About Indian Economy
Indian economy at this level is vocabulary, institutions and addresses: what a term means, what a body does, and where an international organisation sits. The questions are factual and the answers are settled - and deliberately, none of them is a current figure, because a bank that carries this year's rate is out of date next year.
What you need to understand
- The national income terms are a ladder: gross domestic product counts what is produced inside the country, gross national product what its residents produce, and net national product takes depreciation off that.
- The deficits are a second ladder. The fiscal deficit is the gap between total spending and receipts other than borrowing, the revenue deficit is the gap on the revenue account alone, and the primary deficit takes the interest on past debt out of the fiscal deficit.
- The external terms are about the rest of the world: the balance of trade is exports against imports of goods, the current account adds services, income and transfers, and the balance of payments is the whole record.
- The central bank's tools are the ratios and the rates. The cash reserve ratio is the share of deposits kept with the central bank and the statutory liquidity ratio the share held in approved assets.
- The rates run in a family: the repo rate is what a bank pays to borrow against securities, the reverse repo is what it earns on funds left with the central bank, and the bank rate is the long-term rate without securities.
- Inflation is a sustained rise in the general level of prices, deflation a sustained fall, and stagflation the unwelcome combination of stagnant output with rising prices.
- The price indices measure different baskets: the wholesale price index follows bulk transactions and the consumer price index a fixed basket bought by households.
- Purchasing power parity is the rate at which currencies convert so that the same basket costs the same in both countries, and it is used to compare incomes between countries rather than to trade.
- Devaluation is a deliberate lowering of a fixed parity by a government; depreciation is a fall in the market. The first is a decision and the second is an outcome.
- Direct tax falls on the person who pays it and indirect tax is passed on to the buyer. A progressive tax takes a larger share as income rises and a regressive tax the reverse.
- The Goods and Services Tax is a single indirect tax on supply from production to consumption, and it is the reason most other indirect taxes have been subsumed.
- The institutions are best learned by what they were set up to do: the Reserve Bank for currency and banking, the Securities and Exchange Board for the market, NABARD for rural credit and SIDBI for small industry.
- The international addresses are worth learning in threes: the financial institutions in Washington, the United Nations agencies in New York, Geneva, Paris, Rome and Vienna, and the regional bodies in Kathmandu and Dhaka.
How to work through these questions
- Learn the terms in opposed pairs - inflation and deflation, direct and indirect tax, progressive and regressive, devaluation and depreciation - because the questions often give you the pair and ask for the distinction.
- For the deficits, draw the ladder once and use it: fiscal, then revenue, then primary.
- For the institutions, learn the purpose rather than the abbreviation. A question asks what a body does, and the full name usually tells you.
- For the international addresses, learn them by city. Geneva holds a dozen of these bodies, and knowing that narrows the options considerably.
- For the central bank's tools, remember the order in which a bank meets them: the reserve ratio first, then the liquidity ratio, then the borrowing rates.
- Where a question asks which body regulates something, think of the sector: banking gives the Reserve Bank, securities the Securities and Exchange Board, insurance the insurance authority and pensions the pension authority.
Mistakes that cost marks
- Mixing up the cash reserve ratio, which is held with the central bank, with the statutory liquidity ratio, which is held in approved assets.
- Confusing the repo rate, at which banks borrow, with the reverse repo, at which they lend to the central bank.
- Mixing up devaluation, which is a deliberate act, with depreciation, which happens in the market.
- Confusing the fiscal deficit with the revenue deficit: the first includes everything, the second only the revenue account.
- Giving the wholesale price index where the question asks about a household basket, which is the consumer price index.
- Confusing the World Bank and the International Monetary Fund, which do different things although both sit in Washington.
- Placing the World Trade Organization in New York: it is in Geneva, along with the health, labour and telecommunications bodies.
- Answering a question about an institution with the ministry that funds it rather than with the body that does the work.
Worked example
What is meant by the repo rate?
- The term belongs to the central bank's tools, so it is one of the ratios and rates rather than one of the deficits or the balance-of-payments terms.
- The rates that surround it are the reverse repo, at which the central bank absorbs funds, and the bank rate, at which it lends without security.
- The difference between the repo and the bank rate is that the repo is against securities and is for the short term.
- The repo rate is therefore the rate at which the central bank lends to commercial banks against securities.
Answer: the rate at which the central bank lends to commercial banks against securities
Practice questions with answers
A few Indian Economy questions with the full solution shown, so you can see
how the method is applied before you attempt the timed set.
Question 1
Which of these best describes repo rate?
-
A
a tax whose burden falls on the person who pays it
-
B
the record of all\veconomic transactions between residents of a country and the rest of the world
-
C
a combination of stagnant output and rising prices
-
D
the rate at which the central bank lends to commercial banks against securities
Answer: Option D — with explanation
repo rate means the rate at which the central bank lends to commercial banks against securities.
The terms are easier in pairs that oppose each other - inflation and deflation, direct and indirect tax, progressive and regressive - and the ratios are easier in the order in which a bank meets them: cash reserve, then statutory liquidity, then the rates at which it borrows.
Common mistakes
- this describes a different term: a tax whose burden falls on the person who pays it
- this describes a different term
- this describes a different term: a combination of stagnant output and rising prices
Question 2
Which of these best describes balance of trade?
-
A
the excess of total government expenditure over total receipts other than borrowing
-
B
the difference between the value of a country's exports and its imports of goods
-
C
a tax levied for a specified purpose and kept apart from the general revenue
-
D
the rate at which the central bank lends to commercial banks against securities
Answer: Option B — with explanation
balance of trade means the difference between the value of a country's exports and its imports of goods.
The terms are easier in pairs that oppose each other - inflation and deflation, direct and indirect tax, progressive and regressive - and the ratios are easier in the order in which a bank meets them: cash reserve, then statutory liquidity, then the rates at which it borrows.
Common mistakes
- this describes a different term
- this describes a different term
- this describes a different term
Question 3
marginal standing facility refers to which of these?
-
A
the price at which the government undertakes to buy a crop if the market falls below it
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B
a sustained rise in the general level of prices
-
C
an emergency borrowing window for banks against government securities
-
D
currency with the public plus deposits with the banking system
Answer: Option C — with explanation
marginal standing facility means an emergency borrowing window for banks against government securities.
The terms are easier in pairs that oppose each other - inflation and deflation, direct and indirect tax, progressive and regressive - and the ratios are easier in the order in which a bank meets them: cash reserve, then statutory liquidity, then the rates at which it borrows.
Common mistakes
- this describes a different term
- this describes a different term
- this describes a different term: a sustained rise in the general level of prices
Question 4
subsidy refers to which of these?
-
A
a sustained rise in the general level of prices
-
B
a payment by the government that lowers the price a buyer pays
-
C
the excess of total government expenditure over total receipts other than borrowing
-
D
the rate at which one currency converts into another so that the same basket of goods costs the same
Answer: Option B — with explanation
subsidy means a payment by the government that lowers the price a buyer pays.
The terms are easier in pairs that oppose each other - inflation and deflation, direct and indirect tax, progressive and regressive - and the ratios are easier in the order in which a bank meets them: cash reserve, then statutory liquidity, then the rates at which it borrows.
Common mistakes
- this describes a different term
- this describes a different term: a sustained rise in the general level of prices
- this describes a different term
Question 5
revenue deficit refers to which of these?
-
A
the excess of revenue expenditure over revenue receipts
-
B
a single indirect tax on the supply of goods and services from production to consumption
-
C
gross national product less the depreciation of capital
-
D
a sustained fall in the general level of prices
Answer: Option A — with explanation
revenue deficit means the excess of revenue expenditure over revenue receipts.
The terms are easier in pairs that oppose each other - inflation and deflation, direct and indirect tax, progressive and regressive - and the ratios are easier in the order in which a bank meets them: cash reserve, then statutory liquidity, then the rates at which it borrows.
Common mistakes
- this describes a different term
- this describes a different term: gross national product less the depreciation of capital
- this describes a different term: a sustained fall in the general level of prices
Frequently asked questions
Why are there no current figures in this topic?
Because a question bank that carries this year's rate is wrong next year. What is asked here is what a term means and what a body does, and both stay true.
How is this different from current affairs?
Current affairs is about events, which date. This topic is about the vocabulary and the machinery, which do not. A candidate who knows what the cash reserve ratio is can read any budget statement afterwards.
Do I need to know the tax rates?
No. Know the structure: which taxes are direct, which indirect, what a cess and a surcharge are, and why the Goods and Services Tax replaced several others.
Which of these facts are asked most?
The deficits, the central bank's ratios and rates, and the headquarters of the international organisations. The last group appears in almost every paper.
Is NITI Aayog the same as the Planning Commission?
It replaced it. The Planning Commission made plans and allocated funds; NITI Aayog advises and does not allocate. Questions about either are answered by that distinction.
