Economics - II : Previous Year Questions (2017)

PART – A

Q1. Define CRR.

Ans. The minimum percentage of a bank's Net Demand and Time Liabilities (NDTL) that it must maintain as cash reserves with the RBI.

An increase in CRR results in less cash with banks for lending. As a resultant, there is decrease in money supply in the economy. And vice-versa.

Q2. What do you mean by unorganised money market?

Ans. The unorganised money market refers to the part of the financial system that is not regulated by the central bank (like the RBI). It consists of indigenous bankers, money lenders, pawnbrokers, and even friends or relatives.

While often criticized for high interest rates, it plays a vital role in developing economies by providing credit where formal banks fear to tread.

Q3. What is deficit financing?

Ans. This refers to the practice where the government spends more than its revenue, often by printing new money or borrowing from the central bank. It is frequently used in developing countries to finance developmental activities that cannot be funded through taxes alone. If not managed carefully, excessive deficit financing can lead to high inflation.

Q4. Define indirect tax.

Ans. An indirect tax is levied on goods and services rather than on income or profit. The person who pays the tax to the government (e.g., a shopkeeper) can shift the burden to the final consumer by including the tax in the price of the commodity.

Examples include: Goods and Services Tax (GST), Customs Duty, and Excise Duty.

Q5. What is flexible exchange rate?

Ans. The rate is determined entirely by market forces without government intervention.

Q6. What do you mean by Globalisation?

Ans. Globalisation is the process of integrating a nation's economy with the world economy. It involves the conscious movement towards greater interaction with other countries through the removal of barriers to trade and investment.

Q7. Define poverty.

Ans. It is a situation wherein a person is not able to fulfil basic requirements or necessities of life. For e.g.: food, education, shelter, clothing, health, drinking water etc.

Q8. Write any two advantages of FDI.

Ans. Two advantages of FDI are as follows:

1. Economic Development Stimulation: FDI is a primary source of external capital that funds new factories and industrial centres, increasing the national income.
2. Employment Opportunities: By establishing new businesses and expanding existing ones, FDI directly creates jobs for the local population.

Q9. What is foreign aid?

Ans. Foreign aid, or external assistance, is considered a vital element for the advancement of developing countries. It involves the voluntary transfer of resources (financial, material, or technical) from a donor country or international organization to a recipient country to promote economic development and social welfare.

Q10. What do you mean by business cycles?

Ans. Business cycles represent the rhythmic fluctuations in the overall economic activity of a country. These cycles are characterized by alternating periods of growth and decline in key economic indicators such as Gross Domestic Product (GDP), employment, and industrial production.

PART – B

Q11. Write primary functions of commercial banks.

Ans. Commercial banks are profit-making financial institutions that act as intermediaries between savers and borrowers. Their core purpose is the mobilization of savings from the public and the disbursement of credit to various sectors of the economy, thereby acting as a pillar of the national financial system. In India, these banks are primarily regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949, and the RBI Act, 1934.

Primary Functions

1. Accepting Deposits: This is the most fundamental function where banks collect surplus funds from the public.
   • Savings Accounts: Aimed at encouraging small savings; they offer modest interest and limited withdrawal flexibility.
   • Current Accounts: Used mainly by businesses; these accounts offer high liquidity with no interest and sometimes incur service charges.
   • Fixed Deposits (FDs): Deposits for a specific period with higher interest rates.
   • Recurring Deposits (RDs): Regular monthly deposits for a fixed term.
2. Providing Loans and Advances: Banks lend a portion of their deposits to earn interest income, which is their primary source of profit.
   • Cash Credit: A short-term loan against a bond or other security.
   • Overdraft Facility: Allows customers to withdraw more than their account balance up to a specified limit.
   • Term Loans: Provided for specific periods (short, medium, or long-term) for personal or business use.
3. Credit Creation: This is a unique and vital function. When a bank grants a loan, it does not typically provide cash; instead, it opens a deposit account in the borrower's name. This "derivative deposit" increases the total money supply in the economy beyond the initial cash reserves.

Q12. Explain types of inflation.

Ans. 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. But it can also be more narrowly calculated for certain goods, such as food, or for services, such as a haircut, for example. Whatever the context, inflation represents how much more expensive the relevant set of goods and/or services has become over a certain period, most commonly a year.

According to Milton Friedman, “inflation is always and everywhere a monetary phenomenon and can be produced only by increase in the value of money than in output.”

Types of Inflation –

Broadly inflation can be divided into (on the basis of cause): -

1. Demand Pull Inflation – it is caused by an increase in the aggregate demand for goods and services whereas, the aggregate supply is not increasing. It is a situation where too much money is chasing too few goods.
2. Cost Push Inflation – any increase in the cost of production of industry, either because of increase in the price of raw materials or increase in wages of labourers, brings cost push inflation. This is generally caused by wage increase enforced by labour union. This type of inflation is characterised by lack of aggregate demand, unemployment, unused resources and excess capacity.

Inflation is also divided on the basis of speed, at rate which prices increase – 

1. Creeping Inflation (Mild or Low Inflation): A gradual increase in prices, usually less than 3% annually, which is considered manageable and may positively stimulate demand and investment.
2. Walking Inflation (Trotting Inflation): Prices increase at a moderate pace, generally around 3% to 10% per year. If unchecked, it can lead to economic overheating.
3. Galloping Inflation (Hopping or Running Inflation): This inflation occurs when prices increase rapidly at double or triple-digit annual rates, between 10% and 50%. It disrupts economic stability and can severely affect consumer purchasing power.
4. Hyperinflation: An extreme form of inflation where prices rise over 50% monthly. Hyperinflation can decimate a currency’s value.

Q13. Differentiate between public finance and private finance.

Ans. While both disciplines deal with the management of funds and the satisfaction of human wants, they operate under fundamentally different principles and constraints.

Q14. Write any four poverty alleviation programmes in India.

Ans. Four poverty alleviation programmes in India are as follows:

1. National Food for Work Programme –

• Launched on - November 14, 2004
• Aim/Objective - to intensify the generation of supplementary wage employment
• The programme is open to all rural poor who are in need of wage employment and desire to do manual unskilled work.
• It is implemented as a 100 per cent centrally sponsored scheme and the food grains are provided to States free of cost. However, the transportation cost, handling charges and taxes on food grains are the responsibility of the States.
• The collector is the nodal officer at the district level and has the overall responsibility of planning, implementation, coordination, monitoring and supervision.

2. Rural Housing – Indira Awaas Yojana (IAY) –

• Operationalised from – 1999 – 2002
• Aim/Objective - construction of houses for the poor, free of cost.
• The Ministry of Rural Development (MORD) provides equity support to the Housing and Urban Development Corporation (HUDCO) for this purpose.

3. Pradhan Mantri Gram Sadak Yojana (PMGSY) –

• Launched on – 25^th December 2000
• Aim/Objective -  to provide connectivity to eligible unconnected rural habitations as part of a poverty reduction strategy.
• It’s a 100% centrally sponsored scheme.
• Its primary goal is to facilitate overall socio-economic development by improving access to health, education, and markets, creating jobs, and enhancing economic opportunities for villagers.
• The scheme is implemented by State Governments and overseen by the National Rural Infrastructure Development Agency (NRIDA).

4. Antyodaya Anna Yojana (AAY) –

• Launched in – December 2000
• Aim/Objective – to provide food grains at a highly subsidized rate of Rs.2.00 per kg for wheat and Rs.3.00 per kg for rice to the poor families under the Targeted Public Distribution System (TPDS).
• Eligible households receive 35 kg of food grains monthly, including rice and wheat, at a low Central Issue Price (CIP) to ensure food security for the most vulnerable segments of the population. 
• The scheme is part of the Targeted Public Distribution System (TPDS) and targets specific groups such as households headed by widows, disabled persons, the elderly without support, landless labourers, and daily wage earners. 

PART – C

Q15. Describe various functions of Central bank.

Ans. The Reserve Bank of India (RBI) is the central bank of India and the apex regulatory authority for the nation's banking sector. Established on April 1, 1935, under the Reserve Bank of India Act, 1934, it serves as the "Banker to the Government" and the "Banker’s Bank". The RBI’s primary objective is to maintain monetary stability, manage the currency system, and ensure the overall financial health of the economy while supporting economic growth.

Functions of the RBI

The functions of the RBI can be broadly categorized into traditional, supervisory, and developmental roles.

A. Monetary Authority

The RBI formulates and implements India's monetary policy with the primary goal of maintaining price stability (controlling inflation). While controlling inflation, the RBI ensures that there is enough credit available for productive sectors to foster economic development.

B. Issuer of Currency

The RBI has the sole authority to issue banknotes in India, except for the one-rupee note and coins (which are issued by the Ministry of Finance). It is responsible for the design, production, and distribution of currency, as well as the withdrawal of unfit notes from circulation to ensure the integrity of the currency system.

C. Banker to the Government

It maintains and manages the accounts of both the Central and State Governments. The RBI acts as a financial advisor to the government on matters of economic policy, public debt management, and international finance. It provides short-term credit to the government through "Ways and Means Advances" to bridge temporary mismatches in receipts and payments.

D. Banker’s Bank and Lender of Last Resort

Every scheduled bank is required to maintain a portion of its deposits (CRR) with the RBI. The RBI acts as a clearinghouse for banks, facilitating the settlement of inter-bank transactions. In times of extreme liquidity crisis or financial stress, when a bank cannot raise funds from other sources, the RBI provides emergency financial assistance to prevent systemic failure.

E. Custodian of Foreign Exchange Reserves

The RBI manages India's foreign exchange reserves (Forex) to maintain the external value of the Indian Rupee. It buys or sells foreign currency in the market to stabilize the exchange rate against volatility.

F. Supervisory and Regulatory Role

It issues licenses for setting up new banks, opening branches, and conducts periodic inspections of bank operations to ensure compliance with the Banking Regulation Act, 1949. It sets standards for capital adequacy and management to protect the interests of depositors.

Q16. What is National Income? Explain various problems in estimation of National Income.

Ans. National income means the value of goods and services produced by a country during a financial year. Thus, it is the net result of all economic activities of any country during a period of one year and is valued in terms of money.

The estimation of National Income is a complex statistical and conceptual exercise, particularly in developing economies like India. These difficulties are broadly classified into two categories: Conceptual (Theoretical) Difficulties and Practical (Statistical) Difficulties.

I. Conceptual (Theoretical) Difficulties

These pertain to the logical and definitional challenges in deciding what should be included in the national income and how it should be valued.

1. Non-Market (Non-Monetized) Activities

Economic activities occurring outside the formal market, such as household production (housewives' services), volunteer work, and informal services, are often excluded. While these activities significantly contribute to societal well-being, they are challenging to quantify and include in traditional measures. In countries like India, a vast amount of production (e.g., kitchen gardening, child-rearing) never enters the market, leading to a systematic underestimation of the true economic output.

2. The Problem of Double Counting

Double counting occurs when the value of intermediate goods (goods used to produce other goods) is included alongside the final product's value. To avoid overestimation, only the value-added at each stage of production must be counted. For example, if the value of wheat is counted, and then the value of flour made from that wheat is also counted, the national income will be artificially inflated.

3. Price Level Fluctuations

National income is often measured at current market prices. However, prices fluctuate over time due to inflation. If prices rise without an increase in actual production, the "Nominal National Income" increases while "Real National Income" remains stagnant. Measuring real growth requires adjusting current prices using a price index (deflator).

4. Rapid Technological Change & New Economies

Modern advancements, such as the digital economy and the sharing economy (e.g., Uber, Airbnb), often do not fit neatly into traditional national income frameworks. Capturing the economic impact of these rapidly evolving industries remains a conceptual challenge for statisticians.

II. Practical (Statistical) Difficulties

These involve the actual hurdles faced during data collection and the reliability of the figures obtained.

1. Incomplete Coverage & The Informal Sector

National income relies on data from surveys, tax records, and official statistics. Ensuring complete coverage is difficult, especially in the informal sector, which comprises unregistered businesses and informal employment. These activities often go unrecorded and do not contribute to official figures, leading to a distorted picture of the economy.

2. Quality and Reliability of Data

Data collection processes are frequently subject to errors, inconsistencies, and sampling biases. In many regions, flawed or outdated data leads to inaccurate estimations. This is compounded in developing nations by a lack of trained enumerators and low levels of literacy among respondents who cannot maintain accurate accounts of their income or expenditure.

3. International Transactions & Complexities

National income must account for exports, imports, and income from foreign investments. These are subject to complexities such as exchange rate fluctuations, transfer pricing (where MNCs manipulate prices to minimize tax), and intricate corporate structures, making accurate measurement difficult.

4. Lack of Occupational Specialization

In agrarian economies like India, many individuals do not have a single, specialized occupation. A farmer might also work as a seasonal labourer or a small-scale trader. This lack of clear occupational boundaries makes it difficult to categorize and estimate income based on the "Productive Method" or "Income Method."

III. Impact of Estimation Errors on Policy

• Distorted Fiscal Policy: Inaccurate national income figures can lead to flawed government policies regarding taxation and public expenditure.
• Misleading Growth Indicators: If the informal sector's contribution is ignored, the growth rate may appear lower than it actually is, affecting international competitiveness and investor confidence.
• Ineffective Deficit Financing: The government uses national income data to plan deficit financing (spending more than revenue) for infrastructure and human capital development. Faulty data can lead to excessive money supply, triggering high or "galloping" inflation.

Q17. Explain advantages and disadvantages of Globalisation.

Ans. Globalization is the process of integrating a nation's economy with the world economy. It involves the conscious movement towards greater interaction with other countries through the removal of barriers to trade and investment.

Core Components

1. Free Flow of Goods and Services: Reducing or removing tariffs and non-tariff barriers to allow products to move across borders easily.
2. Capital Flow: Encouraging Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) to bring in external capital.
3. Technology Transfer: The exchange of advanced technology, knowledge, and skills between nations.
4. Movement of Labour: Allowing the migration of a skilled and diverse workforce across national boundaries.

Globalisation is the process of integrating a nation's economy with the world economy. It involves the conscious movement towards greater interaction with other countries through the removal of barriers to trade and investment.

Advantages for a Developing Economy (like India)

Globalisation offers several transformative benefits that can accelerate the development of an emerging economy.

A. Economic Growth and Efficiency

India’s average annual GDP growth rate surged to 6–7% post-1991, at times reaching over 8–9%. Resources are allocated more efficiently as industries specialize in areas where they have a comparative advantage. Increased competition forces domestic industries to improve their productivity and adopt better management practices.

B. Foreign Investment and Infrastructure

With Globalisation comes capital influx. FDI provides the long-term capital necessary for setting up new industries and businesses in previously reserved sectors. It helps in resource transfer as foreign investors bring advanced technologies, managerial expertise, and global best practices. Globalisation helps in building forex reserves; India’s foreign exchange reserves grew from less than $1 billion in 1991 to over $600 billion by 2022.

C. Benefits to Consumers and Sectors

Global brands (e.g., Samsung, Amazon, Hyundai) have made a wide variety of quality goods available at competitive prices. India emerged as a global hub for IT, BPO, and software development, leveraging its skilled, English-speaking workforce. Globalisation opened international markets for Indian auto parts, pharmaceuticals, and textiles.

Disadvantages and Challenges for a Developing Economy

Despite its benefits, globalisation presents significant risks that can impact the socio-economic fabric of a developing nation.

A. Economic Disparities

The benefits often accrue to the urban, educated middle class, leaving rural areas and the poor marginalized. Village and small-scale industries often cannot compete with the massive resources and lower production costs of Multinational Corporations (MNCs).

B. Labour and Employment Issues

While GDP has grown, the creation of formal jobs has been slow, leading to a rise in informal and contractual employment. Rapid automation and technological shifts can lead to job losses in traditional sectors.

C. External and Environmental Risks

Developing economies become susceptible to global financial shocks, such as the 2008 recession. Intense industrial activity and pressure for high productivity can lead to deforestation, resource depletion, and increased pollution. Excessive dependence on foreign capital can potentially undermine a host country's economic independence and policy-making sovereignty.

Conclusion

Globalisation has fundamentally transformed India from a tightly controlled, socialist-oriented system into a vibrant, market-driven global player. While it has brought unparalleled economic growth, technological advancement, and a rise in global status, the challenges of regional inequality and environmental sustainability remain critical areas for future policy intervention.

Q18. What are land reforms? Explain various types of land reforms in India.

Ans. Land reforms refer to the institutional changes made in the ownership, tenure, and distribution of land. These reforms are designed to achieve two primary goals: social justice (by redistributing land to the landless) and economic efficiency (by increasing agricultural productivity).

Common measures include the abolition of intermediaries (like Zamindars), tenancy reforms, fixing land ceilings, and the consolidation of land holdings.

Land reforms in India refer to the institutional changes and policies implemented post-independence to address inequities in land distribution, ownership patterns, and the overall agrarian structure. The primary objectives were to promote social justice by eliminating exploitation, reduce inequality in rural wealth, and enhance agricultural productivity by giving the "tiller" a stake in the land.

1. Abolition of the Intermediary (Zamindari) System

Following independence, the Zamindari Abolition Act of 1950 was one of the first major steps taken. The goal was to dismantle the feudal landownership system where intermediaries (Zamindars) collected high rents from peasants while providing no investment in the land. Ultimately, ownership rights were transferred to the actual cultivators and tenants. This helped break the age-old grip of landlords, though in some regions, Zamindars used loopholes to retain vast tracts of "personally cultivated" land.

2. Tenancy Reforms

To protect those who did not own the land they worked on, various states introduced tenancy reforms for the benefit of the tenants. These reforms ensured tenants were not charged exploitative rates. They were assured with security of tenure, providing legal assurance that tenants could not be evicted at the whim of the landlord, provided they paid their rent. Tenants were given the benefit of the right of ownership, the opportunity to eventually purchase the land they cultivated.

3. Land Ceiling Laws

These laws were designed to address the concentration of land in the hands of a few wealthy individuals. They established a legal limit on the maximum amount of land an individual or family could own; surplus land above this ceiling was acquired by the state and redistributed to landless farmers or those with very small holdings. The effectiveness of these laws was often hampered by "Benami" transactions (land held in the names of others) to bypass legal limits.

4. Land Consolidation (Chakbandi)

Indian farms are often fragmented into small, scattered plots, making modern farming difficult. Consolidation involves rearranging these scattered plots into a single, larger, and more viable land unit. This improves efficiency, allows for better irrigation management, and makes the use of machinery (mechanization) more feasible.

5. Rights for Forest-Dwelling Communities

• Joint Forest Management (JFM): A collaborative model where local communities and forest departments work together to conserve forest resources. It empowers tribal populations by granting them rights over forest produce.
• Forest Rights Act (2006): This landmark act recognizes the legal rights of forest-dwelling communities over the land they have occupied for generations. It includes both individual and community rights to manage and conserve forest resources and access non-timber forest products.

6. Modern Digital Land Records

To modernize administration, the government initiated the digitization of land records. It reduces land disputes, prevents fraudulent transactions, and ensures a clear chain of ownership; simplifying the process of buying, selling, or using land as collateral for bank loans.

Commercialization of Agriculture

Commercialization is the transition from subsistence farming (growing food for one’s own family) to market-oriented production (producing crops primarily for sale). This shift is characterized by the use of modern inputs and the integration of the farm into wider economic value chains.

Key Drivers and Aspects

• Modern Inputs: Farmers adopt high-yielding variety (HYV) seeds, chemical fertilizers, pesticides, and advanced irrigation techniques.
• Specialization: Instead of growing a variety of crops for home use, farmers specialize in cash crops (like cotton, sugarcane, or oilseeds) that have high market demand and profitability.
• Mechanization: The use of tractors, harvesters, and modern farm management tools to increase efficiency and output.

Implications and Impacts

Challenges for Small Farmers

While commercialization offers growth, it also brings significant risks:

1. Market Volatility: Farmers become vulnerable to sudden fluctuations in global or local market prices.
2. Access to Credit: Modern farming requires significant capital. Small-scale farmers often struggle to get loans from formal banks, making it hard to compete with larger commercial farms.
3. Technical Knowledge: Successful commercialization requires understanding complex market dynamics and technical farming practices that many smallholders may lack.

Conclusion

The interplay between Land Reforms and Commercialization is vital. While land reforms aimed to provide equity and security to the farmer, commercialization provided the tools for those farmers to move beyond mere survival and toward economic prosperity. However, for this to be sustainable, modern policies must focus on sustainable farming practices and inclusive market access for small and marginal farmers.