death rate

3. High birthrate with low death rate

Select the correct order of the above stages using the codes given below:

Correct Answer: (c) 2, 3, 1
Solution:Demographic Transition is the transition from high birth and death rates to lower birth and death rates as a country or region develops from a pre-industrial to an industrialized economic System.
  • India’s Demography: As per the 2011 Census, India is in stage three of the four stage model of demographic transition, moving from high to low mortality and fertility rates.
  • India’s Total Fertility Rate (TFR) stands at 2.0 as per National Family Health Survey-5 (2019–21), below the replacement rate of 2.1.
  • TFR is the average number of children a woman would have based on current fertility patterns throughout her reproductive years (15-49).
  • The replacement rate of fertility is the average number of children per woman needed to keep a population stable, in the absence of migration.
  • The World Population Prospects 2024 report by the United Nations Department of Economic and Social Affairs (DESA), projects India’s population to peak at 1.7 billion in the early 2060s and decline by 12% thereafter, while remaining the world’s most populous country.

14. Under which of the following circumstances may 'capital gains' arise? [2012-1]

1. When there is an increase in the sales of a product

2. When there is a natural increase in the value of the property owned

3. When you purchase a painting and there is a growth in its value due to increase in its popularity

Select the correct answer using the codes given below:

Correct Answer: (b) 2 & 3 only
Solution:Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is the difference between a higher selling price and a lower purchase price. The increase in the sales of a product does not mean increase the selling price of the product.

Capital Gains Tax in India

  • Any profit or gain that arises from the sale of a ‘capital asset’ is known as ‘income from capital gains’. Such capital gains are taxable in the year in which the transfer of the capital asset takes place. This is called capital gains tax.
  • There are two types of Capital Gains: short-term capital gains (STCG) and long-term capital gains (LTCG).

15. Which of the following measures would result in an increase in the money supply in the economy? [2012-1]

1. Purchase of government securities from the public by the Central Bank

2. Deposit of currency in commercial banks by the public

3. Borrowing by the government from the Central Bank

4. Sale of government securities to the public by the Central Bank

Select the correct answer using the codes given below:

Correct Answer: (c) 1 & 3
Solution:1. Purchase of government securities from the public by the Central Bank

3. Borrowing by the government from the Central Bank

Effects due to increased money supply:

  • An increase in the money supply often lowers interest rates.
  • This stimulates spending by generating more investment and putting more money in the hands of consumers.
  • Businesses respond by expanding production and ordering more raw materials.
  • The need for labour rises as company activity rises generating employment.
  • Increased disposable income increases the demand for commodities and results in inflation.

16. Which of the following would include Foreign Direct Investment in India? [2012-1]

1. Subsidiaries of foreign companies in India

2. Majority foreign equity holding in Indian companies

3. Companies exclusively financed by foreign companies

4. Portfolio investment

Select the correct answer using the codes given below:

Correct Answer: (d) 1, 2 & 3 only
Solution:A Foreign direct investment (FDI) involves establishing a direct business interest in a foreign country, such as buying or establishing a manufacturing business, while foreign Portfolio Investment (FPI) refers to investing in financial assets such as stocks or bords in a foreign country. Hence, FDI does not involve portfolio Investment.
3 Components of Foreign Direct Investment
Equity Capital
Equity Capital refers to the value of the shares of an enterprise held by a foreign direct investor.
Reinvested Earnings
• Reinvested Earnings consists of the foreign direct investors’ share of earnings which has not been distributed as dividends by affiliates or the earnings not remitted to the direct investor.
• Such retained profits by affiliates are reinvested.
Intra-Company Debt or Intra-Company Loans
Intra-Company Debt or Intra-Company Loans transactions refer to short or long-term lending and borrowing of funds between direct investors or enterprises and affiliate enterprises.

17. Who among the following constitute the National Development Council? [2013-1]

1. The Prime Minister

2. The Chairman, Finance Commission

3. Ministers of the Union Cabinet

4. Chief Ministers of the States

Select the correct answer using the codes given below.

Correct Answer: (b) 1, 3 & 4 only
Solution:The National Development Council includes the Prime Minister, Union ministers, Chief ministers of all states. administrative heads of the Union Territories and members of the planning commission.
The National Development Council (NDC) occupies an important place in India’s planning system. It embodies a federal approach to planning, bringing together the Union government, state governments, and other stakeholders to shape a comprehensive national perspective. Over the years, the role and influence of the NDC have fluctuated depending on the political climate, the priorities of the central government, and the assertiveness of the states.
Despite these ups and downs, the NDC has consistently remained a part of India’s apex policy framework for over six decades. The idea of such a coordinating body was first suggested by the Planning Advisory Board (1946) under the chairmanship of K.C. Neogi. Although the proposal could not be implemented before independence, its importance was well recognized.

18. To obtain full benefits of demographic dividend, what should India do? [ [2013-1]

Correct Answer: (a) Promoting skill development
Solution:To reap the benefits of demographic dividend, skills have to be developed because a relatively larger portion of population fall under the category of productive labour force when there is a demographic dividend.
Demographic dividend is “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population is larger than the non-working-age share of the population”. India stands at a demographic crossroads. With over 50% of its 1.4 billion population under 25, India has one of the world’s youngest populations. This demographic bulge represents both a historic opportunity and a formidable challenge.
Effectively leveraging this youthful demography could propel the economy into a higher growth trajectory. However, failure to productively utilise this human capital may result in socio-economic risks. As India transitions towards a knowledge economy, harnessing this ‘demographic dividend’ through appropriate investments and policy reforms will be critical.

19. A rise in general level of prices may be caused by : [2013-1]

1. an increase in the money supply

2. a decrease in the aggregate level of output

3. an increase in the effective demand

Select the correct answer using the codes given below.

Correct Answer: (d) 1, 2 & 3
Solution:General Price rise may be caused by an increase in the money supply as the real value of the money reduces. The higher aggregate price level will reduce the purchasing power subsequently reducing the consumer spending. Effective demand also increases when there is less purchasing power due to inflation.
  • Increase in general price level or inflation has two influencing factors Demand-pull inflation and Cost-push inflation.
  • Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. One potential shock to aggregate demand might come from a central bank that rapidly increases the supply of money.
  •  Various variables might cause an increase in aggregate demand. Some of them are
  • Fiscal Stimulus
  • Population Pressure
  • Increase in Net Exports
  • Monetary Stimulus
  • Policy Decisions
  • Cost-push inflation, on the other hand, occurs when prices of production process inputs increase.
  • The following reasons can cause production costs to rise.
  •  Employees’ salaries being raised
  • Raw material prices increasing
  • Firms profit margins
  • Import prices
  •  Increase in indirect taxes

20. Which one of the following is likely to be the most inflationary in its effect? [2013-1]

Correct Answer: (d) Creating new money to finance a budget deficit
Solution:Extremely high rates of inflation are generally associated with high rates of money growth. It is often the result of financing large deficits by printing money.

Inflation Causes

  • Inflation arises from demand-pull factors, cost-push factors, supply shocks, increased money supply, wage-price spirals, inflation expectations, and certain fiscal policies. These elements collectively drive price increases, impacting purchasing power.
  • Demand-Pull Factors: When demand for goods and services exceeds supply, prices increase. This often happens when there is an inflow of cash or credit in the economy, stimulating purchasing beyond the economy’s capacity.
  • Cost-Push Factors: Rising production costs can also cause inflation. When the costs of inputs like raw materials and labour increase, companies pass these costs on to consumers through higher prices.
  • Supply Shocks: Sudden disruptions to supply, such as natural disasters, conflicts, or pandemics, can significantly reduce the availability of critical goods. For example, supply chain issues during COVID-19 led to price spikes across sectors.
  • Increased Money Supply: A significant increase in the money supply can drive inflation, as more cash circulating in the economy fuels higher demand. With too much money chasing too few goods, prices tend to rise.
  • Wage-Price Spirals: When workers demand higher wages to cope with rising prices, businesses often raise prices to cover these increased labour costs. This cycle, known as the wage-price spiral, can fuel sustained inflation.
  • Inflation Expectations: When people expect inflation to persist, they may demand higher wages and buy goods now to avoid future price increases, reinforcing inflation. Central banks aim to keep these expectations stable to control inflation.
  • Fiscal Policies: Government policies like tax cuts or increased public spending can raise overall demand, leading to inflation if the economy is already operating at full capacity and supply cannot keep pace.