Indian Economy Mixed Quiz: Set 14

The correct answer is A, borrowers. A loan is repaid in a fixed number of rupees, and inflation reduces what those rupees can buy. The borrower therefore returns money of smaller real value than the money received, so the real burden of the debt falls. Producers and traders who hold stocks of goods gain in the same way, since the value of what they hold rises with the price level.

Option B, lenders, lose for the same reason, because the interest they receive may not even cover the loss of purchasing power. Option C, pensioners, live on fixed payments and lose unless the pension is indexed to prices. Option D, holders of fixed deposits, earn a fixed nominal rate; when inflation is higher than that rate the real return is negative and their savings shrink in value.

The correct answer is B, Mahatma Gandhi National Rural Employment Guarantee Act. This law makes the right to work a legal guarantee: every rural household whose adult members are willing to do unskilled manual work is entitled to at least 100 days of wage employment in a financial year. The Act was passed in 2005 as NREGA, came into force from 2 February 2006 in 200 districts, was extended to the whole country by 2008 and renamed after Mahatma Gandhi in 2009. If work is not given within fifteen days, the worker is paid an unemployment allowance, and one third of the days are reserved for women. Option A is wrong because the IIM Act of 2017 only gives those management institutes the power to grant degrees. Option C is wrong because the Payment of Wages amendment merely allowed wages by cheque or bank transfer. Option D is wrong because the Citizenship Act deals with who is a citizen. Exam tip: NREGA 2005, in force 2 February 2006, 100 days of work.

The correct answer is B, Article 112. The Constitution nowhere uses the word budget. Article 112 requires the President to cause to be laid before both Houses of Parliament, in respect of every financial year, a statement of the estimated receipts and expenditure of the Government of India, and this statement is called the Annual Financial Statement. What is popularly known as the Union Budget is that document together with the related papers.

Option A, Article 110, defines what a Money Bill is and lists the matters it may deal with. Option C, Article 114, provides for the Appropriation Bill, without the passage of which no money may be withdrawn from the Consolidated Fund of India. Option D, Article 123, has nothing to do with the budget at all: it gives the President the power to promulgate ordinances when Parliament is not in session.

The correct answer is C, SBI Life Insurance. It is a private sector joint venture, not a public sector insurer.

SBI Life was set up in 2001 as a partnership between the State Bank of India and BNP Paribas Cardif of France. Although the State Bank holds a large stake, the company is registered and classified as a private life insurer and its shares are listed on the stock exchanges. The only public sector life insurer in India is the Life Insurance Corporation, set up in 1956.

Option A, United India Insurance of Chennai, and option B, New India Assurance of Mumbai, are two of the four government owned general insurers, along with National Insurance and Oriental Insurance. Option D, the General Insurance Corporation of India, is the state owned national reinsurer. All of them came out of the nationalisation of general insurance in 1972.

Exam tip: public insurers - LIC plus the four general insurers and GIC Re; SBI Life, HDFC Life and ICICI Prudential are private.

The correct answer is B, disinflation. If the inflation rate falls from seven per cent to five per cent, prices are still higher than last year but they are rising more slowly. That slowing is disinflation, and it is normally what a central bank is trying to achieve when it raises interest rates to fight high inflation.

Option A, deflation, means that prices themselves are falling and the inflation rate has become negative, which signals weak demand and is far more damaging. Option C, stagflation, is high inflation with low growth and high unemployment. Option D, skewflation, is a sharp rise in the prices of a few commodities, typically food, while the general price level stays broadly stable. This question is a favourite because candidates read deflation and disinflation as the same idea.

The correct answer is D, 1982. The National Bank for Agriculture and Rural Development was set up on 12 July 1982.

NABARD was created by an Act of Parliament of 1981 on the recommendation of the Shivaraman Committee, formally the Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development, and it began work in July 1982. It is the apex refinance institution for agriculture, small industry, handicrafts and other rural activities, and its headquarters is in Mumbai. It supervises Regional Rural Banks and cooperative banks, runs the Rural Infrastructure Development Fund, and promotes the self-help group and bank linkage programme.

A is wrong: 1979 is not connected with NABARD. B is wrong: 1981 is the year the enabling Act was passed, not the year the bank started functioning. C is wrong: 1978 is too early for this institution.

Exam tip: NABARD - Act 1981, began 12 July 1982, Shivaraman Committee, headquarters Mumbai.

The correct answer is B. Fiscal deficit is total expenditure minus total receipts other than borrowings, which means it measures exactly how much the government must borrow during the year to meet its planned spending. That is why it is described as the total borrowing requirement and why it, rather than the other deficits, is watched by rating agencies and by the bond market.

Option A describes the revenue deficit, which compares only revenue expenditure with revenue receipts and shows borrowing used for routine running costs. Option C is close to no standard definition; subtracting interest payments is done from the fiscal deficit to arrive at the primary deficit, not from total expenditure. Option D is not a recognised measure at all, since capital receipts consist largely of the very borrowings that the fiscal deficit is meant to exclude.

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 C, six. The Monetary Policy Committee set up under the amended Reserve Bank of India Act has six members. Three are from the Reserve Bank, namely the Governor, the Deputy Governor in charge of monetary policy and an officer of the Bank nominated by its Central Board, and three are external members appointed by the Central Government. The Governor chairs the committee and has a casting vote if the votes are equally divided, the quorum is four members and the committee must meet at least four times a year.

Options A, B and D give the wrong strength. The committee decides the policy repo rate by majority, and its resolution is published with the votes of each member, which is a further detail examiners like to ask.

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 A, interest payments. Primary deficit equals fiscal deficit minus interest payments. Interest is the cost of borrowings made in earlier years, so removing it leaves the borrowing that the present year's policies alone make necessary. A country may therefore run a large fiscal deficit and a very small primary deficit if most of its borrowing goes to service old debt.

Option B, subsidies, is a component of revenue expenditure and is never subtracted to produce a defined deficit measure. Option C, defence expenditure, is likewise an ordinary head of spending and has no special place in any deficit formula. Option D, grants for the creation of capital assets, is subtracted from the revenue deficit, not from the fiscal deficit, and the result of that subtraction is the effective revenue deficit.

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 D, services. The wholesale price index is built entirely from the prices of goods traded in bulk, and it has exactly three major groups: primary articles, fuel and power, and manufactured products, of which manufactured products carry the largest weight. A haircut, a school fee, a bus fare or a doctor's charge never enters the index, even though services make up more than half of the country's output. A separate producer price index that would cover services has long been under preparation.

Options A, B and C name the three groups that the index does cover, so none of them can be the answer. The absence of services is one reason the consumer price index, which includes them, was preferred as the anchor for monetary policy.

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 C, 2003. The Fiscal Responsibility and Budget Management Act was passed by Parliament in 2003 and its rules were brought into force in 2004. It requires the central government to place medium-term fiscal policy statements before Parliament along with the budget, to limit its deficits, and to disclose its liabilities, and it contains an escape clause permitting deviation in defined circumstances such as a national security emergency or a collapse of farm output.

Option A, 1991, is the year of the balance of payments crisis and the start of liberalisation, not of this law. Option B, 1999, saw no such enactment. Option D, 2016, is the year in which the FRBM Review Committee under N. K. Singh was constituted; it submitted its report in 2017 and recommended that the ratio of debt to gross domestic product become the principal fiscal anchor.

The correct answer is B, France. France was the first country to introduce GST, in 1954. The idea came from Maurice Lauré, a French tax official, who designed a tax charged at every stage of production and sale but only on the value added at that stage. This avoids "tax on tax", the cascading effect of older sales taxes. This value added tax (VAT) model later spread across Europe and the world. India adopted GST on 1 July 2017 through the 101st Constitutional Amendment, with a dual model: CGST and SGST on sales within a state and IGST on sales between states. A is wrong because Canada brought in its GST only in 1991. C is wrong because Australia introduced GST in 2000. D is wrong because Germany adopted its VAT system in 1968, long after France. Exam tip: First GST = France, 1954 (Maurice Lauré); India's GST from 1 July 2017 under the 101st Amendment; 1 July is observed as GST Day.

The correct answer is C, minus 2 per cent. The real rate of interest is the nominal rate less the rate of inflation, an approximation known as the Fisher equation. Here six per cent minus eight per cent gives minus two per cent, so the deposit grows in rupees but buys less at the end of the year than the original sum would have bought at the start. Savers lose in real terms whenever inflation is higher than the interest they earn, and that is a common condition in an economy with high inflation and administered deposit rates.

Option A adds the two rates instead of subtracting them. Option B subtracts in the wrong direction and gives a positive real return. Option D simply repeats the inflation rate and ignores the interest earned.

The correct answer is C, the policy cut. A policy cut motion asks that the amount of a demand be reduced to one rupee. The reduction is symbolic; the purpose is to record complete disapproval of the policy underlying the demand, and the member moving it may advocate an alternative policy. Because it is a direct challenge, a policy cut carried in the Lok Sabha would amount to a vote of no confidence in the government.

Option A, the token cut, reduces the demand by one hundred rupees and is used to ventilate a specific grievance within the sphere of the government's responsibility. Option B, the economy cut, reduces the demand by a definite stated amount and represents a demand that the expenditure be carried out more economically. Option D, the guillotine, is not a cut motion at all but the device by which the Speaker puts all outstanding demands to the vote on the last allotted day.

The correct answer is B, nominal GDP divided by real GDP, multiplied by 100. Nominal GDP is measured at current prices and real GDP at the prices of a base year, so the ratio between them isolates the effect of the change in prices. The deflator is the broadest price measure available, because it covers every good and service produced within the country, and unlike the wholesale and consumer indices its basket changes as the composition of output changes.

Option A inverts the formula and would fall when prices rise. Option C gives an absolute difference in rupees, not an index number. Option D describes per capita GDP, which measures income per head and has nothing to do with the measurement of prices. A deflator of 120 means that prices in the current year are twenty per cent above the base year level.

The correct answer is C, Article 116. It empowers the Lok Sabha to make a grant in advance, pending the completion of the procedure prescribed for voting the demands for grants and the passing of the Appropriation Act. This is the vote on account, and it keeps the machinery of government running in the interval, since money cannot lawfully be drawn from the Consolidated Fund without parliamentary authorisation.

Option A, Article 113, provides that estimates of expenditure charged on the Consolidated Fund shall not be submitted to the vote of Parliament and that a demand for a grant needs the President's recommendation. Option B, Article 115, deals with supplementary, additional or excess grants. Option D, Article 117, lays down the special provisions governing financial bills, including the requirement of the President's recommendation.