Indian Economy- PYQs 2022
- ✅ — Statement is definitely true
- 🟢 — Statement is likely true
- 🔴 — Statement is likely false
- ❌ — Statement is definitely false
- 💡 — View hint for guidance
- ⚪ / ⚫ — Mark statement(s) for conflict comparison
Q. With reference to the Indian economy, consider the following statements:
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1)
An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
Hint: NEER is the weighted average of exchange rates against trading partners without adjusting for inflation. Hence, NEER reflects the rupee’s strength. A higher NEER means the rupee buys more foreign currency.
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2)
An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
Hint: REER adjusts NEER for inflation differences. When REER rises, rupee appreciates in real terms—Indian goods become costlier abroad, reducing competitiveness.
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3)
An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Hint: If Indian inflation rises faster than others, REER (inflation-adjusted) will rise more than NEER—creating divergence.
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Statement 1 is correct — a higher NEER means the rupee appreciates. Statement 2 is incorrect — a higher REER reflects reduced competitiveness as Indian goods become costlier abroad. Statement 3 is correct — inflation differentials widen the gap between NEER and REER.
Q. With reference to the Indian economy, consider the following statements:
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1)
If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
Hint: RBI buying government securities → adds liquidity to the system.
High inflation → system already has too much money. |
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2)
If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
Hint: Rupee depreciates → RBI wants to support the rupee.
Selling dollars → more dollars in the market → increases rupee demand. |
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3)
If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Hint: Foreign rates fall → dollars become cheaper.
RBI buying dollars → maintains forex reserves and exchange rate stability. |
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Explanation:
Statement 1 – Incorrect: RBI avoids adding liquidity when inflation is high, so it would not buy government securities in such a situation.
Statement 2 – Correct: Selling dollars supports the rupee when it is depreciating.
Statement 3 – Correct: Falling foreign interest rates make dollars cheaper; RBI may buy dollars to maintain forex reserves and exchange rate stability.
Q. “Rapid Financing Instrument” and “Rapid Credit Facility” are related to the provisions of lending by which of the following:
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(a)
Asian Development Bank
Hint: ADB mainly provides long-term development and infrastructure loans to its member countries in Asia-Pacific.
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(b)
International Monetary Fund
Hint: The IMF’s core function is to assist members in resolving balance of payments problems mostly through rapid, short-term financing instruments.
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(c)
United Nations Environment Programme Finance Initiative
Hint: This is a voluntary partnership for promoting sustainable finance.
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(d)
World Bank
Hint: Focuses on poverty reduction and project-based lending for development.
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Explanation: The Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF) are IMF mechanisms for quick-disbursal financial aid to countries facing sudden balance of payments pressures. Other listed bodies provide development or environmental financing, not crisis lending.
Q. With reference to the “G20 Common Framework”, consider the following statements:
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1)
It is an initiative endorsed by the G20 together with the Paris Club.
Hint: The Paris Club is a group of major creditor countries that work together to restructure debt for countries in financial distress.
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2)
It is an initiative to support Low Income Countries with unsustainable debt.
Hint: If Statement 1 is correct, this Statement should also be correct given the purpose of Paris Club.
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Why? The G20 Common Framework is a coordinated initiative of the G20 and the Paris Club designed to assist low-income countries in restructuring unsustainable debt. It ensures fair burden-sharing among all creditors and supports long-term debt sustainability.
Q. With reference to the Indian economy, what are the advantages of “Inflation-Indexed Bonds (IIBs)”?
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1)
Government can reduce the coupon rates on its borrowing by way of IIBs.
Hint: For regular bonds, the government must offer higher coupon rates to make them attractive and to compensate for inflation. IIBs are already protected against inflation.
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2)
IIBs provide protection to the investors from uncertainty regarding inflation.
Hint: As the name suggests, the principal is adjusted according to inflation.
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3)
The interest received as well as capital gains on IIBs are not taxable.
Hint: Inflation indexation itself is already an incentive. Additional tax exemption would significantly reduce government revenue.
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Why? Inflation-Indexed Bonds (IIBs) help investors hedge against inflation and enable the government to borrow at lower nominal coupon rates. However, the interest and capital gains on IIBs are taxable in India, making Statement 3 incorrect.
Q. With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct?
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1)
They can sell their own goods in addition to offering their platforms as marketplaces.
Hint: Consider India’s FDI rules for marketplace vs inventory models; are foreign e-commerce firms allowed to operate both simultaneously?
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2)
The degree to which they can own big sellers on their platforms is limited.
Hint: Recall restrictions to prevent conflicts of interest and unfair competition.
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Why? Foreign-owned e-commerce firms in India cannot sell their own goods directly under the inventory model. They can only act as marketplaces connecting buyers and sellers. Additionally, they are restricted from owning significant stakes in sellers to prevent preferential treatment and ensure fair competition.
Q. Which of the following activities constitute the real sector in the economy?
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1)
Farmers harvesting their crops
Hint: Real sector refers to production of goods and services.
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2)
Textile mills converting raw cotton into fabrics
Hint: Manufacturing adds value to raw materials.
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3)
A commercial bank lending money to a trading company
Hint: Lending is a financial activity, not production of goods or services.
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4)
A corporate body issuing Rupee Denominated Bonds overseas
Hint: Issuing bonds is a financial transaction.
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Explanation: The real sector includes activities that produce goods and services — such as farming and manufacturing. Financial activities like lending or issuing bonds belong to the financial sector, not the real sector.
Q. Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India?
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a)
An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
Hint: Indian company earning profits abroad and paying foreign taxes. Just like foreign company earning profit in India pays taxes in India.
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b)
A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
Hint: Direct investment in India is taxed under standard provisions.
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c)
An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
Hint: This is a normal foreign investment gain.
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d)
A foreign company transfers shares and such shares derive their substantial value from assets located in India
Hint: The value of foreign shares indirectly comes from Indian assets.
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Explanation: Indirect transfers occur when foreign shares deriving substantial value from Indian assets are sold abroad, making the gains taxable in India. Other scenarios are either direct investments or normal foreign gains.
Q. With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct?
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1)
Acquiring new technology is capital expenditure.
Hint: Capital expenditure relates to spending on assets that provide long-term benefits.
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2)
Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Hint: Raising funds through debt or equity is not expenditure; these are receipts recorded under liabilities or owners’ funds.
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Why? Acquiring new technology is capital expenditure because it provides long-term benefits. Debt and equity financing are receipts, not expenditures, and are recorded under liabilities and owners’ funds respectively.
Q. With reference to the Indian economy, consider the following statements:
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1)
A share of the household financial savings goes towards government borrowings.
Hint: Think about how government borrows domestically—do households indirectly fund it through banks, insurance, or mutual funds?
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2)
Dated securities issued at market-related rates in auctions form a large component of internal debt.
Hint: Key instruments of domestic borrowing include Treasury Bills, Dated Government Securities (G-Secs), and State Development Loans (SDLs)
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Why? Household savings often flow into government borrowings via banks, insurance, and mutual funds. Dated securities issued at auction constitute the major part of India’s internal debt.
Q. With reference to Ayushman Bharat Digital Mission, consider the following statements:
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1)
Private and public hospitals must adopt it.
Hint: Such digital initiatives are usually voluntary; even Aadhaar is not mandatory in India.
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2)
As it aims to achieve universal health coverage, every citizen of India should be part of it ultimately.
Hint: Participation is consent-based and is not mandatory for citizens.
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3)
It has seamless portability across the country.
Hint: The mission provides a unique health ID for citizens.
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Why? Adoption of the Ayushman Bharat Digital Mission is voluntary for all hospitals, and citizen participation is consent-based. However, the system allows seamless portability of health records across India via the health ID.
Q. Consider the following statements:
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1)
Tight monetary policy of US Federal Reserve could lead to capital flight.
Hint: Higher US interest rates attract global investors; think about how this affects capital flows from emerging markets like India.
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2)
Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
Hint: If foreign investors withdraw funds, they may demand higher returns, raising borrowing costs for Indian firms.
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3)
Devaluation of domestic currency decreases the currency risk associated with ECBs.
Hint: A weaker domestic currency makes repayment of foreign currency loans more expensive, increasing currency risk rather than reducing it.
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Why? Tight US monetary policy can trigger capital flight from India, increasing ECB interest costs. Devaluation of the domestic currency actually increases currency risk for ECBs, as repayment in foreign currency becomes costlier.
Q. Consider the following statements:
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1)
In India, credit rating agencies are regulated by Reserve Bank of India.
Hint: Credit rating agencies assess the creditworthiness of companies, debt instruments, and financial obligations. Since they deal with securities and investor protection, should RBI or SEBI regulate them?
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2)
The rating agency popularly known as ICRA is a public limited company.
Hint: ICRA is a listed company.
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3)
Brickwork Ratings is an Indian credit rating agency.
Hint: Major domestic credit rating agencies include CRISIL, ICRA, CARE, and Brickwork.
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Why? Credit rating agencies evaluate credit risk for investors, so SEBI regulates them, not RBI. ICRA is a public limited company, and Brickwork Ratings is an Indian credit rating agency.
Q. With reference to the ‘Banks Board Bureau (BBB)’, which of the following statements are correct?
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1)
The Governor of RBI is the Chairman of BBB.
Hint: BBB was created as an autonomous body to improve governance and appointments in PSBs.
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2)
BBB recommends for the selection of heads for Public Sector Banks.
Hint: One of the primary functions of BBB is to ensure merit-based selection of top management in PSBs, improving professionalism and accountability.
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3)
BBB helps the Public Sector Banks in developing strategies and capital raising plans.
Hint: BBB also provides advisory support to PSBs on strategic matters.
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Why? BBB is an autonomous body with its own full-time chairman, not headed by the RBI Governor. It recommends appointments of PSB heads and advises banks on strategy, restructuring, and capital planning to improve governance and efficiency.
Q. Convertible Bonds, consider the following statements:
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1)
As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
Hint: The conversion option is a benefit for investors, allowing the issuer to offer a lower coupon compared to regular bonds.
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2)
The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Hint: While not formally linked to inflation, equity conversion can provide indirect protection if the company’s growth outpaces inflation, preserving the real value of returns.
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Why? Convertible bonds offer lower interest because of the equity conversion option. The conversion can also indirectly preserve real returns if the company’s equity appreciates over time.
Q. In India, which one of the following is responsible for maintaining price stability by controlling inflation?
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a)
Department of Consumer Affairs
Hint: This department deals with consumer protection, food supply, and prices of essential commodities.
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b)
Expenditure Management Commission
Hint: Focuses on evaluating and managing government spending and fiscal prudence.
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c)
Financial Stability and Development Council
Hint: Monitors financial stability and systemic risks in the financial sector.
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d)
Reserve Bank of India
Hint: The central bank regulates money supply, credit, and interest rates, making it the key authority responsible for price stability and inflation control.
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Why? RBI maintains price stability and controls inflation through monetary policy tools like repo rates, reverse repo, and cash reserve ratios.
Q. With reference to Non-Fungible Tokens (NFTs), consider the following statements:
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1)
They enable the digital representation of physical assets.
Hint: NFTs can represent both digital art and real-world assets like real estate or collectibles in a verifiable digital form.
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2)
They are unique cryptographic tokens that exist on a blockchain.
Hint: NFTs are distinct and non-interchangeable tokens stored securely on a blockchain.
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3)
They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.
Hint: Unlike cryptocurrencies, NFTs are non-fungible, meaning each token is unique and cannot be exchanged one-to-one with another token.
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Why? NFTs uniquely represent assets on a blockchain, including physical or digital items. They are not interchangeable like cryptocurrencies, so they are not used as a medium of exchange in commercial transactions.
Q. In India, which one of the following compiles information on industrial disputes, closures, retrenchments, and lay-offs in factories employing workers?
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a)
Central Statistics Office
Hint: Primarily responsible for macroeconomic statistics like GDP, inflation, and national accounts.
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b)
Department for Promotion of Industry and Internal Trade
Hint: Focuses on industrial policy, investment promotion, and ease of doing business.
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c)
Labour Bureau
Hint: Maintains comprehensive data on employment, wages, industrial disputes, lay-offs, and retrenchments across factories in India.
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d)
National Technical Manpower Information System
Hint: Tracks technical manpower and skill availability.
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Why? The Labour Bureau collects and publishes detailed data on industrial disputes, closures, retrenchments, and lay-offs in factories employing workers, providing critical information for labour policy and planning.