Indian Economy Mixed Quiz: Set 40

The correct answer is A, Relatively elastic. Under monopolistic competition a single firm faces a demand curve that is relatively elastic, so it slopes downward but is fairly flat.

In this market form there are many sellers offering closely similar but differentiated products, as with soaps, toothpastes or restaurants. Because close substitutes are available, a firm that raises its price loses a large part of its sales, which makes demand highly responsive to price. Yet because its product is not identical to the others, it keeps some pricing power and does not lose all its buyers, so demand is not perfectly elastic. Selling costs such as advertising are a feature of this market.

Option B, perfectly elastic, describes perfect competition, where the firm is a price taker and its demand curve is horizontal. Options C and D, relatively and perfectly inelastic, do not apply where substitutes are easy to find.

Exam tip: perfect competition means horizontal demand; monopolistic competition means a flat but downward sloping curve.

The correct answer is C, 90 days. Under the Reserve Bank's prudential norms on income recognition and asset classification, an asset stops being a performing asset when interest or an instalment of principal remains overdue for more than ninety days, and the bank must then stop treating the interest as income and start making provisions. Option A is wrong; thirty days of overdue status only puts the account in the special mention category, an early warning stage, not in the NPA class. Option B is wrong for the same reason, sixty days being another special mention stage. Option D is wrong because 180 days was the older standard, used before 2004, and papers often keep it as the distractor for candidates who have learnt the rule from an old book. For crop loans the test is in crop seasons instead of days.

The correct answer is C, stagflation, a word combining stagnation and inflation. It is the hardest condition for policy to handle, because the remedy for inflation is to squeeze demand while the remedy for unemployment is to expand it, so no single step cures both; the classic episode followed the oil price shocks of the nineteen seventies. Option A, deflation, is wrong because that is a sustained fall in the general price level, usually with falling output as well. Option B, disinflation, is wrong because that is merely a slowing of the rate of inflation while prices continue to rise, which is normally a policy success rather than a problem. Option D, reflation, is wrong because it is the deliberate stimulation of demand and prices in an economy that has fallen into deflation.

The correct answer is B, it is a price lower than the market price. Issue price is the subsidised rate at which grain from the government's buffer stock is sold through ration shops, and it is deliberately kept below the market price.

India's food security system works in three steps. The Food Corporation of India buys grain from farmers at the minimum support price, stores it as a buffer stock, and releases it to fair price shops under the public distribution system. The rate charged at those shops is the issue price, and the gap between what the government pays and what it charges is the food subsidy. Keeping the issue price low is exactly what makes grain affordable to poor households.

A is wrong: if it matched the market price there would be no subsidy and no reason for ration shops. C is wrong: the issue price is fixed by the government, not by the farmer. D is wrong: a price above the market rate would drive buyers away from ration shops altogether.

Exam tip: the farmer gets the MSP, the ration shop charges the issue price, and the difference between them is the food subsidy.

The correct answer is C, 2002. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 lets a secured creditor issue a notice to a defaulting borrower and then take possession of and sell the secured asset without going to court, and it also provides for asset reconstruction companies that buy bad loans from banks. Option A is wrong because 1993 is the year of the Act that created the Debt Recovery Tribunals, and swapping these two years is the standard trap. Option B is wrong because 1998 is the year of the second Narasimham Committee report on banking sector reforms. Option D is wrong because 2016 is the year of the Insolvency and Bankruptcy Code, which works alongside SARFAESI rather than replacing it.

The correct answer is C, Mahila Samriddhi Yojna. It is the micro-finance scheme under which women borrow small sums at a concessional rate of interest, so the rebate in interest is built into the scheme itself. It is run by the National Backward Classes Finance and Development Corporation under the Ministry of Social Justice and Empowerment, and the money reaches women through State Channelising Agencies and self-help groups, mostly for petty trade and self-employment. A parallel scheme is run for Scheduled Caste women by the National Scheduled Castes Finance and Development Corporation. Option A is wrong because the National Maternity Benefit Scheme paid a one-time cash grant to poor pregnant women and was later merged into Janani Suraksha Yojana. Option B is wrong because it is a pilot for social security cover, not a credit scheme for women. Option D is wrong because Raj Rajeshwari Mahila Kalyan Yojana is a personal accident insurance cover for women, not a loan. Exam tip: Mahila Samriddhi Yojana means micro-credit for women at a concessional interest rate, run by NBCFDC.

The correct answer is B, 2014. The Pradhan Mantri Jan Dhan Yojana was launched on 28 August 2014 as the national mission for financial inclusion, offering a zero-balance Basic Savings Bank Deposit Account, a RuPay debit card with accident insurance cover and an overdraft facility for accounts operated satisfactorily. Option A is wrong because 2012 is the year the RuPay card network was launched and the year the no-frills account was renamed the Basic Savings Bank Deposit Account. Option C is wrong because 2015 is the year of the social security package, when the Pradhan Mantri Jeevan Jyoti Bima Yojana, the Pradhan Mantri Suraksha Bima Yojana, the Atal Pension Yojana and MUDRA were announced. Option D is wrong because 2016 is the year the Unified Payments Interface was launched by NPCI.

The correct answer is A, BHEL. Bharat Heavy Electricals Limited is a public sector undertaking, which means the government holds the majority of its shares and controls its management. Set up in 1964 with its headquarters at New Delhi, BHEL is the country's largest maker of power plant equipment such as boilers, turbines and generators, and it carries Maharatna status, the highest grade given to a central public sector enterprise. A public sector unit works for national priorities and balanced regional growth, not only for profit. Option B is wrong because Reliance Industries is a private company promoted by the Ambani family. Option C is wrong because the Tata group, founded by Jamsetji Tata, is a privately owned house of companies, even though many of them matter to the nation. Option D is wrong because the Adani group is likewise a private business house. Exam tip: a public sector undertaking is government owned, and BHEL, SAIL, ONGC, GAIL, NTPC and IOC are Maharatna companies, while Reliance, Tata and Adani are private.

The correct answer is D, (A) is false but (R) is true. The National Infrastructure Pipeline was announced in the Budget speech of 2019-20 and the task force under the Secretary, Department of Economic Affairs, drew it up for the five years from 2019-20 to 2024-25, with projected capital expenditure of about 111 lakh crore rupees. The period in the assertion, 2020-30, is therefore wrong, which rules out A and B, both of which treat the assertion as true. The reason, however, states the pipeline aim correctly: the NIP report sets out to give every citizen equitable access to world-class infrastructure, and that purpose is genuine. C is wrong because it reverses the position, calling the false assertion true and the true reason false. Read such pairs by testing the assertion first, because a false assertion settles the answer at once.

The correct answer is B, Stage 3. The law of variable proportions divides short run production into three stages. In stage one, increasing returns, both total and marginal product rise because the fixed factor is still under used. In stage two, diminishing returns, marginal product falls but stays positive, so total product keeps rising and reaches its maximum at the end of this stage, where marginal product is zero. In stage three, negative returns, extra units of the variable factor crowd the fixed factor, marginal product turns negative and total product actually falls. A sensible producer therefore works in stage two and never enters stage three. A is wrong because marginal product in stage two is falling but still positive. C is wrong because marginal product in stage one is rising. D is wrong because the law has only three stages, so there is no stage four. Exam tip: total product is highest exactly where marginal product is zero.

The correct answer is C, the Lorenz curve and the Gini coefficient. The Lorenz curve plots the cumulative share of income against the cumulative share of population, so a straight diagonal would mean perfect equality and the more the curve sags away from that line the greater the inequality. The Gini coefficient measures the area between the two, taking a value from zero for perfect equality to one for perfect inequality. Option A is wrong because the Phillips curve relates inflation to unemployment and the misery index simply adds the two rates. Option B is wrong because the Laffer curve shows that tax revenue falls when rates rise beyond a point. Option D is wrong because Engel's law and the Engel curve concern the falling share of food in household spending as income rises.

The correct answer is C, 2011-12. In 2017 the base year of the IIP was shifted to 2011-12, the item basket was refreshed to take in goods that had become important since the previous revision, and the weights were recalculated from the gross value added shares of that year. Option B, 2004-05, was the base of the series that the 2011-12 series replaced, and it is the answer a candidate gives who has memorised the older textbook. Option A, 1993-94, was an earlier base still, used before 2004-05, and it also served as the base year for several other Indian indices of that period. Option D, 2017-18, is only the year in which the revision was announced and has never been a base year for this index. A base year is chosen as a normal year, free of unusual disturbance, so that comparisons are meaningful.

The correct answer is B, 1993. The Recovery of Debts Due to Banks and Financial Institutions Act of 1993 set up the Debt Recovery Tribunals, with Debt Recovery Appellate Tribunals above them, to take bank recovery suits out of the ordinary civil courts where they had been pending for years. Option A is wrong because 1985 belongs to the Sick Industrial Companies Act, whose Board for Industrial and Financial Reconstruction the Insolvency Code later replaced. Option C is wrong because 2002 is the year of the SARFAESI Act. Option D is wrong because 2013 is the year of the Companies Act. Under the Insolvency and Bankruptcy Code the same Debt Recovery Tribunal also acts as the adjudicating authority for the insolvency of individuals and partnership firms.

The correct answer is A, whatever the change in price, there is absolutely no change in demand. Elasticity measures how strongly the quantity demanded reacts to price, and zero means no reaction at all. Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. When it is zero, demand is perfectly inelastic and the demand curve is a vertical straight line. Life-saving medicines such as insulin come closest to this, since a patient buys the same dose whatever the price. At the other extreme, perfectly elastic demand, with infinite elasticity, gives a horizontal demand curve. Option B is wrong because any change in demand, however small, means the elasticity is above zero. Option C is wrong because a large response to a small price change means elastic demand, with elasticity greater than one. Option D is wrong because a small response to a large price change is relatively inelastic demand, between zero and one, but still not zero. Exam tip: elasticity zero gives a vertical curve; elasticity infinite gives a horizontal one.

The correct answer is C, the National Payments Corporation of India. NPCI, set up in 2008 as the umbrella organisation for retail payments in the country, built and runs the Unified Payments Interface, along with RuPay, IMPS, the Aadhaar Enabled Payment System, the National Automated Clearing House and FASTag. Option A is wrong because the Reserve Bank promoted NPCI with the Indian Banks' Association and regulates payment systems under the Payment and Settlement Systems Act, 2007, but it does not itself operate UPI; it does operate RTGS and NEFT. Option B is wrong because the State Bank of India is only one of the member banks on the system. Option D is wrong because SEBI regulates the securities market and has no role in retail payments.

The correct answer is B, 1994. In August 1994 India accepted the obligations of Article VIII of the International Monetary Fund and made the rupee fully convertible on the current account, so that foreign exchange for trade, travel, education and remittances could be obtained freely at the market rate. Option A is wrong because 1991 is the year of the balance of payments crisis and of the two-step devaluation, not of convertibility. Option C is wrong because 1997 is the year of the first Tarapore Committee, which drew up a road map for capital account convertibility; that convertibility is still only partial. Option D is wrong because nothing of the kind happened in 2000. Keep the sequence in mind: crisis and devaluation in 1991, the dual exchange rate of 1992, unification in 1993 and current account convertibility in 1994.

The correct answer is B, 40 per cent. The Hybrid Annuity Model was adopted to revive road construction after both the toll and the annuity models ran into trouble. The authority releases forty per cent of the bid project cost as a construction grant in instalments while the work proceeds, and the concessionaire raises the remaining sixty per cent from its own funds and from lenders. That sixty per cent is returned after completion as a series of annuities with interest linked to a bank rate, and the toll is collected by the authority itself. A, twenty per cent, is the ceiling for central viability gap funding, not the HAM grant. C, sixty per cent, is the share the concessionaire brings, so the option inverts the split. D would make it an EPC contract rather than a partnership.

The correct answer is A. The cash reserve ratio is the proportion of a bank's net demand and time liabilities that it must keep as cash with the Reserve Bank of India, on which it earns no interest, and the statutory liquidity ratio is the proportion it must maintain in its own hands in the form of cash, gold or approved securities, chiefly government paper, on which it does earn a return. Option B is wrong because it reverses the two. Option C is wrong because only the cash reserve ratio is held with the central bank. Option D is wrong because the cash reserve ratio cannot be met with securities at all. Both are quantitative instruments of monetary policy, and raising either reduces the funds a bank has available to lend.

The correct answer is A, M. Narasimham. The Committee on the Financial System of 1991 and the Committee on Banking Sector Reforms of 1998, both under him, recommended prudential norms for income recognition and provisioning, a minimum capital to risk-weighted assets ratio, a lower statutory liquidity ratio and cash reserve ratio, entry for new private banks and greater autonomy for bank boards, and these became the base of reform. Option B is wrong because Raghuram Rajan chaired the committee on financial sector reforms of 2008 and later, as Governor, ordered the asset quality review of 2015. Option C is wrong because Bimal Jalan was a Governor of the Reserve Bank and later headed a committee on its economic capital framework. Option D is wrong because Urjit Patel chaired the committee on the monetary policy framework.

The correct answer is B, giving loans and issuing credit cards. Payments banks were licensed on the recommendation of the Nachiket Mor Committee to widen access to deposits and payments, and the Reserve Bank's guidelines expressly bar them from lending and from issuing credit cards; their funds must go into government securities and deposits with other banks. Option A is wrong because taking deposits, up to a ceiling for each customer, is their main business. Option C is wrong because they may issue debit and ATM cards. Option D is wrong because they are allowed to distribute simple financial products such as insurance and mutual funds as an agent. Small finance banks are the other new category and they do lend, mainly in small amounts to the priority sector.