Indian Economy Mixed Quiz: Set 9

The correct answer is D, GDP - Depreciation. Net Domestic Product is what is left of the domestic product after setting aside the wear and tear of capital. Gross Domestic Product measures the value of all final goods and services produced inside a country in a year. Part of that output merely replaces machines, buildings and vehicles that have worn out during the year, and this loss is called depreciation or consumption of fixed capital. Taking it out gives NDP, a truer measure of what the economy has really added. In India these aggregates are estimated by the National Statistical Office. Option A is wrong because net factor income from abroad is added to a domestic aggregate, never subtracted. Option B is wrong because GDP plus net factor income from abroad gives Gross National Product. Option C is wrong because GNP minus depreciation gives Net National Product, the national counterpart of NDP. Exam tip: net always means depreciation removed, and national always means net factor income from abroad included.

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, Primary sector. Dairying takes its produce directly from nature, so it belongs to the primary sector. Economic activity is usually grouped in three sectors. The primary sector draws on natural resources and covers farming, dairy, poultry, fishing, forestry and mining. The secondary sector turns those raw materials into goods, so a plant that converts milk into butter, cheese or milk powder is doing manufacturing. The tertiary sector provides services that support the other two, such as transport, banking, insurance and trade. Milk drawn from cattle is a natural product, which is why dairying, like beekeeping and sericulture, is counted with agriculture and allied activities. In India the primary sector still employs the largest share of workers while the tertiary sector contributes the largest share of GDP. Option A is wrong because the tertiary sector covers services. Option C is wrong because the secondary sector begins only when milk is processed into another product. Option D is wrong because the quaternary sector means knowledge services such as research and IT. Exam tip: dairy, fishing and mining are primary; processing them is secondary.

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 A, Russia. India took the idea of five-year plans from the erstwhile Soviet Union, which began its first plan in 1928 under Stalin. Along with it India borrowed Fundamental Duties and the ideal of justice, social, economic and political, in the Preamble, all from the Soviet constitution. India's own First Five Year Plan ran from 1951 to 1956 and focused on agriculture and irrigation; the Planning Commission set up in 1950 prepared the plans, and the Prime Minister was its chairman. The Twelfth Plan, which ended in 2017, was the last, and NITI Aayog replaced the Planning Commission in 2015. Option B is wrong because England gave the parliamentary system, rule of law and single citizenship. Option C is wrong because the United States gave Fundamental Rights and judicial review. Option D is wrong because Germany, that is the Weimar constitution, gave the suspension of Fundamental Rights during an emergency. Exam tip: from the Soviet Union came Fundamental Duties, five-year plans and the ideal of justice in the Preamble.

The correct answer is C, 2.1. The Total Fertility Rate is the average number of children a woman would have in her lifetime if she followed the current birth rates at each age from 15 to 49. Replacement level is the TFR at which each generation exactly replaces itself, so that over time, leaving migration aside, the population stops growing or shrinking. Two children are needed to replace the two parents, and the extra 0.1 covers children who die before reaching adulthood and the fact that slightly more boys than girls are born. India’s National Population Policy, 2000 set the goal of bringing TFR down to replacement level. Option A is wrong because a TFR of 1.0 would halve the population in each generation. Option B is wrong because 1.6 is below replacement, a level seen in ageing societies. Option D is wrong because 2.3 is above replacement, so the population would keep rising. Exam tip: replacement level fertility means a TFR of about 2.1 children per woman.

The correct answer is A, 1 April 1935. The Reserve Bank of India was constituted under the Reserve Bank of India Act of 1934, on the recommendation of the Hilton Young Commission, and started functioning on 1 April 1935 with its central office at Calcutta, which was shifted permanently to Bombay in 1937.

Option B, 1 January 1949, is the date on which the Reserve Bank was nationalised and passed from private shareholders to full government ownership, so it is a real date but answers a different question. Option C, 1 July 1955, is the date on which the Imperial Bank of India was converted into the State Bank of India. Option D, 19 July 1969, is the date on which fourteen large commercial banks were nationalised. All four dates appear together in option sets, so learn them as a group with the event attached to each.

The correct answer is D, Ministry of Finance. Under the Coinage Act 2011 the Government of India alone has the right to mint coins, and the work is handled by the Department of Economic Affairs in the Ministry of Finance. Coins are struck at the four India Government Mints at Mumbai, Kolkata, Hyderabad and Noida, run by the Security Printing and Minting Corporation of India Limited (SPMCIL), and the Reserve Bank only puts them into circulation as the Government's agent under Section 38 of the RBI Act 1934. The same split explains why the one-rupee note carries the signature of the Finance Secretary, while notes of two rupees and above are issued by the RBI and signed by its Governor. Option A is wrong because the Ministry of External Affairs handles foreign relations. Option B is wrong because the Ministry of Home Affairs handles internal security and police. Option C is wrong because the Ministry of Mines deals with mining and minerals, not coinage. Exam tip: coins and the one-rupee note = Government of India (Finance Ministry); notes of two rupees and above = RBI.

The correct answer is A, the Hilton Young Commission. This body, formally the Royal Commission on Indian Currency and Finance, reported in 1926 and recommended the creation of a central bank separated from the government. Its recommendation led to the Reserve Bank of India Act, 1934, under which the Bank began work on 1 April 1935.

Option B, the Chamberlain Commission of 1913 and 1914, also examined Indian currency and finance and had John Maynard Keynes as a member, but the central bank it discussed was not set up, which makes it the standard distractor. Option C, the Fowler Committee of 1898, dealt with the gold standard question in India. Option D, the Narasimham Committee, belongs to the era of reform after 1991 and made recommendations on the banking sector, long after the Reserve Bank existed.

The correct answer is B, inflationary gap. When demand pushes the economy to produce more than it can at full employment, the extra demand only drives prices up. Full-employment GDP, also called potential GDP, is the output an economy can produce when all its resources are in use. If aggregate demand is so high that equilibrium real GDP sits above this level, the difference is the inflationary gap. Real output cannot keep rising beyond capacity, so the excess shows up as rising prices. The idea comes from J.M. Keynes, who used it in his 1940 pamphlet "How to Pay for the War", and the cure is to cut demand through higher taxes, lower government spending or tighter money. Option A is wrong because a recessionary gap is the opposite case, when equilibrium GDP falls short of full employment. Option C is wrong because the income multiplier measures how much income rises for each rupee of new spending. Option D is wrong because automatic stabilisers are tools, such as progressive taxes, that help narrow these gaps. Exam tip: output above potential is an inflationary gap; output below potential is a recessionary gap.

The correct answer is C, The US. Zero-based budgeting was first put to use in the United States. Peter Pyhrr developed it at Texas Instruments around 1970, and Jimmy Carter, then Governor of Georgia, applied it to a state budget in 1973 and later carried it to the federal government as President. Under this method every expense has to be justified afresh for each new period, starting from a zero base, instead of simply adding a percentage to last year's figure. Each activity is treated as a decision package, examined for its cost and benefit, and ranked; schemes that no longer serve a purpose are dropped. India began using zero-based budgeting in 1986-87 in some departments, and the Department of Science and Technology was the first to try it. Option A is wrong because India adopted the idea more than a decade after it began. Option B is wrong because Germany is not linked with its origin. Option D is wrong because the UK did not introduce it either. Exam tip: zero-based budgeting - Peter Pyhrr, the US, 1970; India from 1986-87.

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, 2005. Value added tax replaced the old general sales tax from 1 April 2005, when most states adopted it on the recommendation of the empowered committee of state finance ministers. The point of VAT is that a trader pays tax only on the value added at that stage, taking credit for the tax already paid on purchases, so the cascading of tax upon tax is removed. Haryana had moved to VAT earlier, in 2003, and a few states joined later, with Uttar Pradesh the last in 2008. VAT on goods was itself absorbed into the Goods and Services Tax from 1 July 2017, though state VAT still applies to petroleum products and liquor. Option A is wrong because 2007 is when the last states were still joining. Option C is wrong because 2013 relates to the debate on the GST bill. Option D is wrong because 2011 is the year the constitutional amendment for GST was first introduced. Exam tip: link VAT 2005 with GST 2017.

The correct answer is B, Dr. C. Rangarajan. The Twelfth Finance Commission, set up in 2002, was headed by Dr. C. Rangarajan, a former Governor of the Reserve Bank of India, and its award covered the five years 2005–10. The President sets up a Finance Commission every five years under Article 280 to recommend how central taxes are shared between the Centre and the states and how grants-in-aid are given. The Twelfth Commission is remembered for its debt consolidation and relief facility, which gave states relief on central loans only if they passed fiscal responsibility laws. Option A is wrong because A. M. Khusro chaired the Eleventh Finance Commission, for 2000–05. Option C is wrong because Dr. Vijay Kelkar chaired the Thirteenth Finance Commission, for 2010–15. Option D is wrong because Y. V. Reddy chaired the Fourteenth Finance Commission, for 2015–20, which raised the states’ share of central taxes to 42 per cent. Exam tip: 11th Khusro, 12th Rangarajan, 13th Kelkar, 14th Y. V. Reddy, 15th N. K. Singh.

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 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 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 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, Sales of final goods. Gross Domestic Product counts the value of final goods and services produced inside a country during a year. Only final output is added, because the value of intermediate goods is already inside the price of the finished product, and counting both would be double counting. The exclusions follow from the same rule. A used good was counted in the year it was made, so selling it again adds nothing to this year's production, although the dealer's commission is a fresh service and does count. A transfer payment such as a pension, a scholarship or unemployment relief is income handed over with no good or service in return, so it is not production. Option A is wrong because the sale of used goods is not new output. Option B is wrong because barter is not recorded in money and cannot be valued, so it stays outside measured GDP. Option D is wrong because transfer payments create no output at all. Exam tip: GDP counts final goods only, and leaves out second-hand sales and transfer payments.

The correct answer is C, M3. M3 is M1 plus time deposits with banks, and it is called broad money or the aggregate monetary resource. It is the measure the Reserve Bank follows most closely because it captures both spendable balances and funds held for a fixed term.

Option A, M0, is reserve money or high-powered money, made up of currency in circulation, bankers' deposits with the Reserve Bank and other deposits with it; it is the base on which credit is created, not broad money. Option B, M1, is narrow money, being currency with the public plus demand deposits plus other deposits with the Reserve Bank, and it is the most liquid measure. Option D, M4, is M3 plus total post office deposits other than national savings certificates, and it is the widest but least used measure. The ranking by liquidity runs M1, M2, M3, M4, from most to least liquid.