Indian Economy Test 4

Answer – B

Top five largest stock exchanges (on the basis of market capitalisation) of
the world in their decreasing order are—the New York Stock Exchange, the NASDAQ, the Tokyo Stock Exchange, the London Stock Exchange and the Bombay Stock Exchange.

Note that investment and trading in Chinese market is very restricted.

Answer – d

• To be listed on the SME exchange, the post-issue paid-up capital of thecompany should not exceed Rs. 25 crores. This means that the SMEexchange is not limited to the small and medium scale enterprises (which aredefined under the ‘Micro, Small And Medium Enterprises Development Act,2006’ as enterprises where the investment in plant and machinery does notexceed Rs. 10 crores).
• Unlike in India, many of the SME exchanges in various countries operateat a global level, due to smallness of the market, allowing for listing by bothdomestic as well as foreign companies

Answer – d

Main functions/powers of the Board as per the SEBI Act, 1992 are

• Registering and stock exchanges, merchant banks, mutual funds,
  underwriters, registrars to the issues, brokers, sub-brokers, transfer
  agents and others
• Levying various fees and other charges (as 1 per cent of the issue
  amount of every company issuing shares are kept by it as a caution
  money in the concerned stock exchange where the company is enlisted)
• Promoting investor education
• Inspection and audit of stock exchanges and various intermediaries
• Performing other concerned functions as may be prescribed from time totime

Answer – c

• Futures are contracts for commodities that are traded at a futures exchange
• Futures contracts have expanded beyond just commodities, now there are futures contracts on financial markets like foreign currencies, interest rates, etc.

Answer – b

• During domestic currency appreciation, there will be a surge in capital flows and the debt service liability falls in domestic currency terms. A sharp depreciation in local currency would mean corresponding increase in debt service liability, as more domestic currency would be required to buy the same amount of foreign exchange for debt service payments. This would lead to erosion in profit margin and have ‘mark-to-market’ implications for the corporate. There would also be ‘debt overhang’ problem, as the volume of debt would rise in local currency terms.
• The opposite would happen when the domestic currency is depreciating due to reversal of capital flows during crisis situations, as happened during the 2008 global crisis. One of the factors contributing to faster recovery of the Indian economy after the 2008 global crisis was the low level of corporate external debt.

Answer – C

• Financial markets in every economy are having two separate segments today, one catering to the requirements of short-term funds and the other to the requirements of long-term funds.
• The short-term financial market is known as the money market, while the long-term financial market is known as the capital market. Hence statement 1 is correct.
• The money market fulfils the requirements of funds for the period upto 364 days (i.e., short term) while the capital market does the same for the period above 364 days (i.e., long term). Hence statement 2 is correct

Answer – C

• The crucial role money market plays in an economy is proved by the fact that if only a few lakhs or crores of rupees of working capital is not met in time, it can push a firm o business enterprise to go for lock-out, which has been setup with thousands of crores of capital. Hence statement 1 is correct.
• Unregulated NonBanking Financial Intermediaries are functioning in the form of chit funds, nidhis (operate in South India, which lend to only their members) and loan companies are crucial actors in unorganised money market. Hence statement 2 is correct.

Answer – D

• Since the government started developing the organised money market in India (mid-1980s), we have seen the arrival of a total of eight instruments designed to be used by different categories of business and industrial firms.
  1. Treasury bills
  2. Certificate of Deposits
  3. Commercial Bill
  4. Commercial paper
  5. Call Money Market
  6. Money Market Mutual Fund
  7. Repos and Reverse Repos
  8. Repos and Reverse Repos
• Hence D is correct option

Answer – D

• Treasury bills are used by the Central Government to fulfil its short-term liquidity requirement upto the period of 364 days. While  Cash Management Bills are non-standard and discounted instruments issued for maturities less than 91 days. Hence statement 2 is incorrect.
• The existing Treasury Bills serve the same purpose, but as they were put under the WMAs (Ways & Means Advances) provisions by the Government of India in 1997, they did not remain a discretionary route for the government in meeting its short-term requirements of funds at will. Hence statement 2 is incorrect.

Answer – D

• The social sector was a neglected area for the British rulers which had a negative impact on the production and productivity of the economy. India remained a continent of illiterate peasants under British rule. At the time of Independence, its literacy was only 17 per cent with 32.5 years of life expectancy at birth. Hence statements 1 and 2 are correct.
• The pre-independence period was altogether a period of near stagnation showing almost no change in the structure of production or in the levels of productivity—the aggregate real output during the first half of the 20^th century estimated at less than 2 per cent a year or less. Hence statement 3 is correct.

Answer – B

• The political leaders and the industrialists both were very much aware and conscious about the economic inheritance once India became independent. Somehow, these dominant lot of people who were going to lay down the foundation stones of the independent Indian economy were almost having consensual view, even before the Independence, on many major strategic issues:
  (i) State/governments should be given a direct responsibility for(ii) An ambitious and vital role to be assigned to the public sector. It thus restricted the role of entrepreneurs. Hence statement 1 is incorrect.
  (iii) Necessity for the development of heavy industries. Though small scale was given due importance, but it was never the celebrated policy goal, hence statement 3 is incorrect.
  (iv) Discouragement to foreign investment. Hence statement 2 is correct
  (v) The need for economic planning

Answer – C

• The political leadership selected industry as the leading force of the economy after Independence—this was already decided by the dominant group of the nationalist leaders way back in the mid-1930s when they felt the need for economic planning in India before setting up the National Planning Committee in 1938.
• Hence option A is correct.

Answer – D

• Looking at the resources available, agriculture would have been the obvious choice as the prime moving force (PMF) of the economy (i.e., cultivable land and the human power). But as Indian agriculture was using traditional tools and technology its modernisation as well as future mechanisation (later to some extent) would have been blocked due to the lack of indigenous industrial support. Thus the political leadership selected industry as the leading force of the economy after independence. Hence statement 1 is incorrect.

• A major shift took place in the Indian economic thinking when the government announced in 2002 that from now onwards, in place of industry, agriculture will be the prime moving force of the economy. This was a policy shift of historic importance which was announced by the highest economic think tank of the country—the Planning commission—as the economy commenced the Tenth Plan (2002–07). Hence statement 2 is incorrect.

Answer – C

• There are six basic industries which every industrialising economy requires, namely—
  (i) Iron and Steel
  (ii) Cement
  (iii) Coal

(iv) Crude oil
(v) Oil refining
(vi) Electricity

• At the time of independence, out of the six basic industries, the cement industry had some strength in the private sector, while in the iron and steel industry a lone private company was present. Hence statement 1 Is correct, but 2 is incorrect.
• The coal industry was controlled by the private sector and crude oil and refining was just a beginning by then. Hence statement 3 is correct.

Solution: c)

Statement 1: PSL are administered independently of the CRR requirements. Banks must lend a portion of their deposits in form of PSL. The recent move was not related to PSL.

Statement 2: CRR is the proportion of deposits that banks have to keep as cash with the RBI. The

present requirement is only 4% of total demand deposits. But, as per the recent measure Banks

had to maintain 100% CRR for incremental deposits they received between September 16, 2016

and November 11, 2016. This is because over 2 lakh crores of cash was deposited in the banking

system. Lending this fund will create a massive rise in liquidity in the financial markets and lead to

inflation and volatility.

Solution: c)

Statement 1: Unnecessary revenue expenditure bloats the fiscal deficit, and since it forms the majority of government spending, its reduction has a very large effect on the fiscal deficit.

Statement 2: It will further increase the fiscal deficit.

Statement 3: Subsidies are a major component of government spending, and its reduction will cut down fiscal deficit.

Statement 4: It reduces tax revenue and thus increases fiscal deficit.

Solution: d)

Statement 1 – In the light of high NPAs, Banks tend to lower the interest rates on deposits on one hand and likely to levy higher interest rates on advances.

Statement 2 – The increased NPAs put pressure on recycling of funds and reduces the ability of banks for lending more and thus results in lesser interest income.

Statement 3 – As per Basel norms, banks are required to maintain adequate capital on risk-weighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets which warrant the banks to shore up their capital base further.

Answer – c

• Cost push inflation refers to the type in which the rise of prices is due to rise in costs of factors of production – entrepreneurship, land, capital and labour.
• As the NPAs of banks increase, they will be asking for stringent regulations and higher credit rate, which will make capital costly. Thus it is cost push inflation type.
• If there is shortage of labour, the wages demanded by the available will be higher, thus pushing cost of production higher. Hence it is also cost push type.

Answer – b

• If food articles are allowed to be imported, it may contain inflation as the demand for imports will be higher only if their price is lesser than domestic produce. Import duties will only curtail their import, and hence will not help food inflation
• The procurement by FCI reduces the supply to the market, thus increasing inflation. However if the stocks with FCI are released strategically in the market based upon contingency of supply at a particular time, it also helps in containing food inflation.
• The stock limits make way for the enhanced supply in the market, which is critical for level food prices

Ans b