UPSC Prelims 2020 Analysis

Explanation

Statement 1 is not correct. The Government of India subsidizes fertilizers to ensure that fertilizers are easily available to farmers and the country remains self-sufficient in agriculture. This has been achieved largely by controlling the price of fertilizer and the amount of production. For example, as per the New Urea Policy of 2015, the government fixes the market price of urea.

Statement 2 is correct. Fertilizer production uses 1.2% of the world's total energy out of which 90% is used for ammonia production, which is a key ingredient in the production of nitrogen fertilizers. Ammonia can be produced from natural gas.

Statement 3 is correct. Sulfur is a major by-product of oil refining and gas processing. Most crude oil grades contain some sulfur, most of which must be removed during the refining process to meet strict sulfur content limits in refined products. Also, Sulphur is used in phosphoric acid fertilizer (There is a process known as 'The Wet Process' for producing the same).

Hence , option B is the correct answer.

Explanation

Statement 1 is incorrect. The procurement of cereals, pulses, and oilseeds at Minimum Support Price (MSP) is not unlimited. The government procures these crops based on pre-decided targets, storage capacity, and buffer stock norms. Additionally, procurement is not uniform across all states/UTs, as it depends on state policies and the presence of procurement agencies.

Statement 2 is incorrect. The MSP is not fixed in such a way that the market price will never rise above it. In many cases, market prices may rise above MSP due to factors like supply-demand dynamics, export demand, and production levels. MSP acts as a floor price to protect farmers but does not cap the market price.

Hence , option D is the correct answer.

Explanation

Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI).

Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices.

Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation.

Hence , option A is the correct answer.

Explanation

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates.

Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more.

Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity.

Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity.

Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

Explanation

In an economy, there are two main sectors: financial and non-financial.

The financial sector consists of institutions like banks, insurance companies, and investment firms. The non-financial sector encompasses everything else, including households, businesses (except financial institutions), and the government.

Non-financial debt refers to the total amount of money owed by the non-financial sector. This includes loans, credit card balances, and other outstanding liabilities. It's a way to measure the overall indebtedness of households, businesses, and the government.

Understanding Non-Financial Debt Components

• Household Debt: This includes various loans and credit obligations incurred by individual households.
• Corporate Debt: This refers to the money owed by businesses (excluding financial institutions) to various creditors.
• Government Debt: This represents the total amount of money borrowed by the government to finance its expenditures.

Therefore, all three options (1, 2, and 3) are considered non-financial debt in the Indian economy.

Explanation

In India, cyber insurance covers (generally) the following

• Identity theft
• Cyber-bullying and cyber-stalking
• Cyber extortion
• Malware intrusion
• Financial loss due to unauthorized and fraudulent use of bank account, credit card, and mobile wallet
• Legal expenses arising out of any covered risk
• Social Media Cover
• Phishing Cover
• E-mail Spoofing
• Media Liability Claims Cover
• Cyber Extortion Cover
• Privacy Breach and Data Breach by Third Party.

Cyber insurance generally focuses on damages caused by cyber threats or electronic incidents, not physical damage to devices. Hence, statement 2 is incorrect.

Hence only options 1, 3, and 4 are correct.

Explanation

Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government. FRBM Act provides a legal institutional framework for fiscal consolidation.

The Act also requires the government to lay before the parliament three policy statements in each financial year namely

1. Medium Term Fiscal Policy Statement
2. Fiscal Policy Strategy Statement
3. Macroeconomic Framework Policy Statement

Explanation

Not depending on short-term foreign borrowings: This reduces exposure to capital flight. During a crisis, foreign investors may pull their money out of emerging markets like India, leading to rupee depreciation and financial instability. By limiting short-term foreign borrowings, India can lessen the impact of such capital flight.

Opening up to more foreign banks: While this might seem beneficial, it can also increase reliance on foreign capital. During a crisis, foreign banks might be more likely to restrict credit, negatively impacting the Indian economy.

Maintaining full capital account convertibility: This allows for the free movement of capital in and out of the country. While it can be beneficial in normal times, it can also exacerbate capital flight during a crisis.

Therefore, the most prudent strategy is to reduce dependence on short-term foreign borrowings to minimize the vulnerability caused by potential capital flight.

Hence, only statement 1 is correct. Hence, option A is the correct answer.

Explanation

Under the Kisan Credit Card (KCC) scheme, short-term credit support is provided to farmers for purposes that directly support agricultural activities and the farm household.

Statement 1 is correct. The KCC scheme provides working capital for the maintenance of farm assets, which includes things like irrigation, fertilizers, and labor costs.

Statement 2 is incorrect. The KCC scheme does not cover the purchase of capital-intensive assets such as combine harvesters, tractors, and mini trucks. These are typically financed through long-term loans, not short-term credit.

Statement 3 is correct. The KCC scheme provides credit for consumption requirements of the farm household, like daily needs and family expenditures.

Statement 4 is correct. The KCC scheme can also be used for post-harvest expenses, including costs for storage, transportation, and marketing of produce.

Statement 5 is incorrect. The construction of a family house and setting up of village cold storage facilities are not covered under the KCC scheme, as these are typically considered long-term capital expenditures.

The list of eligible activities for KCC are

• To meet the short term credit requirements for cultivation of crops
• Post-harvest expenses,
• Produce marketing loan
• Consumption requirements of farmer household.
• Working capital for maintenance of farm assets band activities allied to agriculture like dairy animals, inland fishery etc.
• Investment credit requirement for agriculture and allied activities like pumpsets, sprayers, dairy animals etc.

Hence, option B is the correct answer.

Explanation

The term "West Texas Intermediate" (WTI), often seen in news reports, refers to a grade of crude oil. WTI is used as a benchmark for oil pricing in North America.

Specifically, WTI is a light, sweet crude oil, meaning it has a low density and low sulfur content. This makes it easier and more desirable to refine into gasoline and other products. WTI serves as one of the main benchmarks for oil prices globally.

West Texas Intermediate (WTI) and Brent Crude are two of the most important global benchmarks for crude oil prices. Brent Index is used as a benchmark for oil pricing globally, including Europe, Asia, and Africa.

Explanation

Statement 1 is incorrect. In terms of short-term credit delivery to the agriculture sector, Scheduled Commercial Banks (SCBs) and Regional Rural Banks (RRBs) generally deliver more credit compared to District Central Cooperative Banks (DCCBs). SCBs and RRBs have a larger network and resources to provide credit to the agriculture sector.

Statement 2 is correct. One of the primary functions of DCCBs is indeed to provide funds to the Primary Agricultural Credit Societies (PACS). DCCBs act as the intermediary between the Reserve Bank of India (RBI) and PACS, facilitating the flow of credit from the central bank to the grassroots level through cooperative credit institutions.

Hence , option B is the correct answer.

Explanation

Minimum Support Price (MSP): The government sets an MSP to ensure a minimum income for farmers. If the market price falls below the MSP, the government procures rice from farmers at the MSP. This can lead to higher rice prices for consumers if the government releases these stocks slowly or not at all.

Government's trading: Government agencies like the Food Corporation of India (FCI) procure and sell rice in the market. Large-scale procurement by the government can affect market availability and potentially drive up prices.

Government's stockpiling: The government maintains buffer stocks of rice for food security purposes. If these stocks are depleted due to various reasons, it can lead to a shortage and price hikes.

Consumer subsidies: The government provides subsidized rice to certain sections of the population through schemes like PDS (Public Distribution System). This can influence overall demand and market dynamics. If the subsidies are substantial, it can put upward pressure on prices.

Therefore, all these factors can play a role in influencing the price of rice in India. Hence , option D is the correct answer.

Explanation

Statement 1 is incorrect. After the 1991 economic liberalization, worker productivity increased both in urban and rural areas. While urban areas experienced higher growth, rural areas also saw improvements, especially with the rise in non-farm activities.

Statement 2 is incorrect. The percentage share of rural areas in the workforce has steadily decreased since the liberalization. This is because more people have moved to urban areas for employment in the industrial and service sectors, contributing to the growing urban workforce.

Statement 3 is correct. In rural areas, the growth of the non-farm economy increased significantly. With liberalization, the diversification of rural economies into sectors like manufacturing, construction, and services grew, reducing the dependency on agriculture.

Statement 4 is correct. The growth rate in rural employment decreased after 1991. While the rural economy diversified, the agricultural sector did not provide enough employment opportunities to absorb all the labor, leading to lower growth in rural employment.

Hence , option B is the correct answer.

Explanation

Statement 1 is correct. Merchandise trade deficit is the largest component of India's current account deficit. As per RBIs data, India's Merchandise exports during April-August 2019- 2020 were USD 133.14 billion, as compared to USD 210.39 billion of imports during the same period.

Statement 2 is incorrect. Commodity-wise composition of imports between 2011-12 and 2018-19 shows that imports of iron and steel, organic chemicals, industrial machinery have registered positive growth rates as % of share in imports.

Statement 3 is correct. India's net services (service exports - service imports) have been in surplus. India's Service exports during April-August 2019- 2020 were USD 67.24 billion, as compared to USD 39.25 billion of imports during the same period.

Statement 4 is correct. Current Account Deficit (CAD) or trade deficit is the shortfall between exports and imports. As per Economic Survey 2019-20, India's CAD was 2.1% in 2018-19, and 1.5% of GDP in H1 of 2019-20.

Therefore, the correct answer is (d) 1, 3 and 4 only. (Though, UPSC has not considered this question for marking.)

Explanation

The immediate effect on aggregate money supply in the economy, if you withdraw Rs. 1,00,000 in cash from your Demand Deposit Account at your bank, will be “No change”.

Reason: Aggregate money supply refers to the total amount of money circulating in the economy, including both cash and deposits in commercial banks.

• M3 = M1 + Time Deposits with Banks Where:
• M1 = Currency in circulation + Demand deposits with banks + Other deposits with the central bank

When you withdraw cash from your demand deposit account, you are simply converting your deposit (which is part of the money supply) into currency (also part of the money supply).

The total amount of money in the system remains the same, just the composition (ratio of cash to deposits) changes.

Explanation

In the context of the International Monetary Fund (IMF), "Gold Tranche" (also referred to as "Reserve Tranche") refers to a specific portion of a member country's quota that can be accessed under specific conditions. Here's a breakdown

International Monetary Fund (IMF): An international organization that works to promote global financial stability and economic cooperation.

Quota: The amount of financial resources a member country is obligated to contribute to the IMF. This contribution is based on the country's economic size and importance in the global trade system.

Reserve Tranche: The first 25% of a member country's quota that can be accessed without needing IMF approval or paying any interest or service charges. It's essentially a readily available credit line.

Hence, option D is the correct answer.

Explanation

Statement 1 is correct. The Interest Coverage Ratio (ICR) helps in understanding the present risk of a firm’s ability to pay interest on its debt. A low ICR indicates higher risk, as the firm may not have enough earnings to cover its interest obligations.

Statement 2 is correct. The ICR is also used to assess emerging risks for a firm. A declining ICR over time can signal growing difficulties in servicing debt, which can be important for banks evaluating the risk of granting new loans.

Statement 3 is incorrect. A higher Interest Coverage Ratio actually indicates better ability to service debt, not worse. A high ratio means the firm has a sufficient earnings buffer to cover its interest expenses, which is seen as a positive sign by creditors.

Hence , option A is the correct answer.

Explanation

Public investment in agriculture refers to government expenditures aimed at improving the agricultural sector, including infrastructure development, technological improvements, and providing institutional support.

Statement 1 is incorrect. Fixing the Minimum Support Price (MSP) is a policy decision, not an investment. While it affects the agricultural sector, it is not a direct public investment in terms of capital expenditure.

Statement 2 is correct. The computerization of Primary Agricultural Credit Societies (PACS) is a public investment because it involves government funds directed towards modernizing agricultural credit systems, enhancing efficiency, and accessibility for farmers.

Statement 3 is correct. Social Capital development is a public investment in agriculture, as it involves building networks and community-based resources that help farmers improve productivity and access to resources.

Statement 4 is incorrect. Free electricity supply is more of a subsidy, not a direct public investment in the form of capital expenditure.

Statement 5 is incorrect. Waiver of agricultural loans is a policy measure aimed at alleviating farmer debt but does not qualify as an investment in infrastructure or capital.

Statement 6 is correct. The setting up of cold storage facilities by the government is a direct public investment aimed at improving agricultural infrastructure and reducing post-harvest losses.

Hence , option C is the correct answer.

Explanation

Option A is incorrect. Foreign Direct Investment (FDI) typically involves investment in unlisted companies or companies that involve a direct ownership stake, not just investments through capital instruments in listed companies.

Option B is correct. FDI is considered a non-debt creating capital flow because it involves equity investments that do not require repayment, unlike loans or debt instruments. This type of investment brings in long-term capital and management expertise, which helps in the development of industries in the host country.

Option C is incorrect. FDI does not involve debt-servicing. Unlike loans or bonds, FDI involves ownership stakes, and thus, there is no obligation to pay interest or principal repayments.

Option D is incorrect. The investment in Government securities by foreign institutional investors (FIIs) is considered foreign portfolio investment (FPI), not FDI. FDI focuses on acquiring a substantial ownership stake in a company, whereas FPI involves short-term investments in financial assets.

Hence , option B is the correct answer.

Explanation

The following statements are correct concerning the Indian economy:

• Commercial Paper is a short-term unsecured promissory note. It's a money market instrument issued by companies to raise short-term funds.
• Call Money is a short-term finance used for interbank transactions. Banks borrow or lend money from each other for overnight periods to meet their liquidity requirements.

Incorrect statements:

• Certificate of Deposit is not issued by the Reserve Bank of India. It's a negotiable instrument issued by commercial banks to depositors for a fixed maturity period at a predetermined interest rate.
• Zero-Coupon Bonds can be long-term or short-term, but they are not issued by Scheduled Commercial Banks. These bonds don't pay periodic interest, but are sold at a discount to their face value. The difference between the purchase price and the maturity value represents the return on investment.

Therefore, the correct codes are 1 and 3 only.

Explanation

Statement 1 is correct. The Trade-Related Investment Measures (TRIMS) agreement under the World Trade Organization (WTO) prohibits quantitative restrictions on imports by foreign investors. This means that countries cannot impose conditions like mandatory local sourcing or trade-balancing requirements that distort free trade.

Statement 2 is incorrect. TRIMS only applies to trade in goods, not services. The regulation of trade in services falls under the General Agreement on Trade in Services (GATS), not TRIMS.

Statement 3 is correct. TRIMS is not directly concerned with the regulation of foreign investments. Instead, it focuses on investment measures that affect trade in goods, ensuring that they do not create barriers to international trade.

Hence , option C is the correct answer.