Structure of the Indian Economy & Demographics (Part-II)

Total Questions: 62

1. Consider the following statements: [2005]

1. Poverty Reduction and Growth Facility (PRGF) has been established by the International Development Association (IDA) to provide further assistance to low income countries facing high level of indebtedness.

2. Singapore regional Training Institute (STI) is one of the institutes that provides training in macroeconomic analysis and policy and related subject as a part of programme of the IMF institute.

Which of the statements given above is/are correct?

Correct Answer: (b) 2 only
Solution:In 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF) to make the objectives of poverty reduction and growth more central to lending operations in its poorest member countries.

The International Monetary Fund aims to reducing global poverty, encouraging international trade, and promoting financial stability and economic growth. The IMF has three main functions: overseeing economic development, lending, and capacity development. Through economie surveillance, the IMF monitors developments that affect member economies as well as the global economy as a whole.

2. Which one of the following statements is correct? Fiscal Responsibility and Budget Management Act (FRBMA) concerns: [2006]

Correct Answer: (c) Both fiscal deficit and revenue deficit
Solution:Fiscal responsibility and budget management act aims to bring down Fiscal deficit to 3% by 2008 and the revenue deficit to zero by 2008.
  • The Fiscal Responsibility and Budget Management (FRBM) Act, passed by the Indian Parliament in 2003, was a significant step toward institutionalizing financial discipline in the country. Its core objective is to ensure responsible fiscal management by reducing the fiscal deficit and improving the quality of macroeconomic governance. The key goals of the Act can be understood across four broad themes:
  • The FRBM Act mandates specific targets to bring down the fiscal deficit, revenue deficit, and total government debt as a percentage of GDP.
  • To promote openness in fiscal operations, the FRBM Act requires the government to present documents such as the Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement, and Outcome Budget to Parliament.
  • The FRBM Act aims to reduce inflationary pressures and maintain a stable macroeconomic environment.
  • One of the Act’s long-term aims is to prevent the economy from falling into a debt trap by ensuring that debt levels remain within sustainable limits.

3. Which one of the following is the correct sequence in the decreasing order of contribution of different sectors to the Gross Domestic Product of India? [2007]

Correct Answer: (a) Services - Industry - Agriculture
Solution:Contribution of different sectors to national income. Services -55.1%, Industry-26.4%, Agriculture-18.5%
  • Sectors of Indian economy are categorised into three primary divisions: the primary, secondary, and tertiary sectors. Each sector plays a pivotal role in shaping the nation's economic landscape, and is crucial for Sustainable Development.
  • Primary Sector: The primary sector involves the extraction and production of natural resources, including agriculture, forestry, fishing, and mining, and remains crucial for rural employment despite its declining share in GDP, currently around 16-17%.
  • With the rise of the Blue Economy, especially in marine and fisheries development, this sector is being reimagined for sustainable resource use.
  • Secondary Sector: The secondary sector encompasses manufacturing, construction, and industries that transform raw materials from the primary sector into finished goods, contributing about 28-30% to India's GDP and supporting urbanisation and infrastructure growth.
  • Initiatives promoting Green Economy principles are pushing this sector towards cleaner production, renewable energy use, and emission reduction.
  • Tertiary Sector: The tertiary sector, or service sector, includes banking, education, healthcare, IT, transport, and tourism, and has emerged as the largest contributor to the economy, accounting for nearly 55-60% of GDP.
  • Integration of the Digital Economy, especially through platforms and fintech, has amplified growth and innovation in this sector.
  • In addition to these, the quaternary sector (knowledge-based activities like research and information and communication technology) and quinary sector (high-level decision-making roles in government and NGOs) are gaining importance in the modern economy..

4. Participatory Notes (PNs) are associated with which one of the following? [2007]

Correct Answer: (b) Foreign Institutional Investors
Solution:Participatory Notes (PNs/P-Notes) are instruments used by investors or hedge funds that are not registered with the SEBI (Securities and Exchange Board of India) to invest in Indian securities. Participatory notes are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, the word, 'derivative instruments'. SEBI permitted FIIs to register and participate in the Indian stock market in 1992.

5. Which of the following pairs about India's economic indicator and agricultural production (all in rounded figures) are correctly matched? [2008]

1. GDP per capita (current prices): ₹ 37,000

2. Rice: 180 million tons

3. Wheat: 75 million tons

Select the correct answer using the code given below:

Codes

Correct Answer: (d) 1 & 3 only
Solution:Rice production was 96.69 Million tonnes in 2007-08.
The agricultural practices, cropping patterns and productivity are closely determined by the geo-climatic, socioeconomic, and cultural-political factors. The agriculture of any region is influenced by the following factors:
  • Infrastructural Factors – Such as Irrigation, Electricity, Roads, Credit and Marketing, Storage facilities, Crop insurance, and Research and Development.
  • Institutional Factors – such as land tenure and tenancy, the size of the landholdings, the size of the fields, and land reforms.
  • Technological Factors High-yielding varieties (new seeds) were introduced in the Green Revolution, including chemical fertilisers, insecticides, pesticides, and farm machinery.
  • Physical Factors Terrain, topography, climate, and soil.

6. Consider the following statements with reference to Indira Gandhi National Old Age Pension Scheme (IGNOAPS): [2008]

1. All persons of 60 years or above belonging to the households below poverty line in rural areas are eligible.

2. The Central Assistance under this Scheme is at the rate of ₹300 per month per beneficiary. Under the Scheme, States have been urged to give matching amounts.

Which of the statements given above is/are correct?

Correct Answer: (d) Neither 1 nor 2
Solution:Ministry of Rural Development of India has introduced Indira Gandhi National Old Age Pension Scheme (IGNOAPS) under National Social Assistance Programme (NSAP) in the year 2007.

IGNOAPS also called as National Old Age Pension Scheme (NOAPS). The old age pension scheme aims to provide social protection to the eligible beneficiaries. In this article, we look at the Indira Gandhi National Old Age Pension Scheme in detail.

7. Consider the following: [2009]

1. Fringe Benefit Tax

2. Interest Tax

3. Securities Transaction Tax

Which of the above is/are Direct Tax/Taxes?

Correct Answer: (d) 1, 2 & 3
Solution:Fringe Benefits Tax (FBT) was the tax applied to most, although not all, fringe benefits. A new tax was imposed on employers by India's Finance Act 2005 and was introduced for the financial year commencing April 1, 2005.

The Fringe Benefit Tax was abolished in the Finance Bill of 2009. Securities Transaction Tax (STT) is the tax payable on the value of taxable securities transaction. STT was introduced in India by the 2004 budget and is applicable with effect from 1st October 2004. Interest tax is imposed as a special tax on interest accrued in specified cases.

The Interest Tax Act of 1974 governs the tax process associated with the imposition and collection of interest tax. The Act applies to all scheduled Banks that are required to pay tax on the chargeable interest amounts they have on their deposits. The act is no longer applicable with regard to chargeable interest accruing after 31 March 2000.

8. Which one of the following statements is an appropriate description of deflation? [2010]

Correct Answer: (c) It is a persistent fall in the general price level of goods and services
Solution:
PointsDeflationDisinflation
DefinitionDeflation refers to a sustained decrease in the general price level of goods and services in an economy, leading to a negative inflation rate. It represents a broad-based decline in prices over time.Disinflation refers to a slowdown in the rate of inflation. It occurs when the rate of inflation decreases, but the overall price level still increases, albeit at a slower pace.
Price LevelDeflation is characterized by a decrease in the general price level, meaning that prices of goods and services across various sectors and categories are falling.Disinflation still involves an increase in the price level but at a slower rate compared to previous periods. Prices may continue to rise but at a reduced pace.
Inflation RateDeflation implies a negative inflation rate, as the average price level is declining over time.Disinflation indicates a decreasing inflation rate, but it remains positive, although at a lower rate than before.
Economic ImpactDeflation can have negative consequences on the economy, as it may lead to reduced consumer spending, business investment, and economic growth. It can also increase the burden of debt and lead to deflationary spirals.Disinflation can have mixed effects on the economy. While a slowdown in inflation may indicate a more stable price environment, it can also indicate weaker demand or economic slowdown, affecting businesses and consumers.
CausesDeflation can be caused by factors such as a decrease in money supply, reduced consumer demand, falling commodity prices, or overcapacity in production.Disinflation can be caused by monetary policy measures aimed at reducing inflationary pressures, such as tightening monetary policy, increasing interest rates, or implementing fiscal measures to curb spending.

9. Which of the following is/are treated as artificial currency? [2010]

Correct Answer: (c) SDR
Solution:SDR can be thought as an artificial currency used by the IMF and defined as a basket of national currencies.

ADR is an American Depositary Receipt which represents ownership in the shares of a non-US company that trades in U. S. financial markets. GDR is global Depositary Receipt is a bank certificate issued in more than one country for shares in a foreign company. A GDR is very similar to ADR. SDR is special Drawing Rights. It is an international type of monetary reserve currency, created by the IMF in 1969.

10. When the Reserve Bank of India announces an increase of the Cash Reserve Rate, what does it mean? [2010]

Correct Answer: (a) The commercial banks will have less money to lend
Solution:
  • Cash Reserve Ratio (CRR) is the share of a bank's total deposit that is mandated by the Reserve Bank of India (RBI) to be maintained with the latter as reserves in the form of liquid cash.
  • The bank cannot use this amount for lending and investment purposes and does not get any interest from the RBI.
  • CRR applies to scheduled commercial banks, while the regional rural banks and NBFCs are excluded.

Key objectives of the Cash Reserve Ratio

  • CRR helps control inflation. In a high-inflation environment, RBI can increase CRR to prevent banks from lending more.
  • CRR also ensures banks have a minimum amount of funds readily available to customers even during huge demand.
  • CRR serves as the reference rate for loans. Also known as the base rate for loans, the banks cannot offer loans below this rate.
  • Since CRR regulates the money supply, it boosts the economy whenever required by lowering the CRR.