Economics upsc pyq 2022
20.
With reference to the "G20 Common Framework", consider the following statements:
1.It is an initiative endorsed by the G20 together with the Paris Club.
2.It is an initiative to support Low Income Countries with unsustainable debt.
Which of the statements given above is/are correct ?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Correct Answer:
(c) Both 1 and 2
Explanation:
Statement 1: Correct
The G20 Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI) is endorsed by the G20.
It works in coordination with the Paris Club, which is a group of major official creditor countries.
Statement 2: Correct
The framework is specifically designed to help Low-Income Countries (LICs) facing unsustainable debt burdens.
It aims at debt restructuring, involving both traditional (Paris Club) and non-traditional creditors (like China).
Memory Trick:
“G20 + Paris Club helping poor countries with heavy debt = Common Framework.”
Expected Questions:
What is the meaning of Paris Club here?
Correct Answer:
Paris Club is an informal group of major creditor countries that coordinate to restructure or reschedule debt owed by countries facing repayment difficulties.
Explanation:
Paris Club is a group of government creditors, not a treaty-based organisation.
Members are mainly developed countries (e.g., USA, France, Japan, Germany).
It deals only with sovereign (government-to-government) debt.
When a country cannot repay its external debt:
Paris Club members meet,
Agree on common terms (rescheduling, reduction, or restructuring),
So that no single creditor gets preferential treatment.
In the G20 Common Framework context:
Paris Club provides technical experience and coordination.
It works with non–Paris Club creditors to ensure fair burden-sharing in debt relief for Low-Income Countries.
Memory Trick:
“Paris Club = Rich governments helping restructure poor countries’ debt.”
China is not a permanent member of the Paris Club, an informal group of major creditor nations.
While China has become the world’s largest official bilateral creditor, it maintains a distinct relationship with the group:
Ad Hoc Participant: Since 2013, China has participated in certain Paris Club activities and negotiations as an "ad hoc participant" rather than a full member.
Bilateral Preference: China generally prefers to negotiate debt restructuring deals bilaterally (directly with debtor nations) rather than through the multilateral frameworks typically used by the Paris Club.
G20 Common Framework: Although not a Paris Club member, China coordinates with the group through the G20 Common Framework for Debt Treatments, which seeks to align the debt relief efforts of Paris Club and non-Paris Club creditors (like China and India).
Membership Obstacles: Key barriers to full membership include China’s reluctance to adopt the transparency and information-sharing standards required by the Club, as well as its desire to be a "rule-maker" rather than a "rule-taker" in Western-dominated institutions.
19.
With reference to Ayushman Bharat Digital Mission, consider the following statements:
1.Private and public hospitals must adopt it.
2.As it aims to achieve universal health coverage, every citizen of India should be part of it ultimately.
3.It has seamless portability across the country.
Which of the statements given above is/are correct ?
(a) 1 and 2 only
(b) 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(b) 3 only
Explanation:
It is a classical example of elimination method importance because by using elimination method you can eliminate first to statement because both the statement uses extreme words.
Statement 1: Incorrect
Participation in Ayushman Bharat Digital Mission (ABDM) is voluntary, not mandatory.
Neither private nor public hospitals are legally required to adopt it.
Statement 2: Incorrect
ABDM aims to create digital health infrastructure, not to mandate universal enrolment.
Citizens may choose whether or not to create an Ayushman Bharat Health Account (ABHA).
Universal Health Coverage is a policy goal, not a compulsory digital registration requirement.
Statement 3: Correct
ABDM enables seamless portability of health records across India.
A person’s digital health records can be accessed anywhere in the country with consent.
Memory Trick:
“ABDM is voluntary, but health data travels nationwide.”
18.
With reference to Non-Fungible Tokens (NFTs), consider the following statements:
1.They enable the digital representation of physical assets.
2.They are unique cryptographic tokens that exist on a blockchain.
3.They can be traded or exchanged at equivalency and therefore can be used as a medium of commercial transactions.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(a) 1 and 2 only
Explanation:
Statement 1: Correct
Non-Fungible Tokens (NFTs) can represent ownership or proof of authenticity of physical or digital assets (e.g., art, real estate, collectibles) in digital form.
Non-Fungible Tokens (NFTs)
Non-fungible means not interchangeable on a one-to-one basis.
Each NFT is unique and cannot be replaced by another NFT of equal value.
Simple example:
A ₹100 note can be exchanged with any other ₹100 note → fungible.
A famous painting cannot be exchanged with another painting → non-fungible.
NFT example:
A digital artwork is converted into an NFT.
Even if many people copy the image, only one person owns the original NFT recorded on blockchain.
NFT = digital ownership certificate.
Statement 2: Correct
NFTs are unique cryptographic tokens recorded on a blockchain.
Each NFT has a distinct identity and cannot be replaced by another token of equal value.
Cryptographic Tokens
Cryptographic tokens are digital tokens secured using cryptography (advanced mathematical codes).
In simple words, cryptography is the science of secure communication that keeps information private and safe.
It works like a digital lock and key, ensuring that only the intended recipient can read or use the data
Cryptography ensures:
Ownership cannot be forged
Transactions cannot be altered
Simple example:
ATM PIN / UPI PIN → protected by cryptography.
Similarly, a cryptographic token uses encryption to prove who owns what.
Types:
Fungible tokens: Bitcoin, Ether (can be exchanged equally).
Non-fungible tokens: NFTs (each one is unique).
3. Blockchain
Blockchain is a decentralised digital ledger.
It records transactions in blocks, linked one after another like a chain.
Once recorded, data cannot be changed.
Simple real-world example:
Imagine a shared Google Sheet:
Everyone can see entries.
No single person can secretly change past records.
Blockchain works similarly but with much higher security.
NFT + Blockchain link:
Blockchain stores:
Who created the NFT
Who owns it
Transfer history
In one line:
Blockchain = Digital record book
Cryptographic token = Secure digital asset
NFT = Unique digital ownership proof
Memory Trick:
“Blockchain records, Crypto secures, NFT proves uniqueness.”
Statement 3: Incorrect
NFTs are non-fungible, meaning they cannot be exchanged at equivalency like currency or cryptocurrencies.
Because of this lack of equivalence, NFTs cannot function as a medium of commercial transactions.
Memory Trick:
“NFT = Unique token, not money.”
What is the meaning that NFTs are non-fungible? Explained with simple example.
Correct Answer:
Non-fungible means something that cannot be exchanged on a one-to-one equal basis with another item.
Explanation:
Fungible items:
Items that are identical and interchangeable.
Example:
One ₹100 note = any other ₹100 note.
One kilogram of rice = another kilogram of rice.
Non-fungible items:
Items that are unique and not interchangeable.
Example:
Your Aadhaar card cannot be exchanged with someone else’s Aadhaar card.
An original painting cannot be replaced by another painting.
NFT example:
An NFT is like a digital ownership certificate.
Even if two digital images look exactly the same:
Each NFT has a unique identity on the blockchain.
One NFT cannot be exchanged for another as “equal”.
Therefore:
NFTs are non-fungible because each token is unique and has a different value or ownership.
Memory Trick:
“Money is interchangeable, identity is not — NFTs are identity.”
In blockchain technology, once recorded, data cannot be changed. Isn't it a very extreme statement? It can be difficult to change the data, but there should be a way to change it.
Correct Answer:
The statement is conceptually correct in exams, but technically it means “practically immutable,” not “physically impossible to change.”
Explanation:
What “cannot be changed” really means in blockchain:
Once data is recorded on a blockchain, it cannot be altered unilaterally or secretly.
Any change would require extraordinary effort, making it economically and practically infeasible.
Why changing data is extremely difficult:
Each block contains:
Transaction data
A cryptographic hash of the previous block
If one block is altered:
Its hash changes
All subsequent blocks’ hashes break
To change data, an attacker must:
Recalculate hashes of that block and all following blocks, and
Gain consensus of the majority of the network (e.g., more than 50% of computing power in Proof-of-Work systems).
Is change theoretically possible?
Yes, in theory (e.g., a 51% attack).
No, in normal conditions, because the cost, coordination, and detection risk are prohibitively high.
UPSC-safe conceptual takeaway:
Blockchain data is tamper-resistant, not magically unchangeable.
The system is designed so that trust comes from difficulty of alteration, not from authority.
Memory Trick:
“Blockchain data is not impossible to change, only impractical to change.”
17.
Which one of the following best describes the term "greenwashing"?
(a) Conveying a false impression that a company's products are eco-friendly and environmentally sound
(b) Non-inclusion of ecological/environmental costs in the Annual Financial Statements of a country
(c) Ignoring the disastrous ecological consequences while undertaking infrastructure development
(d) Making mandatory provision for environmental costs in a government project/programme
Correct Answer:
(a) Conveying a false impression that a company's products are eco-friendly and environmentally sound
Explanation:
Option (a): Conveying a false impression that a company's products are eco-friendly and environmentally sound
This is the correct definition of greenwashing.
It involves misleading marketing or communication where a company claims environmental benefits without real action.
Core elements: false claim + environmental image-building.
Option (b): Non-inclusion of ecological/environmental costs in the Annual Financial Statements of a country
This relates to green accounting / environmental accounting issues at the national level.
It is about measurement failure, not deception.
Hence, not greenwashing.
Option (c): Ignoring the disastrous ecological consequences while undertaking infrastructure development
This reflects poor environmental governance or policy negligence.
There is no false projection of being eco-friendly, which is essential for greenwashing.
Therefore, incorrect.
Option (d): Making mandatory provision for environmental costs in a government project/programme
This indicates internalisation of environmental costs.
It represents responsible and sustainable practice, the opposite of greenwashing.
Hence, not correct.
Memory Trick:
“Greenwashing = Green claims without green reality.”
16.
Consider the following statements:
1.Gujarat has the largest solar park in India.
2.Kerala has a fully solar powered International Airport.
3. Goa has the largest floating solar photovoltaic project in India.
Which of the statements given above is/are correct?
(a) 1 and 2
(b) 2 only
(c) 1 and 3
(d) 3 only
Correct Answer:
(b) 2 only
Explanation:
Statement 1: Incorrect
India’s largest solar park is Bhadla Solar Park, located in Rajasthan, not Gujarat.
Statement 2: Correct
Cochin International Airport (Kerala) is the world’s first fully solar-powered international airport.
Kochi is the current, official name, which was adopted in 1996 to reflect the city's original Malayalam name more accurately.
Cochin is the historical, colonial-era name that was used by the Portuguese and later the British.
Statement 3: Incorrect
India’s largest floating solar photovoltaic project is located at Ramagundam in Telangana, not Goa.
Memory Trick:
“Bhadla in Rajasthan largest solar park, Cochin runs on sun, floating giant is Ramagundam(Telangana).”
15.
"Rapid Financing Instrument" and "Rapid Credit Facility" are related to the provisions of lending by which one of the following?
(a) Asian Development Bank
(b) International Monetary Fund
(c) United Nations Environment Programme Finance Initiative
(d) World Bank
Correct Answer:
(b) International Monetary Fund
Explanation:
Rapid Financing Instrument (RFI):
Emergency lending facility of the International Monetary Fund (IMF).
Provides quick financial assistance to member countries facing balance of payments (BOP) crises.
Does not require a full-fledged economic reform programme.
Rapid Credit Facility (RCF):
IMF facility specifically for Low-Income Countries (LICs).
Provides concessional (low-interest) emergency loans.
Both RFI and RCF are IMF lending instruments, not associated with the World Bank or regional development banks.
Memory Trick:
“Rapid help in crisis = IMF.”
Financing for Member facing BOP.
Credit for LICs
14
With reference to the Indian economy, consider the following statements:
1.An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2.An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
3.An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(c) 1 and 3 only
Explanation:
Statement 1: Correct
Nominal Effective Exchange Rate (NEER) is a weighted average of the rupee against major trading partner currencies.
An increase in NEER means the rupee has appreciated in nominal terms.
Example:
Earlier: ₹80 = 1 USD
Now: ₹75 = 1 USD
Rupee has become stronger.
This strength is reflected as an increase in NEER.
Hence, NEER ↑ = Rupee appreciation.
Statement 2: Incorrect
To understand REER we will apply the multidimension approach.
Real Effective Exchange Rate (REER) adjusts NEER for inflation differentials.
An increase in REER indicates real appreciation of the rupee, making exports costlier.
This reduces, not improves, trade competitiveness.
What REER means:
REER = NEER adjusted for inflation differences between India and other countries.
Example:
Rupee value remains stable.
But inflation in India is higher than in other countries.
Indian goods become costlier compared to foreign goods.
Result:
Exports become less competitive.
Imports become cheaper.
So, REER ↑ = Loss of trade competitiveness, not improvement.
Statement 3: Correct
If domestic inflation is higher than inflation in trading partner countries,
REER rises faster than NEER due to inflation adjustment.
This leads to greater divergence between NEER and REER.
Example:
NEER remains constant (rupee’s nominal value unchanged).
India’s inflation = 7%
Trading partners’ inflation = 3%
Because of higher inflation in India:
REER increases faster than NEER.
Gap between NEER and REER widens.
Hence, higher relative inflation causes divergence between NEER and REER.
Memory Trick:
“NEER shows rupee’s price, REER shows rupee’s power (after inflation).”
REER shows the real purchasing power and competitiveness of the rupee after adjusting for inflation.
Explanation:
REER = Real Effective Exchange Rate
It is calculated by taking NEER (Nominal Effective Exchange Rate) and adjusting it for inflation differences between India and its trading partner countries.
Why this reflects “rupee power”:
Power of a currency means:
How much goods and services it can buy relative to other countries.
Even if the rupee looks strong nominally (NEER):
High domestic inflation can reduce its real value.
REER captures this by answering:
Are Indian goods cheaper or costlier after inflation?
Simple example:
NEER unchanged → Rupee value stable on exchange boards.
India inflation = 8%
Other countries’ inflation = 3%
Indian goods become relatively costlier.
REER increases → Rupee has lost real competitiveness.
So:
REER ↑ = Rupee strong in appearance, weak in real buying power
REER ↓ = Rupee competitive, stronger real power
Memory Trick:
“NEER shows rupee’s price; REER shows rupee’s power (after inflation).”
Memory Trick:
“NEER up = rupee strong; REER up = exports weak; higher inflation widens NEER–REER gap.”
13.
With reference to the Indian economy, consider the following statements:
If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct ?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(b) 2 and 3 only
Explanation:
Statement 1: Incorrect
When inflation is high, RBI aims to reduce liquidity.
Buying government securities through Open Market Operations (OMOs) injects liquidity, which can worsen inflation.
Therefore, RBI would sell, not buy, government securities.
Statement 2: Correct
Rapid rupee depreciation indicates excess demand for dollars.
RBI sells dollars from its foreign exchange reserves to stabilise the rupee.
Statement 3: Correct
Fall in interest rates in the USA or European Union reduces returns there.
Capital flows to emerging markets like India, causing rupee appreciation.
RBI buys dollars to prevent excessive appreciation and maintain export competitiveness.
Suppose:
Interest rate in the USA falls sharply.
Returns on US bonds become low.
Foreign investors look for higher returns and invest in Indian bonds, shares, or projects.
This leads to:
Increased inflow of dollars into India.
Higher supply of dollars → rupee starts appreciating (₹ strengthens).
Excessive rupee appreciation hurts Indian exports.
To prevent this, RBI buys dollars from the market:
Absorbs excess dollars
Prevents sharp rupee appreciation
Increases foreign exchange reserves
Memory Trick:
“High inflation → RBI sells bonds; Weak rupee → RBI sells dollars; Global rates fall → RBI buys dollars.”
12.
With reference to the Indian economy, what are the advantages of "Inflation-Indexed Bonds (IIBs)"?
1.Government can reduce the coupon rates on its borrowing by way of IIBs.
2.IIBs provide protection to the investors from uncertainty regarding inflation.
3.The interest received as well as capital gains on IIBs are not taxable.
Which of the statements given above are correct ?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(a) 1 and 2 only
Explanation:
Statement 1: Correct
Inflation-Indexed Bonds (IIBs) adjust principal and/or interest with inflation.
Since investors are protected against inflation, the government can offer lower real coupon rates compared to normal bonds.
An Inflation-Indexed Bond (IIB) adjusts returns according to inflation, so the investor’s real purchasing power is protected.
Explanation:
Suppose the Government issues an Inflation-Indexed Bond (IIB) with:
Face value = ₹1,000
Real coupon rate = 2%
Inflation index = Consumer Price Index (CPI)
Case 1: Inflation = 5%
Principal is adjusted for inflation:
New principal = ₹1,050
Interest is calculated on adjusted principal:
Interest = 2% of ₹1,050 = ₹21
Total value at end of year = ₹1,071
What this means:
Investor earns 2% real return, irrespective of inflation.
Inflation risk is shifted from investor to the government.
Contrast with normal bond:
Fixed interest bond does not adjust for inflation.
High inflation reduces real returns.
Memory Trick:
“IIB = Inflation badhe → Principal badhe.”
Statement 2: Correct
IIBs are linked to an inflation index (e.g., Consumer Price Index).
This provides inflation protection and removes uncertainty about real returns for investors.
Statement 3: Incorrect
Interest income and capital gains from IIBs are taxable as per prevailing tax laws.
There is no blanket tax exemption for IIBs.
Memory Trick:
“IIBs lower coupons and beat inflation, but not taxes.”
11.
With reference to foreign-owned e-commerce firms, operating in India, which of the following statements is/are correct?
1.They can sell their own goods in addition to offering their platforms as market-places.
2.The degree to which they can own big sellers on their platforms is limited.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Correct Answer:
(b) 2 only
Explanation:
Statement 1: Incorrect
Foreign Direct Investment (FDI) policy in India allows foreign-owned e-commerce firms to operate only under the marketplace model.
They cannot sell their own goods directly to consumers.
Inventory-based model is not permitted for foreign-owned e-commerce firms.
Statement 2: Correct
FDI rules restrict ownership and control over sellers on the platform.
An e-commerce marketplace entity cannot own or control sellers, and sales concentration from a single seller is capped.
This is to prevent indirect inventory control.
What is the meaning of inventory here?
Correct Answer:
Inventory means the stock of goods that a seller (vendor) holds for sale.
Explanation:
In this context, inventory refers to:
The goods or products that a vendor keeps to sell on an e-commerce platform.
It includes:
Goods purchased by the vendor,
Stored by the vendor (or through logistics arrangements),
Intended to be sold to customers.
Why inventory matters here:
If the marketplace controls how the vendor gets these goods,
Then the marketplace is indirectly deciding what is sold, how much is sold, and at what price.
This amounts to inventory control, which is not permitted for foreign-owned e-commerce marketplaces.
Hence, inventory is not the platform’s stock, but the seller’s stock whose control is being examined.
Memory Trick:
“Inventory = Seller’s sale-ready stock.”
If a seller buys most of its goods from the same e-commerce platform, the platform is treated as controlling that seller’s inventory.
Explanation:
A vendor (seller) sells goods on an e-commerce marketplace.
If more than 25% of the goods that the vendor sells are purchased from the marketplace itself or its group companies, then:
The seller is not independent.
The marketplace is considered to be indirectly controlling the seller’s inventory.
This is treated as inventory-based control, which is not allowed for foreign-owned e-commerce marketplaces in India.
Purpose of the rule:
To prevent marketplaces from disguising direct selling through favoured or captive sellers.
In very simple words:
If a seller depends heavily on the platform to buy goods,
The platform is effectively running the seller’s business,
So the law treats it as inventory control.
Memory Trick:
“Seller buys too much from platform → Platform controls inventory.”
What is the meaning of inventory-based model?
Correct Answer:
Inventory-based model means an e-commerce entity owns the goods and sells them directly to consumers.
Explanation:
In an inventory-based model:
The e-commerce company owns or controls the inventory (goods).
Goods are purchased, stored, and sold directly by the platform.
The platform acts as seller, not just an intermediary.
Key features:
Ownership of goods lies with the e-commerce entity.
Pricing, discounts, and supply are controlled by the platform.
Example (conceptual):
Platform buys mobiles in bulk → stores them → sells directly to customers.
Indian regulatory position:
Foreign-owned e-commerce firms are NOT allowed to operate under the inventory-based model.
They are permitted only the marketplace model.
Memory Trick:
“Inventory-based = Platform owns and sells.”
Under India’s Foreign Direct Investment (FDI) policy in e-commerce:
Foreign-owned e-commerce entities cannot own or control inventory.
They cannot exercise control over sellers on their platform.
However:
Partial ownership without control (below prescribed thresholds) may exist in complex structures.
What is strictly prohibited is control leading to inventory-based model.
Memory Trick:
“Foreign e-commerce = Marketplace only, no inventory control.”
10.
Which of the following activities constitute real sector in the economy?
1.Farmers harvesting their crops
2.Textile mills converting raw cotton into fabrics
3.A commercial bank lending money to a trading company
4.A corporate body issuing Rupee Denominated Bonds overseas
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only
(d) 1, 2, 3 and 4
Correct Answer:
(a) 1 and 2 only
Explanation:
Statement 1: Correct
Farming and harvesting involve production of real goods.
This is part of the real sector.
Statement 2: Correct
Manufacturing converts raw materials into finished goods.
This is a core activity of the real sector.
Statement 3: Incorrect
Bank lending is a financial activity.
It belongs to the financial sector, not the real sector.
Statement 4: Incorrect
Issuing bonds is a capital market / financial transaction.
No production of goods or services is involved.
Memory Trick:
“Real sector = Grow it or Make it.”
9.
Which one of the following situations best reflects "Indirect Transfers" often talked about in media recently with reference to India ?
(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment
(b) A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment
(c) An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India
(d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Correct Answer:
(d) A foreign company transfers shares and such shares derive their substantial value from assets located in India
Explanation:
Indirect transfer refers to transfer of shares or interest in a foreign company.
Although the transaction occurs outside India,
The underlying value of those shares is derived substantially from assets located in India.
Such transactions are brought under Indian tax law to prevent tax avoidance (Vodafone-type cases).
Hence, option (d) correctly captures the concept of indirect transfer.
Memory Trick:
“Shares sold abroad, value lies in India = Indirect Transfer.”
8.
With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct?
1.Acquiring new technology is capital expenditure.
2.Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Correct Answer:
(a) 1 only
Explanation:
Statement 1: Correct
Capital expenditure creates or enhances long-term assets or productive capacity.
Acquiring new technology provides enduring benefits to the organisation.
Hence, it is capital expenditure.
Statement 2: Incorrect
Debt financing and equity financing are sources of funds, not expenditures.
They do not represent spending on goods or services.
Therefore, classifying debt as capital expenditure and equity as revenue expenditure is conceptually wrong.
Memory Trick:
“Expenditure builds assets; financing only brings funds.”
Capital Expenditure:
Spending that creates or improves long-term assets.
Benefit lasts for many years.
Example:
A company buys new machinery for ₹50 lakh.
A government builds a highway or power plant.
Revenue Expenditure :
Spending for daily operational needs.
Does not create assets.
Example:
Paying salaries, electricity bills, rent.
Government spending on wages, pensions, subsidies.
Debt Financing:
Money raised by borrowing, which must be repaid with interest.
It is not expenditure, only a source of funds.
Example:
A company takes a bank loan to buy machinery.
Government issues dated government securities to raise money.
Key distinction:
Capital expenditure = use of money to create assets
Debt financing = method of raising money, not spending
Revenue expenditure = routine consumption spending
Memory Trick:
“CAPEX builds, Debt borrows, Revenue runs.”
Equity financing is raising funds by issuing ownership shares in the company.
Explanation:
Equity Financing:
Funds are raised by issuing shares to investors.
Investors become owners (shareholders) of the company.
There is no fixed repayment obligation.
Returns are given as dividends, which depend on profits.
It is a source of funds, not an expenditure.
Simple Examples:
A company issues shares worth ₹10 crore to the public to set up a factory.
A startup raises money from angel investors or venture capitalists in exchange for equity.
Key distinction (UPSC-relevant):
Equity financing ≠ Capital expenditure
Equity financing ≠ Revenue expenditure
It only decides where money comes from, not how money is spent.
Memory Trick:
“Equity = Ownership, not obligation.”
7.
With reference to the Indian economy, consider the following statements:
1.A share of the household financial savings goes towards government borrowings.
2.Dated securities issued at market-related rates in auctions form a large component of internal debt.
Which of the above statements is/are statements is/are correct ?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Correct Answer:
(c) Both 1 and 2
Explanation:
Statement 1: Correct
Household financial savings are invested in instruments like bank deposits, insurance, provident funds, etc.
These institutions, in turn, invest significantly in government securities.
Hence, a part of household financial savings ultimately finances government borrowings.
Statement 2: Correct
Dated securities are long-term government securities issued through auctions.
They are issued at market-related interest rates.
Dated securities constitute the largest component of internal public debt of the Government of India.
Memory Trick:
“Household saves → Institutions invest → Government borrows; Internal debt = mostly Dated G-Secs.”
Dated securities are a subset of Government Securities (G-Secs).
Explanation:
Government Securities (G-Secs):
Broad term for debt instruments issued by the Government (Central or State).
Includes both short-term and long-term instruments.
Dated Securities:
A specific category within G-Secs.
Always long-term instruments.
Have a fixed maturity date (hence “dated”).
Carry fixed or floating interest (coupon).
Issued through auctions at market-determined rates.
Form the largest component of internal public debt.
Key distinction:
Treasury Bills (T-bills) are G-Secs but not dated securities because they are short-term and have no coupon.
In short:
All Dated Securities = G-Secs
All G-Secs ≠ Dated Securities
Memory Trick:
“G-Sec is the family; Dated security is the long-term member with a date.”
6.
Consider the following statements:
1.Tight monetary policy of US Federal Reserve could lead to capital flight.
2.Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
3.Devaluation of domestic currency decreases the currency risk associated with ECBs.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(a) 1 and 2 only
Explanation:
Statement 1 – Correct
When the US Federal Reserve tightens monetary policy (higher interest rates), returns on US assets rise.
This often leads to capital outflows (capital flight) from emerging economies towards the US.
Statement 2 – Correct
Capital flight usually leads to:
Domestic currency depreciation
What does “capital flight leads to domestic currency depreciation” mean?
Step 1: What is capital flight?
Capital flight means:
Foreign investors (and sometimes domestic investors) sell domestic assets
They take money out of the country
And convert domestic currency into foreign currency (usually US dollars)
Step 2: What happens in the foreign exchange market?
In the forex market:
Supply of domestic currency increases
(investors are selling rupees to buy dollars)
Demand for foreign currency increases
(investors want dollars to move funds abroad)
Step 3: Impact on exchange rate
Because of basic demand–supply:
Domestic currency becomes abundant
Foreign currency becomes scarce
👉 Result:
Domestic currency loses value
More rupees are needed to buy one dollar
This is called currency depreciation.
Simple numerical example (UPSC-friendly)
Before capital flight:
1 USD = ₹80
After capital flight:
Heavy demand for USD
1 USD = ₹85
👉 The rupee has depreciated.
Why UPSC links this to ECBs
External Commercial Borrowings (ECBs) are in foreign currency
After depreciation:
Firms must pay more rupees for the same dollar debt
Hence:
Currency risk increases
Debt servicing becomes costlier
What depreciation does NOT mean (important traps)
❌ Not deliberate government action (that is devaluation)
❌ Not inflation itself (though linked)
❌ Not improvement in purchasing power
UPSC-ready one-line definition
Domestic currency depreciation means a fall in the value of the domestic currency relative to foreign currencies due to excess supply in the foreign exchange market.
Memory Trick
“foreign Money leaves →domestic currency weakens.”
Higher risk perception
Higher risk perception refers to investors’ increased assessment of uncertainty and potential loss, leading them to demand higher returns or withdraw capital.
Firms with existing External Commercial Borrowings (ECBs) may face:
Higher interest costs (especially for floating-rate or refinanced ECBs)
Increased overall debt servicing burden.
Statement 3 – Incorrect
Devaluation of domestic currency increases, not decreases, the currency risk of ECBs.
ECBs are denominated in foreign currency; depreciation means firms must pay more in domestic currency to service the same foreign debt.
What does ECB mean?
External Commercial Borrowings (ECBs) are loans raised by Indian entities from non-resident (foreign) lenders in foreign currency or Indian rupees.
Who can borrow under ECBs?
Indian companies
NBFCs (Non-Banking Financial Companies)
Infrastructure entities
Certain other eligible borrowers as notified
From whom are ECBs borrowed?
Foreign banks
International capital markets
Multilateral financial institutions
Foreign equity holders (under conditions)
Why do firms use ECBs?
Lower interest rates abroad
Long-term funds
Access to large pools of capital
Infrastructure and capital expenditure financing
Key risk associated with ECBs (UPSC focus)
Currency risk
If the rupee depreciates, repayment in rupees becomes costlier.
Interest rate risk
Especially for floating-rate ECBs.
UPSC-ready one-line definition
External Commercial Borrowings are loans raised by Indian entities from foreign lenders, usually in foreign currency, to meet funding needs.
Memory Trick
“ECB = External money for companies.”
Memory Trick:
“Fed tightens → money flies; weaker currency → ECB risk rises.”
5.
Consider the following statements:
1.In India, credit rating agencies are regulated by Reserve Bank of India.
2.The rating agency popularly known as ICRA is a public limited company.
3.Brickwork Ratings is an Indian credit rating agency.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(b) 2 and 3 only
Explanation:
This was a easy question because it checks only one understanding whether you know the regulator of credit rating Agencies.
Statement 1 – Incorrect
In India, Credit Rating Agencies (CRAs) are regulated by SEBI, not by the Reserve Bank of India.
Regulation is under the SEBI (Credit Rating Agencies) Regulations, 1999.
RBI may use ratings for regulatory purposes, but it is not the regulator.
Statement 2 – Correct
ICRA Limited (earlier Investment Information and Credit Rating Agency of India) is a public limited company.
It is listed on Indian stock exchanges.
Statement 3 – Correct
Brickwork Ratings is an Indian credit rating agency, headquartered in India and registered with SEBI.
✅ Hence, statements 2 and 3 only are correct.
Memory Trick:
“CRAs are watched by SEBI; ICRA is public; Brickwork is desi.”
4.
With reference to the ‘Banks Board Bureau (BBB)’, which of the following statements are correct?
1.The Governor of RBI is the Chairman of BBB.
2.BBB recommends for the selection of heads of Public Sector Banks.
3.BBB helps the Public Sector Banks in developing strategies and capital raising plans.
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Correct Answer:
(b) 2 and 3 only
Explanation:
Statement 1 – Incorrect
The Governor of the Reserve Bank of India (RBI) is not the Chairman of the Banks Board Bureau.
The BBB has an independent Chairperson, appointed by the Government of India.
Statement 2 – Correct
The BBB recommends candidates for the appointment of whole-time directors and non-executive chairpersons of Public Sector Banks (PSBs).
Statement 3 – Correct
The BBB also assists PSBs in:
Formulating business strategies
Developing capital-raising and governance plans
✅ Hence, only statements 2 and 3 are correct.
Memory Trick:
“BBB = Bank heads + Bank strategy .”
Expected Questions
What is the Banks Board Bureau (BBB)?
The Banks Board Bureau (BBB) was an autonomous advisory body set up in 2016.
It was established as part of the Indradhanush Mission for reforms in Public Sector Banks (PSBs).
The BBB has since been replaced by the Financial Services Institutions Bureau (FSIB) in July 2022.
Core Functions of BBB (now FSIB)
The BBB was not a regulator and not a decision-making authority.
It functioned as a recommendatory and advisory body.
Its key roles were:
Appointments
Recommended candidates for:
Whole-time Directors
Non-executive Chairpersons
For:
Public Sector Banks
Public Sector Financial Institutions
(Later extended to insurance sector → led to FSIB)
Advisory Role
Advised the Central Government on:
Appointments
Tenure extensions
Termination of services
Management structure of PSBs
Strategy & Capital Planning
Assisted PSBs in:
Business strategy formulation
Capital raising plans
Handling stressed assets (NPAs)
Governance & Ethics
Recommended codes of conduct and ethics
Aimed at improving corporate governance in PSBs
Capacity Building
Built a performance databank of PSBs and senior officers
Suggested training and leadership development measures
Composition (Exam-relevant)
Chairman (first: Vinod Rai, former CAG)
Ex-officio Government Secretaries
RBI Deputy Governor (not RBI Governor)
Independent expert members
👉 This directly explains why Statement-1 (RBI Governor as Chairman) is incorrect.
Why BBB was replaced by FSIB?
Legal and constitutional challenges arose regarding:
BBB’s authority in appointments to public sector insurance companies
To give a statutory, uniform, and legally robust structure, the government set up:
Financial Services Institutions Bureau (FSIB) in July 2022
FSIB now covers:
PSBs
Financial institutions
Public sector insurance companies
UPSC-Ready One-Line Takeaway
The Banks Board Bureau (2016–2022) was an autonomous advisory body under the Indradhanush Mission for PSB governance and appointments, later replaced by the FSIB to provide a legally robust institutional framework.
What does FSIB (Financial Services Institutions Bureau) cover?
FSIB recommends top-level appointments (Chairperson / MD / Whole-time Directors) only for government-owned financial service institutions, not regulators.
It broadly covers three categories 👇
1️⃣ Public Sector Banks (PSBs)
FSIB recommends appointments for all Public Sector Banks, such as:
State Bank of India
Punjab National Bank
Bank of Baroda
Canara Bank
Union Bank of India
👉 This is the core and original mandate (inherited from BBB).
2️⃣ Public Sector Insurance Companies (Very Important)
Life Insurance
Life Insurance Corporation of India
General Insurance
General Insurance Corporation of India (Reinsurer)
New India Assurance
United India Insurance
Oriental Insurance
National Insurance Company
👉 Inclusion of insurance PSUs was the key reason FSIB replaced BBB.
3️⃣ Select Public Sector Financial Institutions (PSFIs)
These are government-owned financial institutions, not regulators.
Examples:
Export-Import Bank of India
National Bank for Financing Infrastructure and Development
(Any other government-owned financial institution specifically notified by the Government may also come under FSIB.)
❌ What FSIB does NOT cover (High-value elimination points)
FSIB has NO role in appointments of:
Reserve Bank of India
Securities and Exchange Board of India
Insurance Regulatory and Development Authority of India
Pension Fund Regulatory and Development Authority
National Bank for Agriculture and Rural Development
👉 Regulators and statutory development banks have separate appointment mechanisms under their own Acts.
UPSC-ready one-line answer
FSIB covers Public Sector Banks, Public Sector Insurance Companies (LIC and general insurers), and select government-owned financial institutions such as EXIM Bank and NaBFID, but not financial regulators.
Memory Trick
“FSIB = Banks + Big Insurers + Govt finance bodies — NOT regulators.”
3.
With reference to Convertible Bonds, consider the following statements:
1.As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
2.The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Correct Answer:
(c) Both 1 and 2
Explanation:
Statement 1 – Correct
Convertible Bonds offer an equity conversion option, which has value for investors.
Because of this added option, issuers can pay a lower coupon (interest rate) compared to non-convertible bonds.
Statement 2 – Correct
If the bond is converted into equity, the investor’s return becomes linked to company performance and share prices.
Over time, equity prices tend to adjust to inflation, providing an indirect hedge (indexation-like effect) against rising consumer prices.
This is not formal indexation, but a market-linked protection.
Memory Trick:
“Convert to shares → lower coupon, inflation catch.”
👉 Conversion option = lower interest
Expected Questions
Meaning of “degree of indexation” in Statement-II
What is indexation (in economics/finance)?
Indexation means linking the value of an asset or income to a price index (usually the Consumer Price Index – CPI) so that its real value is protected against inflation.
Example:
If prices rise by 6%, an indexed asset’s value or return also rises by ~6%.
What does “degree of indexation” mean here?
It means partial or indirect protection against inflation,
not full, automatic CPI-linked protection.
👉 The phrase “degree of” is crucial.
How convertible bonds provide this degree of indexation
A convertible bond can be converted into equity.
Equity prices, in the long run:
Reflect nominal growth
Adjust to inflation through higher revenues and profits
When inflation rises:
Prices of goods rise
Corporate revenues rise
Share prices tend to rise over time
👉 If the bondholder converts to equity, their returns move with inflation indirectly.
What it is NOT (UPSC trap)
❌ Not formal indexation like inflation-indexed bonds
❌ Not automatic CPI adjustment
❌ Not guaranteed protection
It is:
✅ Market-based
✅ Conditional
✅ Partial
That is why the statement uses “degree of indexation”, not “indexation”.
UPSC-ready one-line meaning
“Degree of indexation” means partial, indirect protection against inflation through equity-linked returns, not direct CPI-linked adjustment.
Memory Trick
“Equity grows with prices, not with CPI math.”
2.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
(a) Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India
Correct Answer:
(d) Reserve Bank of India
Explanation:
Reserve Bank of India (RBI) is mandated to maintain price stability while keeping in mind growth objectives.
Under the inflation targeting framework, RBI uses monetary policy instruments (policy rates, liquidity operations) to control inflation.
The target is set by the Government, but implementation and control of inflation are RBI’s responsibility.
Why others are incorrect :
Department of Consumer Affairs → Monitors prices of essential commodities; not monetary control.
Expenditure Management Commission → Focuses on public expenditure efficiency.
Financial Stability and Development Council (FSDC) → Ensures financial stability; does not control inflation.
Memory Trick:
“Price stability = RBI’s duty.”
1.
In India, which one of the following compiles information on industrial disputes, closures, retrenchments and layoffs in factories employing workers?
(a) Central Statistics Office
(b) Department for Promotion of Industry and Internal Trade
(c) Labour Bureau
(d) National Technical Manpower Information System
Correct Answer:
(c) Labour Bureau
Explanation:
The Labour Bureau compiles and publishes data on:
Industrial disputes
Closures
Retrenchments
Layoffs
Retrenchment: Permanent job elimination; often no recall rights.
Layoff: Temporary; often includes "recall rights" if business improves
Key Aspects of Retrenchment
Reasons: Economic downturns, redundancy (e.g., due to machines), restructuring, lack of demand, or business closure.
Not for: Performance issues, misconduct, voluntary retirement, or superannuation (reaching retirement age).
This data is collected under labour-related laws such as the Industrial Disputes Act, 1947.
The Bureau functions under the Ministry of Labour and Employment and is the nodal agency for labour statistics in India.
Central Statistics Office (CSO) → National accounts, GDP, IIP (now part of NSO).
Department for Promotion of Industry and Internal Trade (DPIIT) → Industrial policy, FDI, startups.
National Technical Manpower Information System (NTMIS) → Technical manpower assessment, not labour disputes.
Memory Trick:
“Dispute–Layoff data = Labour Bureau.”
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