[DAY 34] 60 DAY RAPID REVISION (RaRe) SERIES for UPSC Prelims 2022 – ECONOMICS, CURRENT AFFAIRS & CSAT; Test Series, Videos & Notes!

Solution (c)

Basic Info:

The balance of payments divides transactions in two accounts: Current account and Capital account.

The capital account, broadly defined, includes transactions in financial instruments and central bank reserves. Narrowly defined, it includes only transactions in financial instruments.

The current account on the balance of payments measures the inflow and outflow of goods, services, investment incomes and transfer payments.

The main components of the current account are:

• Trade in goods (visible balance)
• Trade in services (invisible balance), e.g. insurance and services
• Investment incomes, e.g. dividends, interest and migrants remittances from abroad
• Net transfers – e.g. International aid.
• Unilateral transfers from one country to another

NRI Deposits are a part of Capital Account.

Solution (a)

Basic Info:

A tariff is any tax or fee collected by a government. An import tariff is a tax imposed on goods to be imported. Though tariff is used in a non-trade context, it is commonly applied to a tax on imported goods.

There are two broad ways in which tariffs are normally levied namely, specific tax and ad valorem tax. A specific tax is levied as a fixed charge per unit of imports. Whereas ad valorem is charged on the assessed value of the asset.

Ad valorem means – according to value. Thus, it is a tax that is flexible and depends on the value of the asset or the price of the good. In this regard, it is a progressive tax. Example: GST, Property tax, sales tax.

Specific tax is levied based on the volume of the item purchased. They are regressive in nature. Example: Excise duty on petrol and liquor products.

Solution (b)

Basic Info:

Foreign Contribution (Regulation) Act (FCRA), 2010:

FCRA Act regulates foreign funding of voluntary organizations in India. It is implemented by the Ministry of Home Affairs.

The Acts ensures that the recipients of foreign contributions adhere to the stated purpose for which such contribution has been obtained.

The Recent amendment in the FCRA 2010 made by the Ministry of Home Affairs (MHA) stated that the donations received in Indian rupees by NGOs and associations from any foreign source (even if that source is located in India at the time of such donation) should be treated as foreign contribution.

Solution (c)

Basic Info:

Infrastructure Investment Trusts (InvITs)

Infrastructure Investment Trusts (InvITs) are infrastructure developer-sponsored Trusts that own, operate, and invest in completed as well as under-construction infrastructure projects. These infrastructure assets can be roads and highways, power distribution networks, telecom towers, fiber optic networks, etc.

It is similar to a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in  infrastructure to earn a small portion of the income as a return.

InvITs can be treated as the modified version of REITs designed to suit the specific
circumstances of the infrastructure sector.

They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

InvITs are regulated by the Securities and Exchange Board of India and not by the Department of Economic affairs. They are traded on the secondary market similar to a stock.

Foreign Portfolio investors are permitted to invest in units of REITs and InvITs.

Solution (b)

Basic Info:

Under the MFN status, a WTO member country is obliged to treat other trading nations in a non discriminatory manner, especially with regard to customs duty and other levies.

The WTO says that if a country extends favour to another country, the country must return the favour.  Though MFN sounds like special treatment, it actually means non discrimination – treating virtually everyone equally.

In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners -whether rich or poor, weak or strong.

The MFN status is governed by the World Trade Organization’s (WTO) General Agreement
on Tariffs and Trade (GATT). Countries signatory to the agreement commit against discriminating each other and rest of the WTO member countries.

India has accorded ‘Most Favoured Nation’ status to all WTO members, except Pakistan. India suspended Pakistan’s MFN status in 2019.

Solution (c)

Basic Info:

Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies, which can include bonds, treasury bills and other government securities. Foreign exchange reserves are held in US dollars.

Foreign Exchange reserves of a country include

• Foreign currency assets (capital inflows to the capital markets, FDI and external commercial borrowings)
• Gold Stock by RBI.
• Special Drawing Rights holdings
• Reserve tranche

A reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes without a service fee or economic reform conditions.

Solution (c)

Basic Info:

Participatory Notes are issued by registered foreign institutional investors (FII) to overseas investors to invest in the Indian stock market. Participatory Notes enables large hedge funds to carry out their operations without disclosing their identity.

P-notes have attracted significant market attention recently because of huge inflow of foreign funds into Indian stock markets through this route.

Any entity investing in participatory notes is not required to register with SEBI since it is
purchased from registered FII’s.

Solution (a)

Basic Info:

In general, devaluation and depreciation are often used interchangeably.

A devaluation occurs when a country’s central bank makes a conscious decision to lower its exchange rate in a fixed or semi-fixed exchange rate.

A depreciation is when there is a fall in the value of a currency in a floating exchange rate.

Economic fundamentals, political instability, or risk aversion can cause currency depreciation.

Currency depreciation encourages a country’s export activity as its products and services become cheaper to buy.

Solution (b)

Basic Info:

Inverted duty structure is a situation where import duty on finished goods is low compared to the import duty on raw materials that are used in the production of such finished goods.

For example if 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.

This discourages the local production of goods using the imported raw materials as the price of imported finished goods may seem more attractive.

Solution (b)

Basic Info:

Real effective exchange rate (REER) : The real effective exchange rate (REER) is the weighted average of a country’s currency as compared to an index or basket of other major currencies.

A comparison of the relative trade balance of a country’s currency against each country within the index tells about the weightage.

This exchange rate is used to determine an individual country’s currency value relative to the other major currencies in the index.

Nominal effective exchange rate (NEER) : The nominal effective exchange rate (NEER) is the unadjusted weighted average rate at which one country’s currency is exchanged for a basket of foreign currencies.

The nominal exchange rate determines how much domestic money is required to purchase foreign currency.

NEER tells about a country’s international competitiveness in terms of the foreign exchange (forex) market, it is also known as the trade-weighted currency index.

Solution (d)

Basic Info:

Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs.

Goods and services going into the SEZ area from domestic tariff area (DTA) shall be treated as exports and goods coming from the SEZ area into DTA shall be treated as if these are being imported.

Special Economic Zones (SEZ) are growth engines that can boost manufacturing, augment exports and generate employment.

The private sector has been actively associated with the development of SEZs. The SEZs require special fiscal and regulatory regime in order to impart a hassle-free operational regime encompassing the state of the art infrastructure and support services.

The Baba Kalyani led committee was constituted by the Ministry of Commerce and Industry to study the existing SEZ policy of India and had submitted its recommendations.

Solution (a) 

Basic Info:

Indian Customs Electronic Gateway (ICEGATE) is the national portal of Indian Customs of Central Board of Indirect Taxes and Customs (CBIC)

By this facility, the department offers electronic filing of the Bill of Entry, Shipping Bills and related electronic messages between Customs and the Trading Partners.

Solution (c)

Basic Info: The Balance of Payments (BoP) records the transactions in goods, services and assets between residents of a country with the rest of the world for a specified time period typically a year.

It is also known as balance of international payments, summarizes all transactions that a country’s individuals, companies and government bodies complete with individuals, companies and government bodies outside the country.

These transactions consist of imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances.

The balance of payments is composed of a capital account and a current account.

Changes in the balance of payments can provide a lot of clues about a country’s relative level of economic health and future stability.

Because all the transactions recorded in the balance of payments sum to zero, countries
which run large trade deficits (current account deficits), must by definition also run large capital
account surpluses, which means more capital is flowing in than is going out, and increasing foreign ownership of its assets.

A country with a large trade surplus is exporting capital, and running a capital account deficit – which means money is flowing out of the country.

Solution (a)

Basic Info:

External Commercial Borrowing is an instrument that helps Indian firms and organizations raise funds from outside India in foreign currencies.

Indian corporates are permitted by the Indian government to raise funds using External Commercial Borrowing to help the companies expand their current capacity. External Commercial Borrowing can also be used to bring in fresh investments.

The sources similar to ECBs include Foreign Currency Convertible Bonds (FCCBs) and Foreign Currency Exchangeable Bonds (FCEBs).

While the main purpose for the issuance of FCCBs is to raise capital, External Commercial Borrowing applies to commercial loans that can include securitized instruments, bank loans, suppliers credit, buyers credit, and bonds that are availed from lenders that are not Indian residents.

The funds borrowed through External Commercial Borrowing can be used for the expansion of companies, but borrowers cannot use the funds for onward lending, repaying existing loans, or investing in real estate. 

Solution (b)

Basic Info:

Capital Account Convertibilty means the freedom to convert rupee into any foreign currency (Euro, Dollar, Yen, Renminbi etc.) and foreign currency back into rupee for capital account transactions.

Advantages of having full capital convertibility in India

Improved access to foreign markets: Local businesses can benefit from easy access
to foreign loans at comparatively lower costs.

Increased Liquidity in Financial Markets: Full capital account convertibility opens up the country’s markets to global players including investors, businesses, and trade partners. This allows easy access to capital for different businesses and sectors, positively impacting a nation’s economy.

Improved Financial System: The Tarapore Committee, which was tasked with assessing the full convertibility of the rupee, has noted these benefits after full rupee convertibility

Disadvantages of having full capital convertibility in India

High Volatility: High levels of volatility, devaluation, or inflation in forex rates may
happen, challenging the country’s economy.

Foreign Debt Burden: Businesses can easily raise foreign debt, but they are prone to
the risk of high repayments if exchange rates become unfavourable.

Solution (c)

Basic Info:

Foreign Institutional investors (FIIs) are entities established or incorporated outside India
and make proposals for investments in India.

These investment proposals by the FIIs are made on behalf of sub accounts, which may include foreign corporates, individuals, funds etcetera. In order to act as a banker to the FIIs, the RBI has designated banks that are authorised to deal with them.

FIIs can invest in the stocks and debentures of the Indian companies. In order to invest in
the primary and secondary capital markets in India, they have to venture through the
portfolio investment scheme (PIS).

In fact, recently SEBI allowed FIIs to invest in unlisted exchanges as well, which means both
BSE and NSE can now allot shares to FIIs also.

The nodal point for FII registrations is SEBI and hence all FIIs must register themselves with
SEBI and should also comply with the exchange control regulations of the central bank.
Apart from being allowed to invest in securities in primary and secondary markets.

FIIs can also invest in mutual funds, dated government securities, derivatives traded on a recognized stock exchange and commercial papers.

Solution (a)

Basic Info:

According to the recent Status Report of India’s External Debt published by Ministry of Finance, Dept. of Economic Affairs:

At end-December 2021, India’s external debt was placed at US$ 614.9 billion, recording an increase of US$ 11.5 billion over its level at end-September 2021.

The external debt to GDP ratio fell marginally to 20.0 per cent as at end- December 2021 from 20.3 per cent at end-September 2021.

Commercial borrowings remained the largest component of external debt, with a share
of 36.8 per cent, followed by non-resident deposits (23.9 per cent) and short-term trade credit is the third-largest component at 18.0 percent.

Solution (b)

Basic Info:

Indian Depository Receipt (IDR): An IDR is a financial instrument that allows a foreign company to raise funds in India. It is issued by a foreign firm that cannot go through the Indian listing process.

An Overseas Custodian would hold the real shares underlying the IDRs and authorize the Indian Depository to issue the IDRs. They are denominated in Rupees.

Standard Chartered Bank was the first foreign corporation to issue an IDR.

These IDRs would be freely transferable and placed on Indian stock markets.

IDRs are governed under The Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) which were notified by the Central Government under section 605 A of the Companies Act.

SEBI published rules for IDR disclosure as well as a sample listing agreement between the exchange and the foreign issuer that specifies continuous listing criteria.

Solution (b)

Basic Info:

Kerb dealings: The transactions of stocks which take place outside the stock exchanges unofficially after the normal trading hours.

Rolling settlement: An important reform measure started in the Indian stock market in mid-2001 under which all commitments of sale and purchase result into payment/delivery at the end of the ‘X’ days later.

Scrip share: A share given to the existing shareholders without any charge. It is also known as bonus share.

Spread: The difference between the buying and selling prices of a share is called spread. Higher the liquidity of a share lower its spread and vice versa.  It is also known as Jobber’s Turn or Margin or Haircut.

Solution (b)

Basic Info:

A Stock Exchange is a marketplace, where financial securities issued by companies are bought and sold, after they have been issued in the primary market.

In India BSE and NSE are two main stock exchanges:

Bombay Stock Exchange (BSE):

• It is Asia’s first stock exchange established in 1875
• The benchmark index for BSE is the Sensex.
• The BSE’s Sensex comprises of 30 companies

National Stock Exchange (NSE):

• NSE is the biggest stock exchange in India established in 1992
• The benchmark index for the NSE is the Nifty
• NSE’s Nifty comprises of 50 companies

Solution (d)

Statement Analysis:

Context – The program was launched recently

Solution (a)

Statement Analysis:

 Context – Indian Council of Agricultural Research (ICAR) committee predicted that ZBNF would result in reduction in production of agricultural crops.

Solution (c)

The Report is released annually by the World Economic Forum (WEF). It is based on Global Risks Perception Survey (GRPS) and highlights key risks emanating across five categories: Economic, Environmental, Geopolitical, Societal, and Technological.

Context – The report was published.

Solution (b)

Statement Analysis:

 Context – China’s status as a ‘developing country’ was questioned at WTO.

Solution (a)

Statement Analysis:

 Context – Supreme Court made the observation recently in a case related to Maharashtra MLA’s.

Solution (d)

Each alphabet in the word “TEACHER ” is moved two steps forward to obtain the corresponding alphabet of the code.

T E A C H E R

V G C E J G T (Each alphabet is increasing by 2)

Similarly, we have

C H I L D R E N

E J K N F T G P

Solution (b)

The alphabets are coded as shown:

ROSECHAIR

682173456

Therefore, in SEARCH, S is coded as 2, E is coded as 1, A is coded as 8, R is coded as 6, C is coded as 7, H is coded as 3.

Thus, the code for SEARCH is 214673.

Solution (b)

24- 6 * 28 / 7 + 15

24- 6 * 4 + 15

24- 24 + 15

24 –  39

-15

Solution (b)

When alphabets are numbered, then: GHI = 789

EFG = 567

ABC = 123

According to the question, GHI = 1578 = 789 × 2

EFG = 1134 = 567 × 2

BCD = 234 × 2 = 468

Solution (b)

Note the context in which the author uses the word ‘paradoxically’: ‘…by keeping their outer surface below air temperature, the birds might paradoxically be able to draw very slight amounts of heat from the air around them.’ That is, the penguins manage to actually draw heat from the cold Antarctic air by keeping their outer surface temperature below the air temperature. This is best explained by option b.

Option a talk of penguins keeping ‘their body colder’. This is incorrect. Penguins only manage to keep the plumage on certain parts of their body colder than the surrounding air.

Options c and d, talk about thermal radiation which is not relevant in the given context.