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

Total Questions: 62

31. The terms 'Marginal Standing Facility Rate' and 'Net Demand and Time Liabilities', sometimes appearing in news, are used in relation to : [2014-1]

Correct Answer: (a) banking operations
Solution:
  • The Marginal Standing Facility (MSF) is a monetary policy tool used by central banks, including the Reserve Bank of India (RBI), to provide a facility for scheduled commercial banks to borrow funds overnight against approved government securities. It is a mechanism that allows banks to borrow additional funds when they face a shortage of liquidity, typically above their statutory requirements.
  • The MSF serves as a safety valve for banks to access emergency funds from the central bank in situations where they might find it challenging to meet their short-term liquidity needs from other sources. This tool also helps the central bank to manage liquidity in the banking system while ensuring stability in the financial markets.
  • Net demand and time liabilities (NDTL) measure a company's liquidity. It measures the balance between what a company owes in the short term (e.g. bills and loans) and what it owns that can be converted into cash quickly.
  • Maintaining a healthy NDTL is essential for a company to ensure its ability to honour its financial obligations and operate smoothly in the short term. It reflects the company's liquidity position and capacity to manage short-term financial challenges effectively.

32. With reference to Indian economy, consider the following statements: [2015-1]

1. The rate of growth of Real Gross Domestic Product has steadily increased in the last decade.

2. The Gross Domestic Product at market prices (in rupees) has steadily increased in the last decade.

Which of the statements given above is/are correct?

Correct Answer: (b) 2 only
Solution:Due to recession in 2008, the growth rate of the Indian economy had declined for the next few years from 8-9% to 5-6%. Even though the growth rate had declined, it never became negative. So, the GDP at market prices has always increased year on year since last one decade.
  • Nominal GDP: Represents the current prices of goods and services at their monetary value, without adjusting for inflation. Useful for comparing output within the same year but not across years due to inflation effects. Since inflation generally remains positive, it is usually higher than actual GDP.
  • Real GDP: It is adjusted for inflation using the GDP price deflator, reflecting the quantity of goods and services produced. It enables comparison across years by holding prices constant to isolate real growth and reduces discrepancies caused by inflation or deflation in nominal GDP. Formula: Real GDP = Nominal GDP ÷ Price Deflater.

33. Consider the following statements: Human capital formation as a concept is better explained in terms of a process, which enables [2018-1]

1. individuals of a country to accumulate more capital.

2. increasing the knowledge, skill levels and capacities of the people of the country.

3. accumulation of tangible wealth.

4. accumulation of intangible wealth.

Which of the statements given above is/are correct?

Correct Answer: (c) 2 & 4
Solution:Clear cut answer not available in routine books, so it was subjected to multiple interpretations. Accumulation of capital or tangible wealth can be done even by illiterate person if he has ownership over land or natural resources, so #1 or #3 do not necessarily mean Human capital formation. So answer could be b or c. Intangible wealth also includes patents and intellectual property rights so if more patents are generated it shows population is more educated- pointing to human capital formation. UPSC has kept 'c' as the official answer.

34. Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in news? [2018-1]

Correct Answer: (c) The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
Solution:Merchant Discount Rate (MDR) is the fee borne by the merchant for using credit and debit card payment system. To encourage digital transactions, Ministry of Electronics and information technology (MEITY) had announced that from 1 January 2018 for the next two years, it'll bear the MDR fees of merchants, for payments up-to Rs.2,000/- IF such payment is made via debit card, BHIM or Aadhar enabled payment system.

MDR are applicable in: Presently, it is applicable for online transactions and QR-based transactions. The amount that the merchant pays for every transaction gets distributed among three stakeholders. The bank that enables the transaction, vendor that installs the point of sale (PoS) machine and the card network provider such as Visa, MasterCard, Rupay.

35. With reference to digital payments, consider the following statements: [2018-1]

1. BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.

2. While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.

Which of the statements given above is/are correct?

Correct Answer: (a) 1 only
Solution:BHIM App was launched in 2016, it allows money transfer to UPI-enabled bank accounts so #1 is right. The BHIM apps has three levels of authentication.

For one, the app binds with a device's ID and mobile number, second a user needs to sync whichever bank account (UPI or non-UPI enabled) in order to the conduct transaction.

Third, when a user sets up the app they are asked to create a pin which is needed to log into the app. Hence #2 is wrong.

36. Which one of the following links all the ATMs in India? [2018-1]

Correct Answer: (c) National Payments Corporation of India
Solution:Till 2009, RBI's Institute for Development and Research in Banking Technology (IDRBT) provided the linkages to ATM network in India but afterwards, it was taken over by NPCi's National Financial Switch (NFS).
The National Payments Corporation of India (NPCI) was established in 2008, to create a robust and secure infrastructure for payments and settlements across the country. Since then it has been instrumental in revolutionizing the digital payments ecosystem in India. It has introduced various payment systems that have not only promoted a cashless economy but also enhanced financial inclusion. NPCI, through its innovations like UPI, RuPay, and IMPS, has played a pivotal role in transforming how individuals and businesses transact, contributing to the growth of digital payments and positioning India as a global leader in this space.

37. Consider the following statements: [2018-1]

1. Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.

2. CAR is decided by each individual bank.

Which of the statements given above is/are correct?

Correct Answer: (a) 1 only
Solution:
  • The Capital Adequacy Ratio (CAR) of a bank is the ratio of its capital to its risk-weighted assets and current liabilities.
  • The capital adequacy ratio, also known as the capital-to-risk-weighted-assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of global financial systems.
  • A bank with a high CAR has sufficient capital to absorb potential losses. As a result, it is less likely to go bankrupt and lose depositors' money.
  • Following the 2008 financial crisis, the Bank of International Settlements (BIS) began imposing stricter CAR requirements in order to protect depositors.
  • CAR is critical in ensuring that banks have enough cushion to absorb a reasonable amount of losses before going bankrupt.
  • CAR is used by regulators to determine a bank's capital adequacy and to run stress tests.
  • Basel III norms have prescribed a minimum CAR of 8%. Indian public sector banks must maintain a CAR of 12%, while Indian scheduled commercial banks must maintain a CAR of 9%.

38. Consider the following statements [2018-11]

1. The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.

2. The Central Government has domestic liabilities of 21% of GDP as compared to that of 49% of GDP of the State Governments.

3. As per the Constitution of India, it is mandatory for a State to take the Central Government's consent for raising any loan if the former owes any outstanding liabilities to the latter.

Which of the statements given above is/are correct?

Correct Answer: (c) 1 & 3 only
Solution:As per Economic Survey, first statement is right but Central Government's domestic liability is -46% so #2 is wrong. By elimination, we get (C).
  • The FRBM Act was passed by the Indian Parliament in 2003 with the goal of institutionalizing financial discipline and reducing India's fiscal deficit.
  • Its primary goals were to improve macroeconomic management and the overall management of public funds.
  • The Act aimed to move towards a balanced budget and strengthen fiscal management in the long run.
  • It required the government to reduce the fiscal deficit to 3% of GDP by March 2008.
  • The FRBM Act also required the government to eliminate the revenue deficit by 2009.
  • The Act introduced transparent fiscal management systems and limited government borrowings from the Reserve Bank of India.
  • The Act also mandated the presentation of three policy statements to Parliament each year: the Medium-term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Statement.

39. Consider the following items: [2018-1]

1. Cereal grains hulted

2. Chicken eggs cooked

3. Fish processed and canned

4. Newspaper containing advertising material

Which of the above items is/are exempted under GST (Goods and Services Tax)?

Correct Answer: (c) 1, 2 & 4 only
Solution:When client books add in newspaper, he has to pay 18% GST to newspaper owner who deposits it to Government. But when such newspaper is sold to public, they are not required to pay newspaper price + GST. So #4 is exempted from GST. Processed / Canned food (#3) is subject to GST. So, by elimination, we get correct answer C. Some experts were divided that if eggs are cooked in a 5-star hotel, it'll be subjected to GST however UPSC's official Answer key has kept C is the correct option.

40. With reference to India's decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct? [2018-1]

1. It is introduced as a part of the Income Tax Act.

2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements".

Select the correct answer using the code given below:

Correct Answer: (d) Neither 1 nor 2
Solution:This was introduced in 2016, as a separate legislation under Finance Bill, and it doesn't provide tax credit in home country so both wrong.
  • The Equalisation Levy was introduced in India in 2016, with the intention of taxing the digital transactions i.e. the income accruing to foreign e-commerce companies from India.
  • It is aimed at taxing business-to-business transactions.
  • It is also often referred to as the “Google Tax”
  • It is a direct tax, which is withheld at the time of payment by the service recipient.
  • The two conditions to be met to be liable to equalisation levy:
  • The payment should be made to a non-resident service provider;
  • The annual payment made to one service provider exceeds Rs.1,00,000 in one financial year.