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Indian Economy Practice Questions: Set-5

Q.1: Which among the following sectors is/are covered under the Index of Industrial Production (IIP)?

1. Mining

2. Manufacturing

3. Electricity

Select the correct answer using the code given below.

(a) 1 and 2 only

(b) 2 only

(c) 1 and 3 only

(d) 1, 2 and 3

Ans. d

Explanation:  Index of Industrial Production (IIP) measures the quantum of changes in the industrial production in an economy and captures the general level of industrial activity in the country. It is a composite indicator expressed in terms of an index number which measures the short term changes in the volume of production of a basket of industrial products during a given period with respect to the base period. Index of Industrial Production is compiled and published every month by Central Statistics Office (CSO). IIP covers 682 items comprising Mining (61 items), Manufacturing (620 items) & Electricity (1 item). The weights of the three sectors are 14.16%, 75.53% and 10.32% respectively and are on the basis of their share of GDP at factor cost during 2004-05.

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Q.2: With reference to Participatory Notes (PN), consider the following statements:

1. These are financial instruments used by investors that are not registered with the SEBI to invest in Indian securities.

2. The investors enjoy the voting rights in relation to shares invested through the PN.

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

Ans. a

Explanation: Statement 1 is correct. Participatory notes, also referred to as "P-notes," are financial instruments used by investors or hedge funds that are not registered with the Securities and Exchange Board of India (SEBI) to invest in Indian securities.

Statement 2 is incorrect. The investor in PN does not own the underlying Indian security, which is held by the FII who issues the PN. Thus the investors in PNs derive the economic benefits of investing in the security without actually holding it. They benefit from fluctuations in the price of the underlying security since the value of the PN is linked with the value of the underlying Indian security. The PN holder also does not enjoy any voting rights in relation to security/shares referenced by the PN.

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Q.3: Which among the following is/are the instruments of secondary capital market?

1. Bonds

2. Initial Public Offering

3. Commercial Papers

Select the correct answer using the code given below.

(a) 1 and 3 only

(b) 1 only

(c) 2 and 3 only

(d) 1, 2 and 3

Ans.  a

Explanation: Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market.

Secondary market comprises of equity markets and the debt markets. Following are the main financial products/instruments dealt in the secondary market:

Equity: The ownership interest in a company of holders of its common and preferred stock.  Initial Public Offering (IPO) is an offering of the primary market where a private company decides to sell stocks to the public for the first time.

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Q.4: Which among the following is/are likely to result in the current account surplus in the Balance of Payments (BoP)?

1. Increase in the remittances received from abroad.

2. Sale of Bonds by Reserve Bank of India in the global market.

3. Fall in global oil prices

Select the correct answer using the code given below.

(a) 1 and 2 only

(b) 1 and 3 only

(c) 3 only

(d) 1, 2 and 3

Ans.  b

Explanation: Statement 1 is correct as the transfer payments which include the remittances, gifts and grants are the part of the capital account of the Balance of Payments. Any increase in them would likely lead to a surplus in the current account.

Statement 2 is not correct. All the international purchases and sales of assets such as money, stocks, bonds etc. are recorded under the capital account.

Statement 3 is correct as fall in global oil prices will reduce imports which will increase the current account surplus.

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Q.5: With reference to the impact of fall in crude price on inflation in India, consider the following statements:

1. It has benefited urban consumers more than the rural consumers.

2. It has impacted WPI (fuel) component more than the CPI (fuel) component.

Select the answer using the correct code given below.

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Ans. c

Explanation: Statement 1 is correct as rural India's fuel mix is more geared towards domestically produced firewood, chips and biogas inputs, which are dependent much on crude price. On the other hand, fuel products more widely used in urban India, i.e. LPG and diesel have benefited from lower global prices.

Statement 2 is correct. Although fall in crude prices has impacted WPI fuel and power inflation significantly, the impact on CPI fuel & light is minimal. This is mainly due to difference in the commodities and their weights included in the CPI and WPI fuel baskets. Diesel and petrol whose prices are directly linked to global crude prices constitute around 40 per cent of the WPI fuel & power basket. Petroleum products have negligible weight in CPI fuel & light group.

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