Indian Economy Mixed Quiz: Set 6

The correct answer is C, GDP at market price + Net factor income from abroad. GDP counts everything produced within the country's borders, whoever produces it. GNP counts what is produced by the country's own normal residents, wherever they work. So to move from GDP to GNP, we add the income our residents earn abroad and subtract what foreigners earn in India; this net figure is called net factor income from abroad (NFIA). If NFIA is negative, GNP is smaller than GDP. Option A is wrong because GDP at market price minus depreciation gives NDP at market price, not GNP. Option B is wrong because it uses GNP to define itself, and adding subsidies is a step used to move from market price to factor cost, not to find GNP. Option D is wrong because NDP at factor cost plus NFIA gives NNP at factor cost, which is the national income. Exam tip: domestic to national, add NFIA; gross to net, subtract depreciation; market price to factor cost, subtract indirect taxes and add subsidies.

The correct answer is C, Public sector undertakings. Maharatna, Navratna and Miniratna are status tags that the Government of India gives to central public sector enterprises on the basis of their size, profits and performance. The Navratna and Miniratna schemes began in 1997, and the Maharatna category was added later as the top tier for the very largest and most profitable companies. A higher tag means more financial freedom: the board of a Maharatna company can approve very large investments on its own, without going to the government for each project. The aim is to let strong public companies compete and expand like private firms, even abroad. Option A is wrong because Special Economic Zones are areas with special trade and tax rules, not grades of companies. Option B is wrong because India's civilian awards are the Bharat Ratna and the Padma awards. Option D is wrong because mineral-rich areas are not graded with such titles. Exam tip: the order from top is Maharatna, Navratna, Miniratna; all three are grades of central PSUs.

The correct answer is A, the primary sector. Mining takes a product straight out of nature without changing its form, exactly as farming, fishing and forestry do, and every activity of that kind is placed in the primary sector.

Option B, the secondary sector, would be correct only after the ore is processed: turning iron ore into steel is manufacturing and therefore secondary. Option C, the tertiary sector, covers services such as transport, trade and banking, which produce no goods of their own. Option D, the quaternary sector, is a modern extension used for knowledge based services such as research and software, and it does not appear in the standard threefold classification that examinations use. Candidates most often place mining wrongly in the secondary sector because it is heavy industrial work, so remember the test: if the product is taken directly from nature, it is primary.

The correct answer is D, Tariff barriers. Globalisation means the growing integration of countries through trade, investment, technology and the movement of people, and it works by lowering barriers to trade, not by raising them. A tariff barrier is a tax placed on imports to shield domestic producers from foreign competition, so it restricts trade instead of opening it. In India, the 1991 reforms, known by the letters LPG for liberalisation, privatisation and globalisation, cut import duties sharply and opened the economy to foreign companies. Option A is wrong because foreign direct investment, in which a company sets up or buys businesses abroad, grows as countries open up. Option B is wrong because multilateral trade agreements, such as those under the World Trade Organization, are a main vehicle of globalisation. Option C is wrong because outsourcing, like Indian IT and call-centre work done for foreign firms, grew directly out of globalisation and cheap communication. Exam tip: globalisation lowers tariffs and quotas and raises FDI, trade and outsourcing; the WTO replaced GATT on 1 January 1995.

The correct answer is B, 1950. The Planning Commission was constituted on 15 March 1950 by a resolution of the Union Cabinet, with the Prime Minister as its chairman, and it drafted every Five Year Plan until it was replaced in 2015.

Option A, 1947, is the year of Independence and of the partition, not of the commission. Option C, 1952, is the year the National Development Council was set up to associate the states with planning, and it is the commonest distractor in this question. Option D, 1956, is the year of the Industrial Policy Resolution and of the start of the Second Five Year Plan. Note also that the commission was created by an executive resolution and not by the Constitution or by an Act, which is itself asked as a separate statement.

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 B, Cash Reserve Ratio. The Cash Reserve Ratio (CRR) is the share of a bank's deposits that it must keep with the Reserve Bank of India in cash, and the bank earns no interest on this money. The RBI fixes the CRR under Section 42 of the RBI Act, 1934, and uses it to control the money supply: raising the CRR leaves banks with less money to lend, while cutting it releases funds into the economy. The ratio is worked out on a bank's net demand and time liabilities, which are mainly its deposits. Option A is wrong because the Statutory Liquidity Ratio is kept by the bank itself, in cash, gold or approved government securities, not deposited with the RBI. Option C is wrong because the Minimum Reserve System is the rule under which the RBI keeps a minimum stock of gold and foreign exchange to back the currency it issues. Option D is wrong because the reverse repo rate is the rate at which the RBI borrows money from banks. Exam tip: CRR is kept with the RBI; SLR is kept by the bank itself.

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 B, 2011-2012. The all-India Index of Industrial Production is compiled with 2011-12 as its base year, a revision announced in 2017 that replaced the older 2004-05 base. The IIP is a monthly volume index put out by the National Statistical Office and it measures the change in output of three sectors — mining, manufacturing and electricity. In the 2011-12 series manufacturing carries by far the largest weight, about 77.6 per cent, with mining near 14.4 per cent and electricity near 8 per cent, and the index is released about six weeks after the month it reports on. Option A is wrong because 2004-05 was the base of the series that the present one replaced. Option C is wrong because 2005-06 has never been an IIP base year. Option D is wrong because 2010-11 is not the IIP base either. Exam tip: 2011-12 is the base year of the IIP, the Wholesale Price Index and India's national accounts alike, while the Consumer Price Index uses 2012.

The correct answer is A, Morris D. Morris. The American economic historian Morris David Morris built the Physical Quality of Life Index in the 1970s for the Overseas Development Council, and set it out in his 1979 book on measuring the condition of the world’s poor. He wanted a simple measure of well-being that did not depend on income alone. The PQLI uses three indicators, each scored from 0 to 100 and given equal weight: basic literacy, infant mortality and life expectancy at age one. Their average gives a country a score out of 100. Kerala was often cited as a place where a high PQLI came with a low income. Option B is wrong because the UNDP publishes the Human Development Index, which came later, in 1990. Option C is wrong because Mahbub-ul-Haq designed the HDI, not the PQLI. Option D is wrong because the index has a known author, Morris D. Morris. Exam tip: PQLI, Morris D. Morris, 1979, three indicators; HDI, Mahbub-ul-Haq and the UNDP, 1990.

The correct answer is B, The receipts of the government which create liability or reduce financial assets. In the Union Budget, money coming to the government is split into revenue receipts and capital receipts, and the test is exactly this one. Borrowings from the market, loans from the Reserve Bank or from abroad, and small savings and provident fund collections all create a liability, because the money has to be returned. Recovery of loans given earlier and disinvestment of shares in public sector units reduce the government's financial assets. Both kinds are capital receipts and are shown in the capital account. A is wrong because a receipt that creates no claim on the government is the definition of a revenue receipt, such as tax, fee, fine or dividend. C is wrong because grants to state governments are expenditure for the Centre, not a receipt. D is wrong because it reverses the rule; capital receipts add to liabilities rather than reduce them. Exam tip: capital receipts = borrowings + recovery of loans + disinvestment.

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 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 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, Gross National Product. Net National Product is simply Gross National Product minus depreciation, that is NNP = GNP − Depreciation. Depreciation, also called consumption of fixed capital, is the wear and tear of machines, buildings and other capital goods during the year; taking it out shows how much output is really left with the nation. GNP itself is GDP plus the net factor income from abroad, so it counts what the residents of a country earn wherever they work. When NNP is measured at factor cost, it is the same as national income. A is wrong because direct taxes are a form of government revenue and are not an output aggregate. B is wrong because GDP minus depreciation gives Net Domestic Product, not NNP. D is wrong because national income is the result of the calculation, not its starting point. Exam tip: GDP + net factor income from abroad = GNP; GNP − depreciation = NNP; NNP at factor cost = national income.

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 C, the tertiary sector. It produces no goods at all; it provides services such as transport, storage, communication, trade, banking, insurance, education, health care and administration, which is why it is commonly called the service sector.

Option A, the primary sector, is also called the agriculture and allied sector, and option B, the secondary sector, is also called the industrial sector, so all three have a second name and papers exploit the confusion. Option D, the public sector, belongs to an entirely different classification, the one based on ownership rather than on the nature of the activity; a public sector enterprise may be in any of the three sectors, as a government owned coal mine, steel plant or bank shows. Keeping the three classifications apart is the main skill this chapter tests.

The correct answer is A, 1 January 2015. On that date a cabinet resolution created the National Institution for Transforming India in place of the Planning Commission, keeping the Prime Minister as the head of the new body but changing its work from allocating funds to advising governments.

Option B, 15 March, is the date on which the Planning Commission was set up, though in 1950, so the day is right for the wrong body. Option C, 1 April 2016, is a financial year date with no connection to the creation of the institution. Option D, 26 January 2015, is Republic Day and is offered only to confuse. The pair of years worth fixing is 1950 for the Planning Commission and 2015 for NITI Aayog, with 1952 for the National Development Council between them.

The correct answer is B, To maintain price stability and ensure economic growth. Monetary policy is run by the central bank, the Reserve Bank of India, which controls the supply and the cost of money in the economy. Under the RBI Act, 1934, as amended in 2016, its main goal is to keep prices stable while keeping in mind the objective of growth. In 2016 India adopted flexible inflation targeting, with a CPI inflation target of 4 per cent within a band of 2 to 6 per cent, and a six-member Monetary Policy Committee sets the repo rate. Tools such as the repo rate, the cash reserve ratio and open market operations let the RBI make credit cheaper or dearer. Option A is wrong because raising government expenditure is a fiscal policy step decided through the Budget. Option C is wrong because cutting the fiscal deficit is also a fiscal policy goal of the government. Option D is wrong because managing forex reserves is a supporting task of the RBI, not the main aim of monetary policy. Exam tip: monetary policy means the RBI and the repo rate; fiscal policy means the government, taxes and spending.

The correct answer is A, Banking method. National income is estimated by three standard methods — the product or value-added method, the income method and the expenditure method — and there is no banking method. The product method adds the value added by every producing unit so that intermediate goods are not counted twice. The income method adds the wages, rent, interest and profit earned by the factors of production. The expenditure method adds private consumption, investment, government spending and net exports. In India the National Statistical Office uses all three and cross-checks them, since in theory each must give the same total. Option B is wrong because the expenditure method is a recognised route to the same figure. Option C is wrong because the product method is what the estimates for agriculture and industry rest on. Option D is wrong because the income method is used mainly for the service sector. Exam tip: remember the identity Product = Income = Expenditure, the threefold basis of national income accounting.