Indian Economy: previous-year questions

Answer: (D) None of the above

A vehicle currency is one used as the go-between in foreign-exchange deals, for example converting rupees to dollars and then dollars to pesos, because direct markets between most currency pairs are thin. That role is played overwhelmingly by the US dollar, which is on one side of nearly 90% of all foreign-exchange transactions and is also the leading reserve and trade-invoicing currency. As the dollar is not listed, the answer is 'None of the above'; the euro, yen and pound rank second, third and fourth. Related terms: hard currency (stable and widely accepted), hot money (short-term speculative flows) and the IMF's SDR basket (US dollar, euro, Chinese renminbi, Japanese yen and pound sterling).

Answer: (C) Depreciation

Net Domestic Product is Gross Domestic Product minus depreciation, i.e. the consumption of fixed capital (wear and tear of machinery and buildings): $NDP = GDP - \text{Depreciation}$. The same gap separates GNP and NNP. The other adjustments in national income accounting are different: net factor income from abroad converts 'domestic' to 'national' ($GNP = GDP + NFIA$), and net indirect taxes (indirect taxes minus subsidies, option B) convert market price to factor cost. NNP at factor cost is what is called National Income. Government revenue and foreign aid do not enter these identities.

Answer: (B) General Insurance

Insurance is of two broad kinds: life insurance, which covers the risk to human life, and general (non-life) insurance, which covers loss of or damage to property and wealth through fire, marine, motor, theft, health and liability policies. Hence loss of wealth relates to general insurance. Crop insurance (for example PM Fasal Bima Yojana, 2016) is only one branch of general insurance, and social insurance means State-backed schemes such as ESI and provident fund. Facts: general insurance was nationalised in 1972-73 under the General Insurance Corporation with four companies, National (Kolkata), New India (Mumbai), Oriental (New Delhi) and United India (Chennai); LIC was set up in 1956; the regulator IRDAI (1999) is based in Hyderabad.

Answer: (B) High taxation

The unorganised (informal) sector, which employs around nine-tenths of India's workforce, suffers from low productivity, poor technology, low and irregular wages, job insecurity and no social security. High taxation is not one of its problems: its units are small, mostly unregistered and largely outside the direct tax net, so B is the odd one. Government measures to know: the Unorganised Workers' Social Security Act, 2008, the e-Shram portal (2021) for a national database of such workers, PM Shram Yogi Maandhan (pension), and the Code on Social Security, 2020. The Arjun Sengupta Commission (NCEUS) studied this sector.

Answer: (A) Deflation

Deflation is a sustained fall in the general price level, i.e. negative inflation. Disinflation (B) is only a fall in the rate of inflation, with prices still rising but more slowly; stagflation (C) is stagnant growth and high unemployment together with high inflation, as in the oil shocks of the 1970s; and depression (D) is a severe, prolonged fall in output and employment, like the Great Depression of 1929. Related terms: reflation (deliberate stimulus to pull an economy out of deflation), hyperinflation (runaway price rise) and core inflation (excluding food and fuel). In India inflation is measured by the CPI, and the RBI's target is 4% with a band of plus or minus 2%.

Answer: (A) Customs Duties

Customs duty is the tax on goods entering or leaving the country (import and export duties), levied by the Union under the Customs Act, 1962 and administered by the CBIC. Excise duty (B) is a tax on the manufacture of goods within the country; after GST it survives mainly on petroleum products and tobacco (Central) and on liquor for human consumption (State excise). VAT (C) was the state-level tax on sale of goods, now largely limited to petroleum and liquor. GST (D), introduced on 1 July 2017 by the 101st Constitutional Amendment, is a destination-based tax on the supply of goods and services. Basic customs duty was not subsumed in GST, although IGST is charged on imports in addition to it.

Answer: (D) Construction

In national income accounting the secondary sector turns raw materials into finished goods and structures: manufacturing, construction, and electricity, gas and water supply. Construction is therefore the answer. Trade, transport and communication are services and belong to the tertiary sector, together with banking, insurance, real estate, hotels and public administration. The primary sector covers agriculture, forestry, fishing and mining. In India the tertiary sector contributes more than half of gross value added, while agriculture, with under a fifth of output, still employs the largest share of the workforce.

Answer: (D) Increase in money supply

Inflation is controlled by reducing the amount of money chasing goods, so increasing the money supply (D) would feed inflation, not fight it. The real anti-inflationary tools are monetary (the RBI raises the repo rate, CRR and SLR and sells securities in open market operations), fiscal (lower government spending, higher or better-targeted taxes, which is how curbing disposable income and tax reform work) and administrative (action against hoarding and black marketing under the Essential Commodities Act, 1955, stock limits, imports and the public distribution system). Since 2016 the RBI's Monetary Policy Committee has followed flexible inflation targeting of 4% with a band of plus or minus 2%.

Answer: (C) 1966-1969

The 'Plan Holiday' is the gap of 1966-69 between the Third Plan (1961-66) and the Fourth Plan (1969-74), when the government ran three Annual Plans (1966-67, 1967-68, 1968-69) instead of a five-year plan. The causes were the wars with China (1962) and Pakistan (1965), two successive droughts, high inflation and the devaluation of the rupee in June 1966; the Green Revolution strategy was introduced in these years. Other breaks in planning: the Rolling Plan of 1978-80 and the Annual Plans of 1990-92. The Twelfth Plan (2012-17) was the last, and the Planning Commission was replaced by NITI Aayog on 1 January 2015.

Answer: (B) Textile

A 'sunrise sector' is a new or fast-growing industry with high future potential, usually technology-driven. In India the term is applied to food processing, artificial intelligence and IT, space technology, semiconductors, electric vehicles, green hydrogen, renewable energy, drones and biotechnology. Textiles is one of India's oldest, mature industries, with the first cotton mills dating from the 1850s, so it is not classed as a sunrise sector (only its 'technical textiles' segment is sometimes described that way). The opposite term, 'sunset industry', refers to an old industry in decline. Many sunrise sectors are supported by Production Linked Incentive (PLI) schemes.

Answer: (D) Apex financial institution of industrial credit

NABARD (National Bank for Agriculture and Rural Development) was set up on 12 July 1982 on the recommendation of the B. Sivaraman Committee, taking over the agricultural credit functions of the RBI and the ARDC; its head office is in Mumbai. It is the apex institution for agricultural and rural credit: it refinances cooperative banks and Regional Rural Banks, lends to State governments (including long-term loans for share capital of cooperatives), runs the Rural Infrastructure Development Fund and pioneered the SHG-Bank Linkage Programme, so A, B and C are all its functions. Industrial credit (D) is not its field: IDBI (1964) was the apex body for industrial finance and SIDBI (1990, Lucknow) serves MSMEs. Also note EXIM Bank (1982) and the National Housing Bank (1988).

Answer: (B) there is co-existence of public sector and private sector.

A mixed economy is one in which the public sector (state-owned enterprises and planning) and the private sector (privately owned firms working through the market) exist side by side. India adopted this model after Independence through the Industrial Policy Resolutions of 1948 and 1956, which reserved the 'commanding heights' for the public sector, and has moved towards a larger role for the private sector since the reforms of 1991. It stands between capitalism (private ownership, market decisions) and socialism (state ownership, central planning). Options A, C and D describe sectoral balance, foreign investment and a form of government, none of which defines a mixed economy.

Answer: (B) Price Index

The Human Development Index, published by the UNDP since 1990 and devised by Mahbub ul Haq with Amartya Sen, is the geometric mean of three dimension indices: Health (life expectancy at birth), Education (mean years and expected years of schooling) and Income (GNI per capita in PPP terms). A price index such as the CPI or WPI measures inflation and has no place in it, so B is the answer. Countries are grouped into very high, high, medium and low human development; India is in the medium category (ranked 130th in the 2025 report). Other UNDP indices: Inequality-adjusted HDI, Gender Inequality Index, Gender Development Index and the Multidimensional Poverty Index.

Answer: (C) Ratio of Non-working Age Population to Working Age Population.

The dependency ratio is the number of dependants, children aged 0-14 and the elderly aged 65 and above, per 100 persons of working age (15-64): $\frac{\text{population aged 0-14} + \text{population aged 65+}}{\text{population aged 15-64}} \times 100$. It can be split into the young (child) and old-age dependency ratios. A falling ratio means a growing share of workers, the 'demographic dividend' that India is currently experiencing, while ageing societies such as Japan have a rising old-age ratio. Options A, B and D describe import intensity, the share of FDI in investment and the size of government spending, which are unrelated economic ratios.

Answer: (C) 2 and 4 only

A measure is inflationary if it increases liquidity and the money supply. Lowering the SLR and abolishing the CRR both release funds that banks can lend, so statements 2 and 4 are inflationary. When the RBI sells new bonds (an open-market sale) it absorbs money from the system, and raising the Bank Rate makes borrowing costlier; both are contractionary, so statements 1 and 3 are wrong. Remember: CRR is the share of deposits kept as cash with the RBI (no interest earned), while SLR is the share kept by the bank itself in liquid assets such as gold and government securities. Other quantitative tools are the repo and reverse repo rates, MSF and OMO.

Answer: (A) Interest payments

In the Union Budget 2023–24 (presented on 1 February 2023), total expenditure was estimated at about ₹45.03 lakh crore, of which interest payments were about ₹10.80 lakh crore (roughly 24%), the largest single item. In the "Rupee Goes To" chart, interest payments take 20 paise, States' share of taxes and duties 18, central sector schemes 17, centrally sponsored schemes 9, Finance Commission and other transfers 9, defence 8, subsidies 7 and pensions 4. Note that the States' share of taxes is devolution, not the Centre's own spending. The same Budget set capital expenditure at ₹10 lakh crore and the fiscal deficit at 5.9% of GDP.

Answer: (A) Food

In the Budget Estimates for 2023–24 the three major subsidies were food at about ₹1.97 lakh crore, fertiliser at about ₹1.75 lakh crore and petroleum at only about ₹2,257 crore, so food took the largest share. The food subsidy is paid mainly through the Food Corporation of India to supply grain under the National Food Security Act, 2013 and the PM Garib Kalyan Anna Yojana (free grain to about 81 crore people from 1 January 2023). "Interest" is the largest expenditure head but it is not a subsidy. The fertiliser subsidy covers urea (price-controlled) and P&K fertilisers (Nutrient Based Subsidy).

Answer: (D) Investment spending by public companies

Public expenditure is spending by the government itself (Centre, States and local bodies) out of its budget. A subsidy to a city bus service, defence spending and interest on the national debt are all budgetary outlays. Investment by public sector companies out of their own internal resources and market borrowings is the spending of commercial enterprises and is not counted in the government's budget, so it is the odd one out. Useful theory: Wagner's law states that public expenditure grows as an economy develops, and Peacock and Wiseman put forward the "displacement effect".

Answer: (D) Petroleum, oil and lubricants

Answer as of 2023 — this may have changed since.

Petroleum, oil and lubricants (POL), mainly crude oil, is India's largest import item, making up roughly a quarter or more of the import bill, because India imports over 85% of its crude requirement and is the world's third-largest oil consumer and importer. Electronic goods, gold, machinery (capital goods), coal and chemicals follow. Since 2022–23 Russia has been the largest crude supplier, ahead of Iraq, Saudi Arabia and the UAE. On the export side, the leading items are engineering goods, petroleum products, and gems and jewellery.

Answer: (B) Quinary

Economic activities are graded as primary (extraction: farming, mining), secondary (manufacturing), tertiary (ordinary services such as trade and transport), quaternary (knowledge-based services such as IT, research and information) and quinary. Quinary activities are the highest level: top decision-makers and policy-makers such as senior executives, government officials, research scientists and legal and financial consultants, often called "gold-collar" professions. That makes quinary the most modern and developed tier of the service sector. Collar colours: red – primary, blue – secondary, pink – tertiary, white – quaternary, gold – quinary. (The booklet spells quaternary as "Quarternary".)