Indian Economy Previous Year Questions (PYQ) with Answers

The correct answer is C, FRBM Act. The Fiscal Responsibility and Budget Management Act, 2003 is a fiscal reform: it binds the Union government to cut its fiscal and revenue deficits and to report on its borrowing. It deals with the government's budget, not with banks and financial markets. Financial sector reforms after 1991 began with the Narasimham Committee on the financial system, which asked for sound banking rules. Banks had to keep capital in proportion to their risky assets, the capital adequacy ratio based on the Basel norms, and to recognise bad loans honestly as non-performing assets (NPAs) instead of hiding them in their books. Option A is wrong because capital adequacy norms were a core banking reform. Option B is wrong because clear rules for NPAs were part of the same reform. Option D is wrong because the SARFAESI Act, 2002 lets banks seize and sell the security of defaulting borrowers without going to court, a major step to recover bad loans. Exam tip: banking reforms = capital adequacy, NPA norms, SARFAESI; FRBM = fiscal discipline of the government.

The correct answer is B, To maintain price stability and ensure economic growth. Monetary policy is run by the central bank, the Reserve Bank of India, which controls the supply and the cost of money in the economy. Under the RBI Act, 1934, as amended in 2016, its main goal is to keep prices stable while keeping in mind the objective of growth. In 2016 India adopted flexible inflation targeting, with a CPI inflation target of 4 per cent within a band of 2 to 6 per cent, and a six-member Monetary Policy Committee sets the repo rate. Tools such as the repo rate, the cash reserve ratio and open market operations let the RBI make credit cheaper or dearer. Option A is wrong because raising government expenditure is a fiscal policy step decided through the Budget. Option C is wrong because cutting the fiscal deficit is also a fiscal policy goal of the government. Option D is wrong because managing forex reserves is a supporting task of the RBI, not the main aim of monetary policy. Exam tip: monetary policy means the RBI and the repo rate; fiscal policy means the government, taxes and spending.

The correct answer is A, Taxes. Fiscal policy is the government's use of taxation and public spending, so taxes are its main tool. In India, fiscal policy is run by the Union Government through the Ministry of Finance, and the Union Budget is its yearly statement. By raising or cutting taxes and spending, the government tries to steer growth, jobs and prices, and the gap between what it spends and what it earns is the fiscal deficit. Monetary policy is the other lever, and it belongs to the Reserve Bank of India, which works through money supply and credit. Option B is wrong because the Cash Reserve Ratio, the share of deposits banks must keep with the RBI, is a monetary tool. Option C is wrong because a credit ceiling, a limit on how much banks may lend, is a selective credit control used by the RBI. Option D is wrong because the Bank Rate, at which the RBI lends to banks, is also a monetary tool. Exam tip: fiscal means the Finance Ministry's taxes and spending; monetary means the RBI's rates and ratios.

The correct answer is B, Seventh Plan. The Seventh Five Year Plan (1985–90), launched under Prime Minister Rajiv Gandhi, had the slogan 'food, work and productivity'. It aimed to raise food grain production, create jobs and improve productivity, and it laid stress on modern technology. It achieved a growth rate of about 6 per cent against its target of 5 per cent. The Jawahar Rozgar Yojana (1989) for rural employment also came in this period. A is wrong because the Third Plan (1961–66) aimed at a self-reliant economy but failed after the wars of 1962 and 1965 and a severe drought, which led to the plan holidays. C is wrong because the Fourth Plan (1969–74) aimed at 'growth with stability and progressive achievement of self-reliance'. D is wrong because the Sixth Plan (1980–85) focused mainly on removing poverty. Exam tip: Seventh Plan, 1985–90, Rajiv Gandhi, 'food, work and productivity'.

The correct answer is A, Agricultural development. The First Five Year Plan (1951–56) gave top priority to agriculture, irrigation and power, because India faced food shortages after Partition and needed to feed its people first. It was based on the Harrod-Domar model and was presented by Jawaharlal Nehru, who chaired the Planning Commission. Big river projects such as Bhakra-Nangal and Hirakud were started in this period. The Plan aimed at a growth rate of 2.1 per cent and achieved about 3.6 per cent, so it is counted as a success. B is wrong because the development of heavy industries was the focus of the Second Plan (1956–61), based on the Mahalanobis model. C is wrong because rapid industrialisation was also the goal of the Second Plan, not the First. D is wrong because privatisation of industries came with the economic reforms of 1991, forty years later. Exam tip: First Plan, agriculture and Harrod-Domar; Second Plan, heavy industry and Mahalanobis.

The correct answer is B, M3. M3 is called broad money or aggregate monetary resources. It equals M1 plus the time deposits of the public with banks, so it measures almost all the money available in the economy. The Reserve Bank of India uses four measures, M1 to M4, introduced in 1977, and M3 is the one most often used to track money supply. Liquidity falls as we move from M1 to M4, because time deposits and post office deposits cannot be spent as quickly as cash. Option A is wrong because M2 is M1 plus the savings deposits with post office savings banks. Option C is wrong because M4 is M3 plus total post office deposits, excluding National Savings Certificates. Option D is wrong because M1 is narrow money: currency with the public, demand deposits with banks and other deposits with the RBI. Exam tip: M1 is narrow money and M3 is broad money or aggregate monetary resources; M1 is the most liquid and M4 the least.

The correct answer is D, the average number of live births a woman would have by the end of her child-bearing age. Total fertility rate (TFR) adds up the age-specific fertility rates of women aged 15 to 49 to show how many children a woman would have if she lived through these years at current rates. A TFR of about 2.1 is called the replacement level, because at that rate each generation just replaces itself; the extra 0.1 allows for deaths in childhood. TFR guides India's population policy and is measured by surveys such as the National Family Health Survey and the Sample Registration System. Option A is wrong because the number of births per 1,000 people in a year is the crude birth rate. Option B is wrong because TFR is counted per woman, not per couple, and uses current age-wise rates. Option C is wrong because birth rate minus death rate gives the natural growth rate of population. Exam tip: TFR is per woman, ages 15 to 49, with replacement level 2.1.

The correct answer is D, 1, 2, 3 and 4. All four plans came before the First Five Year Plan started on 1 April 1951. The Bombay Plan of 1944 was prepared by eight industrialists led by J. R. D. Tata and G. D. Birla and favoured state-led heavy industry. The Gandhian Plan of 1944 by Shriman Narayan Agarwal stressed village self-sufficiency, cottage industries and agriculture. The People's Plan of 1945 was drawn up by M. N. Roy for the Indian Federation of Labour and put agriculture and nationalisation first over a ten-year period. The Sarvodaya Plan of January 1950 by Jayaprakash Narayan, inspired by Vinoba Bhave, combined Gandhian ideas with land reform and decentralised planning. Even earlier, M. Visvesvaraya's book Planned Economy for India (1934) and the Congress National Planning Committee of 1938 under Nehru had raised the idea. Options A, B and C are wrong only because each leaves out plans that also existed before 1951. Exam tip: sequence them as Visvesvaraya 1934, Bombay and Gandhian 1944, People's 1945, Sarvodaya 1950, Planning Commission March 1950, First Plan 1951.

The correct answer is D, inflation. Inflation is a sustained rise in the general price level, measured in India by the CPI and the WPI. It is fought in three ways: monetary measures by the RBI such as raising the repo rate or CRR, fiscal measures such as higher taxes and lower government spending, and direct or administrative measures. Price control, rationing through the Public Distribution System and stock limits under the Essential Commodities Act 1955 are the direct measures: they cap what sellers may charge and how much each family may buy, so that scarce goods are shared and hoarding is checked. Option A is wrong because reflation is the deliberate effort to push prices and demand up after a slump, the opposite aim. Option B is wrong because disinflation is only a slowing of the inflation rate, not a problem that needs rationing. Option C is wrong because deflation is a fall in the general price level, when governments spend more rather than control prices. Exam tip: inflation = prices rise, deflation = prices fall, disinflation = prices rise more slowly, reflation = pushing prices up again.

The correct answer is A, Most people will expect the interest rate to rise in the future. When the rate of interest is already very low, people believe it can hardly fall further and must rise, so they hold cash instead of bonds. Keynes called this the speculative demand for money, and the extreme case, in which everyone prefers cash at a very low rate, is the liquidity trap. The reason lies in the link between bond prices and interest: when the rate rises, the price of existing bonds falls, so anyone holding bonds would suffer a capital loss. Option B is wrong because people avoid bonds at such a time for exactly that fear of loss. Option C is wrong because a further fall is what people stop expecting once the rate is near its floor. Option D is wrong because in a liquidity trap extra money is simply held as cash and leaves the interest rate unchanged. Exam tip: a very low interest rate means high speculative demand for money, which is the liquidity trap.

The correct answer is B, Rate at which RBI borrows money from commercial banks. The reverse repo rate is what the Reserve Bank pays banks when it takes their surplus cash for a short period. It is the mirror image of the repo rate, at which banks borrow from the RBI against government securities. When the RBI wants to pull extra money out of the system, it makes parking funds with the central bank more attractive; when it wants credit to flow, it does the opposite. The reverse repo rate is always kept below the repo rate, and both are decided by the six member Monetary Policy Committee headed by the RBI Governor. Since 2022 most of this absorption of cash is done through the Standing Deposit Facility. Option A is wrong because the RBI does not borrow from foreign banks through this window. Option C is wrong because the rate at which commercial banks borrow from the RBI is the repo rate. Option D is wrong because lending between commercial banks and foreign banks is not set by the RBI. Exam tip: repo means the RBI lends, reverse repo means the RBI borrows.

The correct answer is C, The US. Zero-based budgeting was first put to use in the United States. Peter Pyhrr developed it at Texas Instruments around 1970, and Jimmy Carter, then Governor of Georgia, applied it to a state budget in 1973 and later carried it to the federal government as President. Under this method every expense has to be justified afresh for each new period, starting from a zero base, instead of simply adding a percentage to last year's figure. Each activity is treated as a decision package, examined for its cost and benefit, and ranked; schemes that no longer serve a purpose are dropped. India began using zero-based budgeting in 1986-87 in some departments, and the Department of Science and Technology was the first to try it. Option A is wrong because India adopted the idea more than a decade after it began. Option B is wrong because Germany is not linked with its origin. Option D is wrong because the UK did not introduce it either. Exam tip: zero-based budgeting - Peter Pyhrr, the US, 1970; India from 1986-87.

The correct answer is B, interest rates were increased. A hawkish stand means the central bank is more worried about inflation than about slow growth, so it leans towards raising the policy rate and tightening money. Costlier loans cool down borrowing and spending, and prices rise more slowly. In India the Monetary Policy Committee, set up in 2016 under the amended RBI Act, has six members - three from the RBI and three named by the Centre - and it decides the repo rate by majority, with the Governor holding a casting vote. It has to keep retail inflation at 4 per cent, within a band of 2 to 6 per cent. Option A is wrong because cutting rates to support growth is the opposite, a dovish stand. Option C is wrong because leaving rates untouched is a neutral or wait-and-watch stance. Option D is wrong because increasing money supply is expansionary and again dovish. Exam tip: hawk fights inflation and raises rates, dove protects growth and cuts them.

The correct answer is C, GDP at market price + Net factor income from abroad. GDP counts everything produced within the country's borders, whoever produces it. GNP counts what is produced by the country's own normal residents, wherever they work. So to move from GDP to GNP, we add the income our residents earn abroad and subtract what foreigners earn in India; this net figure is called net factor income from abroad (NFIA). If NFIA is negative, GNP is smaller than GDP. Option A is wrong because GDP at market price minus depreciation gives NDP at market price, not GNP. Option B is wrong because it uses GNP to define itself, and adding subsidies is a step used to move from market price to factor cost, not to find GNP. Option D is wrong because NDP at factor cost plus NFIA gives NNP at factor cost, which is the national income. Exam tip: domestic to national, add NFIA; gross to net, subtract depreciation; market price to factor cost, subtract indirect taxes and add subsidies.

The correct answer is B, SBI. The State Bank of India was not part of the 1969 nationalisation because it was already a government-owned bank. It was created on 1 July 1955, when the Imperial Bank of India was taken over under the State Bank of India Act, following the advice of the All India Rural Credit Survey Committee. On 19 July 1969, the government of Indira Gandhi nationalised 14 major commercial banks, each with deposits of over ₹50 crore. Six more banks were nationalised in 1980. Option A is wrong because Canara Bank was one of the 14 banks nationalised in 1969. Option C is wrong because UCO Bank, then called United Commercial Bank, was also on the 1969 list. Option D is wrong because Bank of Baroda was likewise nationalised in 1969. Exam tip: Imperial Bank became SBI in 1955; 14 banks were nationalised in 1969 and 6 in 1980; the RBI itself was nationalised in 1949.

The correct answer is B, Both (A) and (B) are correct. Headline inflation is the change in the overall Consumer Price Index, which tracks the average price of a fixed basket of goods and services bought by a typical household, including food, fuel, clothing, housing and services. Core inflation removes the items whose prices swing the most, mainly food and fuel, to show the underlying trend in prices. The difference matters for policy: a jump in vegetable prices after a poor monsoon may fade in a few months, but a steady rise in core inflation tells the central bank that price pressure has spread across the economy. That is why the RBI's Monetary Policy Committee watches both numbers. In India the all-India CPI is compiled every month by the National Statistics Office. Option A is wrong because both statements are correct definitions. Option C is wrong because statement A is also correct. Option D is wrong because statement B is also correct. Exam tip: headline = the whole basket; core = the basket minus food and fuel.

The correct answer is B, Dr. C. Rangarajan. The Twelfth Finance Commission, set up in 2002, was headed by Dr. C. Rangarajan, a former Governor of the Reserve Bank of India, and its award covered the five years 2005–10. The President sets up a Finance Commission every five years under Article 280 to recommend how central taxes are shared between the Centre and the states and how grants-in-aid are given. The Twelfth Commission is remembered for its debt consolidation and relief facility, which gave states relief on central loans only if they passed fiscal responsibility laws. Option A is wrong because A. M. Khusro chaired the Eleventh Finance Commission, for 2000–05. Option C is wrong because Dr. Vijay Kelkar chaired the Thirteenth Finance Commission, for 2010–15. Option D is wrong because Y. V. Reddy chaired the Fourteenth Finance Commission, for 2015–20, which raised the states’ share of central taxes to 42 per cent. Exam tip: 11th Khusro, 12th Rangarajan, 13th Kelkar, 14th Y. V. Reddy, 15th N. K. Singh.

The correct answer is B, 6. On 15 April 1980 the government nationalised six more private banks, each with deposits of over ₹200 crore, which raised the number of nationalised banks to 20. This was the second round; the first and more famous one came on 19 July 1969, when Indira Gandhi’s government took over 14 major banks with deposits of over ₹50 crore. Both times the aim was to take banking to villages, direct credit to farmers and small industry, and end the hold of big business houses over bank lending. The six banks of 1980 were Andhra Bank, Punjab and Sind Bank, New Bank of India, Vijaya Bank, Corporation Bank and Oriental Bank of Commerce. Option A is wrong because four is not the size of either round. Option C is wrong because 14 banks were nationalised in 1969, not in 1980. Option D is wrong because 20 was the total after both rounds, not the number taken over in 1980. Exam tip: 14 banks in 1969, 6 banks in 1980, 20 in all.

The correct answer is B, Only two. The government bond market and the stock market deal in long-term funds, so they are capital markets; call money and treasury bills belong to the money market. The dividing line is maturity: the capital market handles funds for more than one year, and the money market handles funds for up to one year. Government bonds, or dated securities, run for 5 to 40 years, and shares have no maturity at all. Call money is overnight lending between banks, with notice money for 2 to 14 days, and treasury bills are short-term government borrowing for 91, 182 or 364 days. The capital market is regulated by SEBI, while the money market is regulated mainly by the RBI. Option A is wrong because both bonds and shares are capital market segments. Option C is wrong because it would add one short-term market. Option D is wrong because call money and treasury bills are money market segments. Exam tip: over one year is capital market, up to one year is money market; T-bills are 91, 182 and 364 days.

The correct answer is A, Conducting 'Open Market Operations'. Sterilization means cancelling out the effect of foreign exchange operations on the domestic money supply, and the RBI does it mainly through open market operations. When dollars flow in and the RBI buys them to stop the rupee rising too fast, it releases rupees into the system, which can push up inflation. To neutralise this, it sells government securities and pulls the same amount of rupees back. When it sells dollars, it can buy securities to put rupees back in. Other tools used for this are the Market Stabilisation Scheme (from 2004), reverse repo and the Standing Deposit Facility. Option B is wrong because oversight of payment and settlement systems is about safe transactions, not the money supply. Option C is wrong because debt and cash management is the RBI's role as banker to the governments. Option D is wrong because regulating NBFCs is a supervisory function. Exam tip: buying dollars adds rupees, an OMO sale takes them back, and together that is sterilization.