Daily Static Quiz – 20th January, 2023

Correct Answer : A
Fresh loans given by Government forms the part of Capital expenditure. Hence,
statement 3 is incorrect.
Capital Receipts: The government also receives money by way of loans or from the sale of its
assets. Loans will have to be returned to the agencies from which they have been borrowed.
Thus they create liability. Sale of government assets, like sale of shares in Public Sector
Undertakings (PSUs) which is referred to as PSU disinvestment, reduce the total amount of
financial assets of the government. All those receipts of the government which create liability
or reduce financial assets are termed as capital receipts. When government takes fresh
loans it will mean that in future these loans will have to be returned and interest will
have to be paid on these loans. Similarly, when government sells an asset, then it means
that in future its earnings from that asset, will disappear. Thus, these receipts can be debt
creating or non-debt creating.
Capital Receipts (a+b+c)
(a) Recovery of loans
(b) Other receipts (mainly PSU disinvestment)
(c) Borrowings and other liabilities

Correct Answer : C
All the above statements are correct.
Revenue Expenditure
Revenue Expenditure is expenditure incurred for purposes other than the creation of physical
or financial assets of the central government. It relates to those expenses incurred for the
normal functioning of the government departments and various services, interest payments on
debt incurred by the government, and grants given to state governments and other parties
(even though some of the grants may be meant for creation of assets).
Interest payments on market loans, external loans and from various reserve funds constitute
the single largest component of non-plan revenue expenditure. Defence expenditure, is
committed expenditure in the sense that given the national security concerns, there exists
little scope for drastic reduction. Subsidies are an important policy instrument which aim at
increasing welfare. Apart from providing implicit subsidies through underpricing of public
goods and services like education and health, the government also extends subsidies explicitly
on items such as exports, interest on loans, food and fertilisers.
Revenue Expenditure
(a) Interest payments
(b) Major subsidies
(c) Defence expenditure

Correct Answer : C
Answer Justification :
All the above statements are correct.
When a government spends more than it collects by way of revenue, it incurs a budget deficit.
There are various measures that capture government deficit and they have their own
implications for the economy.
Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure
over revenue receipts
Revenue deficit = Revenue expenditure – Revenue receipts
The revenue deficit includes only such transactions that affect the current income
and expenditure of the government. When the government incurs a revenue deficit, it
implies that the government is dissaving and is using up the savings of the other
sectors of the economy to finance a part of its consumption expenditure. This situation
means that the government will have to borrow not only to finance its investment but also its
consumption requirements. This will lead to a build up of stock of debt and interest liabilities
and force the government, eventually, to cut expenditure. Since a major part of revenue
expenditure is committed expenditure, it cannot be reduced. Often the government reduces
productive capital expenditure or welfare expenditure. This would mean lower growth
and adverse welfare implications.

Correct Answer : A
Answer Justification :
Monetary policy refers to the policy of the central bank with regard to the use of
monetary instruments under its control to achieve the goals specified in the Act.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary
policy. This responsibility is explicitly mandated under the Reserve Bank of India Act,
1934.
The primary objective of monetary policy is to maintain price stability while keeping in
mind the objective of growth. Price stability is a necessary precondition to sustainable
growth.
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a
statutory basis for the implementation of the flexible inflation targeting framework.
The amended RBI Act also provides for the inflation target to be set by the
Government of India, in consultation with the Reserve Bank, once in every five
years. Accordingly, the Central Government has notified in the Official Gazette 4
per cent Consumer Price Index (CPI) inflation as the target for the period from
August 5, 2016 to March 31, 2021 with the upper tolerance limit of 6 per cent
and the lower tolerance limit of 2 per cent. Hence, both statement 2 and 3 are incorrect.
The Central Government notified the following as factors that constitute failure to
achieve the inflation target:(a) the average inflation is more than the upper tolerance
level of the inflation target for any three consecutive quarters; or (b) the average
inflation is less than the lower tolerance level for any three consecutive quarters.
Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting
framework was governed by an Agreement on Monetary Policy Framework between the
Government and the Reserve Bank of India of February 20, 2015.
The Monetary Policy Process
The Monetary Policy Committee (MPC) constituted by the Central Government under
Section 45ZB determines the policy interest rate required to achieve the inflation
target.
The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the
monetary policy. Views of key stakeholders in the economy, and analytical work of the Reserve
Bank contribute to the process for arriving at the decision on the policy repo rate.
The Financial Market Committee (FMC) meets daily to review the liquidity conditions so as to
ensure that the operating target of monetary policy (weighted average lending rate) is kept
close to the policy repo rate.

Correct Answer : D

All the above statements are correct.

Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)

In a multi-party parliamentary system, electoral concerns play an important role in
determining expenditure policies. A legislative provision, it is argued, that is applicable to all
governments – present and future – is likely to be effective in keeping deficits under control.

The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms,
binding the government through an institutional framework to pursue a prudent fiscal policy.
The central government must ensure intergenerational equity and long-term macro-economic
stability by achieving sufficient revenue surplus, removing fiscal obstacles to monetary policy
and effective debt management by limiting deficits and borrowing. The rules under the Act
were notified with effect from July, 2004.

Main Features

1. The Act mandates the central government to take appropriate measures to reduce
fiscal deficit to not more than 3 percent of GDP and to eliminate the revenue deficit
by March 31, 2009 and thereafter build up adequate revenue surplus.
2. It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the
revenue deficit by 0.5 per cent. If this is not achieved through tax revenues, the
necessary adjustment has to come from a reduction in expenditure.
3. The actual deficits may exceed the targets specified only on grounds of national
security or natural calamity or such other exceptional grounds as the central
government may specify.
4. The central government shall not borrow from the Reserve Bank of India except by
way of advances to meet temporary excess of cash disbursements over cash receipts.
5. The Reserve Bank of India must not subscribe to the primary issues of central
government securities from the year 2006-07.
6. Measures to be taken to ensure greater transparency in fiscal operations.
7. The central government to lay before both Houses of Parliament three statements – Medium-term Fiscal Policy Statement, The Fiscal Policy Strategy Statement, Macroeconomic Framework Statement along with the Annual Financial Statement.
8. Quarterly review of the trends in receipts and expenditure in relation to the budget
be placed before both Houses of Parliament.

Correct Answer : C
Answer Justification :
India set to launch deep sea mission:
Context:
India will soon launch an ambitious ‘Deep Ocean Mission’.
Required approvals are being obtained for the mission.
About the Mission:
The mission proposes to explore the deep ocean similar to the space exploration started by
ISRO about 35 years ago.
The focus of the mission will be on deep-sea mining, ocean climate change advisory
services, underwater vehicles and underwater robotics related technologies.
Two key projects planned in the ‘Deep Ocean Mission’ report include a desalination
plant powered by tidal energy and a submersible vehicle that can explore depths of at
least 6,000 metres.
Significance:
The mission will give a boost to efforts to explore India’s vast Exclusive Economic Zone
and Continental Shelf.
The plan will enable India to develop capabilities to exploit resources in the Central
Indian Ocean Basin (CIOB).
Potential:
India has been allotted 75,000 square kilometres in the Central Indian Ocean Basin
(CIOB) by UN International Sea Bed Authority for exploration of poly-metallic
nodules. Hence, statement 2 is incorrect.
CIOB reserves contain deposits of metals like iron, manganese, nickel and cobalt.
It is envisaged that 10% of recovery of that large reserve can meet the energy
requirement of India for the next 100 years.
What are PMN?
Polymetallic nodules (also known as manganese nodules) are potato-shaped, largely
porous nodules found in abundance carpeting the sea floor of world oceans in deep sea.
Composition: Besides manganese and iron, they contain nickel, copper, cobalt, lead,
molybdenum, cadmium, vanadium, titanium, of which nickel, cobalt and copper are considered
to be of economic and strategic importance.

Correct Answer : C
Answer Justification :
All the above statements are correct.
What is a Government Security (G-Sec)?
1.2 A Government Security (G-Sec) is a tradeable instrument issued by the Central
Government or the State Governments. It acknowledges the Government’s debt obligation.
Such securities are short term (usually called treasury bills, with original maturities of less
than one year) or long term (usually called Government bonds or dated securities with original
maturity of one year or more). In India, the Central Government issues both, treasury bills and
bonds or dated securities while the State Governments issue only bonds or dated securities,
which are called the State Development Loans (SDLs). G-Secs carry practically no risk of
default and, hence, are called risk-free gilt-edged instruments.
Treasury Bills (T-bills)
1.3 Treasury bills or T-bills, which are money market instruments, are short term debt
instruments issued by the Government of India and are presently issued in three
tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and
pay no interest. Instead, they are issued at a discount and redeemed at the face value at
maturity. For example, a 91 day Treasury bill of ₹100/- (face value) may be issued at say ₹
98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the face value of ₹100/-.

Correct Answer : B
Answer Justification :
Inflation Indexed Bonds (IIBs) – IIBs are bonds wherein both coupon flows and
Principal amounts are protected against inflation. The inflation index used in IIBs may be
Whole Sale Price Index (WPI) or Consumer Price Index (CPI). Globally, IIBs were first
issued in 1981 in UK. In India, Government of India through RBI issued IIBs (linked to WPI)
in June 2013. Since then, they were issued on monthly basis (on last Tuesday of each month)
till December 2013. Based on the success of these IIBs, Government of India in consultation
with RBI issued the IIBs (CPI based) exclusively for the retail customers in December 2013.

Inflation Indexed Bonds (IIBs) were issued in the name of Capital Indexed Bonds (CIBs) during
1997. How is the new product of IIBs different from earlier CIBs?
The CIBs issued in 1997 provided inflation protection only to principal and not
to interest payment.
New product of IIBs will provide inflation protection to both principal and
interest payments. Hence, statement 1 is incorrect.
How will inflation protection be provided to both principal and interest rate? Whether inflation
component will be paid along with interest?
Inflation component on principal will not be paid with interest but the same would be
adjusted in the principal by multiplying principal with index ratio (IR). At the time of
redemption, adjusted principal or the face, whichever is higher, would be paid.
Interest rate will be provided protection against inflation by paying fixed coupon rate on
the principal adjusted against inflation.
Why will WPI be used for inflation protection? Why CPI has not considered for the same?
The consumer price index (CPI) reflects the inflation people at large face and therefore,
globally CPI or Retail Price Index (RPI) is used for inflation target by the Central Banks as well as for providing inflation protection in IIBs.
In India, all India CPI is being released since January 2011 and it will take some time in
stabilizing. Monetary policy has also been continuing to target WPI for its price stability
objective. In view of above, it has been decided to consider WPI for inflation protection
in IIBs.
What is the formula for calculating index ratio?
Index ratio (IR) will be calculated by dividing the reference WPI on the settlement date
with the reference WPI on the issue date.

Correct Answer : A
Answer Justification :
State Development Loans (SDLs)
1.7 State Governments also raise loans from the market which are called SDLs. SDLs
are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government. Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs issued by the State Governments also qualify for SLR. Hence, statement 2 is incorrect.
They are also eligible as collaterals for borrowing through market repo as well as borrowing
by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF) and special repo
conducted under market repo by CCIL. State Governments have also issued special securities
under “Ujjwal Discom Assurance Yojna (UDAY) Scheme for Operational and Financial
Turnaround of Power Distribution Companies (DISCOMs)” notified by Ministry of Power vide
Office Memorandum (No 06/02/2015-NEF/FRP) dated November 20, 2015.

Correct Answer : B
Answer Justification :
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to
primary cooperative banks located in urban and semi-urban areas. These banks, till
1996, were allowed to lend money only for non-agricultural purposes. This distinction
does not hold today. Hence, statement 1 is incorrect.
These banks were traditionally centred around communities, localities work place groups.
They essentially lent to small borrowers and businesses. Today, their scope of operations has
widened considerably.
Duality of Control
However, concerns regarding the professionalism of urban cooperative banks gave rise to the
view that they should be better regulated. Large cooperative banks with paid-up share capital
and reserves of Rs.1 lakh were brought under the perview of the Banking Regulation Act 1949
with effect from 1st March, 1966 and within the ambit of the Reserve Bank”s supervision. This
marked the beginning of an era of duality of control over these banks. Banking
related functions (viz. licensing, area of operations, interest rates etc.) were to be
governed by RBI and registration, management, audit and liquidation, etc. governed
by State Governments as per the provisions of respective State Acts. In 1968, UCBS
were extended the benefits of Deposit Insurance.
Primary (Urban) Co-operative Banks (UCBs)
2.2 Section 24 (2A) of the Banking Regulation Act 1949, (as applicable to co-operative
societies) provides that every primary (urban) cooperative bank shall maintain liquid assets,
the value of which shall not be less than such percentage as may be specified by Reserve Bank
in the Official Gazette from time to time and not exceeding 40% of its DTL in India as on the
last Friday of the second preceding fortnight (in addition to the minimum cash reserve ratio
(CRR) requirement). Such liquid assets shall be in the form of cash, gold or unencumbered
investment in approved securities. This is referred to as the Statutory Liquidity Ratio (SLR)
requirement. It may be noted that balances kept with State Co-operative Banks / District
Central Co-operative Banks as also term deposits with public sector banks are now not eligible
for being reckoned for SLR purpose w.e.f April 1, 2015.