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Approach – Answer: General Studies Mains Mock Test 851 (2017)

Answer all the questions in NOT MORE THAN 200 WORDS each. Content of the answers is more important than
its length. All questions carry equal marks. 12.5X20=250

1. While India has made great strides in removing the barriers to the entry of firms, talent and
technology, less progress has been made in relation to exit. In this context, discuss the causes of and
costs associated with impeded exit in India.

Approach:

 First, briefly explain the statement.

 Then bring out the causes that impede exit in India.
 Also discuss the costs associated with impeded exit.

Answer:

A market economy requires unrestricted entry of new firms, new ideas, and new technologies so that the
forces of competition can guide capital and labour resources to their most productive and dynamic uses.
But it also requires exit so that resources are forced or enticed away from inefficient and unsustainable
uses. Over the course of six decades, the Indian economy has moved from ‘socialism with limited entry
to “marketism” without exit’.

Since the early 1980s, the Indian economy has made remarkable progress in increasing entry: industrial
licensing has been dismantled, public sector monopolies have been diluted, some public sector assets
have been privatised, foreign direct investment has been considerably liberalised and trade barriers have
been reduced. However, there has been less progress in relation to exit and impeded exit has been
resulting in substantial fiscal, economic and political costs.

Associated costs

 Fiscal costs: Exit is impeded often through government support of incumbent, mostly inefficient,
firms. This support – in the form of explicit subsidies (for example, bailouts) or implicit ones (tariffs,
loans from state banks) – represents a fiscal cost to the economy.
 Economic costs: Economic losses result from resources and factors of production not being
employed in their most productive uses. In a capital scarce country such as India, misallocation of
resources can have significant costs. Another cost, in the current context, stems from the overhang
of stressed assets on corporate and bank balance sheets. The consequence is a reduced flow of new
investment, dampening medium term growth.
 Political costs: The lack of exit can have considerable political costs for governments attempting to
reform the economy. The benefits of impeded exit often flow to the rich and influential in the form
of support for “sick” firms. This can give the impression that governments favour large corporates,
which politically limits the ability to undertake measures that will benefit the economy but might be
seen as further benefitting business.

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 In India, the exit problem arises because of three types of reasons, what might be called the three I’s:
interests, institutions, and ideas/ideology.

Causes of impeded exit in India:

 Interests: The first, most obvious, and perhaps most powerful reason for lack of exit is the power of
vested interests. Often, this vested interest problem is aggravated by a certain imbalance or
asymmetry that confers greater power on concentrated producer interests in relation to diffused
consumer interests. An example of interest groups blocking reforms is the introduction of JAM for
MGNREGA. In case of administrative schemes, vested interests often create a market of their own,
planning their actions to benefit from it. Thus, schemes may become an instrument of granting
favours.
 Institutions: Another reason for impeded exit is institutions – both weak and strong institutions.
Examples of weak institutions are legal procedures that increase the costs – time and financial costs
– of exit. One example is the debt recovery tribunals (DRTs). On the other hand, strong investigative
agencies are responsible for the tendency of risk-aversion in decision makers, perpetuating status
quo and impeding exit. Ideas/ ideology: A third reason for impeded exit relates to ideas/ideology. In
a democratic country like India with sizable poverty and inequality, it is very difficult to phase out
entitlements/incentives.

To address the exit problem, the government must allow inefficient firms to exit through its direct
policies and transparent actions. Recent initiatives like Bankruptcy Code, rehabilitation of stalled
projects, changes in Prevention of Corruption Act etc. are steps in the right direction.

2. What were the major objectives and measures initiated by the New Economic Policy of 1991? Examine
the major achievements and limitations of these reforms in the last 25 years.

Approach:

 In the introduction explain why the New Economic Policy of 1991 was needed.
 List the major objectives and measures initiated by the policy.
 Evaluate the achievements as well as limitations of the reforms since then.

Answer:

In 1991, India met with a serious economic crisis relating to its external debt accompanied by rising
prices of essential goods. This led the government to introduce a new set of policy measures which
changed the direction of our developmental strategies.

Objectives

 To create a more competitive economic environment and facilitate economic growth by removing
various barriers on private sector.
 To maintain sufficient foreign exchange reserves and simultaneously keep a stable inflation.
 To increase competitiveness of Indian goods in the international market.
 To correct the balance of payment conditions.

Measures initiated

 Stabilisation measures were short term measures, intended to correct some of the weaknesses that
had developed in the balance of payments and to bring inflation under control.
 Structural reform policies were long-term measures, aimed at improving the efficiency of the
economy and increasing its international competitiveness by removing the rigidities in various

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 segments of the Indian economy. They fall under three heads - liberalization, privatization and
globalization.

Achievements

 High growth: The growth of GDP increased from 5.6 per cent during 1980-91 to 8.2 per cent during
2007-08
 Foreign investment: The foreign investment, which includes foreign direct investment (FDI) and
foreign institutional investment (FII), has increased from about US $ 100 million in 1990-91 to US $
467 billion in 2012-13.
 Foreign exchange reserves: There has been an increase in the foreign exchange reserves from about
US $ 6 billion in 1990-91 to about US $ 366 billion in 2015-16. India is one of the largest foreign
exchange reserve holders in the world.
 Rising exports: India is seen as a successful exporter of auto parts, engineering goods, IT software
and textiles in the reform period.

Limitations

 Jobless growth: Though the GDP growth rate has increased in the reform period, the reform-led
growth has not generated sufficient employment opportunities.
 Agriculture neglected: Reforms have not been able to benefit agriculture, where the growth rate has
been decelerating.
 Social Spending: Economic reforms have placed limits on the growth of public expenditure especially
in social sectors.
 Revenue: The tax reductions in the reform period aimed at yielding larger revenue and to curb tax
evasion, have not achieved its targeted increase in tax revenue for the government.

Need for second generation reforms

The reforms of the 1990’s made India break free of the low growth trap. But there is a need today to
move more strongly with the second generation reforms, open the economy further and allow Indian
companies to make larger acquistions abroad.

3. What do you understand by Green Finance? Explain its importance and discuss the issues related to use
of Green Finance in the context of India.

Approach:

 Explain the meaning of Green Finance.

 Explain its importance in the context of India.
 Discuss issues related to Green Finance
Answer:

Green Finance refers to financial investments flowing towards sustainable development projects and
initiatives. The thematic areas that Green Finance covers are clean energy, energy efficiencies,
sustainable transport, water and waste management, biofuels etc.

Importance of Green Finance

Green finance has attained a lot of importance in the past few years due to increased focus of Green
development. In 2015, green bonds issued by governments, banks, corporate and individual projects
amounted to USD 42 billion.

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 Green Finance is very relevant in the context of India. The Indian government policies and programs in
various sectors require huge funding and most of these are related to sustainable development.
Attainment of renewable energy target of 160 GW by 2022, development of smart cities, providing green
infrastructure in terms of transport etc. requires Green Finance.

The resources of the public sectors are constrained and there is an urgent need for private finances to
invest in green projects and infrastructure development. For this, developing countries like India need to
develop a robust green bond market through international collaboration in information and knowledge
sharing and encouraging private sector to invest

The major issues related to Green Finances are:

 Lack of internationally agreed universal definition of Green Finance with specific standards in terms
of use of proceeds, evaluations, management of proceeds, financial reporting and procedures.
 Most of Green technology is with developed countries and under protected realm of IPR.
 Green Finance should not only be limited to renewable energy investments but also to greening of
coal technologies and poverty programs etc.
 With respect to India, low credit ratings of potential issues of Green Finance and high costs of
issuances act as impediments.
 Green Finance should also consider unsustainable pattern of consumptions as parameters in
deciding finance, particularly conspicuous consumptions and unsustainable lifestyle in developed
countries.

India has started issuing green bonds for renewable energy projects. The government needs to provide
specific tax incentives, increase PSL targets for Green Finance and diversify the process of Green Finance
to areas not limited to renewable energy to realize the full potential.

4. What do you understand by informal sector? How is the status of workers in this sector different from
that in the formal sector? Enumerate the steps taken by the government to improve the condition of
workers in the informal sector in recent times.

Approach:

 Briefly explain the meaning of informal sector.

 Compare the status of workers in informal and formal sectors.
 Mention the recent steps taken by the government to improve the condition of workers in the
informal sector.
Answer:

The National Commission for Enterprises in the Unorganised Sector (NCEUS) defines informal sector in
the following way: “The informal sector consists of all unincorporated private enterprises owned by
individuals or households engaged in the sale and production of goods and services operated on a
proprietary or partnership basis and with less than ten total workers”.

Informal sector includes farmers, agricultural labourers, owners of small enterprises and people working
in those enterprises and also the self-employed who do not have any hired workers. It also includes all
non-farm casual wage labourers who work for more than one employer such as construction workers.

It has following characteristics:

 Absence of official protection and recognition

 Non coverage by minimum wage legislation and social security system
 Predominance of own-account and self-employment work
 Absence of trade union organization
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  Low income and wages
 Little job security

Compared to formal sector workers

The formal sector workers are better placed than informal workers because:

 Workers in formal sector get regular income.

 Labor laws protect their rights.
 They form trade unions, bargains with employers for better wages and other social security
measures.

Steps taken by the government

 Skill development: To take care of the need for skills of workers in the informal economy, the
government has started various programs such as the Skill India Mission, Pradhan Mantri Kaushal
Vikas Yojana, Deen Dayal Upadhyay Grameen Kaushal Yojana, recognition of prior learning etc.
 Social security: To provide social security benefits, the Parliament enacted the Unorgnaised Workers’
Social Security Act, 2008. The government has also launched Atal Pension Yojana, Pradhan Mantri
Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana, Rashtriya Swasthya Bima Yojana etc.

Improving the conditions of workers in the informal sector assumes significance from the perspective of
inclusive growth. Keeping in mind the low incomes of informal works, the Government should take steps
to prescribe minimum wages for the informal sector.

5. Examine the advantages of direct cash transfer of subsidies over other mechanisms of disbursing them.
In this context, bringing out the role of JAM Trinity, identify the challenges in its implementation and
suggest possible solutions to address them.

Approach:

 Evaluate the advantages of direct cash transfer of subsidies.

 Bring out the role of JAM Trinity in its implementation.
 Discuss the challenges in its implementation.
 Conclude by suggesting possible solutions.

Answer:

Direct cash transfer is a mechanism by which government subsidies and other benefits are directly
credited in the bank account of beneficiary.

Advantages

 Market distortions are minimized through direct cash transfers of subsidies. Otherwise dual price
markets are created where two sets of prices for the same goods are present.
 Leakages, corruption and black marketing can be eliminated by direct transfer of cash. In PDS
system where goods are physically moved, lots of diversions take place.
 Cash transfer reduces cost and is simpler to administer. Government spends a huge amount of
money over administrative apparatus for subsidy disbursement.

Role of JAM

For effecting direct cash transfers, government must be able to identify beneficiaries;. transfer money to
beneficiaries; and beneficiaries must be able to easily access their money.

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  Aadhar helps in beneficiary identification.
 Jan Dhan Yojana increased people with bank accounts. It enables transferring money to intended
beneficiaries.
 The Mobile money payments technologies enable beneficiaries to access their money.

Challenges in implementation

The implementation challenges can be categorized as first mile, middle mile and last mile challenges.

First mile

 Targeting: targeted subsidies require detailed information about beneficiaries.

 Beneficiary databases: the databases needs to be continuously updated and seeded with Aadhaar
and bank account information and mobile numbers.
 Eligibility: Some benefits are for households while others are for individuals.

Middle mile

 Within-government coordination: ministries and state government departments share authority in

administering subsidies and transfers.
 Supply chain interest groups: agents along a commodity’s supply chain can obstruct the spread of
JAM if their interests are threatened.

Last mile

 Beneficiary financial inclusion: in rural areas physical connectivity to the banking system remains
limited.
 Beneficiary vulnerability: exclusion error risks increase when the beneficiary population is poorer.

Way forward

The government should incentivize the ministries and states to:

 Invest in first-mile capacity (by improving beneficiary databases).

 Deal with middle-middle challenges (by designing incentives for supply chain interest groups to
support DBT).
 Improve last-mile financial connectivity (by developing the BC and mobile money space).

6. What are various types of irrigation systems in India? Explain the benefits of micro-irrigation over the
conventional irrigation systems. Also discuss the bottlenecks in the adoption of this technology.

Approach:

 Briefly explain the various types of irrigation systems in India.

 Explain the benefits of micro irrigation systems.
 Discuss the bottlenecks in the adoption of micro irrigation.

Answer:

Various types of irrigation techniques differ in how the water is distributed within the field. The various
irrigation techniques are as under:

 Surface Irrigation: Water moves over and across the land by simple gravity flow. Surface irrigation
can be subdivided into furrow, border, strip or basin irrigation. It is often called flood irrigation when
the irrigation results in flooding or near flooding of the cultivated land.

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  Micro irrigation: It is application of water at low volume and frequent interval under low pressure to
plant root zone. Its types are drip irrigation, sprinkler irrigation etc.
 Sub-irrigation: it is also called seepage irrigation. It is used in field crops in areas with high water
tables. It is a method of artificially raising the water table to allow the soil to be moistened from
below the plants' root zone.

Benefits of micro irrigation systems

 Water savings: water is saved through different ways such as:

o By reducing loss of water in conveyance.
o By reducing loss of water through evaporation, run off, and by deep percolation.
 Lower consumption of fertilizers; An efficient drip irrigation system reduces consumption of fertiliser
through fertigation
 Cost savings: There are substantial reductions in irrigation costs and savings on electricity and
fertilisers.
 Higher yields: the yields are higher than traditional flood irrigation. Yields of crops increase – up to
45 per cent in wheat, 20 per cent in gram and 40 per cent in soybean.
 Weed and disease reduction: It helps in inhibiting growth of weeds as it keeps limited wet areas.
Under this condition the incidence of disease is also reduced.
 Improved production on marginal land as the fields need not be leveled.
 Overall, improvement in net farm incomes is substantial.

Bottlenecks in adoption

 The adoption of this technology has high initial costs.

 Uninterrupted availability of electric power is required.
 Micro-irrigation systems normally have greater maintenance requirements. Soil particles, algae, or
mineral precipitates can clog the emission devices.
 Potential for damage. Animals, rodents and insects may cause damage to some components.

However, the increase in yields and reduction in costs of power and fertiliser use can help farmers
recover the fixed cost quickly.

Way Forward

Irrigation investments must shift towards adopting technologies like sprinkler and drip irrigation. In order
to facilitate this shift:

 The new irrigation technologies need to be accorded “infrastructure lending” status; and
 Both the Centre and states need to increase public spending for micro irrigation.
 Provisions for credit to farmers can incentivise greater adoption of this technology.

7. Discuss the scope and significance of food processing industry in India. Also elaborate upon the
upstream and downstream requirements of the food processing industry in India.

Approach:

 In introduction discuss the potential of food processing.

 Mention its scope and significance in detail.
 Define upstream and downstream requirements and the role they play in food processing.
 In conclusion you can discuss few suggestions.

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Answer:

Food processing has an important role to play in linking Indian agriculture to consumers in the domestic
and international markets. The potential of agricultural sector has not been tapped due to
underdevelopment of the food processing sector in India.

Scope and significance of food processing industry

 Development of food processing industries could provide remunerative prices to farmers for their
produce without incurring the additional burden of subsidies.
 It can play a significant role in reducing rural poverty and increasing rural income.
 It leads to significant employment generation- not only directly but across the entire supply chain.
 Processing of food enhances shelf life of agricultural products and thus reduces wastages.
 With low farmer price realizations and wastage in the food supply chain being significant even with
the current level of production, only processing of agri products can secure farmer’s incomes against
a slump in prices.
 A vibrant food processing industry can be a catalyst for crop diversification.

Upstream and downstream requirements

 Upstream requirements or backward linkages for food processing industry refers to sources of
supplies of raw materials like fruits, vegetables, dairy, grains etc. this includes farmers, mandi agents
and middlemen..
 Downstream requirements or forward linkages of food processing industries refer to channels
through which it sells its products. This includes distributors, wholesalers, retailers and final
consumers.
 Strong backward and forward linkages are required for efficient supply chains.

Issues in supply chain

 Lack of direct backward and forward linkages, leads to fragmented supply chains and hinders the
development of industry. For instance, the APMC Act requires companies to obtain specific
permission to source directly from farmers, which hinders the growth of backward linkages and
increases the power of middlemen.
 Cold storages, warehouses and logistics are important link between upstream and downstream.
India’s existing food cold storage facilities are inadequate.
 Warehousing which is a key requirement in the overall supply chain, is mostly dominated by
unorganized players.

To overcome the long and fragmented supply chain, contract farming can emerge as a significant
opportunity. Also, APMC act should be amended to ensure direct linkage between farmers and food
processors.

8. What are 'differentiated' banks? Examine the role that they can play in furthering financial inclusion in
India.

Approach:

• Explain what differentiated banks are and how they are different from normal banks.
• Discuss the role they play in financial inclusion. Substantiate your points. Also a special focus should
on be how they are a more effective tool for financial inclusion than normal banking.

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Answer:

Differentiated banks are specialised institutions, which function only in a specific sector of the banking
industry. They are different from universal banks in the sense that they function in the niche segment.
For instance, Regional Rural Banks, Local Area Banks could be considered as differentiated banks.

The Nachiket Mor Committee recommended Vertically Differentiated Banking Design comprising deposit,
payment and credit services independent from each other. Subsequently, RBI has introduced new
differentiated banks namely, Payment Banks and Small Banks.

Though differentiated banking helps in unlocking growth potential and improving efficiency through
optimal resource utilisation, it plays important role in furthering the agenda of financial inclusion.

Role in financial inclusion

 The existing set of banks may not be adequate to speed up the process of financial inclusion. The
differentiated banks can be faster to replicate and expand the financial services in unbanked and
under-banked areas.
 The small finance banks can further financial inclusion by providing savings vehicles, and credit
supply to small business units; small and marginal farmers; micro and small industries; and other
unorganised sector entities, through high technology-low cost operations.
 The payments banks will integrate migrant labour workforce, low income households, small
businesses, and other unorganised sector entities with financial sector by providing small savings
accounts and payments / remittance services to them.

While differentiated banking has the potential for financial inclusion, they suffer from inherent
weaknesses like narrow capital base, lack of economies of scale and the concentration of risk, which
need to be addressed for fuller utilisation of their potential.

9. Explaining the importance of ports in economic development, identify the reasons for the poor
performance of the port sector in India. How is the Sagarmala Project an important step in the
direction of realising the potential of this sector?

Approach:

 Point out the significance of ports in economic development.

 Discuss the reasons for sluggishness in the port sector in detail.
 Briefly discuss the features of Sagarmala project.
 Point out the ways in which the Sagarmala project would improve the performance of ports.

Answer:

India’s long coastline of 7515 km is serviced by 13 major ports, 187 notified minor ports and
intermediate ports. Ports play an important role in maritime trade, coastal shipping and inland water
transport.

Ports play an important role in economic development via:

 Facilitating international trades - maritime trade accounts for about 95% of Indian trade by volume
and close to 70% by value.
 Infrastructure development – Port development leads to direct and indirect infrastructure around
it in line with the vision of initiatives such as ‘Make in India’.
 Hinterland development – When hinterland region is connected to port by road, railways or inland
waterways, it leads to setting up of new industries, agriculture development etc. in the region.

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  Job creation and development of tourism.
 Enhanced competition and better consumer choices.

Indian ports are not performing well due to various constraints such as: heavy siltation and inadequate
dredging facility - Almost all riverine ports face the natural challenge of heavy siltation, which requires
continuous dredging which is inadequate. For eg. Haldia port.

 Congestion: Heavy congestion en route to the port as well as inside the port leads to trucks stranded
for days For eg. Jawaharlal port.
 Regulatory and policy issues: Continuous squabbles between the terminal operator and the port
authorities over royalty coupled with contractual ambiguities
 Underutilization of physical infrastructure: due to inflated tariff, which again leads to further
reductions in cargo traffic handled, forming a vicious circle with serious implications on the growth
prospects of the port.
 Outdated equipment

The Sagarmala is a series of projects to integrate the development of the Ports, the Industrial clusters
and hinterland and efficient evacuation systems through road, rail, inland and coastal waterways. It
would help in realizing the potential of port sector in following ways:

 Supporting port-led development with pro-active policy initiatives and providing institutional
framework to assist all stakeholders thus resolving many regulatory and policy issues.
 Port Infrastructure Enhancement, including modernization
 Efficient Evacuation to and from hinterland to lessen the cargo turnaround time.

The project aims at holistic port infrastructure development through modernization, mechanization and
computerization.

10. What is MSP and why is it important? Examine the need of rationalizing the MSP policy in India.

Approach:

 Explain minimum support prices and their rationale. Discuss in the context of worsening situation of
farmers in India.
 Pointing out the flaws in the existing MSP regime, discuss the need for rationalizing the MSP policy.
 Conclude by suggesting reforms in the MSP policy.

Answer:

MSP is the minimum price set by the Government at which farmers can expect to sell their produce for
the season. When market prices fall below the announced MSPs, procurement agencies step in to
procure the crop and ‘support’ the prices.

Importance of MSP

 Though prices of agricultural commodities may rise while in short supply, during years of bumper
production, prices crash. MSPs ensure that farmers get a minimum price for their produce in adverse
market conditions.
 MSPs are used as a tool by the Government to incentivise farmers to grow crops that are in short
supply.
 They induce the farmers to make capital investment in agriculture and motivate them to adopt
improved crop production technologies.
 In the absence of such a guaranteed price, there is a concern that farmers may shift to other crops
causing shortage in these commodities.
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 Need for rationalizing MSP policy

 While the government announces MSP for 23 crops, effective MSP-linked procurement occurs mainly
for wheat, rice and cotton.
 But even for these crops MSP is restricted to a subset of farmers in a few states.
 While in principle MSP exists for most farmers for most crops, its realistic impact is quite limited.
 Public procurement at MSP has disproportionately focused on wheat, rice and sugarcane and perhaps
even at the expense of other crops such as pulses and oilseeds. This has resulted in buffer stocks of
paddy and wheat to be above the required norms, but also caused frequent price spikes in pulses and
edible oils, despite substantial imports of these commodities.
 Therefore, farmers have little option but to sell their produce at prices below the MSP, resulting in a
regional bias in farm incomes.

Hence, there is need for reorienting agriculture price policies; such that MSPs are matched by public
procurement efforts towards crops that better reflect the country’s natural resource scarcities.

One way of rationalizing MSP policy is to make these price signals reflect social rather than just private
returns of production.

Farmers could also be assured a floor price for their crops through a “Price Deficiency Payment” as
suggested by NITI Aayog.

11. Explain the objectives of fiscal policy. Differentiate between expansionary and contractionary fiscal
policy. Also mention the limitations of fiscal policy as a tool for macroeconomic management.

Approach:

 Define fiscal policy and mention its objectives in detail.

 Explain the differences between expansionary and contractionary fiscal policy.
Give limitations of fiscal policy as a tool for macroeconomic management.

Answer:

Fiscal policy is the means by which government adjusts its spending and tax rates to monitor and
influence the nation’s economy.

Objectives of fiscal policy

 To achieve a state of near full employment.

 To achieve price stability.
 To accelerate the rate of economic growth and encourage investment and capital formation.
 To allocate scarce resources optimally.
 To stabilize economic growth.

Expansionary and contractionary fiscal policies

Expansionary fiscal policy Contractionary fiscal policy

It is defined as an increase in government
expenditures and/or a decrease in taxes that causes
the government's budget deficit to increase or its
budget surplus to decrease.
It can be used to combat a recession.
It is defined as a decrease in government
expenditures and/or an increase in taxes that
causes the government's budget deficit to
decrease or its budget surplus to increase.
It can be used to fight inflation.

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 When the government pursues an expansionary fiscal
policy, it finances its deficit spending by borrowing
funds. The government's borrowing of funds tends to
reduce the amount of funds available and thereby
drives up interest rates. This leads to crowding‐out
effect on the part of private sector.
If the government reduces its expenditures and
thereby reduces its borrowing, the supply of
available funds in the credit market increases,
causing the interest rate to fall. Hence,
contractionary fiscal policy leads to a crowding‐
in effect on the part of the private sector.

Limitations of fiscal policy

 Time lag: It takes time for the government to realize there is a problem, and to frame and implement
an appropriate policy to resolve it. The impact is also felt with a lag.
 Difficulties associated with changing spending and taxation policies: It is easier to increase spending
and decrease the taxes then doing otherwise.
 Conflict among different levels of government over appropriate policies.
 Increase in government spending may cause crowding out of private investments.
 Foreign owed debt removes capital from the economy.

12. Explain the key issues in infrastructure financing in India. What steps have been taken by the
government to address these issues?

Approach:

 Discuss the issues related to infrastructure financing in detail.

 Discuss the steps taken by the government to address these issues.
 Suggest some measures in conclusion.

Answer:

Infrastructure development is an arduous job as it involves huge investments, long gestation periods,
procedural delays and returns spread over a long period of time. These unique features of infrastructure
development raise some issues which are specific to the financing of infrastructure.

Issues in Infrastructure Financing

 Fiscal Burden - almost half of the total investment in the infrastructure sector is done by the
Government through budget allocations. But Government funds have competing demands, such as,
education, health, employment generation, among others.
 Asset-Liability Mismatch of Commercial Banks - commercial banking sector’s ability to extend long-
term loans to the infrastructure sector is limited.
 Investment Obligations of Insurance and Pension Funds - insurance and pension funds are
constrained by their obligation to invest a substantial portion of their funds in Government
securities.
 Need for an Efficient and Vibrant Corporate Bond Market - the corporate bond market is still a long
way to go in providing adequate financing to the infrastructure sector in India.
 Insufficiency of User Charges - a large part of the infrastructure sector in India especially irrigation,
water supply, urban sanitation, and state road transportis not amenable to commercialization for
various reasons. Due to this, the Government is not in a position to levy sufficient user charges on
these services.
 Legal and Procedural Issues – issues relating to land acquisition and environmental clearances add
uncertainty which affects the risk appetite of investors as well as banks.

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 Steps taken by the Government

 Public-Private Partnership Projects in Infrastructure

 Viability Gap Funding
 Foreign Direct Investment and Infrastructure Development - 100 per cent FDI is allowed under the
automatic route in some of the sectors such as mining, power etc. Further, FDI is also allowed
through the approval route in some sectors such as civil aviation sector etc.
 Setting up of India Infrastructure Finance Company Limited (IIFCL)
 Setting up of Infrastructure Debt Funds
 Tapping the retail investor base through Infrastructure Bonds
 Introduction of Credit Default Swaps
 Liberalisation & Rationalization of ECB policies

Greater Participation of State Governments must be ensured and steps must be taken to simplify the
procedures and to improve efficiency of the Corporate Bond Market.

13. Enumerating the objectives of land reform policy in post-independence India, critically examine its
implementation and achievements.

Approach:

 Mention the objectives of land reforms and explain its significance in post-independence era.
 Mention the measures taken for land reforms since independence. Substantiate your points.
 Evaluate their implementation and achievements. Discuss both the pros and cons of land reform
policies undertaken by the successive governments.

Answer:

The important objectives of land reform measures in India were:

 To enhance the productivity of land by improving the economic conditions of farmers.

 To ensure distributive justice and to create an egalitarian society by eliminating all forms of
exploitation.
 To create a system of peasant proprietorship with the motto of land to the tiller.
 To transfer the incomes of the few to many so that the demand for consumer goods would be
created.

Keeping in mind these objectives, land reform legislations touched upon these measures:

 Abolition of intermediaries
 Tenancy reforms
 Ceilings on holdings
 Consolidation of holdings
 Development of cooperative farming

Implementation of land reforms

 Abolition of intermediaries: By 1972, all the States had passed laws to abolish intermediaries. But
there was no clear mention about just and equitable compensation. Nearly 57.7 lakh hectares were
distributed to landless agriculturists after the successful completion of the Zamindari Abolition Act.
Although, intermediaries were abolished, but the rent receiving class continued to exist.
 Tenancy reforms: The objective of providing security of tenure to all tenants met with only limited
success. But there are success stories such as those of Kerala and West Bengal. The continued

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 existence of large number of insecure tenants made the successful implementation of the second
major objective of reducing rents to a 'fair' level, almost impossible to achieve. The objective of the
acquisition of ownership rights by tenants too was achieved only partially.
 Land ceilings: The long delay, and the nature of the legislation, ensured that the ceilings would have
a limited impact.

There are many factors responsible for the tardy progress but important among them are the lack of
adequate direction and determination, lack of political will, absence of pressure from below, inadequate
policy instrument, legal hurdles, absence of correct-up-dated land records and the lack of financial
support.

Achievements

 Land reforms were implemented within a modern democratic structure without any violence or use
of force.
 Institutional changes enabled the bringing in of modern, progressive farming.
 Rack-renting the peasantry and extraction illegal cesses had become a thing of the past.
 State demand from the peasant also gradually virtually disappeared.

14. What are the problems faced by the power sector in India? Give an account of the steps taken by the
government in recent years to reform the power sector and bring out their limitations.

Approach:

• Briefly mention the current status of power sector in India.

• Highlight the problems faced by India’s power sector.
Give an account of the steps taken by the government in recent years and discuss their limitations.

Answer:

A country’s development is often measured by its power consumption, which on per capita basis is one
of the lowest in India. Even after considerable growth in power sector infrastructure and supply of
electricity, India lags far behind even in comparison to other developing countries.

This can be attributed to various problems plaguing the power sector.

Problems in Power Sector

 Installed Capacity not sufficient to feed an annual economic growth of 8 - 9 per cent.
 Financial Health of State Discoms: Populist tariff schemes, AT&C losses and operational inefficiencies
have adversely affected financial health of State Discoms, reeling under debts.
 Below efficiency operation: Average operational efficiency of power plants in country is 60%.
Fluctuations in power demands further add to losses in generation.
 Under-procurement of Power by States: Poor financial health of Discoms has contributed to
suppressed demand by States.
 Inimical Financing Environment: In last 4-5 years, lending rates have increased significantly from the
time of project appraisal resulting in project cost overrun and hence higher tariffs.
 Equipment Shortage: Lack of adequate supply of coal-handling, ash- handling plants, construction
equipment as well as core components of Boilers, Turbines and Generators.
 Policy Paralysis: The micro level policies governing fuel cost pass-through, mega power policy;
competitive bidding guidelines are not in consonance with macro framework like Electricity Act 2003
and National Electricity Policy.
 Ecological issues: Many power projects are stuck due to protests and delay in land acquisition due to
ambiguity in laws, environmental concerns and litigations.
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 Recent steps by government

• National Solar Mission: Target of 100GW of solar power by year 2022.

• UDAY: To improve health and performance of Discoms.
• e-auctioning of coal mines.
• Deen Dayal Upadhyaya Gram Jyoti Yojana for electrification of all villages.
• Integrated Power Development Scheme for strengthening of sub-transmission and distribution
network and reduction of AT&C losses.
• Domestic Efficient Lighting Program to use LED lights for all purposes
• National Tariff Policy, 2016 to ensure 24X7 power for all latest by 2021-22.
• Proposed amendment in Electricity Act, 2003 to unbundle distribution sector and provide for
National Renewable Energy Policy

Limitations

• National Solar Mission has very ambitious targets difficult to meet with high costs and delays in land
acquisition.
• Success of UDAY rests on reformatory approach of states otherwise it will be just another bailout
package for DISCOMs.
• Though basic electricity infrastructure in the village is created under DDUGJY by agencies, the
DISCOMs fail to provide quality and regular supply. Definition of ‘electrified village’ needs to be
changed. Currently, villages having 10% households with electricity connection are considered as
electrified.
• No concrete action to improve operational efficiency.

15. Discuss the causes and consequences of lack of a common market in Indian agriculture. How can
implementation of the National Agriculture Market help in addressing the issues involved?

Approach:

 First briefly define common agriculture market.

 Explain the causes of lack of a common market.
 Explain the consequences of lack of a common market.
 Point out ways in which National Agriculture Market would improve marketing and promote
efficiency.

Answer:

A common agriculture market is one wherein there is seamless movement of agriculture goods across
districts and state borders, requiring only one license to trade and doing away with intermediate
transaction costs.

India has a fragmented agriculture market because of following reasons:

 APMC Act: It has led to development of mandis with middlemen leading to fragmentation.
 Differences in remoteness and connectivity: some agri regions are well connected while others are
isolated even lacking roads
 Local market power of intermediaries: concentration of power in few hands leading to abuse by
intermediaries of mandis. They are averse to any reform.
 Disinterest of states: Since Mandis are source of revenue for states they are not interested in diluting
them.
 Exposure to shocks: shocks affect regular supply chain hampering dependency
 Poor storage and supply chain: Limited storage capacity, inadequate mandi infrastructure and poor
transportation facility.
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  Multiple taxes across trade.

Lack of a common market results in harm to producers, traders, processors, consumers, etc.:

 Inadequate competition: fragmentation leads to requirement of licenses for each mandi by traders
hampering adequate participation leading to lack of specialization in subsectors.
 Inefficient resources allocation: most of the money is spent on paraphernalia equipment thus
denying resources for core activity performance.
 Large number of intermediaries: denying price benefits to producers, processors and consumers.
 Low cost for producers, high cost for consumers.
 Greater exposure to travesty of natural shocks, crop failures etc.

National Agriculture Market is a pan-India electronic trading portal which seeks to network existing
mandis and other market to create a unified national market for agricultural commodities. NAM is a
“virtual” market but it has a physical market (mandi) at the back end. It will help in improving marketing
and promoting efficiency in following ways:

 Increase in competition: producer can either sell to local traders or online, more trades even from
other states can participate by having only one license per trader.
 Reduction in cost and post-harvest losses: reduction in the number of intermediaries, single levy of
transaction cost, assured sales etc. would lower the cost and reduce losses
 Facilitate emergence of integrated value chains in major agricultural commodities across country
and help to promote scientific storage and movement of agri-commodities.
 Efficient resource allocation.

eNAM would lead to One Nation – One Market and this is an important step towards doubling farmers’
income in the next five years.

16. What do you understand by demographic dividend in the context of India? Examine the challenges in
realizing its potential and the measures required to benefit from it optimally.

Approach:

 Briefly explain demographic dividend in Indian context.

 Discuss challenges that can lead to its underutilisation. Discuss how spending in social infrastructure
will be beneficial to demographic dividend along with the examples taken by government.
 End with positive note with impact on economy of this.

Answer:

In India, the proportion of economically active population (15-59 years) has increased from 57.7 per cent
to 63.3 per cent during 1991 to 2013. Since this segment predominantly contributes to socio-economic
development of the country, it is a ‘demographic dividend’. Hence, it is imperative that investments in
social infrastructure are made in appropriate measure as done by countries like Japan, South Korea, etc.

However, the challenges in realizing this potential are.

Education

 Expenditure as percentage of GDP is 3% much below than other developing countries.

 Poor quality of primary, secondary and higher education

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 Lack of Professional Qualification and Training. Employment

 Skill Gap due to poor quality of higher education, skill mismatch, lack of availability of trainers in
vocational education.
 Informalisation of workforce.
 Poor growth in employment generating sectors like manufacturing and construction.
 Poor Labour Force Participation, especially amongst women.
 High incident of Child Labour.

Health

 Shortage of specialists, doctors, staff, nurses, outreach of health services especially in rural areas.
Higher out of pocket expenditures, unregulated private clinics.
 Contaminated drinking water, improper disposal of human excreta and waste, lack of personal and
food hygiene and spread of slums cause disease,
 Public health expenditure very low.

Poverty

 High rural poverty which can be attributed to low farm incomes due to subsistence agriculture, lack
of sustainable livelihoods in rural areas, inflation, lack of skills, underemployment and
unemployment.
 Urban poverty due to unemployment, inflation and poor social infrastructure.

Action Taken

 Digital Gender Atlas for Advancing Girl’s Education in India’ was launched to help identify low-
performing geographic pockets for girls, particularly from marginalized groups.
 National Scholarship Portal.
 Under National Child Labour Project (NCLP) children rescued will be provided bridge education,
vocational training, midday meal, stipend, health care, etc. Prohibition on employment of children
below 14 years and stricter punishment for employers contravening the provisions of Child Labour
(Prohibition & Regulation) Act, 1986.
 National Skill Qualification Framework (NSQF) will facilitate increased adoption of skill development
programmes. There is need to focus on women and rural areas.
 Pradhan Mantri Kaushal Vikas Yojana (PMKVY), government is targeting to offer, skill-based training
and a certification.
 Make in India, MUDRA, Start-up India are some programmes to give boost to employment
generation.

Way Forward

 Improve school infrastructure, establish industry education link.

 Linking of health related programme to clean environment is important. Investing in human capital
by way of education, skill development, training and provision of health care facilities.
 Focus on agriculture and agro-industries.
 Focusing on labour intensive sectors like manufacturing and construction.
 Governance Reforms.

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17. Examine the issue of mismatch between potential and actual utilisation of waterways in India. Give an
account of the government initiatives in the recent years aimed at removing this anomaly.

Approach:

 Provide key statistics showing the mismatch between potential and realization.
 Highlight the causes responsible for this mismatch.
 Discuss steps taken by the government in this regard.

Answer:

In India, 14,500 km. of river channels are navigable, of which 3,700 km. are usable by mechanised boats.
But, only 2000 km. are used. Of the total canal length of 4,300 km, 900 km. is navigable, but only 330 km.
is used. While countries such as China, and Korea channelize over 40% of their passenger and freight
traffic, in India the proportion is only 3.5%.

The major reasons of the mismatch between the potential and actual utilization are:

 Large parts of Indian waterways have inadequate depth for commercial movement of cargo.
 Indian rivers (especially in the northern plains) face severe problems of siltation round the year. The
river bed rises, impeding movement of cargo during non-monsoon months.
 Fluctuating depth due to seasonal rainfall.
 Inadequate Air draft. Multiple bridges with low vertical clearance obstruct passage of bigger inland
vessels.
 Shortage of Inland water Vessels because vessel buildings is highly capital intensive. The private
sector is reluctant to invest in barges unless long term cargo commitments for onward/return trips
are made from user industries.
 Lack of terminals including those with inter-modal connectivity inhibits connectivity to end user.
 Lack of Night navigation facilities such as DGPS and River Information System (RIS).
 Severe shortage of MRO (Maintenance, Repair and overhaul) facilities for inland water transport
vessels.
 Lack of potential multimodal corridors and detailed mapping of waterways and industrial clusters,
multimodal transport hubs in inland water transport corridor.
 While inland water transport is cost competitive in general with other transport modes such as rail
and road, the situation is sometimes, distorted by preferential treatment offered to other modes.

Government initiatives:

 Inland waterway projects will be developed with PPP and infusion of FDI.
 The Union government is working on a strategy to increase the movement of goods and passengers
through waterways by nearly five-fold from a mere 3.5% now to 15% by 2019.
 To encourage transportation of goods by coastal shipping, service tax has been brought on par with
road and rail transport.
 RIS has been launched to facilitate safe, accurate navigation.
 The National Waterways Act 2016 identifies 101 waterways as national waterways, in addition to the
five existing.
 Pradhan Mantri Jal Marg Yojna launched to provide dry ports and satellite port to landlocked states
and convert rivers into waterways.
 The ‘Jal Marg Vikas’ project will develop a fairway with 3 meters depth to enable bigger commercial
navigation vessels.
 Sagar Mala to connect ports to inland through rail, road and inland waterways.

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18. Highlight the reasons for the importance attached to the MSME sector. In this context, enumerating
the government schemes to promote this sector explain the role that the MSME sector can play in the
success of the Make in India initiative.

Approach:

 Attribute the importance of MSME to its share in production, exports and employment creation etc.
 Explain how MSME sector complements “Make in India” and how the various Government schemes
promote the development of MSME.

Answer:

Importance of MSME in India

MSME sector in India employs 8.05 crore people, contributes 37.5% to India’s GDP, 45% to the total
manufacturing output and 40% to exports from country. The sector has huge potential to address
problems like unemployment, regional imbalances, unequal distribution of income and wealth across the
country.

MSME related schemes and impact on Make in India:

MSMEs are complementary to large industries as ancillary units and possess forward-backward linkages
with other sectors (many of which are priority sectors under Make in India). A robust growth of this
sector will therefore be crucial to the Make in India initiative. However the sector is mired by inadequate
finance (especially in rural areas), low level of technology, low productivity and competitiveness etc.
Improvement on these indicators will invariably give a boost to “Make in India”.

Various initiatives by the government aim to address the same are listed below:

 Providing more credit to MSME sector, especially in the rural areas

o MUDRA: credit linked scheme to facilitate participation of financial institutions for higher credit
flow to micro sector.
o Prime Minister’s Employment Generation Programme (PMEGP) - credit flow scheme
o Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) –provision of collateral
free loans
 Promoting entrepreneurship
o Employment Exchange for Industries: To facilitate link between job seekers and employers.
o Micro and Small Enterprises Cluster Development Programme (MSECDP) for establishment of
new enterprises and development of existing ones.
o A scheme for Promoting Innovation and Rural Entrepreneurs (ASPIRE): setting up a network of
technology centers and incubation
o Start-up India: To promote entrepreneurship
 Quality upgradation for world class competitiveness and leveraging technology
o Credit Linked Capital Subsidy Scheme (CLCSS) for Technology Upgradation- technology
Upgradation of MSME.
 Ensuring Ease of Doing Business
o Udyog Aadhar Memorandum (UAM): online entrepreneurs’ memorandum to instantly get a
unique Udyog Aadhaar Number (UAN) and get registered to avail various government benefits.
o Framework for Revival and Rehabilitation of MSME-banks to constitute a Committee for
Distressed MSME enterprises to prepare a Corrective Action Plan (CAP).
o Bankruptcy Code for easy exit.
o Reform in labor laws.
 Increasing Productivity, enhancing competitiveness and skill development
o Scheme of Fund for Regeneration of Traditional Industries (SFURTI) - to organize the traditional
industries and artisans into clusters to make them competitive and sustainable.
o PMKVY: Giving industry linked skills to youth
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 The success of Make in India invariably depends on the growth of MSME sector in the country. The
government has taken commendable steps, but it should focus on their effective implementation so that
they can bear fruit and Make in India achieves its potential.

19. As the recently released data shows, a narrow tax base remains a major concern in India. What are the
possible reasons for such a scenario? In this context, also examine the government efforts to address
the issue.

Approach:

 Give a brief picture of the narrow tax base in India.

 Bring out various reasons for the narrow tax base.
 Enumerate and examine various steps taken by government to widen the tax base.

Answer:

The recently released data shows that only 2.9 crores Indian filed personal income tax returns for 2012-
13, which is less than 4% of total adult population. More than half of 2.9 crores paid no tax at all. This is
too less for effective functioning of any state as tax is the main source of government revenue and
determines the capacity of government programmes.

Reasons:

 Low level of incomes so that most of the population remains below the tax net.
 Complex maze of taxes which hinders effective compliance.
 Presence of various exemptions in tax laws, which are utilized by tax payers to lower tax burdens.
 Failure of authorities to check tax evasion.
 Large informal sectors and mostly cash economy which makes it difficult for tax authorities to detect
flow of money.
 Flow of black money in the economy.

The government has recognized the need to increase the tax base and has taken the following steps:

 Increasing voluntary compliances and making tax filing user friendly.

 DTC to codify all direct tax laws under one law which would use simple language, provide simplicity
and stability in tax structure, consolidate taxing provisions, definitions, exemptions, incentives and
procedures to make them uniform.
 The government appointed the Tax Administration and Reforms Commission to recommend ways to
enhance tax base.
 Passing of Black Money Act and the Benami Transaction Act to grab tax evaders
 Implement GAAR from April 2017.
 Increased use of technology, e-filling, collecting data from multiple sources and quick disposal of
cases to prevent tax evasion.
 In recent budget, introduction of presumptive taxation regime for small businesses and certain
service providers.

These steps are the need of the time. However, measures like Black Money Act have limited effectiveness
and need international cooperation as well. Hence, more needs to be done:

 Push for Multilateral agreement to address the issue of tax havens.

 Lower the ceiling of tax imposition.
 Gradual withdrawal on exemptions provided on investment and saving schemes.

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20. Explain the process of credit creation by commercial banks with the help of an example. While
distinguishing between quantitative and qualitative credit control instruments of the central bank
explain how CRR and SLR can be used to control credit.

Approach:

 Explain the process of credit creation by commercial banks with the help of an example.
 Distinguish between qualitative and quantitative controls.
 Explain the role of CRR and SLR in controlling credit.

Answer:

Commercial banks are able to create money in the form of deposit money and bring about a change in
the total amount of money by briging about a change in the amount of bank deposits.

Let us understand the process of credit creation with the help of an example. Assume the following:

 There are many commercial banks such as Bank of Baroda, Canara Bank, Syndicate Bank etc.
 Minimum legal cash reserve ratio is 20 per cent.
 Excess (of 20 per cent) is used in extending loans and advances.
 One particular bank, say Bank of Baroda (BoB), receives a cash deposit of Rs. 1000 from its
customers.
 The amount of loan drawn by a customer of one bank somehow is transferred in full to the second
bank, and that of the second bank to the third bank, and so on.
 Each bank starts with an initial deposit which is deposited by its depositer as a result of payment
received from the borrower of another bank.

Suppose a customer of BoB deposits an amount of Rs. 1000 in this bank. BoB keeps a cash reserve of 20
per cent, i.e. Rs. 200 and uses the excess reserve i.e. Rs. 800 in advancing loan to one of its customers by
opening an account in his name. This borrower from BoB uses this amount in buying goods from some
trader and makes payment by drawing a cheque on BoB. Suppose this trader has his account in Canara
Bank. It will deposit this cheque of Rs 800 in Canara Bank to be collected from BoB. Thus, Rs. 800 will be
transferred from BoB to Canara Bank. Canara Bank also keeps 20 per cent, i.e. Rs. 160 and is left with an
excess reserve of Rs 640, which it lends to another customer. Another such transaction, say with
Syndicate Bank, will leave it with Rs. 512. Thus an initial deposit of Rs. 1000 has resulted in the creation
of deposits by three banks amounting to Rs. (1000+800+640+512) = Rs. 2952. This is how the entire
banking system will be able to create new deposits and hence credit creation happens.

While creation of primary deposits (currency or cash deposited by customers with commercial banks)
merely transforms currency money into deposit money without changing the total amount of money
supply in the economy, derivative deposits (created by granting loans, discounting bills of exchange,
providing overdraft facility, making investments through purchase of bonds and securities) increase the
total amount of money supply in the economy. This is because the banking system as a whole can give
loans and make investments by many times more than the cash deposited with the banks. Thus banks
create credit by keeping only a small amount of cash in reserve and lending the remaining amount.

Difference between qualitative and quantitative control

Qualitative controls are the methods used by central banks to control the use and direction of credit.
They control the credit flow to particular sector or to particular end use. Some techniques are rationing
of credit, moral suasion, margin requirements etc.

Quantitative methods aim at controlling the cost and quantity of credit. It does not discriminate between
different sectors and the end use credit. These measures are not applied to particular sector but are
applicable to whole economy.

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 The tools under quantitative control are:

 Bank rate,
 Open Market Operation,
 Cash Reserve Ratio (CRR)
 Statutory Liquidity Ratio (SLR)
 Liquidity Adjustment Facility
 Marginal Standing Facility; and
 Market Stabilization Scheme.

Role of CRR and SLR

CRR: It is the fraction of Net Time and Demand Deposits which scheduled banks have to keep with RBI as
cash reserve. This amount is not available for lending. However, with the increase in ratio, the money
supply, thus, credit creation in the economy reduces. On the other hand, lowering the ratio increases the
credit creation in the economy.

SLR: It is the fraction of Net Time and Demand Deposits which scheduled banks have to keep with
themselves as cash, gold and bonds. With increase in ratio, the money available for lending reduces and
credit creation in the economy reduces. On the other hand, lowering the ratio increases the credit
creation in the economy.

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