Indian Economy Mixed Quiz: Set 17

The correct answer is B, France. France adopted the value added tax in 1954, and the idea of taxing only the value added at each stage, with credit for the tax paid earlier, spread from there to most of the world. This is the single most asked international fact from the GST chapter.

Option A, Canada, is important for a different reason: India borrowed the dual model of GST, with a central and a state component levied on the same supply, from the Canadian system, so Canada is the country to remember for the model rather than for being first. Option C, Germany, adopted a value added tax later, in the nineteen sixties, as did most of western Europe. Option D, Japan, introduced its consumption tax only in 1989. Remember the pair: first in France, dual model from Canada.

The correct answer is B, Rural Cooperatives. Rural cooperative credit societies were the microfinance structure already in place when India became independent. They began with the Cooperative Credit Societies Act of 1904, which was passed to free village borrowers from moneylenders, and by 1947 a three tier structure of primary societies, district central cooperative banks and state cooperative banks was working across the provinces. The later forms of microfinance came much later. A is wrong because Joint Liability Groups were introduced by NABARD only in 2004 05 for small tenant farmers who lack land papers. C is wrong because the Self Help Group movement grew from the 1980s, and the SHG Bank Linkage Programme started as a pilot in 1992. D is wrong because the Grameen model belongs to Bangladesh, where Muhammad Yunus began it in the 1970s, and it reached India afterwards. Exam tip: cooperatives 1904, SHG Bank Linkage 1992, Joint Liability Groups 2004.

The correct answer is A, Interest payments. Primary deficit equals fiscal deficit minus interest payments. Interest is the price of borrowing done in earlier years, so removing it leaves the gap created by the current year's own decisions on spending and taxation, which is why economists read the primary deficit as a measure of present fiscal discipline. Option B is wrong because revenue receipts are already counted on the receipts side in arriving at the fiscal deficit itself. Option C is wrong because capital expenditure is part of total expenditure and is not deducted again; a fiscal deficit financing capital works is treated differently in quality, but the formula does not change. Option D is wrong because grants given to States for creating capital assets are deducted from the revenue deficit to give the effective revenue deficit, not from the fiscal deficit.

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 C, wealth tax. It was levied on the net wealth of individuals, Hindu undivided families and companies, but it collected very little compared with the effort of assessing it, so it was withdrawn in 2015 and replaced by an additional surcharge on very high incomes.

Option A, estate duty, was a tax on property passing on the death of its owner, and it was abolished much earlier, in 1985. Option B, gift tax, was abolished in 1998; since then gifts above a threshold are taxed in the hands of the person who receives them, as income from other sources. Option D, the securities transaction tax, is a small levy on the purchase and sale of securities on a recognised stock exchange and is very much in force, so it is not an abolished tax at all. The order of abolition, 1985, 1998 and 2015, is the part worth memorising.

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, Article 112. Article 112 requires the President to cause a statement of the estimated receipts and expenditure of the Government of India for every financial year to be laid before both Houses of Parliament, and that statement is the Annual Financial Statement. It shows the revenue and the capital accounts separately and distinguishes expenditure charged on the Consolidated Fund, which is not submitted to the vote of Parliament. Option A is wrong because Article 110 defines a Money Bill and lists the matters a Money Bill may deal with. Option C is wrong because Article 114 deals with the Appropriation Bill, through which money is withdrawn from the Consolidated Fund after the demands for grants are voted. Option D is wrong because Article 266 establishes the Consolidated Fund and the Public Account themselves.

The correct answer is A, Small Industries Development Bank of India. SIDBI is the apex institution for micro, small and medium enterprises.

It was set up in 1990 under an Act of Parliament, began work on 2 April that year, and has its head office at Lucknow. It started as a subsidiary of IDBI and became independent later. SIDBI does not usually lend directly in small amounts; it refinances banks, state finance corporations and microfinance institutions, and runs funds such as the Fund of Funds for Startups and the credit guarantee scheme for small units along with the government. It also publishes the MSME Pulse report.

Options B, C and D change one word each and are simply not the name of any institution. The trap is the pair small and service: SIDBI is about small industries, the sector that employs the most people after agriculture.

Exam tip: SIDBI 1990, Lucknow, MSMEs; NABARD 1982, Mumbai, agriculture and rural credit.

The correct answer is B, one third. Article 279A provides that a decision of the Council needs a majority of not less than three fourths of the weighted votes of the members present and voting, with the vote of the Centre carrying one third of the total votes cast and the votes of all the state governments together carrying two thirds. The quorum for a meeting is one half of the total number of members.

Option A is wrong because no single member holds half the weight; the design deliberately requires the Centre and a large group of states to agree. Option C states the combined share of all the states, not of the Centre, and is the commonest wrong choice. Option D does not appear anywhere in the provision. The practical effect of the formula is that neither the Centre alone nor the states alone can carry a proposal, and that is the point the question tests.

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 D, K. C. Neogy. K. C. Neogy chaired the first Finance Commission, which was constituted in 1951 under Article 280 soon after the Constitution came into force, and whose recommendations covered the sharing of income tax and union excise duties with the States. Option A is wrong because C. D. Deshmukh was Union Finance Minister in that period and later Governor of the Reserve Bank of India, but he did not chair the Commission. Option B is wrong because K. Santhanam chaired the second Finance Commission, not the first. Option C is wrong because A. K. Chanda chaired the third Finance Commission and is better remembered as a Comptroller and Auditor General of India. Remembering Neogy for the first and Santhanam for the second is enough for most papers.

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, Both I and II. Statement one is correct because the securities transaction tax is charged on the purchase and sale of securities on a recognised stock exchange and is borne by the investor who makes the transaction; the burden cannot be passed on to anybody else, which is the test of a direct tax, and it is administered by the Central Board of Direct Taxes. Statement two is correct because value added tax was levied by the states on the sale of goods at each stage of the chain, with credit for the tax paid on inputs, and the dealer recovered it from the buyer in the price, which is the test of an indirect tax; VAT has since been subsumed into GST for most goods.

Option B rejects the first statement, option D rejects the second, and option C rejects both, so all three miss one or other of these classifications. Remember the rule and not the list: if the payer can shift the burden, the tax is indirect.

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, Corporation tax. A direct tax is one whose burden cannot be shifted: the person or company assessed both pays it and bears it. Corporation tax, charged on the profits of companies, and income tax, charged on the income of individuals, are the two main direct taxes of the Union. Option A is wrong because the Goods and Services Tax is an indirect tax collected from the seller but passed on to the buyer in the price of goods and services. Option B is wrong because customs duty is levied on imports and exports and is likewise recovered from the consumer. Option D is wrong because excise duty, now confined to a few products such as petroleum and tobacco after GST, is also indirect. The test is simple: ask whether the payer can pass the burden on.

The correct answer is D, 1969. The Monopolies and Restrictive Trade Practices Act was passed in 1969 and came into force on 1 June 1970. It followed the report of the Dutt Committee on industrial licensing, which found that economic power had gathered in a few business houses. The Act set up the MRTP Commission, required large undertakings to get clearance before expanding, and banned restrictive and unfair trade practices. After the reforms of 1991 the licensing clauses were dropped, and the law was finally replaced by the Competition Act, 2002, under which the Competition Commission of India now works. Option A is wrong because 1977 is the year of the Janata government's Industrial Policy Statement, which favoured small and cottage industry. Option B is wrong because 1973 is the year of the Foreign Exchange Regulation Act, FERA. Option C is wrong because 1980 brought another Industrial Policy Statement, which again encouraged larger units. Exam tip: MRTP Act 1969, Competition Act 2002, Competition Commission of India in its place.

The correct answer is B, 2003. The Fiscal Responsibility and Budget Management Act was passed by Parliament in 2003 and brought into force in 2004. It aims at fiscal discipline by placing limits on the fiscal deficit and on government debt, and by requiring the government to lay before Parliament each year a Medium-term Fiscal Policy Statement, a Fiscal Policy Strategy Statement and a Macroeconomic Framework Statement along with the Budget. Option A is wrong because 1991 is the year of the balance of payments crisis and the beginning of economic liberalisation, not of this Act. Option C is wrong because 2005 is associated with the Right to Information Act and the rural employment guarantee law. Option D is wrong because 2016 is the year of the insolvency code and the monetary policy framework amendments.

The correct answer is A, Licence-Permit-Quota Raj. The New Industrial Policy of 24 July 1991 abolished industrial licensing for all but a short list of industries, so a firm no longer needed a government permit to start production, to expand or to import. That system of licences, permits and quotas, named the Licence-Permit-Quota Raj by C. Rajagopalachari, had governed Indian industry since the Industries Act of 1951. The reforms came in a balance of payments crisis under Prime Minister P. V. Narasimha Rao and Finance Minister Manmohan Singh, and are remembered as liberalisation, privatisation and globalisation. Option B is wrong because the banks nationalised in 1969 and 1980 stayed in public hands. Option C is wrong because subsidies on fertiliser, food and power continue to this day. Option D is wrong because cooperative banks still work under the Reserve Bank and state registrars. Exam tip: 1991 reforms, licensing kept for only a handful of industries.

The correct answer is C, Article 267. Article 267 allows Parliament by law to establish a Contingency Fund of India, held at the disposal of the President so that advances can be made for unforeseen expenditure before Parliament authorises it; the amount is afterwards recouped from the Consolidated Fund through a supplementary appropriation. Option A is wrong because Article 265 lays down that no tax shall be levied or collected except by authority of law. Option B is wrong because Article 266 creates the Consolidated Fund of India and the Public Account, from the first of which no money may be drawn without parliamentary authority. Option D is wrong because Article 270 deals with taxes levied and collected by the Union and distributed between the Union and the States, which is the divisible pool the Finance Commission works on.

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.