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 →
A decrease in tax to GDP ratio of a country indicates which of the following?
- Slowing economic growth rates
- Less equitable distribution of national income
Choose the correct code:
Detailed Explanation:
✅ Statement 1 – Correct: A decrease in tax-to-GDP ratio often indicates slowing economic growth, as lower incomes and profits reduce tax collections, or reflects economic contraction where tax revenues fall faster than GDP.
❌ Statement 2 – Incorrect: The tax-to-GDP ratio measures government revenue collection efficiency, not income distribution equity. A decreasing ratio could occur with progressive tax cuts benefiting all income groups, or with regressive taxes declining – it provides no direct information about income inequality or distribution patterns.
Convertibility of rupee implies:
Detailed Explanation:
Convertibility of rupee refers to the freedom to convert Indian rupees into other currencies and vice versa without restrictions, enabling cross-border transactions.
Option 1 refers to the outdated gold standard, Option 2 describes a floating exchange rate system, and Option 4 refers to currency trading infrastructure—none of which defines convertibility itself.
Which one of the following issues the “Global Economic Prospects” report periodically?
Detailed Explanation:
The World Bank publishes the Global Economic Prospects (GEP) report twice a year (January and June).
The report examines global economic developments and provides growth forecasts for emerging market and developing economies (EMDEs).
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When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?
Detailed Explanation:
Statutory Liquidity Ratio (SLR) is the minimum percentage of Net Demand and Time Liabilities (NDTL) that commercial banks must maintain in liquid assets (cash, gold, government securities).
✅ Statement 3 – Correct: Reducing SLR by 50 basis points frees up funds previously locked in government securities, increasing loanable funds with banks, enabling them to cut lending rates to stimulate borrowing.
❌ Statement 1 – Incorrect: SLR reduction is a monetary policy tool with moderate impact; GDP growth depends on multiple factors, not just one policy change causing 'drastic' increase.
❌ Statement 2 – Incorrect: Foreign Institutional Investors (FIIs) respond to interest rate differentials, equity market returns, and global conditions, not domestic SLR adjustments.
❌ Statement 4 – Incorrect: SLR reduction increases liquidity in the banking system by releasing funds for lending, not reducing it.
There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit?
- Reducing revenue expenditure
- Introducing new welfare schemes
- Rationalizing subsidies
- Expanding industries
Select the correct answer using the code given below.
Detailed Explanation:
✅ Statement 1 – Correct: Reducing revenue expenditure (salaries, pensions, subsidies, interest payments) directly decreases government spending and helps narrow the fiscal deficit.
❌ Statement 2 – Incorrect: Introducing new welfare schemes increases government expenditure, thereby widening the budget deficit rather than reducing it.
✅ Statement 3 – Correct: Rationalizing subsidies (targeting, reducing non-merit subsidies) controls unnecessary revenue expenditure and improves fiscal management.
❌ Statement 4 – Incorrect: Expanding industries may increase tax revenue in the long term but requires initial capital expenditure and does not immediately reduce the deficit.
In India the steel production industry requires the import of
Detailed Explanation:
India has abundant reserves of iron ore, the primary raw material for steel production.
However, India lacks sufficient high-quality coking coal (metallurgical coal), which is essential for the blast furnace process in steel manufacturing, making it a key import.
Saltpetre (potassium nitrate) is used in fertilizers and explosives, while rock phosphate is a fertilizer raw material—neither is directly used in steel production.
The terms ‘Agreement on Agriculture’, ‘Agreement on the Application of Sanitary and Phytosanitary Measures’ and ‘Peace Clause’ appear in the news frequently in the context of the affairs of the:
Detailed Explanation:
Agreement on Agriculture (AoA), Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), and Peace Clause are all key agreements/provisions under the World Trade Organization (WTO).
AoA regulates international agricultural trade and subsidies; SPS Agreement sets standards for food safety and plant/animal health in trade; Peace Clause protects developing countries from legal challenges on certain agricultural subsidies provided they meet specified conditions.
Which of the following organizations brings out the publication known as ‘World Economic Outlook’?
Detailed Explanation:
World Economic Outlook (WEO) is a flagship report published by the International Monetary Fund (IMF) twice a year in April and October, providing comprehensive analysis of global economic developments and growth projections.
Other key IMF reports include the Global Financial Stability Report and the Fiscal Monitor.
The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’, sometimes appearing in the news, are used in relation to
Detailed Explanation:
Marginal Standing Facility (MSF) Rate is the rate at which banks borrow overnight funds from the Reserve Bank of India (RBI) against government securities when facing acute liquidity shortfalls.
Net Demand and Time Liabilities (NDTL) represents the aggregate of a bank's demand deposits (current and savings accounts) and time deposits (fixed deposits), used to calculate statutory requirements like CRR and SLR.
What does venture capital mean?
Detailed Explanation:
Venture capital is long-term equity financing provided to start-ups and new entrepreneurial ventures with high growth potential but higher risk.
Option 1 is incorrect as venture capital is long-term, not short-term; Option 3 refers to bailout funds or emergency financing, not venture capital; Option 4 describes replacement/modernization capital, which is different from venture funding for new businesses.
The sales tax you pay while purchasing a toothpaste is a
Detailed Explanation:
Sales tax (before GST) was levied and collected by State Governments under their constitutional powers over intra-state trade.
The Constitution (Entry 54, State List) empowered states to impose taxes on the sale or purchase of goods, making it a state subject for both imposition and collection.
In the context of food and nutritional security of India, enhancing the ‘Seed Replacement Rates’ of various crops helps in achieving the food production targets of the future. But what is/are the constraint/ constraints in its wider / greater implementation?
- There is no National Seeds Policy in place.
- There is no participation of private sector seed companies in the supply of quality seeds of vegetables and planting materials of horticultural crops.
- There is a demand-supply gap regarding quality seeds in case of low value and high volume crops.
Select the correct answer using the code given below.
Detailed Explanation:
❌ Statement 1 – Incorrect: India has the National Seeds Policy (2002) which provides a framework for seed certification, quality assurance, and encourages private sector participation.
❌ Statement 2 – Incorrect: Private sector seed companies like Mahyco, Syngenta, and Nunhems actively participate in supplying quality seeds of vegetables and horticultural crops, especially hybrid varieties.
✅ Statement 3 – Correct: There exists a demand-supply gap for quality certified seeds in low-value, high-volume crops (such as pulses, coarse cereals, and oilseeds) due to lower profitability and limited private sector investment in their seed production.
If the interest rate is decreased in an economy, it will
Detailed Explanation:
When interest rates decrease, the cost of borrowing falls, making loans cheaper for businesses and entrepreneurs.
This encourages firms to take credit for capital investment in machinery, equipment, infrastructure, and expansion projects, thereby increasing investment expenditure in the economy.
Lower interest rates also reduce returns on savings (making saving less attractive) and stimulate consumption through cheaper EMIs, but the most direct and significant impact is on investment decisions by businesses.
With reference to Balance of Payments, which of the following constitutes/constitute the Current Account?
- Balance of trade
- Foreign assets
- Balance of invisibles
- Special Drawing Right
Select the correct answer using the code given below.
Detailed Explanation:
Current Account of the Balance of Payments (BoP) comprises two main components: Balance of Trade (visible items - exports and imports of goods) and Balance of Invisibles (invisible items - services, income, and current transfers).
Foreign Assets are part of the Capital Account/Financial Account, representing investment flows and changes in ownership of international assets. Special Drawing Rights (SDR) are IMF reserve assets recorded under Reserve Assets in the BoP, not in the Current Account.
In the context of Indian economy which of the following is/are the purpose/purposes of ‘Statutory Reserve Requirements’?
- To enable the Central Bank to control the amount of advances the banks can create
- To make the people’s deposits with banks safe and liquid
- To prevent commercial banks from making excessive profits
- To force the banks to have sufficient vault cash to meet their day-to-day requirements
Select the correct answer using the code given below.
Detailed Explanation:
✅ Statement 1 – Correct: Statutory Reserve Requirements (CRR and SLR) are the primary quantitative tools used by the RBI to control the credit-creation capacity and advances that commercial banks can make, thereby regulating money supply in the economy.
❌ Statement 2 – Incorrect: While reserves help liquidity management, the safety of deposits is ensured by DICGC (Deposit Insurance and Credit Guarantee Corporation) and Basel norms (Capital Adequacy Requirements), not by statutory reserves as a primary purpose.
❌ Statement 3 – Incorrect: Statutory reserves are monetary policy instruments designed to control liquidity and credit, not to regulate or prevent bank profits.
❌ Statement 4 – Incorrect: CRR is maintained with the RBI and SLR in liquid assets like government securities; banks maintain separate vault cash for daily operational needs, which is distinct from statutory requirements.