PREVIOUS YEAR SOLVED PAPERS - July 2018
- Option : B
- Explanation : Monetary policy: The central bank, by its policy towards the cost and availability of credit, can significantly influence the savings, investments and consumer spending in the economy. Depending on the conditions of the economy and the general economic policy of the government, the central bank (called the Reserve Bank in India) may adopt an expansionary or contractionary or neutral monetary policy. For example, a one percentage point reduction in the Cash Reserve Ratio (CRR) or Statutory Liquidity Reserve Ratio (SLR) will significantly increase the loanable funds with the commercial banking system. An increase in these ratios will have the opposite effect. Monetary policy may also be pressed into action to influence the exchange rate of the currency.
2. Which one of the following is not the characteristic of capitalism?
- A
Individuals and associations behave with economic motive of maximising their profit with least sacrifice or cost.
- B
The country’s major means of production are either owned by the Government or their use is controlled by the Government.
- C
Producers, consumers and employees compete among themselves, as the resources and opportunities are limited.
- D
Price, the invisible hand, plays a predominant role in the flow of the factors of production and consumption.
- Option : B
- Explanation : The main characteristics of capitalism are as follows:
∎ Two-class system: Historically a capitalist society was characterized by the split between two classes of individuals—the capitalist class, which owns the means for producing and distributing goods (the owners) and the working class, who sell their labour to the capitalist class in exchange for wages. The economy is run by the individuals (or corporations) who own and operate companies and make decisions as to the use of resources. But there exists a “division of labour” which allows for specialization, typically occurring through education and training, further breaking down the two class system into sub-classes (e.g., the middle class).
∎ Profit Motive: Companies exist to make a profit. The motive for all companies is to make and sell goods and services only for profits. Companies do not exist solely to satisfy people’s needs. Even though some goods or services may satisfy needs, they will only be available if the people have the resources to pay for them.
∎ Minimal Government Intervention: Capitalist societies believe markets should be left alone to operate without government intervention. However, a completely government-free capitalist society exists in theory, only. Even in the United States— the poster child for capitalism, the government regulates certain industries, such as the Dodd-Frank Act for financial institutions. By contrast, a purely capitalist society would allow the markets to set prices based on demand and supply for the purpose of making profits.
∎ Competition: True capitalism needs a competitive market. Without competition, monopolies exist, and instead of the market setting the prices, the seller is the price setter, which is against the conditions of capitalism.
∎ Willingness to Change: The last characteristic of capitalism is the ability to adapt and change. Technology has been a game changer in every society, and the willingness to allow change and adaptability of societies to improve inefficiencies within economic structures is a true characteristic.
- A
The scope of the private sector has been enormously expanded.
- B
Public sector has been withdrawing partially or fully from several of the enterprises by divestment.
- C
The Indian industry is increasingly exposed to foreign competition.
- D
Monopoly or dominant position for the public sector in most of the industries and control of the commanding heights of the economy by the public sector.
- Option : D
- Explanation : The government announced a New Industrial Policy on July 24, 1991. This new policy deregulates the industrial economy in a substantial manner. The major objectives of the new policy are to build on the gains already made, correct the distortions or weaknesses that might have crept in, maintain a sustained growth in productivity and gainful employment, and attain international competitiveness. In pursuit of these objectives, the government announced a series of initiatives in the new industrial policy as outlined below:
∎ Abolition of Industrial Licensing: In a major move to liberalise the economy, the new industrial policy abolished all industrial licensing irrespective of the level of investment except for certain industries related to security and strategic concerns, and social reasons. Now there are only 6 industries for which licensing is compulsory as amended in February 1999. These are alcohol, cigarettes, hazardous chemicals, drugs and pharmaceuticals, electronics, aerospace and defense equipments, and industrial explosives.
∎ Public Sector’s Role Diluted: The number of industries reserved for the public sector since 1956 was seventeen. This number has now been reduced to three. They are arms and ammunition and allied items of defense equipment, atomic energy and rail transport. The main elements of Government Policy towards Public Sector Undertakings (PSUs) are:
✶ Bring down government equity in all non-strategic PSUs to 26 per cent or lower, if necessary;
✶ Restructure and revive potentially viable PSUs;
✶ Close down PSUs which cannot be revived; and
✶ Fully protect the interests of workers.
∎ Abolition of Phased Manufacturing Programmes: Devaluation of currency and increasing FDI led government to liberalise local content requirement for indigenous firms.
∎ MRTP Act: MRTP Act has been amended to remove the threshold limits of assets in respect of MRTP companies and dominant undertakings. The new industrial policy also states that the government will undertake review of the existing public enterprises in low technology, small-scale and non-strategic areas. Sick units will be referred to the Board for Industrial and Financial Reconstruction for advice about rehabilitation and reconstruction. For enterprises remaining in the public sector it is stated that they will be provided a much greater degree of management autonomy through the system of Memorandum of Understanding (MOU).
∎ Free Entry to Foreign Investment and Technology: The Government is committed to promote increased flow of Foreign Direct Investment (FDI) for better technology, modernisation, exports and for providing products and services of international standards. Therefore, the policy of the Government has been aimed at encouraging foreign investment particularly in core infrastructure sectors so as to supplement national efforts. The salient features of the FDI policy are:
★ There are two modalities for FDI approval: (a) automatic approval by the Reserve Bank, and (b) approval by Foreign Investment Promotion Board (FIPB)/Government.
★ 34 categories/groups of high priority industries identified on the basis of National Industrial Classification qualify for automatic approval up to 50/51/74/ 100 per cent FDI depending on the nature of activity.
★ Projects for electricity generation, transmission and distribution, and construction and maintenance of roads, highways, vehicular tunnels, vehicular bridges, ports and harbours have permitted foreign equity participation up to 100 per cent under the automatic route. o FIPB is required to dispose of applications for FDI within a time frame of six weeks.
★ FDI is not permissible in agriculture, real estate and insurance activities.
★ Full repatriation of original investment and returns except for dividend balancing and foreign exchange neutrality conditions in certain sectors.
★ Liberal access to foreign technology. Automatic approval to lump sum payment of up to US $2 million and royalty at the rate of 5 per cent for domestic sales and 8 per cent for exports subject to a total payment of 8 per cent on sales for a period not exceeding 7 years from the date of commercial production.
★ Easy access to domestic debt. Foreign companies that invest in India can leverage in India by way of domestic debt from domestic financial institutions.
★ Liberal external commercial borrowings and debt servicing norms.
★ No ceiling on raising Global Depository Receipts (GDRs), American Depository Receipts (ADRs), and Foreign Currency Convertible Bonds (FCCBs).
∎ Industrial Location Policy Liberalised: The new industrial policy provides that in locations other than cities of more than 1 million populations, there will be no requirement of obtaining industrial approvals from the centre, except for industries subject to compulsory licensing. In cities with a population of more than 1 million, industries other than those of a non-polluting nature will be located outside 25 kms of the periphery. Since there is 23 cities in India with a population of more than 1 million each, the new industrial policy has dispensed with government clearance for the location of projects except in the case of these 23 cities.
∎ Removal of Mandatory Convertibility Clause: A large part of industrial investment in India is financed by loans from banks and financial institutions. These institutions have followed a mandatory practice of including a convertibility clause in their lending operations for new projects. This has provided them an option of converting part of their loans into equity if felt necessary by their management. The new industrial policy has provided that henceforth financial institutions will not impose this mandatory convertibility clause.
- Option : C
- Explanation : Important information to be incorporated in the Memorandum of Association as specified in the Companies Act, 2013 mentioned below:
The memorandum of a company shall state—
∎ the name of the company with the last word “Limited” in the case of a public limited company, or the last words “Private Limited” in the case of a private limited company: Provided that nothing in this clause shall apply to a company registered under section 8;
∎ the State in which the registered office of the company is to be situated;
∎ the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof;
∎ the liability of members of the company, whether limited or unlimited, and also state—
★ in the case of a company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the shares held by them; and
★ in the case of a company limited by guarantee, the amount up to which each member undertakes to contribute—
(a) to the assets of the company in the event of its being wound-up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member, as the case may be; and
(b) to the costs, charges and expenses of winding-up and for adjustment of the rights of the contributories among themselves;
∎ in the case of a company having a share capital—
★ the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount and the number of shares which the subscribers to the memorandum agree to subscribe which shall not be less than one share; and
★ the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;
∎ in the case of One Person Company, the name of the person who, in the event of death of the subscriber, shall become the member of the company.
The name stated in the memorandum shall not—
∎ be identical with or resemble too nearly to the name of an existing company registered under this Act or any previous company law; or
∎ be such that its use by the company—
★ will constitute an offence under any law for the time being in force; or
★ is undesirable in the opinion of the Central Government.
Reason (R): High rate of growth, ceteris paribus, is associated with rise in imports and increase in the imports, ceteris paribus, is associated with a fall in the relative price of imports.
- Option : A
- Explanation : The relative price of imports (i.e., the relative change in the prices of imports and domestic goods). An increase in the imports, ceteris paribus, is associated with a fall in the relative price of imports.
From the above factors, it can be inferred that the volume of imports tends to be very high when there is a conjuncture of high rate of economic growth and a sharp fall in the relative price of imports and vice versa.
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