GS Paper IV (Economy) - TCS/ TPS Grade II - (Mains) - 2019
PART- II
SECTION-A
1. The post reforms scenario is described as jobless growth. Why? (5)
Ans: Jobless growth v is a phenomenon where the level of GDP increases in the economy without a perceptible rise in the level of employment, i.e. GDP growth happens to be faster than employment growth.
Jobless growth leads to chronic unemployment even when there is a rise in the GDP growth rate.
The scenario in India:
In India between 1951 and 2000, while the GDP growth rate had risen from 3.6 % to around 8%, the growing great of unemployment has tended to slide down from 1.5% to just 1%., thereby resulting in jobless growth.
Employment elasticity (ratio of employment growth to growth in value-added) has declined progressively over time and across sectors.
In the agricultural sector, employment elasticity has fallen quite fast and has even turned negative between 2004-05 and 2011-12.
Major reasons behind jobless growth:
Western labor-saving technology: our economy has been bound to adopt labor-saving technology due to a lack of investment capital and its dependence on FDI.
Foreign capital in the form of FDI comes with efficient foreign technology, thereby replacing the labor used in production. This results in rising in GDP without employee growth.
2. What is structural unemployment? (5)
Ans: Structural unemployment is associated with the economic structure of the country and is long-term in nature.
Economic structure implies: I) rapidly growing population and ii) Slow rate of capital formation etc.
When the demand for labor falls short of the supply of labor due to the rapidly growing population and their immobility, the problem of such unemployment appears in the economy.
Further, it is also caused due to skill mismatches.
SECTION – B
1. What are automatic stabilizers in fiscal policy? How do they stabilize the economy? 2+3=5
Ans: Automatic stabilizers offset fluctuations in economic activity without direct intervention by policymakers. Automatic stabilizers include unemployment insurance and personal and corporate income tax.
Role of automatic stabilizers:
- During a recession, automatic stabilizers can ease households’ financial stress by decreasing their tax burden or by boosting cash and in-kind benefits, all without changes in the tax code or any other new legislation. For example, when a household’s income declines, it generally owes less in taxes, which helps cushion the blow. Additionally, with a decline in income, a household may become eligible for unemployment insurance/allowance and other welfare programs.
- They further help the overall economy by stimulating aggregate demand when times are bad and when the economy is most in need of a boost. When times are better, automatic stabilizers generally phase down or turn off.
2. What are CLR and SLR? What is their role in economic stabilization? 2+3=5
Ans: SLR and CRR are part of quantitative instruments of credit control and constitute the reserve requirements of RBI.
CRR (Cash Reserve Ratio): It is the minimum percentage of a Bank’s Total Demand and Time Liabilities that any Scheduled Commercial Bank (SCB) is obliged to deposit with the central bank in the form of cash.
RBI does not pay any interest on CRR maintained by SCBs.
SLR (Statutory Liquidity Ratio): It is the percentage of Net Demand and Time Liabilities of Scabs that are kept with them only in the form of:
- Cash or
- Gold(at current market price)
- SLR Securities or
Any combination of the above three.
The range of SLR prescribed by RBI is from 0-40%.
Role of CLR and SLR:
Both are used to control the credit in the economy or increase/decrease the rate of inflation.
To decrease the money supply (inflation is high), RBI increases CRR and vice versa. Similarly, to reduce inflation, RBI increases SLR. In the opposite scenario, to boost the economic growth RBI decreases SLR.
SECTION C
1. What is the liquidity of money? How it is related to the interest rate? 2+3=5
Ans: Liquidity refers to the money floating in the system that is available to all stakeholders of the markets viz. Individuals, corporate entities, and the government.
Liquidity is influenced by the demand and supply of money in the system. RBI can either inject liquidity in the system or absorb the liquidity in the system. RBI uses the weapons of Repo Rate and Reverse Repo Rate for injection or absorption of liquidity that is consistent with the prevailing monetary policy stance.
Impact on interest rates:
In case of tight monetary policy, RBI takes money out of the system (liquidity) by selling securities and raising the reserve requirement at banks. This increases interest rates because the demand for credit is so high that lenders price their loans higher to take advantage of the demand. Tight money and high-interest rates tend to slow economic activity. The opposite happens when RBI adopts an expansionary monetary policy leading to lower interest rates.
2. What is the role of intermediaries in the financial market? (5)
Ans: Financial intermediaries include various organizations who facilitate the smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. Few types and their role are discussed below-
Commercial Banks:
- The main function of these types of banks is to give financial services to entrepreneurs and businesses. Banks finance businesses by providing them with debit cards, banks accounts, short-term deposits, etc. with the money deposited by people in such banks. Examples include-Public and Private sector banks, RRBs, etc.
- Public sector banks: Major focus of these banks is to serve the people rather than earn profits.
- RRBs help in providing credit to the agricultural and rural regions.
NON–BANKING INSTITUTIONS:
- Development Financial Institutions: Examples include the institutions like IDBI, ICICI, IFCI, IIBI, IRDC at all Indian levels.
- Development banks provide medium and long-term finance to the corporate and industrial sector and also take up promotional activities for economic development.
- Investment Institutions:
- They mobilize savings at the public at large through various schemes and invest these funds in corporate and government securities. Examples -LIC, LTT, mutual funds, etc.
3. What constitutes currency in circulation? (5)
Answer: Currency in circulation measures money with the public and in banks. Currency in circulation includes notes in circulation, rupee coins, and small coins.
Currency with the public is arrived at after deducting cash with banks from total currency in circulation.