Indian Economy Mixed Quiz: Set 10

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, the Reserve Bank lends short-term funds to banks against government securities. In a repurchase or repo transaction a bank sells government paper to the Reserve Bank and agrees to buy it back shortly afterwards at a slightly higher price; the difference works out as interest at the repo rate. It is the main operating instrument of monetary policy, and a rise in it makes borrowing costlier for banks and so for their customers.

Option A describes the lending rate charged to customers, which banks fix themselves under a benchmark framework laid down by the Reserve Bank. Option C describes the reverse repo rate, the rate at which the Reserve Bank absorbs surplus funds from banks, which is always below the repo rate. Option D is the savings deposit rate, which banks are free to decide. Keep repo and reverse repo the right way round by remembering that in a repo the Reserve Bank gives money and in a reverse repo it takes money.

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 B, 1 January 1949. The Bank began as a shareholders' institution, and the Reserve Bank (Transfer to Public Ownership) Act, 1948 transferred its shares to the central government with effect from the first day of 1949, since when it has been fully owned by the Government of India.

Option A, 1 April 1935, is the date the Bank began operations under the Act of 1934, not the date of nationalisation, and mixing the two is the commonest error in this question. Option C is the date of independence and has no connection with the ownership of the Bank. Option D, 19 July 1969, is the date on which fourteen major commercial banks were nationalised, a separate event; six more were nationalised in 1980.

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, Fourteen. On 19 July 1969 the government nationalised fourteen of the largest commercial banks in the country, the aim being to take banking to rural areas, direct credit to agriculture and small industry, and end the concentration of bank funds in a few business houses.

Option A, six, is the number of banks nationalised in the second round in April 1980, so it is a correct figure attached to the wrong year. Option B, twelve, does not correspond to any round of nationalisation and is put in only as a near miss. Option D, twenty, is the total of the two rounds taken together, fourteen plus six, and is the trap most often chosen. Read the year in the question carefully, because papers ask the same fact as 1969, as 1980 and as the combined total.

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 B. In a repurchase agreement a bank sells government securities to the Reserve Bank and agrees to buy them back the next day at a fixed price; the difference is the interest, and the rate is the repo rate. It is the policy rate announced by the Monetary Policy Committee, so a change in it moves the whole structure of short term interest rates.

Option A describes the reverse repo rate, under which banks lend their surplus to the central bank, and the standing deposit facility now performs the same absorbing role. Option C describes a lending rate to customers, such as the benchmark rate to which a bank links its loans, which is set by the bank and not by the Reserve Bank. Option D describes government borrowing through the sale of dated securities, which the Bank manages as debt manager but which is not the repo rate.

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.

The correct answer is C, the Government of India. The one rupee note and all coins are issued by the Government of India through the Ministry of Finance, and the one rupee note carries the signature of the Finance Secretary rather than that of the Governor of the Reserve Bank. The Reserve Bank acts only as the agency that distributes them.

Option A, the Reserve Bank of India, issues every currency note of a denomination above one rupee, and those notes carry the Governor's signature, but not the one rupee note. Option B, the State Bank of India, is a commercial bank and does no note issue at all, although it acts as an agent of the Reserve Bank in places where the latter has no office. Option D, the Security Printing and Minting Corporation of India, runs the presses and mints that physically print notes and strike coins, but printing is not issuing. The distinction between issuing and printing is exactly what this question tests.

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, six. Three of them come from the Reserve Bank, the Governor as chairperson, the Deputy Governor in charge of monetary policy and an officer of the Bank nominated by the Central Board, and three are appointed by the central government from among persons of ability and integrity with knowledge of economics, banking or finance.

Option A, four, is the quorum for a meeting rather than the strength of the Committee, which is why it is offered here. Option B and option D are simply wrong numbers, though seven tempts candidates who count the Governor twice, once as chairperson and once as a member. Decisions are taken by a majority of members present and voting, and if the votes are equally divided the Governor has a second or casting vote, which is possible only with an even number of members.

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, 1949. The Reserve Bank began in 1935 as a shareholders' bank with privately held capital. Under the Reserve Bank of India Transfer to Public Ownership Act it passed into full government ownership on 1 January 1949, soon after independence, so that the central bank and the new government's economic policy would work together.

Option A, 1935, is the year the Bank was established and began operations, not the year of its nationalisation. Option C, 1955, is the year the Imperial Bank of India was reconstituted as the State Bank of India following the recommendation of the All India Rural Credit Survey Committee. Option D, 1969, is the year fourteen commercial banks were nationalised. Fix the chain in order: established 1935, nationalised 1949, State Bank of India 1955, bank nationalisation 1969 and 1980.

The correct answer is A, 2nd Oct 2014. Prime Minister Narendra Modi launched the Swachh Bharat Mission on 2 October 2014, Mahatma Gandhi's 145th birth anniversary, at Rajpath in New Delhi. Its target was a clean and open defecation free (ODF) India by 2 October 2019, Gandhiji's 150th birth anniversary, mainly by building household and community toilets and improving waste management. The mission has two parts, Swachh Bharat Mission (Gramin) for villages and Swachh Bharat Mission (Urban) for towns and cities. Its logo is Gandhiji's round spectacles with the words "Swachh Bharat". B is wrong because 14 November is Children's Day, Jawaharlal Nehru's birthday, and 2015 is also the wrong year. C is wrong because 14 November 2014 was Children's Day, not the launch date. D is wrong because by 2 October 2015 the mission had already completed its first year. Exam tip: Swachh Bharat = 2 October 2014, target ODF India by 2 October 2019, logo = Gandhiji's spectacles; the Swachh Survekshan ranks cities on cleanliness.

The correct answer is A, the Finance Act, 2016. It amended the Reserve Bank of India Act, 1934 to insert the provisions on the inflation target and on the Monetary Policy Committee, so that the policy rate is now set by a committee and not by the Governor alone, and the framework of flexible inflation targeting became law.

Option B, the Banking Regulation Act, 1949, gives the Bank its powers to license, regulate and supervise banks and prescribes the statutory liquidity ratio, but it does not deal with the Committee. Option C, the Fiscal Responsibility and Budget Management Act, 2003, sets targets for the fiscal deficit and government debt, which is fiscal and not monetary policy, and it is the usual trap here. Option D, the Foreign Exchange Management Act, 1999, replaced the older foreign exchange law and governs transactions in foreign exchange.

The correct answer is B, 1982. The National Bank for Agriculture and Rural Development was set up on 12 July 1982 on the recommendation of the committee headed by B. Sivaraman, and it took over the agricultural credit functions until then performed by the Reserve Bank and the refinance work of the Agricultural Refinance and Development Corporation. It refinances cooperative banks and regional rural banks rather than lending directly to most farmers.

Option A, 1975, is the year the first regional rural banks were set up under an ordinance, following the Narasimham working group, so it belongs to the same field but to a different institution. Option C, 1991, is the year economic liberalisation began and the Narasimham Committee on the financial system was appointed. Option D, 2005, is associated with the policy push for financial inclusion and no-frills accounts. Attach 1982 and the Sivaraman Committee firmly to NABARD.

The correct answer is A, Section 42 of the Reserve Bank of India Act, 1934. It requires every scheduled bank to keep with the Reserve Bank a cash balance calculated on its net demand and time liabilities, and this proportion is the cash reserve ratio. Since the amendment of 2006 the Bank may set the ratio without any statutory floor or ceiling.

Option B, Section 24 of the Banking Regulation Act, 1949, prescribes the statutory liquidity ratio, the share of liabilities that a bank must hold in cash, gold and approved securities with itself, and the pairing of the two sections is the favourite trap in banking papers. Option C, Section 22 of the Reserve Bank of India Act, gives the Bank the sole right of note issue. Option D governs dealings in foreign exchange and has nothing to do with reserve requirements.

The correct answer is A, kept as cash with the Reserve Bank of India. The cash reserve ratio is the share of a bank's net demand and time liabilities that it must maintain as cash balances with the Reserve Bank. The balance earns the bank nothing, so a rise in the ratio takes money out of the bank's lending pool and tightens credit, while a cut releases funds.

Option C describes the statutory liquidity ratio, which is held by the bank with itself in cash, gold or approved securities and does earn a return; this is the most common confusion in the chapter. Option B is wrong because banks cannot be required to hold reserves in company shares, which carry market risk. Option D describes priority sector lending, under which a prescribed share of adjusted net bank credit must go to agriculture, small enterprises, education, housing and weaker sections. Remember the one-line separation: cash reserve ratio with the Reserve Bank, statutory liquidity ratio with the bank itself.