SFG 2022 Level 1 Test 14 Solutions English

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SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.1) With reference to the World Bank & International Monetary Fund (IMF), consider the following statements:
1. While IMF aims at the expansion of international trade, the aim of World Bank is to reduce global poverty.
2. It is mandatory to be a member of World Bank to become eligible for loans by IMF.
3. While IMF lends to both member countries and private sector, World Bank only lends to the member countries.
Which of the statements given above is/are correct?
a) 1 and 2 only
b) 2 and 3 only
c) 1 only
d) 1, 2 and 3
Ans) c
Exp) Option c is correct.
Statement 1 is correct. The International Monetary Fund (IMF) primarily aims to ensure the stability of the
international monetary system—the system of exchange rates and international payments that enables countries
and their citizens to transact with each other. It aims to facilitate the expansion and balanced growth of
international trade. On the contrary, the World Bank Group primarily aims at reducing poverty, increasing
shared prosperity, and promoting sustainable development. It provides financing, policy advice, and technical
assistance to governments, and also focuses on strengthening the private sector in developing countries.
Statement 2 is incorrect. To become a member of the World Bank, under the International Bank for
Reconstruction and Development (IBRD) Articles of Agreement, a country must first join the International
Monetary Fund (IMF) and not vice-versa.
Statement 3 is incorrect. IMF loans are meant to help only member countries tackle balance of- payments
problems, stabilize their economies, and restore sustainable economic growth. On the contrary, the
International Finance Corporation (IFC) of the World Banks lends to the private sector while Multilateral
Investment Guarantee Agency (MIGA) encourages private companies to invest in foreign countries.
Knowledge Base: Resources for IMF loans to its members on non-concessional terms are provided by member
countries, primarily through their payment of quotas. Multilateral (New Arrangements to Borrow) and bilateral
borrowing agreements serve as a second and third line of defence, respectively, by providing a temporary
supplement to quota resources.
On the other hand, the World Bank's financial reserves come from several sources - from funds raised in the
financial markets, from earnings on its investments, from fees paid in by member countries, from
contributions made by members (particularly the wealthier ones) and from borrowing countries themselves when
they pay back their loans.
Source: https://www.worldbank.org/en/about/history/the-world-bank-group-and-the-imf
https://www.worldbank.org/en/about/leadership/members
https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance
https://www.worldbank.org/en/news/feature/2012/07/26/getting_to_know_theworldbank
Q.2) Consider the following pairs:

Types of Characteristics
Currency
1. Hard High level of liquidity in
currency international currency
market
2. Heated Domestic currency
currency which is under pressure
of depreciation
3. Soft Currency having very
currency high demand in the
Forex market
Which of the pairs given above is/are correctly matched?

a) 2 and 3 only
b) 1 only
c) 1 and 2 only
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d) 1, 2 and 3
Ans) c
Pair 1 is correctly matched. Hard currency is the international currency in which the highest faith is shown and
is needed by every economy. The strongest currency of the world is one which has a high level of liquidity.
Basically, the economy with the highest as well as highly diversified exports that are compulsive imports for other
countries (as of high-level technology, defence products, lifesaving medicines and petroleum products) will also
create high demand for its currency in the end become the hard currency. It is always scarce.
Pair 2 is correct. Heated currency is a term used in the forex market to denote the domestic currency which is
under enough pressure (heat) of depreciation due to a hard currency’s high tendency of exiting the economy
(since it has become hot). It is also known as currency under heat or under hammering.
Pair 3 is incorrect. A soft currency is one with a value that fluctuates because there is less demand for that
currency in the forex markets. This lack of demand may be driven by a variety of factors, but is most often a
result of the country's political or economic uncertainty. Soft currencies are unlikely to be held by central banks
as foreign reserves.
Knowledge Base:
1) Cheap currency is a term first used by the economist J. M Keynes (1930s). If a government starts re-purchasing
its bonds before their maturities (at full-maturity prices) the money which flows into the economy is known as
the cheap currency, also called cheap money.
Source: Indian Economy, Ramesh Singh, Chapter-15
Q.3) Which of the following factors/policies were affecting the price of rice in India in the recent past?
1. Minimum Support Price
2. Government’s trading
3. Government’s stockpiling
4. Consumer subsidies
Select the correct answer using the code given below:
a) 1, 2 and 4 only
b) 1, 3 and 4 only
c) 2 and 3 only
d) 1, 2, 3 and 4
Ans) d
Exp) Option d is correct.
Statement 1 and 3 are correct. Minimum Support Price (MSP) is a form of market intervention by the
Government of India to insure agricultural producers against any sharp fall in farm prices. The major
objectives are to support the farmers from distress sales and to procure food grains for public distribution.
According to the economic survey 2019-20, prices of rice and wheat remained stable since 2014 due to adequate
supply arising out of sufficient domestic production and also due to maintenance of adequate buffer stock of
rice and wheat for meeting the food security requirements. As a result, the price volatility was lower in the case
of rice and wheat.
Statement 2 is correct. The government typically buys more than a third of the country's rice output at a fixed
price, which has a direct impact on prices paid by traders and consumers.
According to economic survey 2019-20, to ensure adequate availability of wheat and rice in central pool, to keep
a check on the open market prices and to ensure food security, the Central Government has undertaken a
number of measures, which include: -
1) State Governments, particularly those undertaking Decentralized Procurement (DCP), are encouraged to
maximize procurement of wheat and rice.
2) Strategic reserves of 5 million tonnes of food grains over the operational stocks are maintained to be used in
extreme situations.
3) Sale of wheat and rice is undertaken through Open Market Sale Scheme (OMSS) (Domestic) so as to check
inflationary trend in prices of foodgrains.
4) There are good examples of PDS reforms such as One Nation - One Ration Card, Aadhaar authenticated
distribution through e-POS machines.
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Statement 4 is correct. The National Food Security Act, 2013 provides for coverage of up to 75% of the rural
population and up to 50% of the urban population for receiving subsidized food grains. Under the act, the ration
cardholders are allowed to buy 5 kg of food grains per person each month at a subsidised rate of ₹2 per kg of
wheat and ₹3 per kg of rice.
Source) UPSC Prelims 2020
Q.4) Which of the following are the possible impact of rising external debt on Indian economy?
1. It may lead to interest rate fluctuations.
2. It may lead to exchange rate fluctuations.
3. Government will have less flexibility to manipulate currency to boost exports.
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Ans) d
External debt is the money that borrowers in a country owe to foreign lenders. At end-March 2021, India’s
external debt was placed at US$ 570.0 billion, recording an increase of US$ 11.5 billion over its level at end-March
2020. The external debt to GDP ratio increased to 21.1 per cent at end-March 2021 from 20.6 per cent at end-
March 2020.
Option 1 is correct. There are certain major risks involved in foreign borrowings. One is that, like in the case of
domestic borrowings, there could be unexpected changes in the interest rates charged on these loans. This
can, for instance, cause widespread default when rates rise as borrowers may not be able to make higher interest
payments, thus raising the risks of a systemic crisis.
Option 2 is correct. A major risk is unexpected changes in the exchange rates of currencies. An unexpected fall
in the value of the rupee (depreciation of rupee) can cause severe difficulties for Indian companies that need to
pay back dollar-denominated loans as they will now have to shell out more rupees than they had previously
estimated to buy the necessary dollars. This eventually results in higher debt on the balance sheet which may
affect many financial ratios adversely.
Option 3 is correct. The government loses the flexibility to manipulate currency to lower levels to boost
exports as it will further worsen the debt payment requirements. High levels of government borrowing from
international sources can also hamper the domestic industry by crowding out their sources of funds.
Source: https://www.thehindu.com/business/why-is-external-debt-a-cause-for-worry/article24241656.ece
https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51819
Q.5) Which of the following statements correctly defines the term ‘Inverted duty structure’?
a) It is duty levied on imports to make domestic manufacturing competitive in comparison to foreign goods.
b) It arises when combined taxes and duties on exports are more than imports.
c) It is laid on the export of certain goods exempted from WTO regime to make it globally competitive.
d) It arises when taxes on raw materials is more than taxes on final goods.
Ans) d
Exp) Option d is correct
An inverted duty structure arises when the taxes on output or final product is lower than the taxes on inputs,
creating an inverse accumulation of input tax credit which in most cases has to be refunded. For example,
suppose the tariff (import tax) on the import of tyres is 10% and the tariff on the imports of natural rubber which
is used in the production of tyres is 20%; this is a case of inverted duty structure.
Knowledge Base:
Impact of inverted duty structure:
1) When the import duty on raw materials is high, it will be more difficult to produce the concerned good
domestically at a competitive price. Several industries depend on imported raw materials and components.
2) High tax on the raw materials compels them to raise price. On the other hand, foreign finished goods will be
coming at a reduced price because of low tax advantage. In conclusion, manufactured goods by the domestic
industry becomes uncompetitive against imported finished goods.
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3) The disadvantage of the inverted duty structure increases with the increased use of imported raw materials.
An inverted duty structure discourages domestic value addition.
Source: https://www.indianeconomy.net/splclassroom/what-is-inverted-duty-structure/
Q.6) Consider the following statements:

1. Inflation benefits the debtors.
2. Inflation benefits the bondholders.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) a
Exp) Option a is correct.
Statements 1 is correct. Inflation redistributes wealth from creditors to debtors, i.e., lenders suffer and
borrowers benefit out of inflation. The opposite effect takes place when inflation falls (i.e., deflation). Inflation
causes the value of a currency to decline over time. In other words, cash now is worth more than cash in the
future. Thus, inflation lets debtors pay lenders back with money that is worth less than it was when they
originally borrowed it.
Statements 2 is incorrect. Inflation erodes the purchasing power of a bond's future cash flows. Thus, inflation
harms bondholders. A rise in either interest rates or the inflation rate will tend to cause bond prices to drop.
Q.7) With reference to the new labor code on Industrial Relations, consider the following statements:
1. Workers, now have to give a notice period of minimum of 14 days to go on strike in any industry.
2. Employers need to contribute to the Reskilling fund, the amount equivalent to one year of salary of worker
before firing any worker.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) a
Statement 1 is correct – Earlier only workers from public utility services had to give notice before going on strike.
From now, the code has made minimum 14 days advance notice mandatory to go on strike in any factory.
Statement 2 is incorrect – A Reskilling Fund has been established to skill the workers who are fired from their
jobs. The contribution to the fund by employer is 15 days of last wage drawn by the employee.
Knowledge Base:
Code on Industrial Relations, 2020
Combines 3 erstwhile laws: Trade Unions Act 1926, Industrial Employment (Standing Orders) Act, 1946 and
Industrial Disputes Act, 1947
Major provisions under the code:
1) Definition of worker: It defines a ‘worker’ as any person who work for hire or reward.
2) It excludes persons employed in a managerial or administrative capacity, or in a supervisory capacity with
wages exceeding Rs 18,000.
3) Standing Orders: to be prepared by all industries with more than 300 workers on matters of:
a. classification of workers,
b. manner of informing workers about work hours, holidays, paydays, and wage rates
c. termination of employment, and
d. grievance redressal mechanisms for workers.
4) Establishment with more than 300 workers to seek prior permission before closure, layoff or retrenchment.
5) GOI empowered only to increase the threshold by notification.
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6) Negotiating Union - If more than one trade union, one with more than 51% of workers as member will be
recognized as sole negotiating union
7) If none eligible, negotiating council with representatives of union having at least 20% of workers as members
8) Tribunals to settle industrial dispute - one judicial and one administrative member.
9) The code classifies any dispute in relation to discharge, dismissal, retrenchment, or otherwise termination of
the services of an individual worker to be an industrial dispute.
10) Reskilling Fund - To skill the workers who are fired from their jobs and 15 days of last wage drawn as
contribution by employer
11) Fixed Term Employment - Refers to workers employed for a fixed duration based on a contract.
12) It may allow employers the flexibility to hire workers, reduce the role of a middleman such as an agency or
contractor, and also benefit the worker and help improve the conditions of temporary workers in comparison
with contract workers who may not be provided with such benefits.
Source:
https://pib.gov.in/PressReleasePage.aspx?PRID=1657898#:~:text=(h)%20Provision%20for%20RE%2D,a%20per
iod%20of%2045%20days.
https://www.livelaw.in/columns/the-industrial-relations-code-2020-implications-for-workers-rights-164921
https://www.business-standard.com/article/economy-policy/govt-defends-easing-retrenchment-norms-
says-it-won-t-be-hire-and-fire-120092800955_1.html
Q.8) Consider the following statements with respect to recession and depression:
1. While the depression marks fall in both employment and inflation rate, recession only results in fall in
employment rate with no impact on inflation.
2. While recession is often limited to single country, depression may have global impacts.
3. While industries go for price-cuts only in depression, they usually resort to labour-cuts in recession.
a) 1 only
b) 2 only
c) 1 and 3 only
d) 2 and 3 only
Ans) b
Exp) Option b is correct.
An economic recession is often defined as a decline of real gross domestic product (GDP) for two consecutive
quarters while an economic depression is typically understood as an extreme downturn in economic activity
lasting several years.
Statement 1 is incorrect. In both recession and depression, there is a general fall in demand as economic
activities takes a downturn, inflation remains lower and employment rate falls or unemployment rate grows.
However, the economic indicators dip severely during depression. The depression is marked by an extremely
low aggregate demand in the economy causing activities to decelerate, inflation is comparatively lower and
employment avenues start shrinking forcing unemployment rate to grow fast.
Statement 2 is correct. While a recession is often limited to a single country, a depression is usually severe
enough to have global trade impacts. A depression spans years, rather than months, and typically sees higher
unemployment and a sharper decline in GDP.
Statement 3 is incorrect. Industries generally resort to price cuts to sustain their business during recession.
While to keep business going during depression, the production houses go for forced labour-cuts or
retrenchment (to cut down production cost and be competitive in the market).
https://www.businessinsider.in/finance/news/depressions-and-recessions-differ-in-their-severity-
duration-and-overall-impact-heres-what-you-need-to-know-
/articleshow/77289455.cms#:~:text=A%20recession%20is%20a%20decline,Insider's%20homepage%20for%20
more%20stories.
Q.9) A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?
a) It is the impact of drastic deficiency in supply due to failure of crops
b) It is the impact of the surge in demand due to rapid economic growth
c) It is the impact of the price levels of previous year on the calculation of inflation rate
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d) None of the statements (a), (b) and (c) given above is correct in this context
Ans) c
The base effect refers to the impact of the rise in price level (i.e. last year’s inflation) in the previous year over
the corresponding rise in price levels in the current year (i.e., current inflation). If the price index had risen at
a high rate in the corresponding period of the previous year leading to a high inflation rate, some of the potential
rise is already factored in, therefore a similar absolute increase in the Price index in the current year will lead to
a relatively lower inflation rates. On the other hand, if the inflation rate was too low in the corresponding period
of the previous year, even a relatively smaller rise in the Price Index will arithmetically give a high rate of current
inflation.
Q.10) Regarding the Wholesale Price Index (WPI) and Consumer Price Index (CPI), which of the following
statements is incorrect?
a) Unlike WPI, CPI takes into account the change in prices of both goods and services.
b) In WPI, highest weightage is given to manufactured goods, while in CPI highest weightage is given to food
items.
c) The Reserve Bank of India uses CPI to set the monetary and credit policy.
d) WPI is used by policymakers for fixing dearness allowance (DA) of employees and industrial workers.
Ans) d
Statement a is correct. Wholesale Price Index (WPI) measures the average change in prices of goods at the
wholesale level. It does not included services rendered in the economy.
However, Consumer Price Index CPI) calculates the average change in prices of both goods and services at the
retail level.
Statement b is correct. Indeed, in WPI, more weightage is given to manufactured goods, while in CPI, more
weightage is given to food items.
The WPI comprises of three major groups:
1) Primary Articles (eg- Food Articles, Vegetables, Milk, Minerals etc) with 22.62 weightage.
2) Fuel and Power (eg- LPG, Petrol etc) with 13.15 weightage.
3) Manufactured Products (eg- manufacture of food products, sugar, manufacture of textiles etc) with 64.23
weigtage.
The major component in CPI (C) are as follows (along with their weights)
1) Food and Beverages – 45.86
2) Housing – 10.07
3) Fuel and Light – 6.84
4) Clothing and Footwear – 6.53
5) Pan, tobacco and intoxicants – 2.38
6) Miscellaneous – 28.32
Housing Inflation is not considered in CPI (Rural)
Statement c is correct. The Reserve Bank of India (RBI) uses the Consumer Price Index (CPI) (combined) as the
key measure of inflation to set the monetary and credit policy. Earlier, RBI had given more weightage to
Wholesale Price Index (WPI) than CPI as the key measure of inflation for all policy purposes.
Statement d is incorrect. The CPI for industrial workers (CPI-IW) and not WPI is mainly used for determining
dearness allowance (DA) paid to central/state government employees and workers in the industrial sectors
besides fixation and revision of minimum wages in scheduled employments. The government had recently
launched the new series of CPI-IW with a new base year of 2016 from 2001.
Knowledge Base:
Other difference between WPI and CPI:
1) WPI data is published by the Office of Economic Adviser, Ministry of Commerce and Industry, while CPI data
is published by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation
(MoSPI).
2) The base year for WPI is 2011-12 while the base year for CPI is 2012.
However, both the figures are released on the monthly basis.
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https://indianexpress.com/article/business/new-retail-inflation-series-for-industrial-workers-base-year-
shifted-to-2016-no-change-in-dearness-allowance-6844192/
https://www.financialexpress.com/what-is/wholesale-price-index-wpi-meaning/1627729/
https://blog.forumias.com/eco-103-inflation/
Q.11) Consider the following pairs in the context of inflation:

Terms Meaning
1. Inflationary Real GDP exceeds Potential

gap GDP
2. Inflation Difference in real and
Premium nominal interest rates
3. Skewflation Sustained increase in prices
of all goods
Which of the pairs given above is/are correctly matched?

a) 1 and 2 only
b) 2 only
c) 3 only
d) 2 and 3 only
Ans) a
Pair 1 is correctly matched. An inflationary gap occurs when real GDP exceed the potential GDP. It is a situation
when the demand for goods and services exceeds production due to factors such as higher levels of overall
employment, increased trade activities, or elevated government expenditure. The inflationary gap is named as
such because the relative rise in real GDP causes an economy to increase its consumption, leading prices to climb
in the long run.
Pair 2 is correctly matched. Inflation premium is the difference between real interest rate and nominal interest
rate, when inflation is taking place. The interest banks charge on their lending is known as the nominal interest
rate. This might not be the real cost of borrowing. To calculate the real interest rate, the nominal interest rate is
adjusted for inflation. Real interest rate is always lower than the nominal interest rate, if inflation is taking
place. This bonus brought by inflation to the borrowers is known as the inflation premium.
Pair 3 is incorrectly matched. Skewflation is price rise of one or a small group of commodities
over a sustained period of time. Skewflation may also mean the skewness of inflation among different sectors of
the economy — some sectors are facing huge inflation, some none and some deflation.
https://www.investopedia.com/terms/i/inflationary_gap.asp
Q.12) With reference to Indian economy, demand-pull inflation can be caused/ increased by which of the
following?
1. Expansionary policies
2. Fiscal stimulus
3. Inflation-indexing wages
4. Higher purchasing power
5. Rising interest rates
Select the correct answer using the code given below.
a) 1, 2 and 4 only
b) 3, 4 and 5 only
c) 1, 2, 3 and 5 only
d) 1, 2, 3, 4 and 5
Ans) a
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Demand-pull inflation is the upward pressure on prices that follows a shortage in supply, a condition that
economists describe as "too many dollars chasing too few goods."
1) Expansionary policies: When the government spends more freely, money in the market is increased. It leads
to increase demand for the goods and fuels demand-pull inflation.
2) Fiscal Stimulus: It also increases the money in the market leads to increase demand for the goods and fuels
demand-pull inflation
3) Higher Purchasing Power: When consumers earn higher income, they feel confident and spend more. This
leads to more demand and fuels Demand-pull inflation
Inflation-indexing wages and rising interest rates do not increase or cause demand-pull inflation
Source: UPSC 2021
Q.13) Which of the following are the possible impacts of the rising inflation in an economy?
1. Depreciation in the value of the currency
2. Decline in investment in short run
3. Unfavourable balance of trade for developing economies
4. Decline in bond yields
a) 1 and 3 only
b) 2 and 4 only
c) 2, 3 and 4 only
d) 1, 2, 3 and 4
Ans) a
Option 1 is correct. With rise in inflation, the currency of the economy depreciates (loses its exchange value in
front of a foreign currency) provided it follows the flexible currency regime. For example: Imagine that the Rs-$
exchange rate was exactly 1 in the first year. This means that with Rs 100, one could buy something that was
priced at $100 in the US. But suppose the Indian inflation is 20% and the US inflation is zero. Then, in the second
year, an Indian would need Rs 120 to buy the same item priced at $100, and the rupee’s exchange rate would
depreciate to 1.20.
Option 2 is incorrect. Investment in the economy is boosted by the inflation in the short run and not vice-versa.
This is because higher inflation indicates higher demand and suggests entrepreneurs to expand their
production level, and higher the inflation, lower the cost of loans.
Option 3 is correct. In case of developing economies, inflation is unfavourable for their balance of trade, while
in the case of a developed economy, inflation makes trade balance favourable. This is because of composition of
foreign trade. The benefit to export which inflation brings in to a developing economy is usually lower than the
loss it incurs due to its compulsory imports which becomes costlier due to inflation.
Option 4 is incorrect. If inflation is rising or is expected to rise, investors would want higher returns to beat
inflation, causing bond yields to rise and bond prices to fall and vice-versa.
https://indianexpress.com/article/explained/how-covid-19-is-hurting-the-rupees-exchange-rate-with-
other-currencies-6371536/
Q.14) As per this concept in economics, inflation and unemployment have an inverse relationship. Higher inflation
is associated with lower unemployment and vice versa. The inverse relationship is depicted as a downward
sloping, concave curve, with inflation on the Y-axis and unemployment on the X-axis.
Which of the following economic curves have been described in the above paragraph?
a) Lorenz curve
b) Phillips curve
c) Laffer curve
d) Engel Curve
Ans) b
Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such
as the overall increase in prices or the increase in the cost of living in a country.
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Option a is incorrect. A Lorenz curve is a graphical representation of the distribution of income or wealth
within a population. Lorenz curves graph percentiles of the population against cumulative income or wealth of
people at or below that percentile. Lorenz curves, along with their derivative statistics, are widely used to
measure inequality across a population. Because Lorenz curves are mathematical estimates based on fitting a
continuous curve to incomplete and discontinuous data, they may be imperfect measures of true inequality.
Option b is correct. The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation
and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes
inflation, which in turn should lead to more jobs and less unemployment. The inverse relationship between
unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis and
unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. Stagflation occurs
when an economy experiences stagnant economic growth, high unemployment and high price inflation. This
scenario, of course, directly contradicts the theory behind the Philips curve.
Option c is incorrect. The Laffer Curve is a theory formalized by supply-side economist Arthur Laffer to show
the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used
to illustrate the argument that sometimes cutting tax rates can result in increased total tax revenue.
Option d is incorrect. The Engel curve, named after the German statistician Ernst Engel (1821-96), is a relation
between the demand for a good and the income of its buyers, the former depending on the latter. It states that
the percentage of income allocated for food purchases decreases as income rises. As a household’s income
increases, the percentage of income spent on food decreases while the proportion spent on other goods (such
as luxury goods) increases.
Source: https://www.economicsdiscussion.net/consumer/engel-curve/the-engel-curve-with-
diagram/22620
https://www.investopedia.com/terms/p/phillipscurve.asp
https://www.investopedia.com/terms/l/laffercurve.asp#:~:text=The%20Laffer%20Curve%20is%20a,in%20in
creased%20total%20tax%20revenue.
https://www.investopedia.com/terms/l/lorenz-
curve.asp#:~:text=A%20Lorenz%20curve%20is%20a,economist%20Max%20Lorenz%20in%201905.&text=In%2
0practice%2C%20a%20Lorenz%20curve,observations%20of%20income%20or%20wealth.
Q.15) What is/are the most likely advantages of implementing ‘Goods and Services Tax (GST)’?
1. It will replace multiple taxes collected by multiple authorities and will thus create a single market in India.
2. It will drastically reduce the ‘Current Account Deficit’ of India and will enable it to increase its foreign exchange
reserves.
3. It will enormously increase the growth and size of economy of India and will enable it to overtake China in the
near future.
a) 1 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Ans) a
Statement 1 is correct and Statements 2 and 3 are incorrect. There is no direct correlation between GST and
‘drastic’ reduction in Current Account Deficit and increase in India’s forex reserves. There is no conclusive
evidence to support the argument that GST will enable to overtake China in near future.
Many taxes are subsumed in a single tax called the Goods and Services Tax (GST) which will be levied on supply
of goods or services or both at each stage of supply chain starting from manufacture or import and till the last
retail level. So basically any tax that is presently being levied by the Central or State Government on the supply
of goods or services is going to be converted into GST.
GST is proposed to be a dual levy where the Central Government will levy and collect Central GST (CGST) and
the State will levy and collect State GST (SGST) on intra-state supply of goods or services. The Centre will also
levy and collect Integrated GST (IGST) on inter-state supply of goods or services. Thus, GST is a unifier that is
going to integrate various taxes being levied by the Centre and the State at present and provide a platform for
forging an economic union of the country.
Source: UPSC 2017
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Q.16) Which among the following are the criteria considered for the identification of Domestic Systemically
Important Insurers (D-SIIs) by the Insurance Regulatory and Development Authority of India?
1. Size of operations in terms of total revenue
2. Premium underwritten
3. Non-performing Assets (NPA)
4. Global activities across more than one jurisdiction
a) 1, 2 and 3 only
b) 2, 3 and 4 only
c) 1, 2 and 4 only
d) 1, 2, 3 and 4
Ans) c
Domestic Systemically Important Insurers (D-SIIs) refer to insurers of such size, market importance and
domestic and global inter connectedness whose distress or failure would cause a significant dislocation in the
domestic financial system. Therefore, the continued functioning of D-SIIs is critical for the uninterrupted
availability of insurance services to the national economy.
The parameters for identification of Domestic Systemically Important Insurers (D-SIIs) by insurance
regulator IRDAI include –
1) the size of operations in terms of total revenue, including premium underwritten and the value of assets
under management
2) global activities across more than one jurisdiction.
Three insurers- Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and
New India Assurance Co.- have been recognised as Domestic Systemically Important Insurers (D-SIIs) for 2020-
21.
Implications:
1) The three insurers will now be subjected to enhanced regulatory supervision.
2) They have also been asked to raise the level of corporate governance, identify all relevant risks and promote
a sound risk management culture.
Source: https://www.irdai.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo4251
https://www.thehindu.com/business/Industry/lic-gic-new-india-assurance-identified-as-d-
siis/article32695701.ece
Q.17) With reference to the insurance situation in India, consider the following:
1. Insurance penetration is calculated as ratio of insurance premium to population.
2. FDI in insurance sector is allowed only upto 49%.
3. Life Insurance Corporation of India (LIC) is a reinsurance company.
Which of the statements given above are incorrect?
a) 1 and 2 only
b) 2 and 3 only
c) 1 and 3 only
d) 1, 2 and 3
Ans) d
In economic terms, anything used to cut down the risk is known as insurance. But in familiar
terms, insurance is provided by an insurance company which covers a person’s life (called life
segment) or covers loss of assets, property (called non-life or general segment). The insurance
policies are purchased at fixed premiums.
Statement 1 is incorrect. Insurance penetration is calculated as percentage of insurance premium to GDP.
The insurance density, is calculated as ratio of insurance premium to population.
Statement 2 is incorrect. FDI in insurance sector is allowed upto 74% and not the 49% limit. Parliament on
March 22, 2021 passed the Insurance Amendment Bill 2021 to increase the foreign direct investment (FDI) limit in
the insurance sector to 74% from 49%.
Page 11 of 28

Statement 3 is incorrect. Life Insurance Corporation of India (LIC) is not a reinsurance company. A reinsurer
is a company that provides financial protection to insurance companies. Reinsurers handle risks that are too
large for insurance companies to handle on their own and make it possible for insurers to obtain more business
than they would otherwise be able to.
Source: https://www.businesstoday.in/latest/economy-politics/story/economic-survey-2020-21-insurance-
penetration-extremely-low-at-376-285890-2021-01-29
https://www.livemint.com/insurance/news/finance-ministry-notifies-rules-for-increased-fdi-in-the-
insurance-sector-
11621528712819.html#:~:text=Parliament%20on%20March%2022%20passed,to%2074%25%20from%2049%25.&t
ext=the%20existing%2049%25.-
,Parliament%20on%20March%2022%20passed%20the%20Insurance%20Amendment%20Bill%202021,to%2074
%25%20from%2049%25.
https://www.investopedia.com/terms/r/reinsurer.asp
Q.18) With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered
by non-resident entities, which of the following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country
under the “Double Taxation Avoidance Agreements”.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) d
Statement 1 is incorrect. ‘Equalisation Levy’ was introduced by the Finance Act, 2016. The levy is a flat rate tax
of 6% on the revenue derived by a non-resident MNE providing digital advertising services to Indian customers,
without having a physical presence in India. It was not introduced as a part of the income tax.
Statement 2 is incorrect. The Levy is not a corporate income-tax and is not subject to any limitations under
India’s tax treaties. Thus, the tax payer cannot claim a tax credit in their home country under the “Double
Taxation Avoidance Agreements”.
Knowledge Base: Finance Act 2020 has further expanded the scope of equalization levy to non-resident e-
commerce operators by introducing a new levy of 2% (EL 2.0). This levy of 2% would be applicable on the
consideration for e-commerce supply or services provided or facilitated by the non-resident e-commerce
operator.
This levy is effective from 1 April 2020. While EL1.0 (Equalization levy introduced in 2016) was limited to B2B
transactions and compliance was required to be carried out by the payer, in case of EL2.0, both B2B and B2C
transactions are covered and compliances are to be carried out by the non-resident e-commerce operator.
Q.19) With reference to the Export Credit guarantee Corporation (ECGC), consider the following statements:
1. It is a fully government-owned company established to promote exports.
2. It occupies 100% of market share in the export credit insurance market in India.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) a
Statement 1 is correct. Export Credit guarantee Corporation (ECGC) Ltd. (Formerly known as Export Credit
Guarantee Corporation of India Ltd.) wholly owned by Government of India, was set up in 1957 with the objective
of promoting exports from the country by providing credit risk insurance and related services for exports.
Page 12 of 28

Over the years it has designed different export credit risk insurance products to suit the requirements of Indian
exporters. ECGC is essentially an export promotion organization, seeking to improve the competitiveness of the
Indian exports by providing them with credit insurance covers.
Statement 2 is incorrect. ECGC is a market leader with around 85% market share in the export credit insurance
market in India. ECGC insures around 50% of total export credit disbursement by banks, covering 22 banks (12
Public Sector Banks and 10 Private Sector Banks).
Knowledge Base: ECGC provides (i) a range of insurance covers to Indian exporters against the risk of non –
realization of export proceeds due to commercial or political risks (ii) different types of credit insurance covers
to banks and other financial institutions to enable them to extend credit facilities to exporters and (iii) Export
Factoring facility for MSME sector which is a package of financial products consisting of working capital
financing, credit risk protection, maintenance of sales ledger and collection of export receivables from the buyer
located in overseas country.
Source: https://indianexpress.com/article/business/companies/government-to-list-ecgc-infuse-rs-4400-
crore-capital-in-5-years-7542237/
https://commerce.gov.in/about-us/public-sector-undertakings/export-credit-guarantee-corporation-of-
india-limited/
https://blog.forumias.com/government-approves-rs-4400-crore-investment-in-ecgc-ltd-in-5-years-to-
provide-support-to-exporters-as-well-as-banks/
Q.20) With reference to cess and surcharge, consider the following:

1. Cess is a tax on tax that is imposed by the central government for a specific purpose.
2. Surcharge is an additional charge or tax.
3. Surcharge goes to Consolidated Fund of India but can be spend only for the specific purposes.
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
Ans) a
The main difference between surcharge and cess is that despite they are not shareable with state governments,
surcharge can be kept with the Consolidated Fund of India and spent like any other taxes, the cess should be kept
as a separate fund after allocating to Consolidated Fund of India and can be spent only for a specific purpose.
Statement 1 is correct. A cess imposed by the central government is a tax on tax, levied by the government for a
specific purpose. Generally, cess is expected to be levied till the time the government gets enough money for
that purpose. For example, a cess for financing primary education – the education cess (which is imposed on all
central government taxes) is to be spent only for financing primary education (SSA) and not for any other
purposes.
Statement 2 is correct. Surcharge is an additional charge or tax. The main surcharges are that on personal
income tax (on high income slabs and on super rich) and on corporate income tax.
Statement 3 is incorrect. The usual taxes go to the consolidated fund of India and can be spend for any
purposes. Surcharge also goes to the consolidated fund of India and can be spent for any purposes (not for
particular purpose). Cess goes to Consolidated Fund of India but can be spend only for the specific purposes.
Source: https://www.indianeconomy.net/splclassroom/what-is-a-cess-how-it-differs-from-surcharge/
https://economictimes.indiatimes.com/definition/surcharge
Q.21) In the context of the Indian economy, non-financial debt includes which of the following?
1. Housing loans owed by households
2. Amounts outstanding on credit cards
3. Treasury bills
a) 1 only
b) 1 and 2 only
c) 3 only
d) 1, 2 and 3
Page 13 of 28

Ans) d
Statements 1, 2 and 3 are correct. The Housing loans owed by households, amounts outstanding on credit cards
and Treasury bills all are examples of non-financial debt.
Non-financial debt consists of credit instruments issued by governmental entities, households and businesses
that are not included in the financial sector.
Source) UPSC 2020
Q.22) What do you understand by the term Cobweb phenomenon?

a) It is the phenomenon of price rise due to reopening of economies globally.
b) It is a regulatory issue that forces firms to opt for contract workers due to slow labour reforms.
c) It is the impact of increase in oil prices on current account deficit.
d) It is a phenomenon where the prices of certain goods witness fluctuations that are cyclical in nature.
Ans) d
Cobweb phenomenon is a phenomenon where the prices of certain goods witness fluctuations that are cyclical
in nature. After the prices of a particular agricultural commodity shoot through the roof during a season of
scarcity, farmers resort to boosting the production on the premise of the pre-existing demand and prices, leading
to a problem of plenty. This phenomenon is known as Cobweb phenomenon.
Source: https://www.thehindu.com/news/national/karnataka/glut-ruins-farmers-trapped-in-cobweb-
phenomenon/article18404845.ece
https://www.thehindu.com/opinion/op-ed/what-is-cobweb-cycle-in-economics/article22744641.ece
Q.23) With reference to disinvestment, consider the following statements:

1. Public sector enterprises in the areas of Arms and ammunition and allied items of defence equipment are not
eligible for strategic disinvestment.
2. The role of identifying Central Public sector enterprises for strategic disinvestment is done by NITI Aayog.
3. The Cabinet committee on economic affairs is the final decision-making body for approving the disinvestment
process.
4. 75% proceeds from disinvestment are used for reviving the sick PSUs and rest are used for social sectors.
a) 1, 2 and 4 only
b) 2 and 3 only
c) 3 only
d) 2, 3 and 4 only
Ans) b
Statement 1 is incorrect. PSEs (Public sector enterprises) in the areas of Arms and ammunition and allied items of
defence equipment, defence aircraft and warships are now eligible for strategic disinvestment. The government
had announced in the AtmaNirbhar Package the policy of strategic disinvestment of public sector enterprises.
The policy provides a clear roadmap for disinvestment in all nonstrategic and strategic sectors. at present, only
two industrial sectors are reserved for public sector — atomic energy and railway operations.
Statement 2 is correct. NITI Aayog identifies CPSEs for strategic disinvestment and advice on the mode of sale,
percentage of shares to be sold of the CPSE and method for valuation of the CPSE. DIPAM’s role is to identify
PSUs in consultation with respective administrative Ministries and submit proposal to Government in cases
requiring Offer for Sale of Government equity.
Statement 3 is correct. The Cabinet committee on economic affairs is the final decision-making body for
approving the disinvestment process. It supervises/monitors the process of implementation of strategic
disinvestment.
Statement 4 is incorrect. The proceeds from disinvestment are channelized into NIF (National investment
fund). 75% proceeds from disinvestment are used for social sectors and rest are used for reviving the sick PSUs.
Source: https://www.dipam.gov.in/dipam-faq#
https://dipam.gov.in/disinvestment-policy
Page 14 of 28

https://indianexpress.com/article/india/budget-2021-divestment-push-2-psbs-1-insurer-added-to-the-list-
7170717/
Q.24) Consider the following items:

1. Cereal grains hulled
2. Chicken eggs cooked
3. Fish processed and canned
4. Newspapers containing advertising material
Which of the above items is/are exempted under GST (Goods and Services Tax)?
a) 1 only
b) 2 and 3 only
c) 1, 2 and 4 only
d) 1, 2, 3 and 4
Ans) c
Statements 1, 2 and 4 are correct.
The Goods and Services Tax in India is comprehensive, multi-stage, destination-based value-added indirect tax.
It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.
There are four slabs for taxes for both goods and services- 5%, 12%, 18% and 28%. Although GST aimed at levying
a uniform tax rate on all products and services, four different tax slabs were introduced because daily necessities
could not be subject to the same rate as luxury items. A number of items are exempted from GST i.e. they are
kept at zero or nil GST rate.
Items exempted from GST include fresh or pasteurized milk, butter milk, curd, chena or paneer, and non-
vegetarian items like eggs (cooked or raw), chicken, fresh meat, and fresh or chilled fish. Fruits, vegetables, as
well as unit container-packed frozen branded vegetables (uncooked or steamed) are also exempt.
Other items on this list include natural honey, hulled cereal grains (like barley, wheat, oat), Palmyra jiggery etc.
There are other items on the exempted list like manuscripts, postal items like envelope and post cards sold by
the government, newspapers, journals and periodicals, whether illustrated or containing advertising material
etc.
Statement 3 is incorrect. Fish, crustaceans, molluscs & other aquatic invertebrates in processed, cured or frozen
state are taxable at 5% rate under GST.
The items that are kept outside the purview of GST are petroleum products (such as petroleum crude, motor
spirit, diesel, aviation turbine fuel and natural gas), electricity and alcohol for human consumption.
Q.25) With regard to Micro, small and medium enterprises (MSME) sector, which of the following statements
is/are correct?
1. More than 99% of MSMEs sector is represented by micro-enterprises.
2. MSME sector contributes more than 40% in India’s total exports.
3. Labour intensive industries like agarbattis making are reserved for MSMEs sector.
a) 1 and 2 only
b) 2 only
c) 2 and 3 only
d) 1 and 3 only
Ans) a
Statement 1 is correct. More than 99% of MSMEs sector is represented by micro-enterprises.
India has 6.33 crore MSMEs out of which 6.30 crore i.e. 99.4 per cent are micro-enterprises while 0.52 per cent
i.e. 3.31 lakh are small and 0.007 per cent i.e., 5,000 are medium enterprises.
Statement 2 is correct. MSME sector contributes around 48% in India’s total exports basket. As per the
information received from Directorate General of Commercial Intelligence and Statistics (DGCIS) the Share of
MSME related Products in total Export from India during 2018-19 is 48.10%.
Page 15 of 28

Statement 3 is incorrect. Currently there are no items reserved for MSMEs sector. The policy of reserving
products was started in 1967 with forty-seven items; the list of reserved items rose to 873 in 1984. But the
government in 2018 removed the remaining last 20 items from the original list of over 800 items reserved for
exclusive production by the MSME sector. So currently there are no items reserved for MSMEs sector.
Source: https://www.financialexpress.com/industry/sme/msme-other-indias-msme-sector-swells-adds-
these-many-enterprises-in-fy20-micro-businesses-dominate/1906979/
https://www.financialexpress.com/industry/sme/nearly-half-of-indias-exports-came-from-msmes-in-fy19-
up-from-7-5-in-fy18/1653526/
https://www.thehindubusinessline.com/economy/policy/govt-removes-last-20-items-reserved-for-
production-by-msmes/article7099156.ece
http://dcmsme.gov.in/publications/policies/preseve.htm
Q.26) Which of the following activities comes under the definition of secondary sector?
1. Animal husbandry
2. Mining and quarrying
3. Transport sector
4. Textile industry
5. Fishing
a) 1, 2 and 4 only
b) 3, 4 and 5 only
c) 3 and 4 only
d) 4 only
Ans) d
Option 1, 2 and 5 are incorrect. Animal husbandry, Mining and quarrying, fishing is included in primary
activities as it makes utilisation of earth’s resources such as land, water, vegetation, building materials and
minerals.
Option 3 is incorrect. Tertiary activities include both production and exchange. So, Exchange, involves trade,
transport and communication facilities that are used to overcome distance and are included in Tertiary activities.
Option 4 is correct. Goods produced by exploiting natural resources come under the category of secondary
activities. Activities associated with the secondary sector include metal working and smelting, automobile
production, textile production, chemical and engineering industries, aerospace manufacturing, energy utilities,
engineering, breweries and bottlers, construction, and shipbuilding.
Source: NCERT Geography class-XII chapter-5 pag-45 Chapte-7 page-55
Q.27) In India the overall Index of Industrial Production, the Indices of Eighth Core Industries have combined
weight of 37.90%. Which of the following are among those Eight Core Industries?
1. Cement
2. Fertilizers
3. Natural Gas
4. Refinery products
5. Textiles
Select the correct answer using the codes given below:
a) 1 and 5 only
b) 2, 3 and 4 only
c) 1, 2, 3 and 4 only
d) 1, 2, 3, 4 and 5
Ans) c
The 'Index of Eight Core Industries' is an index of the eight most fundamental industrial sectors of the Indian
economy and it maps the volume of production in these industries. It includes Coal, Natural Gas, Crude Oil,
Refinery Products (such as Petrol and Diesel), Fertilisers, Steel, Cement and Electricity. The index gives
different weights to each of these sectors to arrive at a final figure.
Page 16 of 28

Refinery Products have the largest weight while fertilizers have the lowest weight.
The Eight Core Industries comprise 40.27 per cent of the weight of items included in the Index of Industrial
Production (IIP)
The Office of Economic Adviser, Department for Promotion of Industry and Internal Trade releases the Index of
Eight Core Industries.
Knowledge Base: Index of Industrial Production data or IIP as it is commonly called is an index that tracks
manufacturing activity in different sectors of an economy. The IIP number measures the industrial production
for the period under review, usually a month, as against the reference period. IIP is a key economic indicator of
the manufacturing sector of the economy. Mining, manufacturing, and electricity are the three broad sectors in
which IIP constituents fall.
Source) UPSC 2012
Q.28) With reference to steel industry in India, consider the following statements:
1. India is the second largest producer of crude steel in the world.
2. PLI scheme is extended to all grades of steel manufacturing units in India registered under companies act 2013.
3. Lack of high-grade iron ore deposits is one of the main challenges faced by this industry.
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
Ans) a
Statement 1 is correct. India is the second largest producer of crude steel In FY21, the production of crude steel
and finished steel stood a 102.49 MT and 94.66 MT, respectively. In FY22, crude steel production in India is
estimated to increase by 18%, to reach 120 million tonnes, driven by rising demand from customers.
Statement 2 is incorrect. PLI scheme is not extended to all grades of steel manufacturing units in India
registered under companies act 2013 but to those which are engaged in manufacturing of the identified
“Specialty steel” grades, subject to the input material being melted and poured within the country using iron
ore/scrap/sponge iron/pellets etc.
Statement 3 is incorrect. India has huge deposits of high-grade iron ore but the main challenges faced by this
industry is the of high-grade cooking coal for smelting iron which are limited. Many steel plants are forced to
import metallurgical coal.
Source: https://www.ibef.org/news/pli-scheme-for-specialized-steel-is-a-big-boost-for-the-industry-says-
jsws-rao
https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1738126
https://www.yourarticlelibrary.com/industries/8-major-problems-faced-by-indian-iron-and-steel-
industry/19691
Page 17 of 28

Q.29) Recently “TReDS” platform was in news is:
a) an electronic platform for third-party guarantee-free loans to the Micro and Small enterprises, especially in
the absence of collateral.
b) an electronic platform for facilitating the financing of trade receivables of Micro, small and Medium Enterprises
(MSMEs) through multiple financiers.
c) a platform to support traditional artisans to provide sustainable employment.
d) a post COVID Resilience and Recovery Programme to revitalize the MSME sector.
Ans) b
TReDS (Trade Receivables Discounting System) is an institutional mechanism set up in order to facilitate the
discounting of invoices for MSMEs from corporate buyers through multiple financiers. It involves three
participants MSME Supplier, Corporate Buyer and Financier. It is a platform for uploading, accepting,
discounting, trading and settling invoices / bills of MSMEs and facilitating both receivables as well as payables
factoring (reverse factoring). It is an electronic platform.
Knowledge Base:
Credit Guarantee Scheme for Micro & Small Enterprises (CGTMSE) – It is a platform for third-party guarantee-
free loans to the Micro and Small enterprises (MSEs), especially in the absence of collateral. It provides Credit
guarantee for loans up to Rs. 2 crores, without collateral and third-party guarantee.
SFURTI (Scheme of Fund for Regeneration of Traditional Industries) -a platform to support traditional artisans
to provide sustainable employment
Emergency Credit Line Guarantee Scheme (ECLGS)- is a post COVID Resilience and Recovery Programme to
revitalize the MSME sector.
Source: https://vikaspedia.in/e-governance/digital-payment/payment-systems-in-india/trade-receivables-
discounting-system-treds
Q.30) Which one of the following is likely to be the most inflationary in its effect?
a) Repayment of public debt
b) Borrowing from the public to finance a budget deficit
c) Borrowing from banks to finance a budget deficit
d) Creating new money to finance a budget deficit
Ans) d
Creating new money to finance a budget deficit is likely to be the most inflationary in its effect. It is because in
this case, the new money will increase the money supply in the economy to the greatest extent. Printing new
currency notes increases the flow of money in the economy. This leads to increase in inflationary pressures
which leads to rise of prices of goods and services in the country.
The total stock of money circulating in an economy is the money supply. The circulating money involves the
currency, printed notes, money in the deposit accounts and in the form of other liquid assets.
When the government finances its budget deficit through creation of money, it causes inflation, and the
purchasing power of old money balances held by the public falls. Also, creation of new money is like a tax on
holding money.
Q.31) With reference to ‘Compulsory Licensing’, consider the following statements:

1. It allows an applicant to produce a patented product without the consent of the patent owner.
2. It is included in the WTO’s Trade-Related Aspects of Intellectual Property Rights Agreement.
3. Indian laws do not allow the grant of Compulsory licensing.
a) 1 and 2 only
b) 1 only
c) 2 and 3 only
d) 1, 2 and 3
Ans) a
Page 18 of 28

Statement 1 is correct. Compulsory licensing is when a government allows someone else to produce a patented
product or process without the consent of the patent owner or plans to use the patent-protected invention
itself.
Statement 2 is correct. Compulsory licensing is one of the flexibilities in the field of patent protection included
in the WTO’s agreement on intellectual property — the TRIPS (Trade-Related Aspects of Intellectual Property
Rights) Agreement.
Statement 3 is incorrect. Indian laws allow the grant of Compulsory licensing.
An Indian company can apply for a compulsory license under Section 84 of the TRIPs-compliant Indian Patents
Act. The Controller of Patents can issue a compulsory license under Section 92 of the Act.
Under Section 84, a company can be given compulsory license if it is able to show one of the three circumstances
exists: i) reasonable requirement of the public with regard to the patented invention not being satisfied, or ii) that
the patented invention is not available to the public at the reasonably affordable price; or iii) that the patented
invention is not worked in the territory of India.
India’s first ever compulsory license was granted by the Patent Office on March 9, 2012, to Hyderabad-based
Natco Pharma for the production of a generic version of Bayer’s Nexavar, an anti-cancer agent used in the
treatment of liver and kidney cancer.
Source: https://www.wto.org/
Q.32) With reference to Swiss Challenge Method of Public Private Participation, which of the following statements
is/are correct?
1. The private player in this method can submit the proposal for development of an infrastructure without any
invitation from government.
2. In such method, the original proponent is not given any opportunity to match any competing counter
proposals.
a) 1 Only
b) 2 Only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) a
Statement 1 is correct – Government need not invite bids for the projects in this method. Any private players
with good experience who wants to develop an infrastructure can submit the proposal to the government for
initiating the process. That proposal will be made online and a second person can give suggestions to improve
and beat that proposal. An expert committee will accept the best proposal and the original proposer will get a
chance to accept it if it is an improvement on his proposal.
Statement 2 is incorrect - If merit is found in proposal the Infrastructure Authority will require the Government
Agency or the Local Authority to invite competing proposals using the Swiss Challenge Method. The original
proponent will be given an opportunity to match any competing counter proposals that may be better than the
original proposal, if the original proponent matches or improvises upon any such counter proposal the project
shall be awarded to the original proponent, otherwise, the bidder making the competing offer will be allowed to
execute the project
Knowledge Base: Issues with Swiss Challenge Method:
The Central Vigilance Commission (CVC) had earlier observed that there is a lack of transparency, and lack of fair
and equal treatment of potential bidders in the Swiss Challenge method. It advocated fully transparent and
competitive procedures for procurement for PPP projects. The erstwhile Planning Commission of India had
advised some State governments to adopt Swiss Challenge method as an exception rather than a rule. Recently,
the Vijay Kelkar panel on ‘Revisiting and Revitalising the PPP model of infrastructure development’ had
discouraged the government from following the ‘Swiss Challenge’ model. Without a strong legal and regulatory
framework, the method fosters crony capitalism and is also conducive to discretionary favours being shown to a
private party by the government of the day. It is argued that this method shows bias towards the originator.
Source: https://theprint.in/india/governance/modi-govt-plans-national-policy-framework-for-swiss-
challenge-system-of-public-procurement/564401/
Page 19 of 28

Q.33) With reference to chemical fertilizers in India, consider the following statements:
1. At present, the retail price of chemical fertilizers is market -driven and not administered by the Government.
2. Ammonia, which is an input of urea, is produced from natural gas.
3. Sulphur, which is a raw material for phosphoric acid fertilizer, is a by -product of oil refineries.
a) 1 only
b) 2 and 3 only
c) 2 only
d) 1, 2 and 3
Ans) b
Statement 1 is incorrect. The retail price of chemical fertilizers is not market -driven as the government
subsidizes the fertilizers. Under Nutrient Based Subsidy Scheme (NBS), the fertilizers are provided to the farmers
at the subsidized rates based on the nutrients (N, P, K & S) contained in these fertilizers.
Statement 2 is correct. Ammonia, which is an input of urea, is produced from natural ga
Statement 3 is correct. Sulphur, which is a raw material for phosphoric acid fertilizer, is a by -product of oil
refineries.
Source) UPSC 2020
Q.34) With reference to taxation powers of local bodies, which of the following statements is/are incorrect?
1. The Property tax can only be decided by state government and not by Urban Local bodies.
2. More than 50% of revenue of local bodies comes from their own source of internal revenue.
3. Urban local bodies are not allowed to raise loans directly from capital market.
a) 1 only
b) 1 and 2 only
c) 2 and 3 only
d) 1, 2 and 3
Ans) d
Statement 1 is incorrect. ULBs (Urban local bodies) has the power to raise revenue through taxes such as land
or property tax or through non-tax sources which include rents and user-fees. These come under the category
of internal source of revenue
Statement 2 is incorrect. Studies show that around 80 percent to 95 percent of revenue is obtained from
external sources, particularly state and central government loans and grants.
Statement 3 is incorrect. ULBs (Urban local bodies) can raise loans directly from capital market, financial
intermediaries the central and state governments, domestic institutions. For example municipal bonds.
Knowledge Base: External revenue sources include
1) Assigned revenue, which covers taxes, duties, tolls, and fees due to local bodies, that are collected by the state
and central governments. The exact percentage allocation of these revenues is done through recommendations
of State Finance Commissions.
2) Grants-in-aid and loans from the central and state governments, domestic institutions, financial
intermediaries, capital markets, and/or donor agencies.
Source: https://idronline.org/idr-explains-local-government-in-india/
Q.35) Consider the following Pairs with reference to types of taxation and their Purpose/Impacts:
Types of taxation Description
1. Progressive Tax Encourage more
earnings by the
individual
2. Regressive Tax Taxes people
according to their
affordability
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3. Proportional Fixed rates for
Tax every level of
income/production
Which of the above pairs is/are correctly matched?

a) 3 only
b) 1 and 2 only
c) 1, 2 and 3
d) 2 and 3 only
Ans) a
There are three methods of taxation prevalent in economies with their individual merits and demerits.
Pair 1 is incorrect. In Progressive Taxation, the tax liability increases with individual or entity income. This is
based on the principle of ‘ability to pay.’ This method is believed to discourage more earnings by the individual
to support low growth and development unintentionally. Being poor is rewarded while richness is punished.
The idea here is less tax on the people who earn less and higher tax on the people who earn more—classifying
income earners into different slabs. But this tax is pro-poor and taxes people according to their
affordability/sustainability. Indian income tax is a typical example of it.
Pair 2 is incorrect Regressive Taxation is just opposite to the progressive method having decreasing rates of
tax for increasing value or volume on which the tax is being imposed.
It is used to promote development of some specific sectors and promote more earnings. Unlike progressive
taxation, it does not tax people according to their affordability.
As for example, to promote the growth and development of small scale industries, India at one time had
regressive excise duty on their productions—with increasing slabs of volume they produced, the burden of tax
used to go on decreasing.
This method while appreciated for rewarding the higher producers or income-earners, is criticised for being
more taxing on the poor and low-producers.
Pair 3 is correct Proportional Taxation: They are neither progression nor regression from the point of view of
rate of taxes. Such taxes have fixed rates for every level of income or production, they are neutral from the
poor or rich point view or from the point of view of the levels of production. Usually, this is not used by the
economies as an independent method of taxation. Generally, this mode is used as a complementary method with
either progressive or regressive taxation. If not converted into proportional taxes, every progressive tax will go
on increasing and similarly every regressive tax will decrease to zero, becoming completely a futile tax methods.
That is why every tax, be it progressive or regressive in nature, must be converted into proportional taxes after
a certain level.
Source: Ramesh Singh 12th Edition-Chapter 17: Taxation
Q.36) Which one of the following is a purpose of ‘UDAY’, a scheme of the Government?
a) Providing technical and financial assistance to start-up entrepreneurs in the field of renewable sources of
energy
b) Providing electricity to every household in the countries by 2018
c) Replacing the coal-based power plants with natural gas, nuclear, solar, wind and tidal power plants over a
period of time
d) Providing for financial turnaround and revival of power distribution companies
Ans) d
The UDAY scheme was launched in 2015, under the Government of India for operational and financial turnaround
of the Power Distribution Companies (DISCOMs) owned by any state. UDAY scheme also aims in providing a
solution for revenue-side efficiency as well as cost-side efficiency.
Source) UPSC 2016
Q.37) Which of the following are the most possible impacts of higher ‘Tax Expenditure’ on Indian economy?
1. Promotion of some specific social sectors
2. More complex tax system
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3. Promotion of Crony capitalism
4. Excessive rise in Revenue Receipts
a) 1, 2 and 3 only
b) 2, 3 and 4 only
c) 1, 2, 3 and 4
d) 1, 3 and 4 only
Ans) a
Tax expenditure is also known as revenue forgone. It is the incentives given by the government to promote
certain sectors, in absence of which they may not have come up.
Tax Expenditure corresponds to relaxations given when tax burden becomes difficult for the sustainability of a
particular sector.
Option 1 is correct and Option 4 is incorrect. Tax expenditures are revenue losses attributable to tax provisions
that often result from the use of the tax system to promote social goals without incurring direct expenditures.
If government didn’t give any tax exemptions, this deducted amount would have belonged to government itself.
Though Tax Expenditure are not direct spending by government, the concept of tax expenditure is that,
government is giving back money to achieve certain social goals, like strengthening housing sector or
industrial sector. But in actual sense, Government is not collecting money to be re-distributed later, but gives
away tax exemptions. Thus, it does not result in excessive rise in revenue receipts.
Option 2 is correct High tax expenditure can make the tax system unduly complex and bring in distortions in
it. To realise full tax potential the governments, need to limit exemptions. grandfathering together with
broadening the tax base. As a result of simplification in the tax system Improvements in tax administration in
recent years have brought tax expenditure down.
Option 3 is correct. The tax exemptions and excess favors given to corporates may result in crony capitalism.
Businesses may develop close contacts with politicians and administration in order to get incentives (like lower
taxation) for the sector in which they operate.
Knowledge Base:
There has been a divergence between the official tax rate and effective tax rate in India—defined as the ratio of
total tax collected to the aggregate tax base. The divergence occurs mainly on account of tax exemptions.
Source: Ramesh Singh 12th Edition-Chapter 17: Taxation
Q.38) What do you understand by the term “grandfathering” clause in economics?

a) It is the process of consolidating all swap agreements between two entities into one single agreement.
b) It refers to the practice of providing credit to entities that do not have the capability to repay.
c) It is agreement in which two parties exchange the principal amount of a loan and the interest in one currency
for the principal and interest in another currency.
d) It is a special provision by which any entity can be exempted from a new law, rule or regulation.
Ans) d
Option a is incorrect. Bilateral netting is the process of consolidating all swap agreements between two parties
into one single, or master, agreement.
Option b is incorrect. Zombie lending refers to the practice of providing credit to entities that do not have the
capability to repay. One way of ever-greening loans is lending a new loan to a borrower on the verge of default,
near the repayment date of an existing loan, to facilitate its repayment. Zombies are typically identified using the
interest-coverage ratio, the ratio of a firm’s profit after tax to its total interest expense. Firms with an interest-
coverage ratio lower than one are unable to meet their interest obligations from their income.
Option c is incorrect. A currency swap is an agreement in which two parties exchange the principal amount of
a loan and the interest in one currency for the principal and interest in another currency. At the inception of
the swap, the equivalent principal amounts are exchanged at the spot rate.
Option d is correct. The 'Grandfathering' clause is a special provision by which any entity can be exempted from
a new law, rule or regulation.
This means the regulations would continue to apply in certain cases in the future. Usually, grandfathering is
extended only to a limited number of people.
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Such a provision is generally made in a bid to allow new regulations to be enforced without creating a chaos in
the existing system.
For example, if the capital gains accrued prior to January 31 on mutual funds/ equity will be grandfathered this
means that all the gains on mutual funds/ equity until
January 31 will be exempt from taxation. Only the gains made after that date will be taxed.
grandfathering is to exempt someone or something from a new law or regulation.
Source: https://www.moneycontrol.com/news/business/economy/budget-2018-what-does-grandfathering-
mean-2498333.html
https://economictimes.indiatimes.com/wealth/tax/understanding-the-new-ltcg-tax-on-
equity-and-equity-mutual-fund-units/what-is-grandfathering/slideshow/62860588.cms
https://www.deccanherald.com/business/union-budget/zombie-lending-forbearance-evergreening-
economic-survey-talks-about-lending-perils-in-india-944845.html
https://www.livemint.com/news/india/be-wary-of-zombie-lending-cea-11604016228978.html
Q.39) Consider the following actions which the Government can take:
1. Devaluing the domestic currency.
2. Reduction in the export subsidy.
3. Adopting suitable policies which attract greater FDI and more funds from FIIs.
Which of the above action/actions can help in reducing the current account deficit?
a) 1 and 2 only
b) 2 and 3 only
c) 3 only
d) 1 and 3 only
Ans) d
Statements 1 and 3 are correct. The main components of the capital account include foreign investment, loans
and banking capital. Foreign investments comprise Foreign Direct Investment (FDI) and Portfolio Investment
consisting of Foreign Institutional Investors (FIIs) investment among others.
Statement 2 is incorrect. Reducing export subsidy usually increases the current account deficit.
Source) UPSC 2011
Q.40) Which among the following are the taxes which are presently imposed/applicable on security market
instruments in India?
1. Dividend Distribution Tax
2. Capital gains tax
3. Wealth tax
4. Inheritance tax
5. Security Transaction Tax
a) 2 and 5 only
b) 3, 4 and 5 only
c) 1, 2, 3 and 4 only
d) 1, 2, 3, 4 and 5
Ans) a
Exp) Option a is correct
There are two major taxes that are levied on stock market investors: Capital Gains Tax, and Dividend
Distribution Tax.
Option 1 is incorrect: Dividend Distribution Tax: Dividend constitutes income for shareholders (recipient of
the dividend) of a company, which ideally should be subject to income tax. Earlier, individuals receiving dividends
were required to pay a DDT of 10% only if the quantum of the dividend was more than ₹ 10 lakh. After
Budget 2020, the Dividend Distribution Tax stands abolished.
Option 2 is correct: Capital Gains Tax Capital gains is the profit investors earn when they sell a security at a
price higher than the purchase price. For example, an investor can buy shares of a stock at ₹ 10 lakh and then sell
Page 23 of 28

them for ₹ 15 lakh after three years. In this case, the capital gain would be ₹ 5 lakh and the tax levied on this gain
is Capital Gains Tax. But for capital gains to be calculated an investor has to sell the shares in the market.
Capital gains are taxed as short-term capital gains and long-term capital gains, based on the holding period. If
the shares are held for less than 12 months, gains earned on these transactions are considered short-term gains
and subject to a tax of 15%.
Shares held for more than 12 months come under long-term capital gains. At present, long-term capital gains
from trading of listed shares is exempted from tax, but there are some riders.
Option 3 is incorrect. A wealth tax also may be called “capital tax” or “equity tax” and is imposed on the wealth
possessed by individuals. The tax usually applies to a person's net worth, which is assets minus liabilities. The
government abolished wealth tax as announced in the budget 2015.
Option 4 is incorrect. Inheritance tax is a type of tax which is levied on the income earned by an individual
from his/her ancestral property. In case of properties that are equally divided among all the siblings, the tax is
equally levied on the inheritors. In India, however, the concept of levying tax on inheritance does not exist now.
Option 5 is correct: Securities Transaction Tax is a direct tax levied on the purchase or sale of
each security listed on the recognized stock exchanges such as shares, equity mutual funds and derivatives. In
other words, investors have to pay it for each transaction and it is aimed at discouraging tax evasion by them.
Source: https://www.ndtv.com/business/what-taxes-are-levied-on-investments-made-in-stocks-2455440
https://www.investopedia.com/terms/w/wealth-
tax.asp#:~:text=A%20wealth%20tax%20also%20may,which%20is%20assets%20minus%20liabilities.&text=An%
20ad%20valorem%20tax%20on,examples%20of%20a%20wealth%20tax.
https://www.bankbazaar.com/tax/understanding-inheritance-tax-in-
india.html#:~:text=Inheritance%20tax%20is%20a%20type,equally%20levied%20on%20the%20inheritors.
https://www.financialexpress.com/budget/union-budget-2021-dividend-distribution-tax-nirmala-
sitharaman-share-buyback/2163813/
Q.41) With reference to ‘Bank of international settlement’, consider the following statement.
1. It was established after the World War II, to promote global monetary and financial stability through the
coordination of global central banks.
2. Bank of international settlement’ is owned by more than 100 central banks, accounting for about 75% of world
GDP.
3. Its head office is in Basel, Switzerland
a) 2 and 3 only
b) 1 and 2 only
c) 3 only
d) 1 and 3 only
Ans) c
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that
"fosters international monetary and financial cooperation and serves as a bank for central banks".
Statement 1 is incorrect: Bank of international settlement was established in 1930. The BIS was originally
intended to facilitate reparations imposed on Germany by the Treaty of Versailles after World War I, and to act
as the trustee for the German Government International Loan (Young Loan) that was floated in 1930.
Statement 2 is incorrect: The Bank of international settlement is owned by 62 central banks, representing
countries from around the world that together account for about 95% of world GDP. Statement 3 is correct: The
Bank of international settlement head office is in Basel; Switzerland and it has two representative offices: in
Hong Kong SAR and in Mexico City.
Knowledge Base: The Financial Stability Institute (FSI) was jointly created in 1998 by the Bank for International
Settlements and the Basel Committee on Banking Supervision. Its mandate is to assist supervisors around the
world in improving and strengthening their financial systems.
Source: https://www.bis.org/about/index.htm?m=1%7C1
Q.42) With reference to 'Quality Council of India (QCI)', consider the following statements:
1. QCI was set up jointly by the Government of India and the Indian Industry.
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2. Chairman of QCI is appointed by the Prime Minister on the recommendations of the industry to the
Government.
Which of the above statements is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) c
The Quality Council of India is an autonomous body set up by the Ministry of Commerce and Industry,
Government of India jointly with the Indian Industry.
It is registered as a non-profit society and is governed by a Council with equal representations of government,
industry and consumers. The Chairman of QCI is appointed by the Prime Minister on the recommendations of
the industry to the Government.
Source) UPSC 2017
Q.43) Which one of the following statements is correct, with reference to various kind of taxes levied in India?
a) Corporate tax is an indirect tax levied on a company’s income/capital by the government.
b) In 2019, Government lowered corporate tax to 25% for new manufacturing companies.
c) Indirect tax collections were more than direct tax collection in Financial Year 2021.
d) Direct tax collections as share of gross tax revenue have consistently increased in last 5 years.
Ans) c
Option a is incorrect. Corporate tax, also called company tax or corporation tax, is a direct tax levied on a
company’s income or capital by the government.
Option b is incorrect. In September 2019, the government lowered the base corporate tax rate to 22% from 30%,
and to 15% from 25% for new manufacturing companies. This kept collections of corporation tax low.
Option c is correct Direct tax collections for FY21 were at the lowest since 2017-18 registering a contraction of
13.1%, while indirect tax mop-up saw a growth of 12.6%. As a result, the proportion of indirect tax collections
was higher than direct taxes, indicating an uneven impact of the pandemic on income and consumption. The
primary reason for this was the windfall gain from excise duty collections and higher goods and services tax
collections.
Direct Tax collections for the Financial Year 2020-21 show that net collections are at Rs. 9.45 lakh crore. Indirect
tax collections (GST & non-GST) for the Financial Year 2020-21 show that net revenue collections are at Rs 10.71
lakh crore.
Option d is incorrect. In the financial year 2017-18 when the GST was implemented, the share of direct taxes was
almost more than half of the gross tax revenue receipt of the Union government. It was 52% of the gross tax
revenue. It gradually declined to 47% during the financial year 2020-21. During the financial year 2021-22, it is
estimated that the proportion of direct tax to the gross tax revenue would stand at 49%.
Knowledge Base: Indirect taxes are regressive in nature. It affects the poor adversely and hence results in a rise
in inequality. This effect could be neutralised if the increased revenue is used to increase the social sector
expenditure, especially on health and education. But, the budget allocated for these two critical sectors shows
that there has been a decline or minimal increase in the expenditure as a percentage of total Union budget
expenditure.
Under the GST regime, the country is relying more on the indirect tax, which is applicable to everyone who
makes a purchase or uses a service. During the last four years, indirect tax as a share of gross revenue receipt
has been increasing. In contrast, there is a decline in the proportion of corporate tax in gross tax revenue
receipt of the Union government. Too much reliance on revenues from the GST will increase inequality in the
future.
Source: https://thewire.in/economy/gst-india-indirected-taxes-inequality
https://www.bloombergquint.com/business/in-charts-how-tax-trends-changed-in-the-pandemic-year
https://pib.gov.in/PressReleasePage.aspx?PRID=1710598
https://pib.gov.in/PressReleasePage.aspx?PRID=1711352
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Q.44) Consider the following statements with reference to various types of taxes:
1. Tobin tax is a Financial Transactions Tax meant to encourage short-term currency speculation.
2. Ad valorem tax is a specific tax, where the tax amount remains constant, irrespective of the underlying asset's
value.
3. Pigouvian tax is a tax on a market transaction that creates a negative externality.
a) 1 and 2 only
b) 2 and 3 only
c) 1, 2 and 3
d) 3 only
Ans) d
Statement 1 is incorrect Tobin tax is a proposal of imposing small tax on all foreign exchange transactions with
the objective to discourage destabilising speculation and volatility in the foreign exchange markets. Proposed
by the Nobel prize-winning economist James Tobin (1918–2002). It is more formally known today as a Financial
Transactions Tax (FTT), or less formally a Robin Hood tax.
The Tobin tax is a duty proposed on spot currency trades to penalize short-term currency trading in order to
stabilize markets and disincentive speculation.
Statement 2 is incorrect. Ad valorem is a Latin phrase that translates to “according to the value.” The essential
characteristic of ad valorem tax is that it is proportional to the value of the underlying asset, unlike specific tax,
where the tax amount remains constant, irrespective of the underlying asset's value.
Ad valorem taxes are taxes determined by the assessed value of an item. One prime example is the Value Added
Tax (VAT), which varies in percentage depending on the assessed value of the goods sold. The most common ad
valorem taxes are property taxes levied on real estate.
Statement 3 is correct. A Pigouvian tax, named after 1920 British economist Arthur C. Pigou, it is a tax on a
market transaction that creates a negative externality, or an additional cost, borne by individuals not directly
involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes.
An externality is an activity that creates a negative effect on others in a society but not necessarily the person
who does that activity. For example, Pollution is an externality.
Ideally, a Pigouvian tax will cost the producer the amount equivalent to the harm it causes others.
Source: https://www.investopedia.com/terms/a/advaloremtax.asp
https://www.livemint.com/Opinion/ZGzzp9EygOTeAzBjc0Yc4N/Arun-Jaitleys-Pigouvian-trick.html
https://www.investopedia.com/terms/p/pigoviantax.asp
https://www.investopedia.com/terms/t/tobin-tax.asp
Q.45) With reference to inflation in India, which of the following statements is correct?
a) Controlling the inflation in India is the responsibility of the Government of India only
b) The Reserve Bank of India has no role in controlling the inflation
c) Decreased money circulation helps in controlling the inflation
d) Increased money circulation helps in controlling the inflation
Ans) c
RBI and government both play a role in controlling the inflation, often termed as ‘inflation targeting’ by the RBI.
When RBI follows a dear money policy it sets high interest rates so that credit is not easily available to the banks
and to the public. This decreases the real income and purchasing power of the people. Thus, controlling inflation
as there is less amount of money to buy existing amount of goods in the economy. Therefore, decreased money
circulation helps in controlling the inflation
Source) UPSC 2015
Q.46) Consider the following statements with reference to Public Private Partnership models in India:
1. In Build-Operate-Transfer (BOT-TOLL) model, the toll collection is the responsibility of the Government.
2. In Engineering-Procurement-Construction (EPC) model, the private entities are only exposed to the
construction-related risks.
3. In Hybrid Annuity Model (HAM) model, bid is given to the private player which demands the lowest annuity.
Page 26 of 28

Which of the above statements are correct?
a) 1 and 2 only
b) 1 and 3 only
c) 1, 2 and 3
d) 2 and 3 only
Ans) d
Public-Private Partnership Model: PPP is an arrangement between government and private sector for the
provision of public assets and/or public services. Public-private partnerships allow large-scale government
projects, such as roads, bridges, or hospitals, to be completed with private funding.
Statement 1 is incorrect: Build-Operate-Transfer (BOT-TOLL): Other than sharing the project cost (with the
Government) the private bidder has to build, maintain, operate the road and collect toll on the vehicular traffic.
The bid was given to the private company offering to share maximum toll revenue to the government. The
private party used to cover “all risks” related to—land acquisition, construction (damage), inflation, cost over-
runs caused by delays and commercial. The government was responsible for only regulatory clearances. Due to
inherent drawbacks, this model proved to be unsustainable for the private bidder —undue delay in land
acquisition due to litigation, cost over-runs and uncertainties in traffic movement (commercial risk)—made the
road projects economically unviable.
Statement 2 is correct: Engineering-Procurement-Construction (EPC) Model - In this model, project cost was
fully covered by the Government. The private developers are supposed to design, construct and hand over the
road projects to the government—maintenance, operation and toll collection being the government’s
responsibilities. Contract is given to the private player who offered to construct roads at the lowest cost/price
guaranteeing the desired quality levels. It means, the private player in this model was only exposed to the
construction-related risks which is a normal risk involved in any contract given by the government to the private
party. EPC Model could have been a temporary way out to develop road projects as it was fully funded by the
government—reform era had aimed to attract investment from the private players by evolving a ‘business model’
for the road sector—need was to develop a new PPP model.
Statement 3 is correct: Hybrid Annuity Model (HAM): is a mix of EPC and BOT-ANNUITY models. In this model
the project cost is shared by the government and the private player in ratio of 40:60, respectively. The private
player which demands lowest annuity (in bidding) gets the contract. The private player is responsible to
construct and hand over the roads to the government which will collect toll (if wishes)—maintenance remaining
the responsibility of the private player till the annuity period. Private player is paid a fixed sum of economic
compensation (called ‘annuity’, similar to the BOT-ANNUITY model of past) by the government for a fixed tenure
(normally 15 years, though it is flexible).
Source: Ramesh singh indian economy 12 edition. Pg 308
Q.47) Consider the following statements with reference to Power sector in India:
1. India’s aggregate technical and commercial losses have increased in last 5 years.
2. Populist tendencies and operational inefficiencies have adversely affected the financial health of State
DISCOMS.
3. The capacity utilisation of thermal power plants (also called Plant Load factor or PLF) has declined in last
decade.
a) 1 and 2 only
b) 2 and 3 only
c) 1, 2 and 3
d) 2 only
Ans) b
Some of the issues leading to the power deficit situation in the country include (i) shortage of fuel, (ii) high AT&C
losses, (iii) a differential tariff structure, and (iv) delays in tariff revisions.
Statement 1 is incorrect: the Aggregate Technical & Commercial (AT&C) losses at the all India level have reduced
from 23.70% in financial year (FY) 2015-16 to 21.83% in FY 2019-20, an 2% reduction in the five years. AT&C loss
Page 27 of 28

is calculated as the difference between the energy input in the distribution network and revenue collected for
the same
Statement 2 is correct: Financial Health of State Discoms: Years of populist tariff schemes, mounting losses
and operational inefficiencies have adversely affected the financial health of State Discoms which are currently
plagued with humongous out-standing debts. As of June 2017, NPAs in the electricity sector amounted to Rs 37,941
crore.
Statement 3 is correct: The capacity utilisation of thermal power plants (also called Plant Load factor or PLF)
has declined from 78% in 2009-10 to 61% in 2018-19. Low PLF implies that thermal plants have been lying idle,
which could be due to non-availability of fuel, surplus capacity (in certain regions of the country), low demand
for power, or demand being met through other sources. One of the key reasons behind poor capacity utilisation
of thermal power plants is the planned shift in the energy mix. With renewable energy seeing a push through
government policies, its tariff has decreased significantly. This poses a challenge to the existing thermal capacity,
which is witnessing subdued demand, and poor capacity utilisation as a consequence.
Knowledge Base: Challenges faced by the Power Sector:
1) Fuel Security Concerns: Thermal capacity addition is plagued by the growing fuel availability concerns faced
by the Industry. A significant natural gas based capacity of more than 20,000 MW is idle due to non-availability
of natural gas. Coal supply is restricted, leading to increased dependence on imported coal with the cascading
result of high power generation costs.
2) Aging Power Plants and Transmission network: Since most of the power plants and transmission lines have
been installed immediately after independence, they have become old and inefficient. This is the main reason
for low growth and transmission rate in electricity generation and transmission during the recent years. About
half of the power plants need to be upgraded or shut down as quickly as possible.
3) Under-procurement of Power by States: Increasing power generation costs due to limited fuel availability,
poor financial health of State Discoms, have contributed in suppressed demand projections by State Discoms.
4) Interstate Disputes: India is a federal democracy, and because rivers cross state boundaries, constructing
efficient and equitable mechanisms for allocating river flows has long been an important legal and
constitutional issues. Due to this there is not availability of water all the time to operate hydro plants. Inter-
state disputes also restrict the excess power exchange between the states. For example, Mahanadi water
dispute.
5) Policy Paralysis: The micro level policies governing the fuel cost pass-through, mega power policy,
competitive bidding guidelines are not in consonance with the macro framework like The Electricity Act 2003
and the National Electricity Policy.
6) Coordination Issues: Multiple ministries and agencies are currently involved in managing energy-related
issues, presenting challenges of coordination and optimal resource utilisation, hence undermining efforts to
increase energy security, as reported by the Kelkar Committee in 2013.
Source: https://ncert.nic.in/textbook/pdf/keec108.pdf
https://blog.forumias.com/answereddiscuss-the-problems-faced-by-the-power-sector-in-india-suggest-
some-measures-to-tackle-these-problems/
https://economictimes.indiatimes.com/blogs/et-editorials/toothless-reform-move-for-power-sector/
https://prsindia.org/policy/analytical-reports/overview-power-sector
Q.48) Which of the following best describes the term ‘import cover’, sometimes seen in the news?
a) It is the ratio of value of imports to the Gross Domestic Product of a country.
b) It is the total value of imports of a country in a year.
c) It is the ratio between the value of exports and that of imports between two countries.
d) It is the number of months of imports that could be paid for by a country’s international reserves.
Ans) d
Option d is correct. Countries hold foreign-exchange reserves like (foreign banknotes, bank deposits, bonds,
treasury bills and other government securities) partly to protect themselves against external crises. Foreign
currency reserves are key to countries' defenses against shocks to their economy.
Import Cover measures the number of months of imports that can be covered with foreign exchange reserves
available with the central bank of the country. Eight to ten months of import cover is essential for the stability of
a currency. It is an important indicator of the stability of a currency.
Source) UPSC 2016
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Q.49) Which of the following could be the possible effect of decreasing the tax rates?
1. In the short term it may boost demand in an economy.
2. In the long term it may slow economic growth by increasing deficits.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
Ans) c
By influencing incentives, taxes can affect both supply and demand factors. Reducing marginal tax rates on wages
and salaries, for example, can induce people to work more.
Statement 1 is correct. In the short term (the next one or two years), cutting taxes is an effective way to boost
demand in an economy. This is because consumers have more disposable income and businesses have more
money to hire employers and invest in their business. Tax cuts increase worker's take-home pay. Tax cuts also
increase firms’ after-tax cash flow. Businesses can use this extra cash flow to pay dividends and expand activity,
and it can make hiring and investing more attractive. Tax increases have the opposite effect.
Statement 2 is correct. In the long term, tax reductions can induce people to work more, bring more low-skilled
workers into the labor force, encourage saving, cause companies to invest domestically (rather than
internationally), and encourage the creation of new ideas through research. However, tax reductions in the long
term can also slow economic growth by increasing deficits. In addition, if tax cuts increase workers’ after-tax
income, they may choose to work less, and this can negatively impact supply.
Source: https://www.investopedia.com/terms/t/tax-to-gdp-
ratio.asp#:~:text=The%20tax%2Dto%2DGDP%20ratio%20is%20the%20ratio%20of%20the,time%20period%20
by%20the%20GDP.
Q.50) Which of the following statement is correct with reference to Research and development (R&D) in India?
a) India is among the top 10 countries in the Global Innovation Index 2021 released by WIPO.
b) The semiconductor industry is the top spending sector in R&D in India.
c) More than 50% of R&D expenditure is met by government sources.
d) India spends around 5% of its GDP in Research and Development, among the lowest in world.
Ans) c
Option a is incorrect - India has climbed 2 spots and has been ranked 46th by the World Intellectual Property
Organization in the Global Innovation Index 2021 rankings. India has been on a rising trajectory, over the past
several years in the Global Innovation Index (GII), from a rank of 81 in 2015 to 46 in 2021.
Option b is incorrect – Industry wise spending in R and D – Healthcare (780 USD), Automotive (130 USD),
Software and IT (117), Semiconductors (61 USD). Semiconductor is way behind the health care research which is
among the top industry spending in R and D.
Option c is correct - 63.2% of the total R&D expenditure was met from government sources and 36.8% came
from private sources during 2017-18. The percentage share of Private Sector in National R&D expenditure has
increased from 32.1% in 2010-11 to 36.8% in 2017-18. The percentage share of Central Government, State
Governments, Higher Education and Public Sector Industries in national R&D expenditure during 2017-18 was
45.4%, 6.4%. 6.8%, 4.6% respectively.
Option d is incorrect – No Country in the world spends more than 5% of GDP in Research and Development.
Israel and Korea spends around 4.5% of GDP but India spends only 0.7% of its GDP in Research and Development.
Knowledge Base: There were 56,747 women directly engaged in R&D activities which constitute 16.6% of the total
R&D manpower. India’s researchers per million population has increased to 255 in 2017 from 218 in 2015. 13,045
patents were sealed in the year 2017-18. Out of which 1,937 patents were sealed by Indians. Out of the total 32,304
Patents filed by foreigners in India during 2017-18, United States of America topped the list with a share of 56.3%.
Source: https://dst.gov.in/sites/default/files/Research%20and%20Deveopment%20Statistics%202019-
20_0.pdf
https://www.investindia.gov.in/team-india-blogs/research-and-development-india-overview

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Page 1 of 28

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.2) Consider the following pairs:

Which of the pairs given above is/are correctly matched?

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.6) Consider the following statements:

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.11) Consider the following pairs in the context of inflation:

1. Inflationary Real GDP exceeds Potential

Which of the pairs given above is/are correctly matched?

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.20) With reference to cess and surcharge, consider the following:

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.22) What do you understand by the term Cobweb phenomenon?

Q.23) With reference to disinvestment, consider the following statements:

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.24) Consider the following items:

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.31) With reference to ‘Compulsory Licensing’, consider the following statements:

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Which of the above pairs is/are correctly matched?

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

Q.38) What do you understand by the term “grandfathering” clause in economics?

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

SFG 2022 | LEVEL 1 | Test #14 – Solutions |

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