7th June Static Quiz 2021 (Indian Economy)

Solution: b)
Statement 1: This policy abolished the Industrial licensing for all industries except for a short list of 18 industries. This list of 18 industries was further pruned in 1999 whereby the number reduced to six industries viz. drugs and pharmaceuticals, hazardous chemicals, explosives such as gun powder and detonating fuses, tobacco products, alcoholic drinks, and electronic, aerospace and defence equipment.

Statement 2: The limit was abolished and companies were allowed to expand freely with only certain limitations.

Statement 3: This was the first Industrial policy in which foreign companies were allowed to have majority stake in India. In 47 high priority industries, up to 51% FDI was allowed. For export trading houses, FDI up to 74% was allowed. Today, there are numerous sectors in the economy where government allows 100% FDI.

Statement 4: Restrictions on exchange of currency for the purposes of current account (such as trade or remittances) were revoked.

Solution: b)
Statement 1: Agriculture is a key feed to other industries, for e.g. food processing sector. An increase in agricultural growth directly translates to growth in other sectors of the economy.

Statement 2: The movement was intended not to cut down competition in any particular sector of the economy rather to facilitate growth in all the sectors.

Statement 3: Investment in agriculture also involves creation of capital goods such as warehousing, irrigation infrastructure which both directly and indirectly generates employment.
The other major challenges to be solved were:

Food Security, which in a sense means ensuring adequate infrastructure in rural areas in agriculture. It is because food security is not just about productivity; it is also about the accessibility of food.

Market Failure: It also had to solve the case of India being a market failure. It means that goods and services are available in the economy, but there is little demand.

This is because the majority of population lives on agriculture which does not provide them with good purchasing power. With this policy shift, their incomes were supposed to be improved and market demand be boosted. This would also involve generating more rural employment.

Solution: a)
Justification: Foreign exchange reserves in the late 1980s declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest that needs to be paid to international lenders. Therefore, a BoP crisis was looming to avert which India resorted to the help of WB and IMF.

Other objectives of the policy were to tackle high inflation, mismanagement of the economy, revive growth prospects etc. However, the most appropriate reason is to avert a BoP crisis.

The NEP aimed towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms. It can broadly be classified into two groups: the stabilization measures and the structural reform measures.

Solution: b)
Justification: As a country develops, it undergoes ‘structural change’. Usually, with development, the share of agriculture declines and the share of industry becomes dominant. At higher levels of development, the service sector contributes more to the GDP than the other two sectors. In the case of India, the structural change is ‘peculiar’ with regard to its sectoral composition especially the services sector. The services sector has grown much faster compared to other sectors of the economy post-liberalization. Traditionally services sector growth is propelled by the manufacturing sector but in India services have overtaken manufacturing, in terms of GDP, even though manufacturing has not been fully developed. Hence, the service sector contributes more to the GDP (over 60%) than agriculture (14%) and manufacturing even though India is not a developed country

Solution: a
Wage goods, in contrast to capital goods, are consumed by the workers of the country. In the initial phase of Indian economic development, it was alleged that wage goods were given a lesser priority as compared to the capital goods that require a specialized workforce and heavy investment to pick up. This industrialization-led strategy of development neglected the constraint of wage goods availability on two things: Employment generation as demand for workers and thus wage goods increases post-economic growth, and its potential influence on inflation that is caused by the shortage of wage goods as a nation’s GDP starts growing. However, with the renewed focus on catching up with National GDP, wage goods are no longer neglected