Indian Economy Mixed Quiz: Set 2

The correct answer is B, depreciation. Machines, buildings and vehicles wear out as they are used, and the value of that wear and tear must be set aside if the country is to keep its capital intact. Deducting it from GNP gives NNP, and NNP measured at factor cost is what economists call national income.

Option A, indirect taxes, and Option C, subsidies, connect market price with factor cost, not gross with net. Option D, net factor income from abroad, is the item that connects the domestic aggregates with the national ones, so subtracting it from GNP would take you back to GDP rather than to NNP. Note the parallel: GDP minus depreciation gives NDP in just the same way that GNP minus depreciation gives NNP.

The correct answer is B, April 1935. The Reserve Bank of India started working on 1 April 1935 under the Reserve Bank of India Act, 1934, following the recommendation of the Hilton Young Commission of 1926. It began as a privately owned shareholders' bank with its central office in Calcutta, which moved permanently to Bombay (Mumbai) in 1937. Its first Governor was Sir Osborne Smith, and C. D. Deshmukh became the first Indian Governor in 1943. The bank was nationalised on 1 January 1949, after which it has been fully owned by the Government of India. A is wrong because nothing about the RBI's founding happened in April 1948; 1949 is the nationalisation year. C is wrong because April 1945 was still wartime and the bank had already existed for ten years. D is wrong because April 1936 is a year too late; the bank had already completed its first year. Exam tip: RBI Act 1934, RBI born 1 April 1935, nationalised 1 January 1949.

The correct answer is D, 1, 2, 3 and 4. All four plans came before the First Five Year Plan started on 1 April 1951. The Bombay Plan of 1944 was prepared by eight industrialists led by J. R. D. Tata and G. D. Birla and favoured state-led heavy industry. The Gandhian Plan of 1944 by Shriman Narayan Agarwal stressed village self-sufficiency, cottage industries and agriculture. The People's Plan of 1945 was drawn up by M. N. Roy for the Indian Federation of Labour and put agriculture and nationalisation first over a ten-year period. The Sarvodaya Plan of January 1950 by Jayaprakash Narayan, inspired by Vinoba Bhave, combined Gandhian ideas with land reform and decentralised planning. Even earlier, M. Visvesvaraya's book Planned Economy for India (1934) and the Congress National Planning Committee of 1938 under Nehru had raised the idea. Options A, B and C are wrong only because each leaves out plans that also existed before 1951. Exam tip: sequence them as Visvesvaraya 1934, Bombay and Gandhian 1944, People's 1945, Sarvodaya 1950, Planning Commission March 1950, First Plan 1951.

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, Increase in the banking habit of the people. When people keep more of their money in banks instead of as cash, banks can lend more, so each rupee of reserve money creates more money in the economy. The money multiplier is the ratio of broad money (M3) to reserve money (M0). It depends on two leakages: the cash people hold, measured by the currency–deposit ratio, and the reserves banks must keep, measured by the reserve ratios. The smaller the leakage, the bigger the multiplier. A stronger banking habit lowers the currency–deposit ratio, so more of each rupee returns to banks and is lent again. Option A is wrong because a higher Cash Reserve Ratio makes banks park more money with the RBI, which lowers the multiplier. Option B is wrong because a higher Statutory Liquidity Ratio also locks up more of banks' funds and cuts lending. Option D is wrong because population by itself does not change how much of each deposit banks can lend. Exam tip: more money in banks means a bigger multiplier; a higher CRR or SLR means a smaller one.

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 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, 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 D, inflation. Inflation is a sustained rise in the general price level, measured in India by the CPI and the WPI. It is fought in three ways: monetary measures by the RBI such as raising the repo rate or CRR, fiscal measures such as higher taxes and lower government spending, and direct or administrative measures. Price control, rationing through the Public Distribution System and stock limits under the Essential Commodities Act 1955 are the direct measures: they cap what sellers may charge and how much each family may buy, so that scarce goods are shared and hoarding is checked. Option A is wrong because reflation is the deliberate effort to push prices and demand up after a slump, the opposite aim. Option B is wrong because disinflation is only a slowing of the inflation rate, not a problem that needs rationing. Option C is wrong because deflation is a fall in the general price level, when governments spend more rather than control prices. Exam tip: inflation = prices rise, deflation = prices fall, disinflation = prices rise more slowly, reflation = pushing prices up again.

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 C, Economy budget. By the balance between estimated receipts and expenditure, a budget is of only three types. A balanced budget has receipts equal to expenditure. A surplus budget has receipts higher than expenditure, and a government may use it to cool an overheated, inflationary economy. A deficit budget has expenditure higher than receipts; it is the normal case in India and is used to push demand and growth, the gap being met by borrowing. 'Economy budget' is not a recognised type at all; it is a distractor. In India the budget is called the Annual Financial Statement under Article 112, is presented on 1 February since 2017, and the first budget of independent India was presented by R. K. Shanmukham Chetty on 26 November 1947. Option A is wrong because a deficit budget is a real type. Option B is wrong because a balanced budget is a real type. Option D is wrong because a surplus budget is a real type. Exam tip: three types by balance, balanced, surplus and deficit; India normally runs a deficit budget.

The correct answer is B, Only two. The government bond market and the stock market deal in long-term funds, so they are capital markets; call money and treasury bills belong to the money market. The dividing line is maturity: the capital market handles funds for more than one year, and the money market handles funds for up to one year. Government bonds, or dated securities, run for 5 to 40 years, and shares have no maturity at all. Call money is overnight lending between banks, with notice money for 2 to 14 days, and treasury bills are short-term government borrowing for 91, 182 or 364 days. The capital market is regulated by SEBI, while the money market is regulated mainly by the RBI. Option A is wrong because both bonds and shares are capital market segments. Option C is wrong because it would add one short-term market. Option D is wrong because call money and treasury bills are money market segments. Exam tip: over one year is capital market, up to one year is money market; T-bills are 91, 182 and 364 days.

The correct answer is A, Assam. Assam became the first state to ratify the GST Constitution Amendment Bill, on 12 August 2016, soon after Parliament passed it. Because GST changes the taxing powers of both the Centre and the states, the bill needed approval from at least half of the state legislatures under Article 368. Bihar was the second state and Jharkhand the third. After enough states ratified it, the President gave assent on 8 September 2016 and it became the Constitution (101st Amendment) Act, 2016. It added Article 246A and created the GST Council under Article 279A, and GST came into force on 1 July 2017. B is wrong because West Bengal ratified the bill only after Assam. C is wrong because Meghalaya was not the first state to ratify it. D is wrong because Arunachal Pradesh was not the first state either. Exam tip: GST = 101st Amendment, 2016; first state to ratify = Assam; GST Council = Article 279A, chaired by the Union Finance Minister; GST in force from 1 July 2017.

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 C, Public Account of India. Money from National Savings Certificates belongs to the savers, not the government, so under Article 266(2) it is credited to the Public Account. The Public Account holds money that the government keeps as a banker or trustee, such as small savings, provident funds, deposits and remittances. Since the money has to be returned to its owners, it can be paid out by executive action without a vote of Parliament. Option A is wrong because the Consolidated Fund, under Article 266(1), receives the government's own revenues, the loans it raises and loan repayments, and nothing can be spent from it without Parliament's approval. Option B is wrong because the Prime Minister's National Relief Fund is a separate fund built from public donations, set up in 1948 to help people displaced by Partition. Option D is wrong because the Contingency Fund, under Article 267, is kept at the disposal of the President for urgent, unforeseen spending. Exam tip: Article 266(1) is the Consolidated Fund, 266(2) the Public Account, 267 the Contingency Fund.

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 B, 30. Sensex, short for ‘Sensitive Index’, tracks 30 large, well-established and actively traded companies listed on the BSE, chosen from different sectors of the economy. It was launched in 1986 with 1978–79 as its base year, when its value was set at 100, and it is calculated by the free-float market capitalisation method, which counts only the shares available for trading. When people say ‘the market rose today’, they usually mean the Sensex or the Nifty went up. The BSE, founded in 1875 and located on Dalal Street in Mumbai, is Asia’s oldest stock exchange. Option A is wrong because the Sensex has never been a 20-stock index. Option C is wrong because 25 is not its size either; the count has stayed at 30 since 1986. Option D is wrong because ten companies would be too few to represent the whole market. Exam tip: Sensex has 30 companies on the BSE, base 1978–79 = 100; Nifty has 50 companies on the NSE.

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, 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 D, the average number of live births a woman would have by the end of her child-bearing age. Total fertility rate (TFR) adds up the age-specific fertility rates of women aged 15 to 49 to show how many children a woman would have if she lived through these years at current rates. A TFR of about 2.1 is called the replacement level, because at that rate each generation just replaces itself; the extra 0.1 allows for deaths in childhood. TFR guides India's population policy and is measured by surveys such as the National Family Health Survey and the Sample Registration System. Option A is wrong because the number of births per 1,000 people in a year is the crude birth rate. Option B is wrong because TFR is counted per woman, not per couple, and uses current age-wise rates. Option C is wrong because birth rate minus death rate gives the natural growth rate of population. Exam tip: TFR is per woman, ages 15 to 49, with replacement level 2.1.