Indian Economy Previous Year Questions (PYQ) with Answers – Page 3

The correct answer is B, Gulzarilal Nanda. Gulzarilal Nanda became the first Deputy Chairman when the Planning Commission began work in 1950, and he later became interim Prime Minister twice, in 1964 and 1966. The Planning Commission was set up by a Cabinet resolution on 15 March 1950 with the Prime Minister as its ex-officio Chairman; it was neither a constitutional nor a statutory body. Nanda was also Union Planning Minister and received the Bharat Ratna in 1997. The Commission was replaced by NITI Aayog on 1 January 2015. A is wrong because Sardar Patel was Deputy Prime Minister and Home Minister and never served on the Planning Commission. C is wrong because K.C. Neogy headed the first Finance Commission in 1951. D is wrong because Nehru was the Chairman of the Planning Commission as Prime Minister, not its Deputy Chairman. Exam tip: Planning Commission 1950, Chairman = Prime Minister, first Deputy Chairman = Gulzarilal Nanda; NITI Aayog replaced it on 1 January 2015.

The correct answer is B, 1976. Regional Rural Banks were set up under the Regional Rural Banks Act, 1976, after the Narasimham Working Group of 1975 recommended small banks close to the villages. The first RRB, Prathama Bank, opened at Moradabad in Uttar Pradesh on 2 October 1975 under an ordinance, and the Act followed in 1976. Each RRB is sponsored by a commercial bank, and its capital is shared by the Centre (50 per cent), the sponsor bank (35 per cent) and the State government (15 per cent). Their aim is credit for small farmers, artisans and rural labourers, and NABARD supervises them. A is wrong because in 1966 rural credit still depended on cooperatives; no RRB law existed. C is wrong because 1986 saw no such Act. D is wrong because 1996 is long after the Act, not the year it was passed. Exam tip: RRB Act 1976; first RRB Prathama Bank, 2 October 1975; capital shared 50:35:15 between Centre, sponsor bank and State.

The correct answer is B, 2 and 3 only. Selling dollars supports a falling rupee and buying dollars absorbs heavy inflows, but to fight inflation the RBI sells, not buys, securities. Buying government securities through open market operations pumps rupees into the system and would add to inflation, so when inflation is too high the RBI sells securities to soak up money. So statement 1 is wrong. When the rupee is falling fast, the RBI sells dollars from its reserves, which raises the supply of dollars and steadies the rupee, so statement 2 is right. When interest rates in the USA or the EU fall, investors move money to India for better returns; the dollar inflow pushes the rupee up, and the RBI buys dollars to prevent sharp appreciation and to add to reserves, so statement 3 is right. Option A is wrong because it includes statement 1. Option C is wrong for the same reason. Option D is wrong because statement 1 is false. Exam tip: high inflation, sell bonds; weak rupee, sell dollars; heavy inflows, buy dollars.

The correct answer is C, Second. The Second Five-Year Plan, 1956 to 1961, moved the focus from farming to rapid industrialisation, especially heavy and basic industries. It was built on the Mahalanobis model, drawn up by the statistician P. C. Mahalanobis, which argued that investing in machine-making and steel would give faster long-run growth. Three public-sector steel plants came up in this plan: Bhilai with Soviet help, Rourkela with West German help and Durgapur with British help. The First Plan, 1951 to 1956, had put agriculture, irrigation and power first, on the Harrod-Domar model. A is wrong because the Third Plan, 1961 to 1966, aimed at a self-reliant, self-generating economy and was hit by the wars of 1962 and 1965. B is wrong because the Fourth Plan, 1969 to 1974, aimed at growth with stability and progressive achievement of self-reliance. D is wrong because the Fifth Plan, 1974 to 1979, made removal of poverty its main goal. Exam tip: First plan farms, Second plan factories on the Mahalanobis model, Fifth plan Garibi Hatao.

The correct answer is A, Any privately held startup company with a value of over $1 billion. A unicorn is a startup that is not listed on the stock market and is valued at more than one billion US dollars. The term was coined in 2013 by the American venture capitalist Aileen Lee, who picked the mythical animal because such startups were then very rare. Related words follow the same pattern: a decacorn is valued at over 10 billion dollars and a hectocorn at over 100 billion dollars. Once a unicorn lists its shares through an IPO, it becomes a listed company and, strictly speaking, is no longer called a unicorn. B is wrong, because merging one public sector company with another, as done with several public sector banks, is consolidation. C is wrong, because selling a loss-making state-owned company is privatisation or disinvestment. D is wrong, because a foreign firm working with an Indian partner forms a joint venture. Exam tip: unicorn, private startup, over 1 billion dollars; decacorn, over 10 billion.

The correct answer is A, the Bombay Plan. The Bombay Plan of 1944 was drawn up by a group of eight, mostly leading industrialists such as J. R. D. Tata, G. D. Birla, Purushottamdas Thakurdas, Lala Shri Ram and Kasturbhai Lalbhai, with John Mathai among them. It proposed a fifteen-year plan to double per-capita income and treble national income, with the state taking the lead in heavy industry and infrastructure and the private sector working under its guidance. It showed that even big business wanted the state to plan the economy and to run a large public sector, and this consensus shaped the Planning Commission of 1950 and the mixed-economy model. B, the demand of peasants, and C, the demand of workers' unions, were not the origin of the planning idea; they were groups the plans tried to serve. D, the Gandhian vision, favoured village industries and decentralisation and was set out separately in the Gandhian Plan of 1944 by S. N. Agarwal. Exam tip: Bombay Plan 1944 by eight industrialists; People's Plan 1945 by M. N. Roy; Gandhian Plan 1944 by S. N. Agarwal.

The correct answer is B, Base year. Real GDP measures the value of all final goods and services produced in a year at the prices of one fixed earlier year, called the base year, so that the effect of rising prices is removed and true growth can be seen. Nominal GDP uses the current year's prices. The ratio of nominal GDP to real GDP, multiplied by 100, is the GDP deflator, a measure of inflation. The base year is chosen by the government's statistics office and is revised from time to time so that it reflects the present structure of the economy. A is wrong because the fiscal year is simply the twelve months over which accounts are kept, April to March in India. C is wrong because financial year is another name for the same accounting period, not a price reference. D is wrong because 'common year' means a calendar year of 365 days, a term from the calendar, not economics. Exam tip: real GDP = base-year prices, nominal GDP = current prices; GDP deflator = nominal divided by real, times 100.

The correct answer is D, Hawkish. A hawkish stance means the central bank treats inflation as its first enemy and is ready to raise interest rates and tighten money supply, even at some cost to growth. Higher rates make loans dearer, so people and firms borrow and spend less, demand cools and prices stop rising so fast. India saw this when the RBI raised the repo rate from 4 per cent to 6.5 per cent between May 2022 and February 2023 to fight inflation. The opposite, a dovish stance, cuts rates to support growth and jobs, as in 2020 during the Covid slowdown. Option A is wrong because 'owlish' is only an informal label some writers use for a wait-and-watch, neutral position, not the usual anti-inflation stance. Option B is wrong because a dovish stance eases money and fuels inflation rather than fighting it. Option C is wrong because 'Hicksian' refers to the economist John Hicks and his IS-LM model, not to a policy stance. Exam tip: hawk = fight inflation, raise rates; dove = support growth, cut rates.

The correct answer is A, M1 and M2. The Reserve Bank of India measures money supply in four grades, M1 to M4, in decreasing order of liquidity. M1 is currency with the public plus demand deposits of banks plus other deposits with the RBI, and M2 is M1 plus savings deposits with post offices. Both consist of money that can be spent at once, so they are called narrow money. M3 adds the time deposits of banks to M1, and M4 adds all post office deposits to M3; these two are broad money because they include savings locked for a period. M3 is the measure the RBI usually quotes as "money supply". B, M2 and M4, mixes a narrow and a broad measure. C, M3 and M2, does the same in the other order. D, M1 and M4, pairs the narrowest with the broadest. Exam tip: M1, M2 narrow; M3, M4 broad; M3 is the headline figure.

The correct answer is A, stagflation. Stagflation is a blend of the words stagnation and inflation: output stops growing, unemployment rises, and yet prices keep climbing. Normally inflation and unemployment move in opposite directions, as the Phillips curve shows, so stagflation is a puzzle for policy makers, because raising interest rates to cool prices worsens unemployment while spending to create jobs pushes prices higher. The classic example is the 1970s, when the oil price shocks of 1973 and 1979 hit western economies with slow growth and double-digit inflation at the same time. B is wrong because an inflation premium is the extra return lenders demand to make up for expected inflation. C is wrong because an inflationary gap is the amount by which total demand exceeds full-employment output, a situation of too much demand, not of high unemployment. D is wrong because reflation is a deliberate policy of boosting demand to lift an economy out of a slump. Exam tip: stagflation equals high inflation plus high unemployment plus stagnant growth, remembered by the 1970s oil crisis.

The correct answer is C, Open market operations. Open market operations, or OMO, are the buying and selling of government securities by the central bank in the open market to control the money supply. When the RBI buys government bonds it pays money to banks, so liquidity in the system rises and interest rates tend to fall; when it sells bonds it pulls money out, tightening liquidity and pushing rates up. OMO is a quantitative tool of monetary policy, used along with the cash reserve ratio, the statutory liquidity ratio, the repo rate and the bank rate, and the RBI also uses it to manage the government's borrowing programme. A is wrong because national market operations is not a term used in monetary policy. B is wrong because closed market operations does not exist; the whole point is that the trades happen in the open market. D is wrong because international market operations would refer to foreign exchange dealings, not government securities. Exam tip: RBI buys securities means more money, RBI sells securities means less money; that is OMO.

The correct answer is D, gross domestic product. Gross domestic product, or GDP, is the money value of all final goods and services produced inside the borders of a country in one year. Two words in the definition matter. Domestic means the output is counted where it is produced, no matter who owns the factor of production, so the earnings of a foreign company working in India are inside India's GDP. Gross means depreciation, the wear and tear of machines and buildings, has not been deducted. In India the National Statistical Office estimates GDP and releases it every quarter. Option A is wrong because per capita income is national income divided by population, an average per person. Option B is wrong because net domestic product is GDP minus depreciation. Option C is wrong because national income, or net national product at factor cost, counts the output of the residents of a country wherever they earn it. Exam tip: domestic means inside the borders, national means by the residents; gross keeps depreciation, net removes it.

The correct answer is B, 1999. The Foreign Exchange Management Act was passed in 1999 and came into force on 1 June 2000, replacing the Foreign Exchange Regulation Act of 1973. The change of one word in the title tells the story: FERA regulated and restricted dealings in foreign exchange and treated a breach as a criminal offence, while FEMA manages them in an open economy and treats a breach as a civil matter with a monetary penalty. FEMA freed most current account transactions, kept capital account transactions under the control of the Reserve Bank, and is administered by the Directorate of Enforcement. Option A is wrong because 1988 has no link with this law. Option C is wrong because 2014 relates to later changes in foreign investment policy, not to FEMA's enactment. Option D is wrong because 1992 is the year of the SEBI Act and of the first big liberalisation of trade policy. Exam tip: FERA 1973 was criminal in approach, FEMA 1999 is civil, and it took effect in June 2000.

The correct answer is B, 2005. Value added tax replaced the old general sales tax from 1 April 2005, when most states adopted it on the recommendation of the empowered committee of state finance ministers. The point of VAT is that a trader pays tax only on the value added at that stage, taking credit for the tax already paid on purchases, so the cascading of tax upon tax is removed. Haryana had moved to VAT earlier, in 2003, and a few states joined later, with Uttar Pradesh the last in 2008. VAT on goods was itself absorbed into the Goods and Services Tax from 1 July 2017, though state VAT still applies to petroleum products and liquor. Option A is wrong because 2007 is when the last states were still joining. Option C is wrong because 2013 relates to the debate on the GST bill. Option D is wrong because 2011 is the year the constitutional amendment for GST was first introduced. Exam tip: link VAT 2005 with GST 2017.

The correct answer is D, 1977. IBM and Coca-Cola wound up their Indian operations in 1977 rather than dilute their holdings to 40 per cent. The Foreign Exchange Regulation Act, passed in 1973, required foreign companies to cut their equity in Indian subsidiaries to that level and to obtain permission for most dealings in foreign exchange. This was the high point of a closed, licence based economy, and the exit of two well known American firms became its symbol. Coca-Cola returned only after the reforms of 1991, and FERA itself was replaced by the milder Foreign Exchange Management Act of 1999. Option A is wrong because 1964 falls well before FERA was enacted. Option B is wrong because 1981 is after both companies had already left. Option C is wrong because 1956 is the year of the Industrial Policy Resolution, unrelated to this exit. Exam tip: remember FERA 1973, the IBM and Coca-Cola exit in 1977, liberalisation in 1991 and FEMA in 1999 as one chain.

The correct answer is C, Sales of final goods. Gross Domestic Product counts the value of final goods and services produced inside a country during a year. Only final output is added, because the value of intermediate goods is already inside the price of the finished product, and counting both would be double counting. The exclusions follow from the same rule. A used good was counted in the year it was made, so selling it again adds nothing to this year's production, although the dealer's commission is a fresh service and does count. A transfer payment such as a pension, a scholarship or unemployment relief is income handed over with no good or service in return, so it is not production. Option A is wrong because the sale of used goods is not new output. Option B is wrong because barter is not recorded in money and cannot be valued, so it stays outside measured GDP. Option D is wrong because transfer payments create no output at all. Exam tip: GDP counts final goods only, and leaves out second-hand sales and transfer payments.

The correct answer is D, GDP - Depreciation. Net Domestic Product is what is left of the domestic product after setting aside the wear and tear of capital. Gross Domestic Product measures the value of all final goods and services produced inside a country in a year. Part of that output merely replaces machines, buildings and vehicles that have worn out during the year, and this loss is called depreciation or consumption of fixed capital. Taking it out gives NDP, a truer measure of what the economy has really added. In India these aggregates are estimated by the National Statistical Office. Option A is wrong because net factor income from abroad is added to a domestic aggregate, never subtracted. Option B is wrong because GDP plus net factor income from abroad gives Gross National Product. Option C is wrong because GNP minus depreciation gives Net National Product, the national counterpart of NDP. Exam tip: net always means depreciation removed, and national always means net factor income from abroad included.

The correct answer is D, Gas and water supply. The Index of Industrial Production (IIP) covers only three sectors: mining, manufacturing and electricity. It is a monthly index released by the National Statistics Office under the Ministry of Statistics and Programme Implementation, and it shows how fast the volume of industrial output is rising or falling compared with a base year. Manufacturing carries by far the largest weight in the index, so a slowdown in factories pulls the IIP down quickly. Gas and water supply are counted in the wider industry sector of national income, together with electricity, but they are not part of the IIP basket, and that is the trap in this question. Option A is wrong because mining is one of the three sectors of the IIP. Option B is wrong because electricity is also a sector of the IIP. Option C is wrong because manufacturing is the biggest part of the index. Exam tip: IIP = mining + manufacturing + electricity; the index of eight core industries is a separate, smaller index.

The correct answer is B, Cash Reserve Ratio. The Cash Reserve Ratio (CRR) is the share of a bank's deposits that it must keep with the Reserve Bank of India in cash, and the bank earns no interest on this money. The RBI fixes the CRR under Section 42 of the RBI Act, 1934, and uses it to control the money supply: raising the CRR leaves banks with less money to lend, while cutting it releases funds into the economy. The ratio is worked out on a bank's net demand and time liabilities, which are mainly its deposits. Option A is wrong because the Statutory Liquidity Ratio is kept by the bank itself, in cash, gold or approved government securities, not deposited with the RBI. Option C is wrong because the Minimum Reserve System is the rule under which the RBI keeps a minimum stock of gold and foreign exchange to back the currency it issues. Option D is wrong because the reverse repo rate is the rate at which the RBI borrows money from banks. Exam tip: CRR is kept with the RBI; SLR is kept by the bank itself.

The correct answer is C, minimum support price. The MSP is announced before sowing so that farmers know the lowest price at which the government will buy their crop. The Union Government fixes it on the recommendation of the Commission for Agricultural Costs and Prices (CACP), set up in 1965, and the final approval comes from the Cabinet Committee on Economic Affairs. It is announced separately for kharif and rabi crops, while sugarcane gets a fair and remunerative price instead. Wheat was the first crop brought under MSP, in 1966-67, at the start of the Green Revolution. Option A is wrong because a buffer stock is grain the government holds for food security, and no "buffer price" is announced for farmers. Option B is wrong because the issue price is the rate at which the Food Corporation of India sells grain to the States for the public distribution system. Option D is wrong because "fair sustenance price" is not an official price at all. Exam tip: MSP is recommended by the CACP and approved by the CCEA; sugarcane gets the FRP instead.