UPSC Prelims Test Series 2019 - Test 10(Economic And Social Development-2)

Situation where inflation pushes income into higher tax brackets-bracket creep. The result is income tax increases but purchasing power remains constant. This problem is in during high inflation periods .Govt gains higher taxes and economy suffers as growth is dragged down due to less demand. In high growth and high inflation economies ,fiscal drag acts as an automatic stabiliser which keeps demand stable.

World’s first stock exchange was established in Antwerp, Belgium (then part of the Netherlands) in 1631.
Established in 1875, the BSE (formerly known as Bombay Stock Exchange Ltd.)is Asia's first stock exchange.

In the following cases it is not necessary to generate e-Waybill:
1. The mode of transport is non-motor vehicle.
2. Goods transported from Customs port, airport, air cargo complex or land customs station to Inland Container Depot (ICD) or Container Freight Station (CFS) for clearance by Customs.
3. Goods transported under Customs supervision or under customs seal
4. Goods transported under Customs Bond from ICD to Customs port or from one custom station to another.
5. Transit cargo transported to or from Nepal or Bhutan
6. Movement of goods caused by defence formation under Ministry of defence as a consignor or consignee
7. Empty Cargo containers are being transported
8. Consignor transporting goods to or from between place of business and a weighbridge for weighment at a distance of 20 kms, accompanied by a Delivery challan.
9. Goods being transported by rail where the Consignor of goods is the Central Government, State Governments or a local authority.
10. Goods specified as exempt from E-Waybill requirements in the respective State/Union territory GST Rules.
11. Transport of certain specified goods- Includes the list of exempt supply of goods, Annexure to Rule 138(14), goods treated as no supply as per Schedule III, Certain schedule to Central tax Rate notifications.

Currency convertibility is the ease with which a country's currency can be converted into gold or another currency. Convertibility is extremely important for international commerce. When a currency in inconvertible, it poses a risk and barrier to trade with foreigners who have no need for the domestic currency. Freely convertible currencies have immediate value on the foreign exchange market, and few restrictions on the manner and amount that can be traded for another currency. Free convertibility is a major feature of a hard currency

Participatory Notes or P-notes are offshore derivative instruments, used by Foreign Institutional Investors (FIIs) who are NOT registered with SEBI. The major characteristics of P-notes are: They are offshore derivative instruments they are used by Foreign Institutional Investors (FIIs) who are NOT registered with SEBI. They are used on Indian shares, but at a location outside of India.

As per Section 1(2) of FCRA, 2010, the provisions of the act shall apply to:
1. Whole of India
2. Citizens of India outside India; and
3. Associate Branches or subsidiaries, outside India, of companies or bodies corporate, registered or incorporated in India.

• The key difference between a share and a debenture is that while share represents part of the ownership of a company, debenture acknowledges loan or debt to the company. Thus, a shareholder is a participant in the profits as well as losses of the company.
• The dividend is paid on share, which is an appropriation of profits, but a debenture holder is paid interest over the lifetime of the debenture and the principal amount at the end of life.

Protectionism refers to government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are tariffs and quotas on imports and subsidies or tax cuts granted to local businesses. The primary objective of protectionism is to make local businesses or industries more competitive by increasing the price or restricting the quantity of imports entering the country.

Tax Expenditures, as the word might indicate, does not relate to the expenditures incurred by the Government in the collection of taxes. Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers. Tax expenditures indicate how much more revenue could have been collected by the Government if not for such measures. In other words, it shows the extent of indirect subsidy enjoyed by the tax payers in the country.

Statement 1 is correct. Better sovereign ratings can reduce inflation risk, ensure political stability, and make it cheaper to borrow money when needed. Better sovereign ratings attract investors. Sovereign ratings represent a useful tool for international investors to determine a country's investment quality.
Statement 2 is incorrect. Sovereign Credit Ratings issued to sovereign entities like national governments take into account political risk, regulatory risk and other unique factors to determine the likelihood of a default. The three most popular issuers of sovereign ratings are S&P, Moody's and Fitch. Statement 3 is correct. More economically-developed countries are seen has less likely to default. On the other hand, countries with a history of defaulting are perceived to have a higher credit risk.

A depreciation of the currency will in itself reduce the prices of products abroad; this can offset inflation.

• To finance its expenditure, government likes to borrow from public rather than withdraw cash balances or borrow from RBI.
• The reason is found on the effects of money supply in the country. Borrowing from public has no effect on money supply in the country.
• When government borrows, money gets transferred from the public to the government. The net effect on total money supply in the country is nil.

1. Blue box subsidies are Subsidies that don’t increase with production. For example, subsidies linked with acreage or number of animals. Very few countries use blue box subsidies - Iceland, Norway, Slovenia etc.WTO has put no limit on Blue Box subsidies.
2. Amber box subsidies: Subsidies that disturb trade balance like subsidies on fertilizers, seeds, power and irrigation. They distort trade balance because they encourage excessive production, therefore given country’s product becomes cheaper than others, in the international market. WTO has put certain limits on Amber box subsidies.
3. Green box subsidies: Subsidies that don’t disrupt trade balance or Only cause minimum damage to trade balance. E.g. agriculture research and development, extension services, farmer training programs, pest-disease control program, and flood/drought relief money paid to farmers etc.WTO has put no limit on Green Box subsidies.

Under Article 266 (1) of the Constitution of India, all revenues ( example tax revenue from personal income tax, corporate income tax, customs and excise duties as well as non-tax revenue such as licence fees, dividends and profits from public sector undertakings etc. )received by the Union government as well as all loans raised by issue of treasury bills, internal and external loans and all moneys received by the Union Government in repayment of loans shall form a consolidated fund entitled the 'Consolidated Fund of India' for the Union Government.
Except the loans that are credited to the Consolidated Fund, government does not have the liability to pay it back. It is a one-way transaction only. Proceeds from the Small Savings Scheme, Provident Fund etc, where the government acts as the custodian of the money is credited to the Public Fund of India established under the Art 266 (2) of the Indian Constitution.

GAAR refers to General Anti -Avoidance Rules. These rules target any transaction or business arrangement that is entered into with the objective of avoiding tax. The objective is to check aggressive tax planning.

Both the borrowing from the Public and from the banks will not lead to increase in the money supply in the economy, on the contrary, the public will have less money in their hands to Spend. On the other hand, creating new money increases the supply of Money which helps in creating aggregate demand. So this is most likely to cause the demand Pull inflation.

There are huge funds owned by banks, multinational companies and wealthy individuals that circulate in the world economy in search of higher interest rates on them. If a country A offers lower interest rates than country B, these funds would prefer country B over the country A. Also, funds from country B itself would tend to invest in the country itself. This leads in increased demand of the currency of country B and hence, it's appreciation. Hence, rise in interest rates in a country lead to the appreciation in its currency.

• Quantitative Easing is an unconventional monetary policy in which the Central Bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply by promoting lending and liquidity. So, statement 1 is incorrect.
• Statement 2 is correct. If central banks increase the money supply too quickly, it can cause inflation. This happens when there is increased money but only a fixed amount of goods available for sale when the money supply increases.

• Derivatives are instruments/products which derive its value from one or more basic variables, called bases in a defined manner.
• The underlying asset can be equity, forex, currency, interest rates, commodity rates etc.,

• Statement 1 is correct. The investor in Participatory Note does not own the underlying Indian security, which is actually held by the FII who issues the PN. Thus the investors in PNs derive the economic benefits of investing in the security without actually holding it.
• Statement 2 is incorrect. The PN holder also does not enjoy any voting rights in relation to security/shares referenced by the PN.

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision making of a foreign business FDI is direct investment in productive assets, while FII is investment in financial securities. FDI can enter only in those sectors in which FDI is allowed while FII enters the financial market which is of general nature and no specific industry or sector is involved. FII is volatile by nature, while FDI is considered more stable.

Under a currency board, the management of the exchange rate and money supply are given to a monetary authority that makes decisions about the valuation of a nation’s currency, specifically whether to peg the exchange rate of the local currency to a foreign currency, an equal amount of which is held in reserves. Often this monetary authority has express instructions to back all units of domestic currency in circulation with foreign currency. In this way a currency board operates not unlike the gold standard. They are normally constituted to combat hyperinflation.

• A proportional tax is a tax in which the rate of taxation is fixed which does not change as the taxable amount increases or decreases. This type of tax increases with increase in income.
• While a regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.
• The proportional income tax acts as an automatic stabiliser - a shock absorber because it makes disposable income less senstitive to fluctuations of GDP. So when GDP rises, disposable incomes rises but less than rise in GDP as it is lessened by the taxation.

Statement 1 is incorrect. TRIPS agreement allows both process and product patents, though only product patents must be awarded for food, pharmaceutical and chemicals. Patents should be valid for 20 years. Statement 2 is correct. Copyright is a legal protection extended to the owner of the rights in an original work of creation. Copyright protects expressions and not the ideas. There is no copyright in an idea. Statement 3 is correct. A trademark is the legal version of a brand. When a brand is registered, and legalized it becomes a trademark. A brand is registered under the Trade and Merchandise Mark Act, 1958. Thus, we can say all trademarks are brand but a brand can be called as a trademark only when it is legally protected and has been appropriated by one seller.

• Statement 1 is correct. ICOR is a metric that assesses the marginal amount of investment capital necessary for an entity to generate the next unit of production. Overall, a higher ICOR value is not preferred because it indicates that the entity's production is inefficient.
• Statement 2 is not correct. Higher ICOR signifies that more input investment is required to get same amount of output. It indicates that the efficiency of the firm / economy to produce has come down.

The Eight Core Industries comprise 40.27 per cent of the weight of items included in the Index of Industrial Production (IIP).
Coal production (weight: 10.33 per cent), Crude Oil production (weight: 8.98 per cent), Natural Gas production (weight: 6.88 per cent), Petroleum Refinery production (weight: 28.04 per cent), Fertilizer production (weight: 2.63 per cent), Steel production (weight: 17.92 per cent), Cement production (weight: 5.37 per cent), Electricity generation (weight: 19.85 per cent).

IBRD is a part of the World Bank Group

• FSDC is not a statutory body. It was established in 2010 , based on the recommedations of Raghuram Rajan committee.
• Also, no separate funds are allocated to the council for undertaking its activites.

Fiscal Deficit = Total Expenditure – Total Receipts excluding borrowings. The extent of fiscal deficit is an indication of how far the government is spending beyond its means.
Fiscal deficit indicates the total borrowing requirements of the government. Borrowings not only involve repayment of principal amount, but also require payment of interest. Interest payments increase the revenue expenditure, which leads to revenue deficit. It creates a vicious circle of fiscal deficit and revenue deficit, wherein government takes more loans to repay the earlier loans. As a result, country is caught in a debt trap.

• Statement 1 is incorrect: Commodities transaction tax (CTT) is a tax similar to Securities Transaction Tax (STT), levied in India, on transactions done on the domestic commodity derivatives exchanges except agricultural commodities. Globally, commodity derivatives are also considered as financial contracts. Hence CTT can also be considered as a type of financial transaction tax.
• Statement 2 is incorrect: It is considered as a direct tax.

Goods and Services Tax Network (GSTN) is a not for profit company governed under section 8 of the companies Act.
Currently the centre holds 24.5% equity and the States(including UTs Delhi and Puducherry) hold 24.5% equity in GSTN. The Balance 51% equity is with non-Government financial institutions.

1. Preferential Trade Agreement: Agreeing parties reduce the level of tariff imposed on traded goods among themselves.
2. Custom Union: Member countries abolish barriers to trade and service among them. And, they also maintain common external tariff against third parties.
3. Free trade Agreement: Agreeing parties abolish tariff on most of the goods and services.

As per the Interim Budget 2019-20, Expenditure of government in various sectors is as follows:
● Central Sector Schemes -12%
● Interest payments - 18%
● Defence - 8%
● Subsidies - 9%
● Centrally Sponsored Schemes - 9%
● Finance commission & other transfers - 8%
● State's share of taxes and duties - 23%
● Pensions- 5%
● Other expenditures - 8%

Reducing export subsidies will affect exports negatively and may further widen the Current Account Deficit.

At the end of the speech of the Finance Minister in Lok Sabha, the budget is introduced in the Rajya Sabha. The Budget needs to be passed within 75 days of its introduction in the Parliament. The amendments suggested by the Rajya sabha to the budget may or may not be accepted by the Loksabha.In both the cases, the budget is deemed to have been passed by both houses of the Parliament.

• ‘Call money’ is the borrowing or lending of funds for 1 day.
• ‘Notice money’ is the borrowing or lending of funds for a period between 2 and 14 days.

Statement 2 is incorrect. Quantitative Easing is a method which used only when all other state apparatus like standard monetary policy instruments, Fiscal policy instruments failed to increase the money supply in the market.

Commission for Agricultural Costs and Prices (CACP) is a decentralised agency of the Government of India. It was established in 1965 as the Agricultural Prices Commission, and was given its present name in 1985.It is an attached office of the Ministry of Agriculture and Farmers Welfare, Government of India.
The commission was established to recommend Minimum Support Prices (MSPs), to motivate cultivators and farmers to adopt the latest technology in order to optimise the use of resources and increase productivity.

The South Asia Subregional Economic Cooperation (SASEC) Program, a project-based partnership to promote regional prosperity by improving cross-border connectivity, boosting trade among member countries, and strengthening regional economic cooperation.
Membership: Bangladesh, Bhutan, India, Maldives, Myanmar, Nepal, Sri Lanka.
Philippines-based Asian Development Bank (ADB) serves as the Secretariat for the SASEC member countries.

• Statement 1 is not correct. Where an investor has a stake of 10 percent or less in a company, is treated as FII and, where an investor has a stake of more than 10 percent, is treated as FDI
Statement 2 is not correct. As per Section 15 (1) (a) of the SEBI FII Regulations, 1995, a Foreign Institutional Investor (FII) may invest in the securities in the primary and secondary markets including shares, debentures and warrants of companies unlisted, listed or to be listed on a recognized stock exchange in India.

A foreign currency convertible bond (FCCB) is a type of corporate bond issued by an Indian listed company in an overseas market and hence, in a currency different from that of the issuer. The highlight of the FCCB, however, is the option of converting the bonds into equity at a price determined at the time the bond is issued. It also has the benefits of a debt instrument as it includes guaranteed returns or yields which are payable in foreign currency.

A Policy cut motion results in the reduction of the amount of the demand to Rs.1. Economy cut motion results in the reduction of an amount by a specified amount (specified amount may be Rs. 100). Token cut motion states that the amount of the demand be reduced by Rs 100/-

• Statement 1 is correct. Arundhati Bhattacharya was appointed as the Chairman in December 2018.
• Stament 2 is incorrect. SWIFT India is a joint venture of top Indian public and private sector banks and not a joint venture of foreign and Indian private sector banks.

Twin deficits refer to a situation where an economy is running both a fiscal deficit and also a deficit on the current account of the balance of payments.
Even though Fiscal deficit will impact current account deficit in certain ways it still doesn’t reinforce each other i.e., they are not proportional to each other.

• REIT are similar to mutual funds and not hedge funds. Mutual funds provide for an opportunity to invest in equity, REIT allows one to invest in income-generating real estate assets.
• Statement 2 is correct. A shorter-term Capital gain tax is applicable for unit holders at the rate of 15%. Long-term capital gains tax is applicable post holding for 12 months.

In the recent budget, the Government extended the KCC scheme to animal husbandry. PM KISAN is a Central Sector scheme with 100% funding from Government of India.