UPSC Prelims 2020 Question Paper

Detailed Explanation:

Answer: Option 4 — to leave it unchanged

When you withdraw Rs. 1,00,000 in cash from your demand deposit account, you are converting a deposit (part of money supply) into currency (also part of money supply). The total money supply remains constant; only its composition changes—cash increases while demand deposits decrease by the same amount. Since both cash and demand deposits are components of M1 (the primary measure of money supply), the net effect on aggregate money supply is zero.

Detailed Explanation:

Answer: Option 4 — Provisions of the Fiscal Responsibility and Budget Management Act, 2003

The Macro Economic Framework Statement is mandated to be presented before Parliament by the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. This Act establishes a legal framework requiring the government to lay three key policy statements before Parliament each financial year: the Medium Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement, and the Macroeconomic Framework Statement. These statements ensure transparency in fiscal operations, promote inter-generational equity in fiscal management, and support long-run macroeconomic stability and better coordination between fiscal and monetary policies.

Detailed Explanation:

Answer: Option 1 — 1 only

During a global financial crisis, India's primary shield against external shocks is reducing dependence on short-term foreign borrowings, which minimizes vulnerability to sudden capital flight and currency instability. The other two measures would actually increase systemic risk rather than provide immunity.

✅ Statement 1 – Correct: Limiting short-term foreign borrowings reduces exposure to capital flight; when foreign investors withdraw funds during a crisis, economies with lower short-term external debt face less rupee depreciation and financial instability.

❌ Statement 2 – Incorrect: Opening up to more foreign banks increases reliance on foreign capital and credit; during a crisis, foreign banks typically restrict lending, amplifying credit contraction and economic damage in the host economy.

❌ Statement 3 – Incorrect: Full capital account convertibility permits unrestricted outflow of foreign capital; this accelerates capital flight during crises, causing sharp currency depreciation and financial sector stress, making the economy more vulnerable rather than immune.

📝 Short Notes: Capital Account Management and Financial Stability

• Capital Account Convertibility: Allows free movement of capital across borders. India has partial convertibility on the capital account, maintaining restrictions on short-term speculative flows to manage systemic risk.
• Short-term Foreign Debt Risk: Creates currency mismatch and rollover risk; during crises, maturity mismatches force rapid repayment, depleting foreign reserves and destabilizing the exchange rate.
• Foreign Direct Investment vs. Foreign Portfolio Investment: FDI (long-term, stable) is preferred over FPI (short-term, volatile); foreign banks' presence increases FPI dependency and pro-cyclical credit behavior during downturns.
• Debt Sustainability Framework: Countries with lower short-term external debt as a percentage of foreign reserves and lower debt-to-GDP ratios demonstrate greater resilience to external shocks.

Detailed Explanation:

Answer: Option 2 — 2 only

An expansionary monetary policy aims to increase money supply and lower interest rates to stimulate economic activity. Statement 2 (increasing the Marginal Standing Facility Rate) is the only action the RBI would NOT take under expansionary policy, as it contradicts the goal of reducing borrowing costs for banks.

✅ Statement 1 – Correct: Cutting and optimizing the Statutory Liquidity Ratio allows banks to lend more money, directly supporting expansionary policy.

❌ Statement 2 – Incorrect: Increasing the MSF Rate makes borrowing from RBI more expensive for banks, which restricts liquidity and contradicts expansionary objectives.

✅ Statement 3 – Correct: Cutting Bank Rate and Repo Rate are core expansionary tools that encourage banks to borrow and lend at lower rates, boosting credit and economic activity.

📝 Short Notes: RBI Monetary Policy Tools

• Repo Rate: Rate at which RBI lends to banks; cutting it encourages borrowing and lending (expansionary).
• Reverse Repo Rate: Rate at which RBI borrows from banks; cutting it reduces incentive to park funds with RBI.
• Bank Rate: Long-term lending rate used for discounting bills; lower rates support credit expansion.
• Statutory Liquidity Ratio (SLR): Percentage of deposits banks must keep in liquid form; reducing it frees up capital for lending.
• Marginal Standing Facility (MSF) Rate: Emergency borrowing rate for banks; higher rates restrict liquidity (contractionary tool).
• Cash Reserve Ratio (CRR): Percentage of deposits held as reserves; reducing it increases lendable resources.

Detailed Explanation:

Answer: Option 4 — 1, 2 and 3

Non-financial debt encompasses all debt obligations incurred by non-financial sectors of the economy, including households, businesses, and government. All three statements represent legitimate components of non-financial debt.

✅ Statement 1 – Correct: Housing loans owed by households are credit obligations of the non-financial sector and constitute non-financial debt.

✅ Statement 2 – Correct: Credit card outstanding amounts represent consumer debt owed by households (non-financial sector) to financial institutions and are included in non-financial debt.

✅ Statement 3 – Correct: Treasury bills issued by the Government of India represent government borrowing; since government is part of the non-financial sector, T-bills and similar government securities are classified as non-financial debt.

Detailed Explanation:

Answer: Option 2 — 2 and 3 only

Statements 2 and 3 are correct, while Statement 1 is incorrect. The Government of India maintains significant control over fertilizer pricing through subsidy mechanisms and policies like the New Urea Policy 2015, ensuring agricultural affordability and self-sufficiency. Ammonia, a critical input for urea production, is indeed produced from natural gas through industrial processes. Sulphur, essential for phosphoric acid fertilizer production via the Wet Process, is naturally generated as a by-product during crude oil refining and gas processing operations.

✅ Statement 2 – Correct: Ammonia is produced from natural gas and accounts for 90% of energy consumption in fertilizer production, being a key ingredient in nitrogen fertilizers.

✅ Statement 3 – Correct: Sulphur is a major by-product of oil refining and gas processing, used in phosphoric acid fertilizer production through the Wet Process.

❌ Statement 1 – Incorrect: Fertilizer prices in India are not fully market-driven; the Government subsidizes and administers prices through policies like the New Urea Policy 2015 to ensure affordability and agricultural self-sufficiency.

Detailed Explanation:

Answer: Option 1 — 1 and 2 only

This question tests understanding of the structural differences between CPI and WPI, and the RBI's monetary policy framework. Statements 1 and 2 correctly identify key distinctions between these price indices, while Statement 3 contains a factual error about RBI's policy choice.

✅ Statement 1 – Correct: Food and Beverages constitute approximately 45.86% of the CPI (Combined, Base Year 2012), whereas food items account for only about 24.38% of the WPI (Base Year 2011-12), reflecting the higher weightage of food in CPI.

✅ Statement 2 – Correct: The WPI measures prices of goods at the wholesale level and excludes services entirely, while the CPI captures price changes in both goods and services (healthcare, education, transportation, recreation) as consumed by households.

❌ Statement 3 – Incorrect: Following the Urjit Patel Committee recommendations, the RBI officially adopted CPI (Combined) as its primary measure of inflation for monetary policy and interest rate decisions in April 2014, not WPI.

Detailed Explanation:

Answer: Option 2 — 3 and 4 only

After the 1991 economic liberalization, rural India underwent structural changes with the expansion of non-farm sectors and a relative slowdown in rural employment growth. Statements 3 and 4 correctly capture these post-liberalization trends, while Statements 1 and 2 misrepresent the actual outcomes.

✅ Statement 3 – Correct: Rural non-farm economy growth expanded significantly post-1991 as diversification into manufacturing, construction, retail, and services provided alternative income sources beyond agriculture.

❌ Statement 1 – Incorrect: Worker productivity increased in both urban and rural areas after liberalization; it did not decrease in rural areas despite sectoral shifts.

❌ Statement 2 – Incorrect: The percentage share of rural areas in the workforce steadily decreased (not increased) as rural-to-urban migration accelerated due to better employment opportunities in industrial and service sectors.

✅ Statement 4 – Correct: The growth rate in rural employment decreased because agricultural sector contraction and inadequate labor absorption in new rural sectors created employment bottlenecks despite economic diversification.

Detailed Explanation:

Answer: Option 4 — 1, 2, 3 and 4

All four factors significantly influence rice prices in India. The government employs multiple policy tools—MSP guarantees, FCI procurement and sales, buffer stock management, and subsidized distribution through PDS—creating a complex web of interventions that collectively shape market availability and consumer prices.

✅ Statement 1 – Minimum Support Price (MSP): Correct MSP guarantees a floor price for farmers; when procurement occurs at MSP levels, it reduces market supply and can push up consumer prices.

✅ Statement 2 – Government's Trading: Correct FCI and other government agencies' procurement and sale decisions directly affect market supply dynamics and rice availability in the open market.

✅ Statement 3 – Government's Stockpiling: Correct Buffer stock management affects supply; depleted stocks can create shortages and price spikes, while excessive stocks can depress prices.

✅ Statement 4 – Consumer Subsidies: Correct Subsidized rice through PDS increases effective demand and can exert upward pressure on overall market prices by boosting consumption.

Detailed Explanation:

Answer: Option 2 — 1, 3 and 4 only

Cyber insurance for individuals covers digital risks and financial losses arising from cyber incidents. It includes restoration costs for compromised systems, legal defense expenses, and consultant fees for handling cyber extortion, but excludes physical damage to hardware caused by willful acts of vandalism.

✅ Statement 1 – Correct: Cyber insurance covers the cost of restoring computer systems and data corrupted or disrupted by malware attacks.

❌ Statement 2 – Incorrect: Cyber insurance does not cover physical damage to hardware or replacement costs due to willful physical vandalism; it covers only digital risks and cyber-related losses.

✅ Statement 3 – Correct: Cyber insurance covers expenses for hiring specialized consultants to investigate cyber extortion threats (such as ransomware) and minimize associated losses.

✅ Statement 4 – Correct: Cyber insurance provides coverage for legal defense costs when a third party files a lawsuit for privacy breaches, data theft, or defamation resulting from a cyber incident.

Detailed Explanation:

Answer: Option 1 — Crude oil

West Texas Intermediate (WTI) is a grade of crude oil that serves as a major benchmark for oil pricing, particularly in North America. It is classified as light, sweet crude oil due to its low density and low sulfur content, making it highly desirable for refining into gasoline and other petroleum products.

📝 Short Notes: Global Crude Oil Benchmarks

• Light vs Heavy Crude: Refers to API gravity (density); light crude has higher API gravity and is easier to refine.
• Sweet vs Sour Crude: Based on sulfur content; sweet crude has less than 0.5% sulfur, making it cleaner and more valuable.
• Price Differential: WTI and Brent prices often differ due to supply-demand dynamics, transportation costs, and regional factors.
• Strategic Importance: Crude oil prices impact global inflation, currency values, trade balances, and economic growth, making these benchmarks crucial for economic planning.

Detailed Explanation:

Answer: Option 2 — 1, 3 and 4 only

The Kisan Credit Card (KCC) scheme provides short-term credit support for agricultural operations, post-harvest activities, and consumption needs of farm households. It does not cover long-term capital investments like purchase of heavy machinery or construction of buildings.

✅ Statement 1 – Correct: Working capital for maintenance of farm assets (irrigation, fertilizers, labor costs) is covered under short-term credit support of KCC.
❌ Statement 2 – Incorrect: Purchase of combine harvesters, tractors, and mini trucks are capital-intensive assets requiring long-term investment credit, not covered under short-term KCC credit.
✅ Statement 3 – Correct: Consumption requirements of farm households are covered under KCC, typically capped at a certain percentage of the credit limit.
✅ Statement 4 – Correct: Post-harvest expenses including storage, transportation, and marketing of produce are eligible under KCC short-term credit.
❌ Statement 5 – Incorrect: Construction of family house and setting up village cold storage facilities are long-term capital investments, not covered under short-term credit component of KCC.

📝 Short Notes: Kisan Credit Card (KCC) Scheme

• Launched: 1998-99 by NABARD to provide timely and adequate credit to farmers
• Objective: Single window for meeting short-term, medium-term and long-term credit needs of farmers
• Short-term credit coverage: Cultivation expenses, post-harvest expenses, produce marketing loan, consumption needs, working capital for farm asset maintenance
• Allied activities: Dairy animals, inland fishery, poultry, beekeeping covered under KCC
• Interest subvention: Government provides interest subsidy to make credit affordable (typically 2% subvention, additional 3% prompt repayment incentive)
• Validity: 5 years, subject to annual review; credit limit fixed based on land holding and cropping pattern
• Collateral: No collateral required up to ₹1.6 lakh credit limit

Detailed Explanation:

Answer: Option 3 — 3 only

This question tests the association of ancient Indian scholars with their contemporary rulers. Only Kalidasa's association with Chandragupta II is historically accurate, while Panini and Amarasimha are incorrectly matched with the given rulers.

❌ Statement 1 – Incorrect: Panini (5th-4th century BCE), author of Ashtadhyayi, lived centuries before Pushyamitra Shunga (2nd century BCE). Patanjali, not Panini, was contemporary to Pushyamitra Shunga.
❌ Statement 2 – Incorrect: Amarasimha, author of Amarakosha, was one of the Navaratnas in the court of Chandragupta II (Gupta period), not Harshavardhana (7th century CE, Pushyabhuti dynasty).
✅ Statement 3 – Correct: Kalidasa, the greatest Sanskrit poet and dramatist, was indeed one of the Navaratnas in the court of Chandragupta II (Vikramaditya, r. 375-415 CE).

📝 Short Notes: Scholars and Their Patrons

• Navaratnas of Chandragupta II: Included Kalidasa, Amarasimha, Dhanvantari, Varahamihira, Vararuchi, Kshapanaka, Shanku, Vetala Bhatta, and Ghatakarpara.
• Gupta Golden Age: The period of Chandragupta II (375-415 CE) marked the zenith of classical Sanskrit literature and learning.
• Harsha's Court: While Harshavardhana (r. 606-647 CE) was a patron of learning, his court litterateurs included Banabhatta and Mayura, not Amarasimha.

Detailed Explanation:

Answer: Option 1 — Ashoka

This inscription is from Ashoka's Major Rock Edict XII, which emphasizes religious tolerance and harmony among different sects. Ashoka, the Mauryan emperor (268-232 BCE), promoted dhamma (righteousness) and religious pluralism after his transformation following the Kalinga War. The edict specifically warns against sectarian intolerance and advocates respecting all religious traditions.

📝 Short Notes: Ashoka's Edicts

• Languages: Primarily Prakrit (Brahmi script), Greek and Aramaic in northwest regions
• Main Themes: Dhamma (righteousness), non-violence, religious tolerance, animal welfare, social harmony
• Rock Edict XII specifically: Criticizes sectarian pride, promotes mutual respect among religions, emphasizes growth through restraint in speech about other sects
• Historical Significance: Earliest deciphered inscriptions in India; provide insights into Mauryan administration and Ashoka's ideology
• Geographical Spread: Found across Indian subcontinent from Afghanistan to Karnataka, indicating vast empire extent

Detailed Explanation:

Answer: Option 2 — 1 and 3 only

This question tests knowledge of ancient Indian religious and cultural terminology. Pair 1 and Pair 3 are correctly matched, while Pair 2 incorrectly describes Shramanas as high-status priests, whereas they were actually ascetic practitioners who rejected Brahmanical orthodoxy.

✅ Pair 1 – Correct: Parivrajaka literally means 'wanderer' and refers to renunciants who abandoned worldly life to travel and pursue spiritual knowledge.
❌ Pair 2 – Incorrect: Shramana means 'one who strives' and refers to ascetic traditions (Buddhism, Jainism, Ajivika) that opposed the Vedic priestly hierarchy, not priests with high status.
✅ Pair 3 – Correct: Upasaka refers to lay followers of Buddhism who practiced the faith without joining the monastic Sangha.

📝 Short Notes: Ancient Indian Religious Terminology

Detailed Explanation:

Answer: Option 2 — 2 and 3 only

This question tests knowledge of early Buddhist sectarian developments that led to the emergence of Mahayana Buddhism. The Mahasanghika sect played a crucial role in the evolution of Mahayana through its liberal doctrinal approach and deification of Buddha.

❌ Statement 1 – Incorrect: Sthaviravadins (Theravadins) belong to Theravada Buddhism, not Mahayana Buddhism. They represent the conservative orthodox school that emphasized strict adherence to monastic discipline and original teachings.

✅ Statement 2 – Correct: The Lokottaravadin sect was indeed an offshoot of the Mahasanghika school. The term 'Lokottaravada' means 'transcendentalist doctrine,' believing that Buddha was supramundane (lokottara) and not bound by worldly laws.

✅ Statement 3 – Correct: The Mahasanghikas' progressive views, including the deification and transcendental nature of Buddha, directly contributed to the doctrinal foundation of Mahayana Buddhism, which emphasized the Bodhisattva ideal and multiple Buddhas.

📝 Short Notes: Early Buddhist Schools and Mahayana Development

• First Buddhist Council (483 BCE): Held at Rajagriha after Buddha's death; compiled teachings but seeds of disagreement emerged.
• Second Buddhist Council (383 BCE): Held at Vaishali; major split between Sthaviravadins and Mahasanghikas over monastic discipline.
• Lokottaravadins: Believed Buddha possessed infinite powers, infinite lifespan, and was never truly bound by physical limitations.
• Mahayana Evolution: Emerged around 1st century BCE-CE, building on Mahasanghika concepts of Buddha's transcendence, multiple Buddhas, and the Bodhisattva path.
• Theravada Today: Survives in Sri Lanka, Myanmar, Thailand, Cambodia, and Laos as the only surviving school of early Buddhism.

Detailed Explanation:

Answer: Option 3 — Perfections whose attainment led to the Bodhisattva path

The term 'paramitas' in Buddhist philosophy refers to the transcendent virtues or perfections that must be cultivated by Bodhisattvas on their path to enlightenment. In Mahayana Buddhism, these perfections typically include six virtues: generosity (dana), moral conduct (sila), patience (kshanti), diligence (virya), meditation (dhyana), and wisdom (prajna). The practice and perfection of these virtues enable Bodhisattvas to progress toward Buddhahood while helping others achieve liberation from suffering.

📝 Short Notes: Paramitas in Buddhism

• Paramitas (Perfections): Transcendent virtues practiced in Mahayana Buddhism to attain enlightenment and Bodhisattva status.
• Six Traditional Paramitas: (1) Dana (Generosity), (2) Sila (Moral Conduct/Ethics), (3) Kshanti (Patience/Forbearance), (4) Virya (Energy/Diligence), (5) Dhyana (Meditation/Concentration), (6) Prajna (Wisdom/Insight).
• Extended List: Some texts mention ten paramitas, adding Upaya (Skillful Means), Pranidhana (Vow/Resolution), Bala (Spiritual Power), and Jnana (Knowledge).
• Bodhisattva Path: A Bodhisattva is one who seeks enlightenment not just for themselves but to help all sentient beings; paramitas are essential practices on this path.
• Mahayana Tradition: The concept of paramitas is central to Mahayana Buddhism and distinguishes it from Theravada tradition in its emphasis on the Bodhisattva ideal.

Detailed Explanation:

Answer: Option 1 — measurement of land

The terms kulyavapa and dronavapa were units of land measurement used in ancient India, particularly during the Gupta period. These measurements were based on the quantity of seed required to sow a specific area of land—'vapa' means 'to sow', while 'kulya' and 'drona' were volumetric measures of grain.

📝 Short Notes: Ancient Indian Land Measurement Systems

• Vapa literally means 'to sow', indicating these were seed-based measurements
• These units reflect an agricultural economy where land value was tied to productivity
• The Gupta period (c. 320-550 CE) saw systematic land revenue administration using these measures
• Land grants to Brahmanas and temples were often recorded using these units
• This system differed from modern area-based measurements, instead using functional agricultural capacity

Detailed Explanation:

Answer: Option 1 — Ports handling foreign trade

During the Gupta period (c. 320–550 CE), Ghantasala and Kadura on the eastern coast (Andhra region) and Chaul on the western coast (Maharashtra) were prominent maritime centers engaged in overseas trade. These ports facilitated commerce with Southeast Asia, Western Asia, and the Roman world, trading in textiles, spices, ivory, and other commodities.

📝 Short Notes: Major Ports of Ancient India (Gupta Period)

Detailed Explanation:

Answer: Option 1 — 1 and 3 only

This question tests knowledge of historical places and their present-day locations in India. Only pairs 1 and 3 are correctly matched, while pairs 2 and 4 incorrectly identify the present states.

✅ Pair 1 – Correct: Bhilsa (Vidisha) is indeed located in Madhya Pradesh and was the capital of the Sunga dynasty.

❌ Pair 2 – Incorrect: Dwarasamudra (Halebidu) is located in Karnataka, not Maharashtra. It was the capital of the Hoysala dynasty.

✅ Pair 3 – Correct: Girinagar (Junagadh) is located in Gujarat and is famous for Mauryan rock inscriptions including Ashoka's edicts.

❌ Pair 4 – Incorrect: Sthanesvara (Thanesar) is located in Haryana, not Uttar Pradesh. It was the initial capital of Emperor Harsha of the Vardhana dynasty.

📝 Short Notes: Historical Places and Their Present Locations