UPSC CSE Prelims
Indian Economy Previous Year Questions (PYQs)
Solved Previous Year Questions (PYQs) for Indian Economy in UPSC CSE Prelims in English & Hindi Medium.
Chapter Breakdown: Scroll →
With reference to the governance of public sector banking in India, consider the following statements
- Capital infusion into public sector banks by the Government of India has steadily increased in the last decade.
- To put the public sector banks in order, the merger of associate banks with the parent State Bank of India has been affected.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 3 — 2 only
This question evaluates statements about public sector banking reforms in India. Statement 1 is incorrect as capital infusion has not been steady but rather sporadic and need-based. Statement 2 is correct as the merger of SBI associate banks with the parent State Bank of India was indeed carried out as a reform measure.
❌ Statement 1 – Incorrect: Capital infusion into public sector banks by the Government has not been steady over the last decade. It has been sporadic and need-based, with significant infusions through recapitalisation bonds in certain years (especially post-2017) when banks faced high NPAs, rather than a steady increase throughout the decade.
✅ Statement 2 – Correct: As part of public sector banking reforms, the merger of five associate banks and Bharatiya Mahila Bank with State Bank of India was completed in 2017, creating a stronger banking entity and improving operational efficiency.
📝 Short Notes: Public Sector Banking Reforms in India
- Bank Recapitalisation: Government infuses capital into PSBs through budgetary support and recapitalisation bonds to strengthen their capital base and meet Basel III norms.
- SBI Merger (2017): Five associate banks (State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Travancore, State Bank of Hyderabad, State Bank of Patiala) and Bharatiya Mahila Bank were merged with SBI, creating India's largest bank with improved global ranking.
- Other PSB Mergers: In 2019-20, 10 PSBs were consolidated into 4 banks, reducing the total number of PSBs from 27 (in 2017) to 12 (by 2020).
- 4R Strategy: Recognition (of NPAs), Resolution (through IBC), Recapitalisation, and Reforms for PSB strengthening.
- Prompt Corrective Action (PCA): Framework by RBI to monitor weak banks based on capital adequacy, asset quality, and profitability parameters.
- Bank Board Bureau: Established in 2016 to improve governance and professionalism in PSBs through transparent board appointments and performance evaluation.
Consider the following statements
- The Fiscal Responsibility and Budget Management (FRBM) Review Committee Report has recommended a debt to GDP ratio of 60% for the general (combined) government by 2023, comprising 40% for the Central Government and 20% for the State Governments.
- The Central Government has domestic liabilities of 21% of GDP as compared to 49% of GDP of the State Governments.
- As per the Constitution of India, it is mandatory for a State to take the Central Government’s consent for raising any loan if the former owes any outstanding liabilities to the latter.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 3 — 1 and 3 only
This question tests knowledge of fiscal federalism, the FRBM Review Committee recommendations, and constitutional provisions regarding state borrowings. Statement 1 correctly reflects the FRBM Committee's debt-to-GDP targets, and Statement 3 accurately describes Article 293 provisions, while Statement 2 provides incorrect figures for domestic liabilities.
✅ Statement 1 – Correct: The FRBM Review Committee (N.K. Singh Committee, 2017) recommended a combined debt-to-GDP ratio of 60% by 2023, with 40% for the Centre and 20% for States, to ensure fiscal sustainability.
❌ Statement 2 – Incorrect: The Central Government's domestic liabilities were approximately 46.1% of GDP (2016-17), not 21%, while State Governments' liabilities were around 23.2% of GDP, not 49% — the figures are reversed and incorrect.
✅ Statement 3 – Correct: Article 293(3) of the Constitution mandates that a State must obtain Central Government consent for raising any loan if it has outstanding liabilities to the Centre.
📝 Short Notes: Fiscal Responsibility and State Borrowings
- FRBM Act, 2003: Enacted to ensure fiscal discipline and reduce fiscal deficit through institutional mechanisms.
- FRBM Review Committee (2017): Chaired by N.K. Singh; recommended a debt-to-GDP ratio of 60% for general government (40% Centre + 20% States) by 2023, and introduced an escape clause for deviation during structural reforms, recession, or national calamity.
- Article 293(1): Empowers State Governments to borrow within India upon the security of the Consolidated Fund of the State, subject to limits prescribed by the State Legislature.
- Article 293(3): Requires a State to obtain Central Government consent before raising any loan if it has outstanding liabilities to the Centre, ensuring coordination in fiscal management.
- Article 292: Empowers the Central Government to borrow upon the security of the Consolidated Fund of India, subject to limits prescribed by Parliament.
- Fiscal Deficit: Difference between total revenue and total expenditure of the government; FRBM targets aimed at 3% of GDP for the Centre.
Which one of the following links all the ATMs in India?
Detailed Explanation:
Answer: Option 3 — National Payments Corporation of India
The National Payments Corporation of India (NPCI) operates the National Financial Switch (NFS), which is the largest network of shared ATMs in India. NFS links ATMs across all banks, enabling customers to access any bank's ATM for cash withdrawal and other banking services, facilitating seamless inter-bank ATM transactions nationwide.
📝 Short Notes: National Payments Corporation of India (NPCI)
- Establishment: NPCI was incorporated in 2008 as an umbrella organization for operating retail payments and settlement systems in India.
- Ownership: It is an initiative of the Reserve Bank of India (RBI) and Indian Banks' Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007.
- National Financial Switch (NFS): Launched in 2004, NFS is the largest network of shared ATMs in India, connecting over 1 lakh ATMs across banks.
- Key Services: NPCI operates multiple payment systems including UPI (Unified Payments Interface), IMPS (Immediate Payment Service), RuPay card scheme, BHIM, AePS (Aadhaar Enabled Payment System), and NFS.
- UPI: Unified Payments Interface is NPCI's flagship real-time payment system that has revolutionized digital payments in India.
- RuPay: India's own domestic card payment network, competing with Visa and Mastercard, launched by NPCI in 2012.
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If a commodity is provided free to the public by the Government, then
Detailed Explanation:
Answer: Option 4 — the opportunity cost is transferred from the consumers of the product to the tax-paying public.
When the government provides a commodity free of cost, the opportunity cost does not disappear—it is merely transferred from the direct consumers to the tax-paying public. The resources used to provide the free commodity are financed through taxation, meaning taxpayers bear the burden of foregone alternative uses of those resources. Thus, while consumers do not pay directly, society as a whole incurs the opportunity cost through taxation.
📝 Short Notes: Opportunity Cost
- Definition: Opportunity cost is the value of the next best alternative foregone when making a choice. It represents what is given up when resources are allocated to one use instead of another.
- Universal Principle: Opportunity cost exists in all economic decisions, whether made by individuals, firms, or governments, because resources are scarce and have alternative uses.
- Free Goods vs. Economic Goods: True free goods (like air) have no opportunity cost as they are abundant. However, goods provided "free" by the government are economic goods with real resource costs.
- Government Provision: When governments provide goods or services for free, they use tax revenues or borrowed funds. The opportunity cost is thus transferred to taxpayers who could have used those resources elsewhere.
- Example: If the government provides free electricity to farmers, the cost is borne by all taxpayers through subsidies, representing the opportunity cost of alternative public spending (like healthcare or education).
- Policy Implication: Understanding opportunity cost is crucial for evaluating the true cost of public policies and ensuring efficient resource allocation in the economy.
With reference to India's decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?
- It is introduced as a part of the Income Tax Act.
- Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the "Double Taxation Avoidance Agreements".
Select the correct answer using the code given below:
Detailed Explanation:
Answer: Option 1 — None
Both statements regarding India's equalization tax of 6% on online advertisement services are incorrect.
❌ Statement 1 – Incorrect: The equalization levy was introduced under the Finance Act, 2016 as a separate tax, not as a part of the Income Tax Act, 1961.
❌ Statement 2 – Incorrect: Since the equalization levy is not classified as an income tax but as a separate levy on specified transactions, non-resident entities cannot claim tax credit in their home country under Double Taxation Avoidance Agreements (DTAAs), which typically apply only to income tax.
📝 Short Notes: Equalization Levy
| Aspect | Details |
|---|---|
| Introduction | Finance Act, 2016 (effective from June 1, 2016) |
| Legal Framework | Separate tax levy, not part of Income Tax Act, 1961 |
| Initial Rate & Scope | 6% on online advertisement services and related services by non-resident entities |
| Expansion (2020) | 2% levy on e-commerce transactions exceeding ₹2 crore annually |
| Threshold | Applicable when annual payment exceeds ₹1 lakh (for advertisement services) |
| DTAA Applicability | No tax credit available under DTAAs as it is not an income tax |
| Objective | Tax digital economy transactions where service provider has no permanent establishment in India |
| Recent Development | 6% levy on online advertisements abolished from April 1, 2025 |
Consider the following events:
- The first democratically elected communist party government formed in a State in India.
- India's then largest bank, 'Imperial Bank of India', was renamed 'State Bank of India'.
- Air India was nationalised and became the national carrier.
- Goa became a part of independent India.
Which of the following is the correct chronological sequence of the above events?
Detailed Explanation:
Answer: Option 2 — 3 - 2 - 1 - 4
The correct chronological sequence of these historical events is determined by their occurrence dates: Air India nationalization (1953), Imperial Bank renamed to SBI (1955), first democratically elected Communist government in Kerala (1957), and Goa's integration into India (1961).
Chronological Analysis:
Event 3 – Air India Nationalisation (1953): Air India was nationalised following the Air Corporations Act, 1953, when the Government of India acquired majority stake from the Tata Group, making it the national carrier.
Event 2 – Imperial Bank renamed to SBI (1955): Based on the Gorewala Committee recommendations, the State Bank of India Act was passed, and on July 1, 1955, the Imperial Bank of India was officially renamed as State Bank of India.
Event 1 – First Communist Government (1957): In the 1957 Kerala Legislative Assembly elections, the Communist Party of India won a majority, and E.M.S. Namboodiripad formed the government, marking the first democratically elected Communist government in any Indian state.
Event 4 – Goa's Integration (1961): Goa was liberated from Portuguese rule on December 19, 1961, through Operation Vijay and subsequently incorporated into India as a Union Territory by the 12th Constitutional Amendment Act, 1962.
📝 Short Notes: Post-Independence Milestones (1950s-60s)
| Year | Event | Significance |
|---|---|---|
| 1953 | Air India Nationalisation | Air Corporations Act, 1953; establishment of national carrier |
| 1955 | State Bank of India created | Imperial Bank renamed; based on Gorewala Committee (All India Rural Credit Survey Committee) recommendations |
| 1957 | First Communist Government | Kerala - CPI under E.M.S. Namboodiripad; first democratically elected communist government worldwide |
| 1961 | Goa Liberation | Operation Vijay (December 19); ended 451 years of Portuguese rule |
| 1962 | Goa's Constitutional Integration | 12th Constitutional Amendment Act; Union Territory status |
| 1987 | Goa Statehood | Goa became 25th state of India (May 30) |
Which one of the following best describes the term "Merchant Discount Rate" sometimes seen in the news?
Detailed Explanation:
Answer: Option 3 — The charge to a merchant by a bank for accepting payments from his customers through the bank's debit cards.
The Merchant Discount Rate (MDR) is a fee charged to merchants by banks or payment processors for enabling and processing digital payment transactions through debit cards, credit cards, or digital wallets. It is typically a percentage of the transaction amount and is deducted from the merchant's account. This fee covers the cost of providing the payment infrastructure, processing the transaction, and bearing the associated risks.
📝 Short Notes: Merchant Discount Rate (MDR)
- Definition: MDR is the fee charged to merchants by banks/payment processors for accepting card-based or digital payments from customers.
- Components: It typically includes interchange fees (paid to the card-issuing bank), network fees (paid to card networks like Visa/RuPay), and acquirer margin (retained by the merchant's bank).
- Rate Structure: MDR varies based on the type of card (debit/credit), transaction value, merchant category, and payment method used.
- Government Intervention (2020): The Government of India abolished MDR on digital payments made through RuPay debit cards and UPI to promote digital transactions and reduce merchant costs.
- Purpose: MDR compensates the payment ecosystem participants for infrastructure, technology, fraud prevention, and operational costs.
- Impact: While MDR enables seamless digital transactions, high rates can discourage small merchants from adopting digital payment methods.
Consider the following statements:
- Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
- CAR is decided by each individual bank.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 1 — 1 only
Capital Adequacy Ratio (CAR) is a regulatory measure that ensures banks maintain sufficient capital reserves to absorb potential losses from loan defaults and other financial risks, thereby protecting depositors' interests. Statement 1 correctly defines CAR as the capital banks must hold to offset losses if borrowers fail to repay dues, while Statement 2 is incorrect because CAR is mandated and regulated by the central bank (RBI in India), not decided by individual banks.
✅ Statement 1 – Correct: CAR represents the minimum capital that banks must maintain as a cushion against potential losses from loan defaults and other risks, protecting depositors and ensuring financial stability.
❌ Statement 2 – Incorrect: CAR is not decided by individual banks but is mandated and regulated by the Reserve Bank of India (RBI), which sets minimum CAR requirements to ensure uniformity and financial system stability.
📝 Short Notes: Capital Adequacy Ratio (CAR)
- Definition: CAR is the ratio of a bank's capital to its risk-weighted assets, expressed as a percentage.
- Regulatory Authority: In India, the Reserve Bank of India (RBI) sets and monitors CAR requirements for all banks.
- Purpose: Ensures banks have adequate capital buffers to absorb losses, protecting depositors and maintaining financial system stability.
- Minimum CAR in India: RBI mandates a minimum CAR of 9% for scheduled commercial banks (higher than Basel III's 8% requirement).
- Components: CAR includes Tier I capital (core capital like equity and disclosed reserves) and Tier II capital (supplementary capital like subordinated debt).
- Basel Norms: CAR requirements in India are aligned with Basel III international banking regulations.
- Impact: Higher CAR indicates a bank's greater capacity to withstand financial stress and protects against insolvency.
Increase in absolute and per capita real GNP do not connote a higher level of economic development, if -
Detailed Explanation:
Answer: Option 3 — poverty and unemployment increase.
Economic growth (increase in GNP) does not automatically translate to economic development if the benefits are not equitably distributed. When poverty and unemployment increase despite rising GNP, it indicates that growth is concentrated among a few, failing to improve the living standards of the broader population. True economic development requires inclusive growth that reduces poverty, creates employment, and enhances overall welfare.
📝 Short Notes: Economic Growth vs Economic Development
- Economic Growth: Refers to the quantitative increase in the production of goods and services, measured by indicators like GNP, GDP, and per capita income.
- Economic Development: A qualitative concept that includes economic growth plus improvements in living standards, reduction in poverty and inequality, better health and education, and sustainable resource use.
- Key Difference: Growth is a necessary but not sufficient condition for development. Development implies structural transformation and equitable distribution of resources.
- Inclusive Growth: Economic development requires that the benefits of growth reach all sections of society, particularly the poor and marginalized.
- Development Indicators: HDI (Human Development Index), poverty ratio, unemployment rate, literacy rate, life expectancy, and infant mortality rate are better measures of development than just GNP.
- Policy Implication: Governments must focus on employment generation, social welfare programs, education, and healthcare to convert growth into development.
Consider the following statements:
- The Reserve Bank of India manages and services Government of India Securities but not any State Government Securities.
- Treasury bills are issued by the Government of India and there are no treasury bills issued by the State Governments.
- Treasury bills are issued at a discount from the par value.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 3 — 2 and 3 only
Only statements 2 and 3 are correct. The RBI manages securities for both Central and State Governments, making statement 1 incorrect. Treasury Bills are exclusively issued by the Government of India (not by states), and they are zero-coupon instruments issued at a discount to face value and redeemed at par on maturity.
❌ Statement 1 – Incorrect: RBI manages and services both Government of India Securities and State Government Securities (State Development Loans).
✅ Statement 2 – Correct: Treasury Bills are issued only by the Government of India; State Governments issue State Development Loans (SDLs) instead.
✅ Statement 3 – Correct: Treasury Bills are zero-coupon instruments issued at a discount from par value and redeemed at par on maturity.
📝 Short Notes: Government Securities and Treasury Bills
- RBI as Debt Manager: RBI acts as banker and debt manager for both Central Government and State Governments under agreements.
- Treasury Bills (T-Bills): Short-term money market instruments issued only by the Government of India through RBI. Maturities: 91 days, 182 days, and 364 days.
- Zero-Coupon Instruments: T-Bills do not carry any interest payment; they are issued at a discount and redeemed at face value. The difference represents the implicit interest.
- State Government Borrowing: States cannot issue Treasury Bills. They issue State Development Loans (SDLs) for their borrowing requirements, which are dated securities with coupon payments.
- Government Securities (G-Secs): Long-term debt instruments issued by both Central and State Governments. Central G-Secs and SDLs are managed by RBI.
With reference to digital payments, consider the following statements:
- BHIM app allows the user to transfer money to anyone with a UPI-enabled bank account.
- While a chip-pin debit card has four factors of authentication, BHIM app has only two factors of authentication.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 1 — 1 only
Statement 1 is correct because BHIM app enables UPI-based direct bank-to-bank transfers using the recipient's UPI ID or QR code. Statement 2 is incorrect because BHIM requires three factors of authentication (device ID/mobile number, linked bank account, and UPI PIN), whereas a chip-pin debit card typically requires only two factors (card and PIN).
✅ Statement 1 – Correct: BHIM app allows money transfer to anyone with a UPI-enabled bank account using their UPI ID or by scanning QR codes.
❌ Statement 2 – Incorrect: BHIM app has three factors of authentication (device ID/mobile, bank account, UPI PIN), not two, while chip-pin debit cards have two factors (card possession and PIN).
📝 Short Notes: Digital Payment Systems in India
- BHIM (Bharat Interface for Money): A UPI-based mobile payment app launched by NPCI in December 2016 for instant bank-to-bank transactions.
- Three Authentication Factors in BHIM: (1) Device ID and registered mobile number, (2) Linked bank account, (3) UPI PIN for transaction completion.
- UPI (Unified Payments Interface): Real-time payment system enabling inter-bank transactions through mobile platform using unique Virtual Payment Address (VPA).
- Transaction Methods: UPI ID-based transfer, QR code scanning, mobile number-based transfer, and payment requests.
- Chip-Pin Debit Card Authentication: Two factors - physical card possession (something you have) and PIN (something you know).
- Security Advantage: BHIM's three-factor authentication provides higher security compared to traditional two-factor card-based systems.
With reference to organic farming in India, consider the following statements:
- The National Programme for Organic Production (NPOP) is operated under the guidelines and directions of the Union Ministry of Rural Development.
- The Agricultural and Processed Food Products Export Development Authority (APEDA) functions as the Secretariat for the implementation of NPOP.
- Sikkim has become India's first fully organic State.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 2 — 2 and 3 only
The National Programme for Organic Production (NPOP) is operated under the Ministry of Commerce and Industry, not the Ministry of Rural Development, making statement 1 incorrect. Statement 2 is correct as APEDA serves as the Secretariat for NPOP implementation, and statement 3 is correct as Sikkim became India's first fully organic state in 2016.
❌ Statement 1 – Incorrect: NPOP is operated under the Ministry of Commerce and Industry, not the Ministry of Rural Development.
✅ Statement 2 – Correct: APEDA functions as the Secretariat for the implementation of NPOP under the Ministry of Commerce and Industry.
✅ Statement 3 – Correct: Sikkim became India's first fully organic state in 2016, converting all its cultivable land to organic farming.
📝 Short Notes: Organic Farming in India
- National Programme for Organic Production (NPOP): Launched in 2001 under the Ministry of Commerce and Industry to provide framework for accreditation of certification bodies and standards for organic production.
- APEDA's Role: Agricultural and Processed Food Products Export Development Authority acts as the Secretariat for NPOP implementation and promotes export of organic products.
- Sikkim's Achievement: Became India's first fully organic state in 2016 by converting approximately 76,000 hectares of agricultural land to certified organic farming.
- Paramparagat Krishi Vikas Yojana (PKVY): Launched in 2015 under the Ministry of Agriculture to promote organic farming through cluster approach and PGS certification.
- Mission Organic Value Chain Development for North Eastern Region (MOVCDNER): Central Sector Scheme to support certified organic production in northeastern states.
Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news?
Detailed Explanation:
Answer: Option 2 — It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
The Scheme for Sustainable Structuring of Stressed Assets (S4A) was launched by the Reserve Bank of India on 13 June 2016 to address large stressed assets in the corporate sector. The scheme enabled deep financial restructuring of big debt-laden projects by allowing banks to convert part of the debt into equity, thereby restoring the viability of critical sectors including infrastructure.
✅ Option 2 – Correct: S4A is indeed an RBI scheme for financial restructuring of stressed corporate entities by allowing lenders to acquire equity.
❌ Option 1 – Incorrect: The scheme is not related to ecological costs of developmental schemes.
❌ Option 3 – Incorrect: S4A is not a disinvestment plan but a debt restructuring mechanism.
❌ Option 4 – Incorrect: While related to stressed assets, S4A is a separate RBI scheme, not a provision in the Insolvency and Bankruptcy Code.
Consider the following statements:
- India has ratified the Trade Facilitation Agreement (TFA) of WTO.
- TFA is a part of WTO’s Bali Ministerial Package of 2013.
- TFA came into force in January 2016.
Which of the statements given above is/are correct?
Detailed Explanation:
Answer: Option 1 — 1 and 2 only
The Trade Facilitation Agreement (TFA) is a multilateral deal aimed at simplifying customs procedures, reducing costs, and improving speed and efficiency of trade. India ratified this agreement, which was a key component of the WTO's Bali Ministerial Package of 2013. However, the TFA came into force in February 2017 (not January 2016), after receiving ratification from two-thirds of WTO members.
✅ Statement 1 – Correct: India has ratified the Trade Facilitation Agreement (TFA) of WTO, demonstrating its commitment to streamlining trade procedures.
✅ Statement 2 – Correct: The TFA is indeed a part of the WTO's Bali Ministerial Package of 2013, which was agreed upon at the Ninth Ministerial Conference in Bali, Indonesia.
❌ Statement 3 – Incorrect: The TFA came into force in February 2017, not January 2016, after two-thirds of WTO members completed their ratification process.
Which of the following gives the ‘Global Gender Gap Index’ ranking to the countries of the world?
Detailed Explanation:
Answer: Option 1 — World Economic Forum
The Global Gender Gap Index is an annual report published by the World Economic Forum (WEF) since 2006. It measures gender-based disparities across four key dimensions: Economic Participation and Opportunity, Educational Attainment, Health and Survival, and Political Empowerment. The index ranks countries based on their progress towards gender parity, with scores ranging from 0 (complete disparity) to 1 (complete parity). India's ranking has varied over the years, typically placing in the lower half among assessed nations. The report is released annually as part of WEF's global initiatives on inclusive growth.