[DAY 46] 60 DAY RAPID REVISION (RaRe) SERIES for UPSC Prelims 2022 – ECONOMICS, CURRENT AFFAIRS & CSAT; Test Series, Videos & Notes!

Solution (c)

Basic Info:

Import Substitution (IS) generally refers to a policy that eliminates the importation of the commodity and allows for the production in the domestic market.

The policy of import substitution is achieved through discrimination of capital goods against consumer goods by tariffs, quotas, exchange control barriers, exchange rate policies, and fiscal and credit policies.

India adopted the strategy of import substitution industrialization strategy in the fifties. From the Second Five Year Plan, there was determined thrust towards the substitution of basic and capital goods industries. The ISI strategy was based on the model of growth as propounded by Mahalanobis.

The State was to play an active role in building a self-reliant economy, discriminating structure of protection was evolved to acquire foreign technology and for policies towards foreign investment.

Solution (a)

Basic Info:

Under the WTO Agreement on Agriculture (AoA), domestic agri-subsidies are classified into three categories: green, blue and amber.

Under WTO principles, “amber box” subsidies create trade distortions because they encourage excessive production through farm subsidies to fertilizers, seeds, electricity, and irrigation.

They are also called as Aggregate Measure of Support.

As per the WTO norms, the AMS can be given up to 10 % of a country’s agricultural GDP (at 1986-88 prices) in the case of developing countries. On the other hand, the limit is 5% for a developed economy. This limit is called the de minimis level of support.

It is thus minimal amounts of domestic support that are allowed even though they distort trade; up to 5% of the value of production for developed countries, 10% for developing countries.

Solution (b)

Basic Info:

Foreign Direct Investment is an investment that a parent company makes in a foreign nation. Foreign Direct Investment simply targets an exact enterprise. Whereas, Foreign Institutional Investor is an investment prepared by an investor in the stock markets of a foreign country.

In FII, the companies just require to get registered in the stock exchange to make investments.

FDI is more favored to the FII as FDI is considered to be more stable than FII. FDI not just brings in the capital but also assists in high-quality governance practices and improved management skills and even technology transfer.

RBI via the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (FEMA 20) has allowed startups to issue convertible notes to foreign investors apart from FDI in startups by foreign venture capital investors through subscribing to equity or equity linked instruments or debt instruments.

Solution (d)

Basic Info:

In flexible exchange rates (also known as floating exchange rates), the exchange rate is determined by the forces of market demand and supply. If the demand for foreign exchange goes up, the domestic currency (rupee) depreciates since it has become less expensive in terms of foreign currency. By contrast, the currency appreciates when it becomes more expensive in terms of foreign currency.

Interest rate differential is important in determining exchange rate movements. There are huge funds owned by banks, multinational corporations and wealthy individuals who move around the world in search of the highest interest rates. If we assume that government bonds in country A pay 8 percent rate of interest whereas equally safe bonds in country B yield 10 percent, the interest rate differential is 2 percent.

Investors from country A will be attracted by the high-interest rates in country B and will buy the currency of country B selling their own currency.

At the same time, investors in country B will also find investing in their own country more attractive and will, therefore, demand less of country A’s currency. This means that the demand for country A’s currency will decrease while that of country B’s currency will increase.

Therefore, country A’s currency depreciates whereas that of country B’s currency appreciates. Thus, a rise in the interest rates at home often leads to an appreciation of the domestic currency which will lead to increase in the exchange rate of the domestic currency.

If a country’s imports grow faster than exports, the capital inflows from exports will not be sufficient to pay for the imports. This will lead to an increase in demand for foreign currency. Therefore the domestic currency depreciates.

Solution (b)

Basic Info:

The current account records exports and imports in goods and services and transfer payments. Trade-in services denoted as invisible trade includes both factor income (payment for inputs-investment income, that is, the interest, profits and dividends on our assets abroad minus the income foreigners earn on assets they own in India) and non-factor income (shipping, banking, insurance, tourism, software services, etc.)

Transfer payments are receipts which the residents of a country receive for free, without having to make any present or future payments in return. They consist of remittances, gifts, and grants.

CAD rises/widens when the value of goods and services a country imports exceeds the value of goods and services it exports.

 Reducing export subsidy can hamper the growth of exports and thus widen the current account deficit.

One of the objectives of enforcing import quota is to reduce the balance of payments deficit by restricting imports. That portion of national income going into imports can be utilised for investment in the import substitution or export industries. The expansion in exports, coupled with the restriction of imports is likely to bring about improvement in the balance of payments position of the country.

India is one of the biggest importers of crude oil. A rise in crude oil prices indicates rising imports and thus CAD widens.

ECBs are borrowings raised by permitted resident entities from recognized non-resident entities. Therefore, ECBs would lead to capital inflow which would in turn reduce CAD.

Solution (b)

Basic Info:

Devaluating a currency is decided by the government issuing the currency, and unlike depreciation, is not a result of non-governmental activities.

Impacts:

Increased Aggregate Demand (AD) : Exports become cheaper and more competitive to foreign buyers. Higher exports relative to imports can increase aggregate demand as increased consumer spending on domestic goods and services.

Inflation is more likely to occur because imports are more expensive causing cost-push inflation, AD increases causing demand-pull inflation and with exports becoming, cheaper manufacturers may have less incentive to cut costs and become more efficient. Therefore over time, costs may increase.

Improvement in the current account balance:  With exports more competitive and imports more expensive, we may see higher exports and lower imports, which will reduce the current account deficit.

Solution (c)

Basic Info:

The Balance of Payments can be divided under the following components:

Autonomous:

• International economic transactions are called autonomous when transactions are made independently of the state of the BoP (for instance due to profit motive).
• These items are called ‘above the line’ items in the BoP. The balance of payments is said to be in surplus / deficit if autonomous receipts are greater / less than autonomous payments.

Accommodating transactions:

• These are termed ‘below the line’ items. These are determined by the net consequences of the autonomous items, that is, whether the BoP is in surplus or deficit.
• The official reserve transactions are seen as the accommodating item in the BoP (all others being autonomous).

Errors and Omissions:

These constitute the third element in the BoP (apart from the current and capital accounts) which is the ‘balancing item’ reflecting our inability to record all international transactions accurately.

Solution (b)

Basic Info:

Currency appreciation is an increase in the value of one currency in relation to another currency. A strong currency makes imports cheaper and can improve living standards.

However, it can also make exports less competitive and lead to lower economic growth. So, to stabilise the currency, various measures are adopted to increase the quantum of domestic currency and reduce the volume of foreign currency.

All the options given above lead to an infusion of domestic currency among the public and reduces the foreign currency in the market. Thus it helps in tackling rupee appreciation.

Solution (c)

Basic Info:

The Qualified Foreign Investor (QFI) is sub-category of Foreign Portfolio Investor and refers to any foreign individuals, groups or associations, or resident, however, restricted to resident from a country that is a member of Financial Action Task Force (FATF) or a country that is a member of a group (the Gulf Cooperation Council /the European Commission) which is a member of FATF and a country that is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU).

As per the guidelines issued by the Securities & Exchange Board of India, other eligibilities
for QFIs (which shall include individuals, groups or associations) are:

A QFI should neither be a person resident in India nor should be registered with the SEBI as a Foreign Institutional Investor (‘FII’), sub-account or Foreign Venture Capital Investor.

A QFI should be set up with a SEBI – registered Qualified Depository Participant (QDP)
to commence activities. The QDP shall provide inter alia custody services.

Solution (b)

Basic Info:

Purchasing Power Parity (PPP) exchange rates are calculated by the prices of the same basket of goods and services in different countries.

India stands third in the world in terms of purchasing power parity (PPP), behind the US and China.

PPP is a popular macroeconomic analysis metric to compare economic productivity and standards of living between countries. PPP is an economic theory that compares different countries’ currencies through a “basket of goods” approach. It measures prices at different locations using a common good or goods to contrast the real purchasing power between different currencies.

Solution (d)

Basic Info:

Introduction of new and retaliatory tariff measures, Heightened US-China trade tensions, weaker global economic growth, Volatility in financial markets.

Introduction of a new and retaliatory tariff imposed by countries are the effects of ongoing trade wars between USA and China, which negatively impacts investor sentiments and is one of the primary reasons for the slowdown in global trade growth

Weaker economic growth reinstates weaker global trade growth creating a downward spiral of growth.

Such a weak global scenario also creates a bearish market and drop in the stock market. Added to this, crude oil price volatility also creates uncertainty in financial markets.

Trade growth in 2022 is likely to be lower than expected, given the macroeconomic trends like persistent inflation in the United States and concerns related to China’s real estate sector.

Solution (a)

Basic Info:

Elasticity is defined as the ratio of one variable’s percent change to another variable’s percent change. It is denoted as follows:

The elasticity of demand describes how sensitive a good’s demand is to changes in other economic variables like prices and consumer benefits.

Higher demand elasticity for an economic variable indicates that the customers are more conscious of changes in this variable.

Solution (c)

Basic Info:

The J Curve is an economic theory which states that, under certain assumptions, a country’s trade deficit will initially worsen after the depreciation of its currency.

It is often used to observe the effects of a weaker currency on trade balances. The pattern is as follow:

• Immediately after a nation’s currency is devalued, imports get more expensive and exports get cheaper, creating a worsening trade deficit (or at least a smaller trade surplus).
• Shortly thereafter, the sales volume of the nation’s exports begins to rise steadily, thanks to their relatively cheap prices.
• At the same time, consumers at home begin to buy more locally-produced goods because they are relatively affordable compared to imports.
• Over time, the trade balance between the nation and its partners bounces back and even exceeds pre-devaluation times.

The J Curve theory can be applied to other areas besides trade deficits, including in private equity, the medical field, and politics.

Solution (b)

Basic Info:

Marginal cost is the cost added by producing one additional unit of a product or service while opportunity cost is the loss of other alternatives when one alternative is chosen.

Absolute Advantage is the inherent ability of a country that allows that country to produce
specific goods efficiently and effectively at a relatively lower marginal cost. A country has
an absolute advantage in producing a good if it can produce that good at lower marginal
cost, lesser workforce, lesser time and lesser cost without compromising the quality.

Comparative Advantage refers to the country’s capability of producing the specific good at
lower marginal cost and opportunity cost in comparison to other countries. In absolute
advantage, whereas the emphasis is only on marginal cost, comparative advantage takes
into account both marginal and opportunity cost.

Solution (c)

Basic Info:

Escrow Account:

• An escrow account in simple terms is a third party account.
• It is a separate bank account to hold money which belongs to others and where the money parked will be released only under the fulfillment of certain conditions of a contract.
• An escrow account is an arrangement for safeguarding the seller against its buyer from the payment risk for the goods or services sold by the former to the latter

How it operates:

• This is done by removing the control over cash flows from the hands of the buyer to an independent agent.
• The independent agent, i.e, the holder of the escrow account would ensure that the appropriation of cash flows is as per the agreed terms and conditions between the transacting parties.
• In India, escrow account is widely used in public-private partnership projects in infrastructure.
• RBI has also permitted Banks (Authorised Dealer Category I) to open escrow accounts on behalf of Non-Resident corporates for acquisition/transfer of shares/ convertible shares of an Indian company

Solution (d)

Basic Info:

There are two main accounts in the Balance of Payments: Current account and the Capital account.

Current account:

It records exports and imports in goods and services and transfer payments. Trade in services denoted as invisible trade (because they are not seen to cross national borders) includes both factor income (payment for inputs-investment income, that is, the interest, profits and dividends on our assets abroad minus the income foreigners earn on assets they own in India) and non-factor income (shipping, banking, insurance, tourism, software services, etc.).

Transfer payments are receipts which the residents of a country receive for free, without having to make any present or future payments in return. They consist of remittances, gifts and grants. They could be official or private.

Capital Account:

It includes sales of assets such as money, stocks, bonds, etc. The main components of the capital account include foreign investment, loans and banking capital. Foreign investment, comprising Foreign Direct Investment (FDI) and Portfolio Investment consisting of Foreign Institutional Investors (FIIs) investment, American Depository Receipts/Global Depository Receipts (ADRs/GDRs) represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital, including non-resident Indian (NRI) deposit are debt liabilities.

Solution (a)

Basic Info:

When goods are exported to another country at a price which is less than what it is sold for in the home country or when the export price is less than the cost of production in the home
country, then those goods have been dumped.

Home Market Price – Export Sales Price = Margin of dumping

The Department of Commerce in the Union Ministry of Commerce and Industry has a dedicated unit, called the Directorate General of Anti-Dumping & Allied Duties which investigates cases where the domestic industry (domestic producers) provide evidence that dumping has taken place by producers abroad. They also defend cases where allegations of dumping are brought
against Indian exporters by foreign governments.

There is a well-established process which is followed where questionnaires are sent to all stakeholders and evidence is collected in a time-bound fashion to either prove or disprove that dumping has taken place.

If the good is alleged to be dumped from a non-market country (a country where there are considerable distortions to the market through government subsidies) then the Anti-dumping cell will calculate what the ―normal price of the product should be in the home market. The normal price will reflect the market price of the product had it been produced in the exporting country without these subsidies.

If necessary, the price of such a commodity in a similar market (say a neighbouring country at the same level of development as the exporting country) will be considered as the normal price.

If there is evidence of dumping then the Government of India will levy anti-dumping duty on that commodity.

Solution (b)

Basic Info:

Deemed Exports refers to those transactions in which goods supplied do not leave the country, and payment for such supplies is received either in Indian rupees or in foreign exchange.

Deemed benefit export scheme has been in operation for more than two decades. The benefits under the scheme include a rebate on duty chargeable on imports or excisable material used in the manufacture of goods which are supplied to the eligible projects.

The policy aims to create a level playing field for the domestic industry vis-a-vis direct import by providing duty-free inputs or exemption/refund of duty paid on goods manufactured in India. Thus, it is an instrument for import substitution. It helps in creating manufacturing capability, value addition and employment opportunities in the country.

Deemed Export Benefit Scheme benefits are availed of by units in Power, Petroleum refinery, fertilizer, and Nuclear Power Projects. They are also availed by the supply of goods to projects financed by multilateral or bilateral agencies.

Solution (b)

Basic Info:

Free Trade Agreement (FTA): A free trade agreement is a preferential arrangement in which members reduce tariffs on trade among themselves, while maintaining their own tariff rates for trade with non members.

Customs Union (CU): A customs union (CU) is a free-trade agreement in which members apply a
common external tariff (CET) schedule to imports from non-members.

Common Market (CM): A common market is a customs union where the movement of factors of production is relatively free amongst member countries.

Solution (c)

Basic Info:

Comprehensive Economic Partnership Agreement:

• It is a kind of free trade pact that covers negotiation on the trade in services and investment, and other areas of economic partnership.
• It may even consider negotiation in areas such as trade facilitation and customs cooperation, competition, and IPR.
• Partnership agreements or cooperation agreements are more comprehensive than Free Trade Agreements.
• CEPA also looks into the regulatory aspect of trade and encompasses an agreement covering the regulatory issues.
• India has signed CEPAs with South Korea and Japan.

Comprehensive Economic Cooperation Agreement (CECA):

• CECA generally covers negotiation on trade tariff and TRQ (Tariff Rate Quotas) rates only. It is not as comprehensive as CEPA. India has signed CECA with Malaysia.

Solution (c)

Statement Analysis:

 Context – Arctic policy was released.

Solution (d)

Statement Analysis:

 Context – Centre has announced to recapitalise weak Public Sector Banks (PSB)

Solution (a)

Statement Analysis:

 Context – It was in news due to ongoing Russia-Ukraine War.

Solution (b)

World Energy transition Outlook 2022 was launched by the International Renewable Energy Agency (IRENA) at the Berlin Energy Transition Dialogue.  It sets out priority areas and actions based on available technologies that must be realised by 2030 to achieve net zero emissions by midcentury.

Context – It was launched recently

Solution (b)

Statement Analysis:

 Context – Russia was accused of using thermobaric bombs

Solution (d)

Solution (a)

Solution (d)

Some countries are city – False, it is not a definite case.

No villages are city – False, it is not a definite case.

So, neither conclusion I nor conclusion II follows.

Solution (d)

According to the statement,

80% of the total runs were made by spinners. So, (I) does not follow.

Nothing about the opening batsmen is mentioned in the statement. So, (II) also does not follow.

Solution (a)

Refer to, “Tracking a student means having the ability to target education towards weaknesses and strengths. The ability to accurately customize to the individual….”

It can be clearly inferred from the above two sentences given in the passage that by the term ‘tracking a student’ the author meant analysing the performance of a student and designing an educational syllabus accordingly

Hence, option a is the correct answer.