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 →
Consider the following statements :
- Inflation benefits the debtors.
- Inflation benefits the bondholders.
Which of the statements given above is/are correct?
Detailed Explanation:
✅ Statement 1 – Correct: Inflation erodes the real value of money. Debtors repay loans with money that has less purchasing power than when borrowed, reducing their real debt burden.
❌ Statement 2 – Incorrect: Bondholders receive fixed nominal payments. During inflation, the real value of these payments falls, causing bondholders to lose purchasing power.
Which one of the following is likely to be the most inflationary in its effect?
Detailed Explanation:
Creating new money (Option 4) is the most inflationary method because it directly increases money supply without any corresponding increase in goods and services production, leading to demand-pull inflation.
Repayment of public debt reduces money supply; borrowing from public merely transfers existing money; borrowing from banks has moderate inflationary effect through credit creation, but printing new currency has the strongest direct impact on excess liquidity and price levels.
The balance of payments of a country is a systematic record of
Detailed Explanation:
Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world during a specific period (usually a year).
It includes trade in goods (visible trade), trade in services (invisible trade), income flows, current transfers, and capital and financial account transactions—making it comprehensive, not limited to just imports/exports of goods or only government transactions.
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Supply of money remaining the same when there is an increase in demand for money, there will be:
Detailed Explanation:
When money supply is constant and demand for money increases, there is greater competition for the available money in the economy.
According to the Liquidity Preference Theory, banks and lenders respond by raising the interest rate to equilibrate the money market—higher rates reduce money demand and attract more deposits, restoring balance between supply and demand.
A rise in the general level of prices may be caused by:
- an increase in the money supply
- a decrease in the aggregate level of output
- an increase in the effective demand
Select the correct answer using the codes given below.
Detailed Explanation:
✅ Statement 1 – Correct: An increase in money supply without corresponding increase in output leads to more money chasing fewer goods, causing demand-pull inflation as per the Quantity Theory of Money.
✅ Statement 2 – Correct: A decrease in aggregate output/supply while demand remains constant creates excess demand, pushing prices upward through supply-side inflation.
✅ Statement 3 – Correct: An increase in effective demand (purchasing power-backed demand) beyond the economy's productive capacity causes demand-pull inflation.
Disguised unemployment generally means
Detailed Explanation:
Disguised unemployment occurs when more people are engaged in work than actually required, typically seen in agriculture where entire families work on small plots.
The key characteristic is that removal of surplus workers would not reduce total output, meaning their marginal productivity is zero.
Economic growth in country X will necessarily have to occur if
Detailed Explanation:
Capital formation is the only factor among the given options that necessarily leads to economic growth within a country.
✅ Statement 3 – Correct: Capital formation in X (investment in physical capital like machinery, infrastructure, and human capital) directly increases the productive capacity of the economy, making growth inevitable.
❌ Statement 1 – Incorrect: Technical progress in the world economy does not guarantee growth in country X unless X adopts and implements those technologies.
❌ Statement 2 – Incorrect: Population growth in X alone does not ensure economic growth; it may even lower per capita income if not accompanied by proportionate increase in production.
❌ Statement 4 – Incorrect: Growth in world trade volume benefits country X only if it actively participates and increases its share; mere global trade expansion is insufficient.
Fruits stored in a cold chamber exhibit longer storage life because -
Detailed Explanation:
Cold storage lowers the temperature, which directly reduces the rate of respiration in fruits.
Slower metabolic and enzymatic processes delay ripening, reduce microbial activity, and extend storage life significantly.
With reference to the usefulness of the by-products of the sugar industry, which of the following statements is/are correct?
- Bagasse can be used as biomass fuel for the generation of energy.
- Molasses can be used as one of the feedstocks for the production of synthetic chemical fertilizers.
- Molasses can be used for the production of ethanol.
Select the correct answer using the codes given below.
Detailed Explanation:
✅ Statement 1 – Correct: Bagasse (fibrous residue after sugarcane crushing) is widely used as biomass fuel for co-generation of electricity in sugar mills, making them energy self-sufficient.
❌ Statement 2 – Incorrect: Molasses is not a feedstock for synthetic chemical fertilizers; these are produced through Haber-Bosch process (ammonia) and phosphate/potash mining, not from sugar by-products.
✅ Statement 3 – Correct: Molasses serves as a key feedstock for ethanol production through fermentation, supporting India's Ethanol Blending Programme (EBP) for fuel.
To obtain full benefits of demographic dividend, what should India do?
Detailed Explanation:
Demographic dividend refers to economic growth potential when the working-age population (15-64 years) exceeds the non-working-age population.
Promoting skill development is essential to transform this large workforce into productive and employable human capital. Without adequate technical and vocational skills, a large working-age population leads to unemployment and social instability rather than economic growth. Social security schemes provide safety nets but don't directly enhance productivity. Reducing infant mortality affects future demographics, not current workforce quality. Privatization of higher education alone doesn't ensure skill-based employability across all economic sectors.
Priority Sector Lending by banks in India constitutes the lending to:
Detailed Explanation:
Priority Sector Lending (PSL) mandates banks to allocate 40% of Adjusted Net Bank Credit (ANBC) to designated sectors including agriculture and allied activities, micro and small enterprises, weaker sections (low-income groups, students for education, housing), export credit, renewable energy, and social infrastructure.
All three options – agriculture, micro and small enterprises, and weaker sections – are explicitly covered under the RBI's PSL guidelines, making option 4 the correct answer.
In India, in the overall Index of Industrial Production, the Indices of Eight Core Industries have a combined weight of 37.90%. Which of the following is among those Eight Core Industries?
- Cement
- Fertilizers
- Natural gas
- Refinery products
- Textiles
Select the correct answer using the codes given below:
Detailed Explanation:
The Eight Core Industries (ICI) with 37.90% weight in IIP are: Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement, and Electricity.
Options 1, 2, 3, and 4 (Cement, Fertilizers, Natural Gas, Refinery Products) are all part of the Eight Core Industries, while Textiles is not included in this list.
What is/are the recent policy initiative(s) of Government of India to promote the growth of the manufacturing sector?
- Setting up of National Investment and Manufacturing Zones
- Providing the benefit of ‘single window clearance’
- Establishing the Technology Acquisition and Development Fund
Select the correct answer using the codes given below:
Detailed Explanation:
✅ Statement 1 – Correct: National Investment and Manufacturing Zones (NIMZs) were announced in the National Manufacturing Policy 2011 to create integrated industrial townships with world-class infrastructure for promoting investment and manufacturing.
✅ Statement 2 – Correct: Single Window Clearance mechanism has been implemented through platforms like eBiz portal and Industrial Development Portal to provide time-bound approvals and reduce compliance burden on businesses.
✅ Statement 3 – Correct: Technology Acquisition and Development Fund (TADF) was established under the Ministry of Science and Technology to facilitate acquisition and development of clean, green and energy-efficient technologies by Indian industry.
The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following?
- Other banks retain their deposits with the RBI.
- The RBI lends funds to the commercial banks in times of need.
- The RBI advises the commercial banks on monetary matters.
Select the correct answer using the codes given below :
Detailed Explanation:
✅ Statement 1 – Correct: Commercial banks maintain their deposits with the RBI in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, making RBI the custodian of banking system reserves.
✅ Statement 2 – Correct: RBI acts as the Lender of Last Resort, providing emergency liquidity to commercial banks through mechanisms like repo operations and marginal standing facility during financial crunch.
✅ Statement 3 – Correct: RBI exercises supervisory and regulatory functions over commercial banks, advising them on monetary policy implementation, credit management, and prudential norms to maintain banking system stability.
Which of the following can be said to be essentially the parts of Inclusive Governance?
- Permitting the Non-Banking Financial Companies to do banking
- Establishing effective District Planning Committees in all the districts
- Increasing government spending on public health
- Strengthening the Mid-day Meal Scheme
Choose the correct answer:
Detailed Explanation:
❌ Statement 1 – Incorrect: Permitting NBFCs to do banking is a financial sector reform aimed at credit expansion, not an essential part of inclusive governance.
✅ Statement 2 – Correct: Establishing effective District Planning Committees (DPCs) under Article 243ZD promotes decentralized participatory planning, a core pillar of inclusive governance.
✅ Statement 3 – Correct: Increasing government spending on public health ensures universal access to healthcare, reduces inequalities, and promotes social inclusion.
✅ Statement 4 – Correct: Strengthening the Mid-day Meal Scheme addresses nutritional and educational needs of marginalized children, directly contributing to inclusive development.