Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
- A.Diversion of resources to the purchase of real estate and investment in luxury housing
- B.Investment in unproductive activities and purchase of precious stones, jewellery, gold, etc.
- C.Large donations to political parties and growth of regionalism
- D.Loss of revenue to the State Exchequer due to tax evasion
Correct answer
Explanation
The correct answer is D, Loss of revenue to the State Exchequer due to tax evasion. Black money is, by definition, income hidden from the tax authorities, so its most direct and serious effect is the tax the government never receives.
Black money is income on which tax due has not been paid, whether it is earned legally and concealed or earned through illegal activity. Every rupee kept outside the books is a rupee of tax lost, which reduces what the government can spend on infrastructure, health and welfare, widens the fiscal deficit and pushes up the tax burden on honest taxpayers. This is why measures such as the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, and the Benami Transactions (Prohibition) Amendment Act, 2016, focus on taxing and penalising hidden income.
A is wrong: investment in real estate is one way black money is used, but it is a consequence, not the main worry.
B is wrong: buying gold and jewellery is another use of black money, again secondary to the revenue loss.
C is wrong: political funding is a concern, but regionalism is not a recognised effect of black money.
Exam tip: black money = untaxed income; the core harm is revenue loss to the exchequer.
Practice Questions
View allWhich of the following gives 'Global Gender Gap Index' ranking to the countries of the world?
- A.World Economic Forum
- B.UN Human Rights Council
- C.UN Women
- D.World Health Organization
Show answer
Explanation
The correct answer is A, World Economic Forum. The Global Gender Gap Index is published every year by the World Economic Forum in its Global Gender Gap Report.
The World Economic Forum, a non-profit foundation based in Geneva, Switzerland, and known for its annual meeting at Davos, first released the index in 2006. It measures the gap between women and men in four areas: economic participation and opportunity, educational attainment, health and survival, and political empowerment. Scores run from 0 to 1, where 1 means full parity, so the index measures the size of gaps rather than overall levels of development. The WEF also publishes the Global Competitiveness Report and the Global Risks Report.
B is wrong: the UN Human Rights Council reviews human rights records through the Universal Periodic Review and does not publish this index.
C is wrong: UN Women works for gender equality but is not the publisher of this ranking.
D is wrong: the WHO deals with health and does not rank gender gaps.
Exam tip: Gender Gap Index = WEF (four pillars, since 2006); Gender Inequality Index = UNDP, in the Human Development Report.
Which of the following activities constitute real sector in the economy ?
1. Farmers harvesting their crops
2. Textile mills converting raw cotton into fabrics
3. A commercial bank lending money to a trading company
4. A corporate body issuing Rupee Denominated Bonds overseas
Select the correct answer using the code given below:
- A.1 and 2 only
- B.2, 3 and 4 only
- C.1, 3 and 4 only
- D.1, 2, 3 and 4
Show answer
Explanation
The correct answer is A, 1 and 2 only. The real sector produces actual goods and services, so harvesting crops and making cloth belong to it, while lending and issuing bonds belong to the financial sector.
Economists divide an economy into the real sector and the financial sector. The real sector covers the production, distribution and consumption of goods and services: agriculture, mining, manufacturing, construction and trade. Its output is measured in physical terms and adds directly to GDP. The financial sector deals with money and claims on money, such as bank loans, shares, bonds and insurance, and its job is to move savings to those who invest in the real sector. Rupee-denominated bonds sold abroad, popularly called "masala bonds", are a financial instrument used to raise funds.
B is wrong: it includes activities 3 and 4, which are financial, and leaves out farming.
C is wrong: it includes the two financial activities and leaves out textile manufacturing.
D is wrong: bank lending and bond issues are not real-sector activities.
Exam tip: real sector = goods and services produced (farm, factory, trade); financial sector = money, credit, bonds and shares.
Consider the following statements :
The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic exports in the foreign markets
2. increases the foreign value of domestic currency
3. improves the trade balance
Which of the above statements is/are correct?
- A.1 only
- B.1 and 2
- C.3 only
- D.2 and 3
Show answer
Explanation
The correct answer is A, 1 only. Devaluation makes domestic goods cheaper abroad, so export competitiveness improves, but it lowers the external value of the currency and does not necessarily improve the trade balance.
Devaluation is a deliberate cut in the official exchange value of a currency under a fixed or managed exchange rate; India devalued the rupee in 1966 and in 1991. After it, each unit of foreign currency buys more domestic currency, so the foreign-currency price of exports falls and the domestic price of imports rises. Whether the trade balance improves depends on how strongly export and import volumes respond (the Marshall-Lerner condition), and in the short run it often worsens first, a pattern known as the J-curve.
B is wrong: statement 2 is the opposite of what happens, as devaluation reduces the foreign value of the domestic currency.
C is wrong: improvement in the trade balance is not guaranteed.
D is wrong: both statements 2 and 3 are false.
Exam tip: devaluation = cheaper exports, dearer imports; trade balance improves only if demand is elastic (Marshall-Lerner), J-curve in the short run.
Consider the following statements :
I. Capital receipts create a liability or cause a reduction in the assets of the Government.
II. Borrowings and disinvestment are capital receipts.
III. Interest received on loans creates a liability of the Government.
Which of the statements given above are correct?
- A.I and II only
- B.II and III only
- C.I and III only
- D.I, II and III
Show answer
Explanation
The correct answer is A, I and II only. Capital receipts either add to liabilities or reduce assets, and borrowings and disinvestment are typical examples; interest received is a revenue receipt.
In the Union Budget, a receipt is a capital receipt if it creates a liability (as with market borrowings, small savings and other debt, which must be repaid) or reduces an asset (as with disinvestment, where the government sells part of its stake in public sector enterprises, or recovery of loans it gave earlier). Revenue receipts do neither: tax revenue and non-tax revenue such as interest received, dividends, profits and fees simply come in. So interest earned on loans given by the government is non-tax revenue and creates no liability.
B is wrong: it includes statement III, which is false.
C is wrong: it includes the false statement III and leaves out the true statement II.
D is wrong: statement III is false, so all three cannot be correct.
Exam tip: capital receipt = liability up or asset down (borrowing, disinvestment, loan recovery); interest and dividends = revenue receipts.
With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"?
1. Government can reduce the coupon rates on its borrowing by way of IIBs.
2. IIBs provide protection to the investors from uncertainty regarding inflation.
3. The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct?
- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1, 2 and 3
Show answer
Explanation
The correct answer is A, 1 and 2 only. IIBs protect investors from inflation, and because of that protection the government can borrow at a lower coupon; they carry no special tax exemption.
In an inflation-indexed bond the principal, and so the interest paid on it, is linked to a price index, so the investor's real return stays intact whatever inflation turns out to be (statement 2). Since the investor no longer needs an extra inflation premium in the coupon, the government can offer a lower coupon rate than on an ordinary bond (statement 1). The RBI issued such bonds linked to the Wholesale Price Index in 2013 and Consumer Price Index-linked bonds for retail investors later that year.
B is wrong: it includes statement 3, but interest and capital gains on IIBs are taxed under normal income tax rules.
C is wrong: it leaves out statement 2, the main purpose of IIBs, and includes the false statement 3.
D is wrong: statement 3 is false, so all three cannot be correct.
Exam tip: IIB = principal indexed to inflation, lower coupon for government, real-return safety for investor, but no tax exemption.