Indian Economy Test 1

Solution: c)

The Monetary Policy Committee (MPC) is a committee of the Central Bank in India (Reserve Bank of India), headed by its Governor, which is entrusted with the task of fixing the benchmark policy interest rate (repo rate) to contain inflation within the specified target level. Monetary Policy Committee is defined in Section 2(iii)(cci) of the Reserve Bank of India Act, 1934 and is constituted under Sub-section (1) of Section 45ZB of the same Act. The MPC replaces the current system where the RBI governor, with the aid and advice of his internal team and a technical advisory committee, has complete control over monetary policy decisions. A Committee-based approach will add lot of value and transparency to monetary policy decisions.

Solution: d)

Mistry, based in the UK, was appointed by former finance minister P Chidambaram in 2005 to work on a blueprint for a global financial centre in Mumbai which could compete with London, Tokyo and Singapore. The reason why Frankfurt, Paris and Tokyo are not as successful IFCs as London is, he said, because they are not as global.

Solution: b)

The Financial Stability and Development Council (FSDC) has been constituted vide GOI notification dated 30th December, 2010. The Council is chaired by the Union Finance Minister and its members are Governor, Reserve Bank of India; Finance Secretary and/or Secretary, Department of Economic Affairs; Secretary, Department of Financial Services; Chief Economic Adviser, Ministry of Finance; Chairman, Securities and Exchange Board of India; Chairman, Insurance Regulatory and Development Authority and Chairman, Pension Fund Regulatory and Development Authority.

The Council deals, inter-alia, with issues relating to financial stability, financial sector development, inter–regulatory coordination, financial literacy, financial inclusion and macro prudential supervision of the economy including the functioning of large financial conglomerates. No funds are separately allocated to the Council for undertaking its activities.

1. Solution: c)

   The APY will be focussed on all citizens in the unorganised sector, who join the National Pension System (NPS) administered by the Pension Fund Regulatory and Development Authority (PFRDA) and who are not members of any statutory social security scheme. Under the APY, the subscribers would receive the fixed pension of    Rs. 1000 per month, Rs. 2000 per month, Rs. 3000 per month, Rs. 4000 per month, Rs. 5000 per month, at the age of 60 years, depending on their contributions, which itself would vary on the age of joining the APY. The minimum age of joining APY is 18 years and maximum age is 40 years.

Solution: c)

Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational companies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.[1]The project headed by the OECD[2] was initiated by the G20 in 2012. BEPS concerns strategies which aim to move profits to where they are taxed at lower rates and expenses to where they are relieved at higher rates. The result is a tendency to associate more profit with legal constructs and intangible rights and obligations, and reduce the share of profits associated with substantive operations involving the interaction of people with one another. “While these corporate tax planning strategies may be technically legal and rely on carefully planned interactions of a variety of tax rules and principles, the overall effect of this type of tax planning is to erode the corporate tax base of many countries in a manner that is not intended by domestic policy.

Solution: d)

https://www.investopedia.com/terms/b/budget-deficit.asp

Countries can counter budget deficits by promoting economic growth through fiscal policies such as reducing government spending and increasing taxes. For example, one strategy is to reduce regulations and lower corporate taxes to improve business confidence and increase treasury inflows from taxes. A nation can print additional currency to cover payments on debts owed by issuing securities including Treasury bills and bonds. While this provides a mechanism to make payments, it does carry the risk of devaluing the nation’s currency.

Solution: c)

Definition: Capital Budget consists of capital receipts and payments. It also incorporates transactions in the Public Account.

Description: Capital receipts are loans raised by the government from the public (which are called market loans), borrowings by the government from the Reserve Bank and other parties through sale of treasury bills, loans received from foreign bodies and governments, and recoveries of loans granted by the Central government to state and Union Territory governments and other parties.

Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, and equipment, as also investments in shares, loans and advances granted by the Central government to state and Union Territory governments, government companies, corporations and other parties.

Solution: b)

A country can reduce its current account deficit by increasing the value of its exports relative to the value of imports. It can place restrictions on imports, such as tariffs or quotas, or it can emphasize policies that promote exports, such as import substitution, industrialization or policies that improve domestic companies’ global competitiveness. The country can also use monetary policy to improve the domestic currency’s valuation relative to other currencies through devaluation, which reduces the cost of a country’s exports.

While a current account deficit can imply that a country is spending “beyond its means,” having a current account deficit is not inherently disadvantageous. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, however, it may become insolvent.

Read more: Current Account Deficit https://www.investopedia.com/terms/c/currentaccountdeficit.asp#ixzz59bl9x0EX

Solution: c)

http://www.financialexpress.com/budget/how-union-budget-2018-will-be-different-from-2017/1014468/

http://www.business-standard.com/article/economy-policy/govt-to-scrap-distinction-between-plan-and-non-plan-expenditures-in-annual-budget-116092100741_1.html

https://www.moneycontrol.com/news/business/economy/ending-plannon-plan-expenditure-what-does-it-mean-963248.html

Solution: a)

The Union Budget of India, also referred to as the Annual Financial Statement in the Article 112 of the Constitution of India,[1] is the annual budget of the Republic of India.

112.         Annual financial statement.

113.         Procedure in Parliament with respect to estimates.

114.         Appropriation Bills.

115.         Supplementary, additional or excess grants.

116.         Votes on account, votes of credit and exceptional grants.

117.         Special provisions as to financial Bills.

Solution: c)

NCPI was in news due to Unified Payments Interface (UPI).

National Payments Corporation of India (NPCI), an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.

Considering the utility nature of the objects of NPCI, it has been incorporated as a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013), with an intention to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems. The Company is focused on bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.

The ten core promoter banks are State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and HSBC. In 2016 the shareholding was broad-based to 56 member banks to include more banks representing all sectors.

Solution: d)

In order to implement GST, Constitutional (122nd Amendment) Bill (CAB for short) was introduced in the Parliament and passed by Rajya Sabha on 03rd August, 2016 and Lok Sabha on 08th August, 2016. The CAB was passed by more than 15 states and thereafter Hon’ble President gave assent to “The Constitution (One Hundred And First Amendment) Act, 2016” on 8th of September, 2016. Since then the GST council and been notified bringing into existence the Constitutional body to decide issues relating to GST.

On September 16, 2016, Government of India issued notifications bringing into effect all the sections of CAB setting firmly into motion the rolling out of GST. This notification sets out an outer limit of time of one year, that is till 15-9-2017 for bringing into effect GST.

GST COUNCIL

As per Article 279A (1) of the amended Constitution, the GST Council has to be constituted by the President within 60 days of the commencement of Article 279A. The notification for bringing into force Article 279A with effect from 12th September, 2016 was issued on 10th September, 2016.

As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members: –

• Union Finance Minister – Chairperson

1. b) The Union Minister of State, in-charge of Revenue of finance – Member
2. c) The Minister In-charge of finance or taxation or any other Minister nominated by each State Government – Members

As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to GST, like the goods and services that may be subjected or exempted from GST, model GST Laws, principles that govern Place of Supply, threshold limits, GST rates including the floor rates with bands, special rates for raising additional resources during natural calamities/disasters, special provisions for certain States, etc.

The GST Council will be the body that decides which taxes levied by the Centre, States and local bodies will go into the GST; which goods and services will be subjected to GST; and the basis and the rates at which GST will be applied

http://www.gstcouncil.gov.in/gst-council

Solution: a)

The Central Board of Excise and Custom renamed as Central Board of Indirect taxes and Customs (CBIC) is the nodal national agency responsible for administering Customs, GST, Central Excise, Service Tax & Narcotics in India. The Customs & Central Excise department[1] was established in the year 1855 by the then British Governor General of India, to administer customs laws in India and collection of import duties / land revenue. It is one of the oldest government departments of India.

Currently the Customs and Excise department comes under the Department of Revenue, Ministry of Finance. The agency is staffed by IRS officers who start their careers as Assistant Commissioners in the field and within 20–25 years rise to the post of Chief Commissioners, with a few senior most officers who become Members of CBEC / CESTAT / Settlement Commission.

Solution: b)

India’s tax-GDP ratio is comparable to other developing countries. It’s not very low

http://www.livemint.com/Industry/7UAyR2aM3Yh8rBeTD28WHL/Is-India-an-outlier-when-it-comes-to-taxGDP-ratio.html

Second statement is right (self evident).

Solution: c)

The Economic Survey says that the sale of tractors to a great extent reflects the level of mechanization. Indian tractor industries have emerged as the largest in the world and account for about one-third of total global tractor production, the Survey adds. While the trend is encouraging, the Economic Survey notes that more needs to be done. It is estimated that percentage of agricultural workers of total workforce would drop to 25.7 per cent by 2050 from 58.2 per cent in 2001. “Thus, there is a need to enhance the level of farm mechanization in the country. Due to intensive involvement of labour in different farm operations, the cost of production of many crops is quite high,” Chief Economic Advisor Arvind Subramanian said.

http://www.financialexpress.com/budget/india-economic-survey-2018-for-farmers-agriculture-gdp-msp/1034266/

Solution: c)

Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the penal rate at which banks can borrow money from the central bank over and above what is available to them through the LAF window.

MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging government securities, where the rates are lower in comparison with the MSF. The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.

MSF represents the upper band of the interest corridor with repo rate at the middle and reverse repo as the lower band.

To balance the liquidity, RBI uses the sole independent “policy rate” which is the repo rate (in the LAF window) and the MSF rate automatically gets adjusted to a fixed per cent above the repo rate (MSF was originally intended to be 1% above the repo rate). MSF is at present aligned with the Bank rate. Under Section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as “the standard rate at which the Reserve Bank is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under the Act. On introduction of Liquidity Adjustment Facility (LAF), discounting/rediscounting of bills of exchange by the Reserve Bank has been discontinued. As a result, the Bank Rate became dormant as an instrument of monetary management. It is now aligned to MSF rate and is used only for calculating penalty on default in the maintenance of cash reserve ratio(CRR) and the statutory liquidity ratio (SLR).

Solution: d)

‘Statutory liquidity ratio (SLR) is the Indian government term for the reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, government approved securities before providing credit to the customers. Statutory liquidity ratio is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit. The SLR is determined by a percentage of total demand and time liabilities.

Time liabilities refer to the liabilities which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon, and demand liabilities are such deposits of the customers which are payable on demand. An example of time liability is a six month fixed deposit which is not payable on demand but only after six months. An example of demand liability is a deposit maintained in a saving account or current account that is payable on demand through a withdrawal form such as a cheque.

If any Indian bank fails to maintain the required level of the statutory liquidity ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the bank rate, on the shortfall amount for that particular day. However, according to the Circular released by the Department of Banking Operations and Development, Reserve Bank of India, if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the bank rate. This restriction is imposed by RBI on banks to make funds available to customers on demand as soon as possible. Gold and government securities (or gilts) are included along with cash because they are highly liquid and safe assets.

Solution: a)

CSP-2014

Investment expenditure refers to the expenditure incurred either by an individual or a firm or the government for the creation of new capital assets like machinery, building etc.

The relationship between interest rate and investment Expenditure is illustrated by the investment curve of the economy. The curve has downward slope, indicating that a drop in interest rate, causes the investment-spending to rise.

Solution: b)

Angel investors provide more favorable terms compared to other lenders, since they usually invest in the entrepreneur starting the business rather than the viability of the business. Angel investors are focused on helping startups take their first steps, rather than the possible profit they may get from the business. Essentially, angel investors are the opposite of venture capitalists.

Angel investors are also called informal investors, angel funders, private investors, seed investors or business angels. These are affluent individuals who inject capital for startups in exchange for ownership equity or convertible debt. Some angel investors invest through crowdfunding platforms online or build angel investor networks to pool in capital.

https://www.investopedia.com/terms/a/angelinvestor.asp

Solution: b)

Love money is usually given to entrepreneurs who have proved their responsibility to close family and friends over the years, but who fail to meet the capital requirements that financial institutions look for in borrowers. An angel investor’s love money is sometimes the only way a business can get off the ground; this type of financing can allow for growth that would be impossible through traditional financing channels.