Indian Economy Previous Year Questions (PYQ) with Answers – Page 2

The correct answer is D, Reserve Bank of India. Under Section 22 of the RBI Act, 1934, the Reserve Bank has the sole right to issue banknotes in India. The RBI was set up on 1 April 1935 and nationalised in 1949, and its head office is in Mumbai. It issues notes under the Minimum Reserve System, keeping at least ₹200 crore in gold and foreign assets, of which ₹115 crore must be gold. One small exception is worth remembering: the one-rupee note and all coins are issued by the Government of India through the Ministry of Finance, while the RBI only puts them into circulation. A is wrong because the State Bank of India is the largest commercial bank but cannot print currency. B is wrong because no body called a 'Securities bank' has any power to issue currency in India. C is wrong because the World Bank is an international lender in Washington, D.C., and issues no country's currency. Exam tip: the RBI issues all notes except the one-rupee note, which, like coins, is issued by the Government of India.

The correct answer is B, KC Neogy. Kshitish Chandra Neogy chaired the First Finance Commission, set up by the President in November 1951, which gave its report in 1952 for the period 1952 to 1957. The Finance Commission is a constitutional body under Article 280. It is formed every five years, or earlier if needed, with a chairman and four other members, and it recommends how the taxes collected by the Union are shared with the States and how grants-in-aid are given. The qualifications of its members are laid down in the Finance Commission (Miscellaneous Provisions) Act of 1951. Neogy had earlier been a member of the Constituent Assembly and a minister in Nehru's first Cabinet. A is wrong because Ashok Kumar Chanda chaired the Third Finance Commission. C is wrong because K Santhanam chaired the Second Finance Commission. D is wrong because PV Rajamannar chaired the Fourth Finance Commission. Exam tip: the first four chairmen in order are Neogy, Santhanam, Chanda, Rajamannar; Article 280 is the Finance Commission article.

The correct answer is D, Progressive. In a progressive tax the rate rises as income rises, so each extra rupee is taxed at a higher rate than the rupees before it. The marginal rate is the tax on the last rupee earned, and the average rate is total tax divided by total income. When every new slab carries a higher rate, the marginal rate stays above the average. India's income tax, with slabs rising from nil to 30 percent, is the everyday example. A is wrong because a digressive tax is only mildly progressive: its rate rises slowly and then levels off at a flat rate, so it is treated as a diluted form, not the standard case. B is wrong because a proportional tax charges the same rate at every income, so the marginal and average rates are equal. C is wrong because in a regressive tax the rate falls as income rises, so the marginal rate is below the average. Exam tip: marginal above average means progressive, equal means proportional, below means regressive.

The correct answer is B, Vote on Account. It is the advance grant the Lok Sabha makes so that the government can keep spending from 1 April until the full budget is passed. Article 116 of the Constitution allows it. No money can leave the Consolidated Fund of India without Parliament's approval, so this grant fills the gap. It usually covers two months, about one-sixth of the year's estimates. Since the budget moved to 1 February in 2017, it is mostly seen in election years, when the outgoing government leaves the full budget to the new Lok Sabha. A is wrong, because a vote of credit, also under Article 116, is a blank-cheque grant for an unexpected need that cannot be stated in detail. C is wrong, because the Appropriation Bill under Article 114 authorises withdrawal from the Consolidated Fund after the demands are voted. D is wrong, because advance account is not a budget term of the Constitution. Exam tip: vote on account keeps the government running, vote of credit is the blank cheque; both sit in Article 116.

The correct answer is B, Tendulkar Committee. The expert group headed by Suresh Tendulkar, which reported in 2009, recommended measuring poverty through MPCE on the Mixed Reference Period. Under this method, spending on five rarely bought items, namely clothing, footwear, durable goods, education and institutional medical care, is recorded over the last 365 days, and all other items over the last 30 days. Tendulkar also moved away from the old calorie norm and used one poverty line basket for rural and urban India, covering spending on health and education. By this method, India's poverty ratio came to 21.9 per cent in 2011-12. A is wrong, because the Lakdawala group of 1993 used the Uniform Reference Period and state-wise poverty lines. C is wrong, because the Dandekar and Rath study of 1971 based poverty on an intake of 2,250 calories a day. D is wrong, because the Alagh task force of 1979 fixed calorie norms of 2,400 rural and 2,100 urban. Exam tip: Alagh 1979 calories, Lakdawala 1993 URP, Tendulkar 2009 MRP, Rangarajan 2014.

The correct answer is A, crowding out. When the government runs a deficit, it borrows heavily from the same pool of savings that private firms use, so interest rates rise and private investment falls. This squeezing out of private spending by public borrowing is called the crowding out effect. It is the main argument against high fiscal deficits: if the state absorbs most of the savings, businesses find loans costlier and invest less, and the boost from government spending is partly cancelled. It is also why India's fiscal rules, such as the FRBM Act, 2003, aim to keep the deficit in check. B is wrong, because crowding in is the opposite, when public spending on roads, ports and the like encourages more private investment. C is wrong, because pump priming means government spending during a slump to restart demand, not the fall in private investment. D is wrong, because dumping is selling exports abroad below their home price or cost, a trade issue met with anti-dumping duty. Exam tip: deficit borrowing, higher interest rates, less private investment; that is crowding out.

The correct answer is B, Second Five Year Plan. The Second Plan (1956 to 1961) was built on the model of the statistician P. C. Mahalanobis and aimed at rapid industrialisation with a stress on heavy and basic industries such as steel, machinery and chemicals, on the belief that machines to make machines would speed up growth. The three public sector steel plants at Bhilai, Rourkela and Durgapur, set up with Soviet, German and British help, belong to this plan, and the Industrial Policy Resolution of 1956 gave the public sector the commanding heights of the economy. The plan ran into a foreign exchange crisis and its target growth of 4.5 percent was not fully met. A, the First Plan (1951 to 1956), followed the Harrod-Domar model and gave priority to agriculture, irrigation and power. C, the Fifth Plan (1974 to 1979), focused on poverty removal and self-reliance under the slogan Garibi Hatao. D, the Seventh Plan (1985 to 1990), stressed food, work and productivity. Exam tip: Second Plan means the Mahalanobis model, heavy industry, and Bhilai, Rourkela, Durgapur.

The correct answer is A, 1st April of a year to 31st March of the next upcoming year. In India the fiscal or financial year runs from 1 April to 31 March, so the year that starts on 1 April 2025 is written as 2025-26. The Union Budget, the government's accounts, income tax and company accounts all follow this period. India inherited this April to March cycle from British practice in 1867; before that the government year ran from May to April. The Union Budget is presented on 1 February so that the new year can start on 1 April with the money already approved. B is wrong because a year cannot be only nine months long. C is wrong because January to December is the calendar year, used by some countries but not for India's public finances. D is wrong because it describes a two-year span, which no fiscal year covers. Exam tip: fiscal year 1 April to 31 March; Budget on 1 February; the assessment year follows the financial year.

The correct answer is D, Ministry of Finance. Under the Coinage Act 2011 the Government of India alone has the right to mint coins, and the work is handled by the Department of Economic Affairs in the Ministry of Finance. Coins are struck at the four India Government Mints at Mumbai, Kolkata, Hyderabad and Noida, run by the Security Printing and Minting Corporation of India Limited (SPMCIL), and the Reserve Bank only puts them into circulation as the Government's agent under Section 38 of the RBI Act 1934. The same split explains why the one-rupee note carries the signature of the Finance Secretary, while notes of two rupees and above are issued by the RBI and signed by its Governor. Option A is wrong because the Ministry of External Affairs handles foreign relations. Option B is wrong because the Ministry of Home Affairs handles internal security and police. Option C is wrong because the Ministry of Mines deals with mining and minerals, not coinage. Exam tip: coins and the one-rupee note = Government of India (Finance Ministry); notes of two rupees and above = RBI.

The correct answer is C, GST collected by the government. A revenue receipt is money the government gets without creating a liability for itself or selling off an asset; tax collections such as GST, income tax and excise, and non-tax income such as interest, dividends and fees, all fall in this class. A capital receipt is the opposite: it either creates a liability, like a loan, or reduces an asset, like selling shares. Apply that two-part test to each option and only GST passes. A, sale of shares of public sector companies, is disinvestment, which reduces the government's assets, so it is a capital receipt. B, recovery of loans, also reduces an asset, the loan owed to the government, so it too is capital. D, borrowings from the public, create a liability that must be repaid, the clearest capital receipt of all. Exam tip: revenue receipt = tax and non-tax income; capital receipt = borrowings, disinvestment and loan recoveries.

The correct answer is B, Total demand and term deposits. The Statutory Liquidity Ratio, or SLR, is the share of a bank's net demand and time liabilities, that is, all its demand deposits and term deposits taken together, that it must hold in liquid assets such as cash, gold or approved government securities. It is prescribed under Section 24 of the Banking Regulation Act, 1949, and the bank keeps these assets with itself, unlike the Cash Reserve Ratio, which is a cash balance kept with the Reserve Bank under the RBI Act, 1934. Both ratios are fixed on the same base, total deposits, and both are tools the RBI uses to control how much banks can lend. A, Current deposits, are only one part of demand deposits, so the base would be far too small. C, Term deposits, leave out demand deposits. D, Saving deposits, are again only one slice of the total. Exam tip: SLR and CRR are both fractions of net demand and time liabilities; SLR stays with the bank in liquid assets, CRR goes to the RBI in cash.

The correct answer is B, NABARD. The National Bank for Agriculture and Rural Development was set up on 12 July 1982 by an Act of Parliament, on the recommendation of the Sivaraman Committee (CRAFICARD), as the apex body for rural and farm credit. It took over the agricultural credit work of the Reserve Bank and the whole of the Agricultural Refinance and Development Corporation. Its headquarters is in Mumbai, it refinances cooperative banks and regional rural banks, and it runs the Rural Infrastructure Development Fund. The year 1982 and the words "farmers" and "national level" together point only to NABARD. A, NEDFI, the North Eastern Development Finance Corporation, was set up in 1995 to fund projects in the North-East. C, IFCI, the Industrial Finance Corporation of India, was India's first development bank, founded in 1948 for industry, not farmers. D, SIDBI, the Small Industries Development Bank of India, began in 1990 at Lucknow for small and medium enterprises. Exam tip: IFCI 1948, NABARD 1982, SIDBI 1990, NEDFI 1995.

The correct answer is D, money. Consumer theory studies how a household decides to spend its money among the goods and services available to it.

The idea rests on three things: the wants of the consumer, the prices of goods, and the income in hand, which is the budget constraint. Since income is limited, the consumer chooses the basket that gives the greatest satisfaction, or utility, from the money spent, and is said to be in equilibrium when no rearrangement of spending can raise that satisfaction. The law of diminishing marginal utility, indifference curves and the law of demand all belong to this branch of microeconomics.

Option A is wrong because the use of time is studied separately as the labour-leisure choice. Option B is wrong because relations are social, not economic, choices. Option C is wrong because energy here has no economic meaning as a thing the consumer allocates.

Exam tip: consumer theory joins three things - wants, prices and income - and explains the demand curve.

The correct answer is C, Public. The public sector is owned and run by the government, and its guiding aim is social welfare rather than profit. Services such as railways, electricity, drinking water, schools and hospitals need heavy spending and return money slowly, so private firms often keep away from them; the state supplies them at prices ordinary people can pay. The public sector is also used to reduce regional imbalance and to create employment, and in India it expanded after the Industrial Policy Resolution of 1956 gave the state the leading role in basic industries. Option A is wrong because the foreign sector covers trade and investment across borders and follows returns. Option B is wrong because the co-operative sector is owned by its own members and works chiefly for their benefit, not for society at large. Option D is wrong because the private sector is owned by individuals and companies whose main aim is profit. Exam tip: public sector equals government ownership plus welfare motive; private sector equals private ownership plus profit motive.

The correct answer is A, Banking method. National income is estimated by three standard methods — the product or value-added method, the income method and the expenditure method — and there is no banking method. The product method adds the value added by every producing unit so that intermediate goods are not counted twice. The income method adds the wages, rent, interest and profit earned by the factors of production. The expenditure method adds private consumption, investment, government spending and net exports. In India the National Statistical Office uses all three and cross-checks them, since in theory each must give the same total. Option B is wrong because the expenditure method is a recognised route to the same figure. Option C is wrong because the product method is what the estimates for agriculture and industry rest on. Option D is wrong because the income method is used mainly for the service sector. Exam tip: remember the identity Product = Income = Expenditure, the threefold basis of national income accounting.

The correct answer is C, Gross National Product. Net National Product is simply Gross National Product minus depreciation, that is NNP = GNP − Depreciation. Depreciation, also called consumption of fixed capital, is the wear and tear of machines, buildings and other capital goods during the year; taking it out shows how much output is really left with the nation. GNP itself is GDP plus the net factor income from abroad, so it counts what the residents of a country earn wherever they work. When NNP is measured at factor cost, it is the same as national income. A is wrong because direct taxes are a form of government revenue and are not an output aggregate. B is wrong because GDP minus depreciation gives Net Domestic Product, not NNP. D is wrong because national income is the result of the calculation, not its starting point. Exam tip: GDP + net factor income from abroad = GNP; GNP − depreciation = NNP; NNP at factor cost = national income.

The correct answer is B, The receipts of the government which create liability or reduce financial assets. In the Union Budget, money coming to the government is split into revenue receipts and capital receipts, and the test is exactly this one. Borrowings from the market, loans from the Reserve Bank or from abroad, and small savings and provident fund collections all create a liability, because the money has to be returned. Recovery of loans given earlier and disinvestment of shares in public sector units reduce the government's financial assets. Both kinds are capital receipts and are shown in the capital account. A is wrong because a receipt that creates no claim on the government is the definition of a revenue receipt, such as tax, fee, fine or dividend. C is wrong because grants to state governments are expenditure for the Centre, not a receipt. D is wrong because it reverses the rule; capital receipts add to liabilities rather than reduce them. Exam tip: capital receipts = borrowings + recovery of loans + disinvestment.

The correct answer is C, 1948. India's first Industrial Policy Resolution was announced on 6 April 1948 by Shyama Prasad Mukherjee, the first Industry Minister. It accepted a mixed economy for the new nation and sorted industries into four groups: those kept solely with the State, such as arms and ammunition, atomic energy and railways; those in which the State would start all new units; those under State regulation; and the rest left to private enterprise. A is wrong because 1952 is remembered for India's first general election, not for an industrial policy. B is wrong because the second Industrial Policy Resolution came in 1956, not 1955. D is wrong because no resolution was issued in 1960; the next important statements came in 1977, 1980 and 1991. Exam tip: IPR 1948 was the first, IPR 1956 is called the economic constitution of India and built on the Mahalanobis model, and the 1991 policy opened the economy up.

The correct answer is C, Public sector undertakings. Maharatna, Navratna and Miniratna are status tags that the Government of India gives to central public sector enterprises on the basis of their size, profits and performance. The Navratna and Miniratna schemes began in 1997, and the Maharatna category was added later as the top tier for the very largest and most profitable companies. A higher tag means more financial freedom: the board of a Maharatna company can approve very large investments on its own, without going to the government for each project. The aim is to let strong public companies compete and expand like private firms, even abroad. Option A is wrong because Special Economic Zones are areas with special trade and tax rules, not grades of companies. Option B is wrong because India's civilian awards are the Bharat Ratna and the Padma awards. Option D is wrong because mineral-rich areas are not graded with such titles. Exam tip: the order from top is Maharatna, Navratna, Miniratna; all three are grades of central PSUs.

The correct answer is D, Tariff barriers. Globalisation means the growing integration of countries through trade, investment, technology and the movement of people, and it works by lowering barriers to trade, not by raising them. A tariff barrier is a tax placed on imports to shield domestic producers from foreign competition, so it restricts trade instead of opening it. In India, the 1991 reforms, known by the letters LPG for liberalisation, privatisation and globalisation, cut import duties sharply and opened the economy to foreign companies. Option A is wrong because foreign direct investment, in which a company sets up or buys businesses abroad, grows as countries open up. Option B is wrong because multilateral trade agreements, such as those under the World Trade Organization, are a main vehicle of globalisation. Option C is wrong because outsourcing, like Indian IT and call-centre work done for foreign firms, grew directly out of globalisation and cheap communication. Exam tip: globalisation lowers tariffs and quotas and raises FDI, trade and outsourcing; the WTO replaced GATT on 1 January 1995.