There were 13 Questions from Economy in 2024, of which

• 5 Questions on Economy Basics (TFR, Financial Instruments, Sectors of economy, Fixed Capital, US Treasury Bonds)
• 3 Questions on Banking (Digital Rupee, Syndicated lending, Banking Subsidiaries)
• 2 Questions on Capital Market (Stock exchange, G-secs)
• 1 Question on Money Market (CBLO)
• 1 Question on International Institutions (Grain Council)
• 1 Question on Foreign Trade (USA Imports)

Examiner tested candidates’ knowledge of basic concepts and understanding of current issues in Economy.

The level of the questions was easy to moderate.

Previous Year UPSC Economy Questions (PYQs) With Explanation 2024

1. With reference to the Indian economy, “Collateral Borrowing and Lending Obligations” are the instruments of:

(a) Bond market

(b) Forex market

(c) Money market

(d) Stock market

1. Ans: c

Explanation:

Collateralized Borrowing and Lending Obligations (CBLOs): 

The Clearing Corporation of India Ltd. (CCIL) has developed and introduced with effect from January 20, 2003 a money market instrument called Collateralised Borrowing and Lending Obligation (CBLO)

CBLO represents an obligation between a borrower and a lender concerning the terms and conditions of a loan. CBLOs allow those restricted from using the interbank call money market in any given specific country to participate in the short-term money markets.

CBLOs in India are operated by the Clearing Corporation of India Ltd. (CCIL) and the Reserve Bank of India (RBI). CBLOs allow short-term loans to be secured by financial institutions, helping to cover their transactions. To access these funds, the institution must provide eligible securities as collateral—such as Treasury Bills that are at least six months from maturity.Since the repayment of loans is guaranteed by the CCIL, all borrowings are fully collateralized. 

Bond Market

A bond is a debt instrument in which an investor loans money to an entity (typically corporate or government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.

 A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The various types of Bonds are as follows.

a) Coupon Bond : These are the normal bonds on which the issuer pays the investor interest at predetermined rate (known as coupon ) at agreed intervals , normally twice a year.

b) Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The buyer of these bonds receives only one payment, at the maturity of the bond.

Stock Market: Industrial securities market refers to the market for shares and debentures of old and new companies. The market is further divided into.

i) Primary market: Primary market/New issue market deals with new securities (IPO/Rights issue). It is market for raising fresh shares or debentures.

ii) Secondary market/Stock market: Secondary market or stock market is the market for buying and selling securities of the existing companies.

Money Market: The Money Market is basically concerned with the issue and trading of securities with short term maturities or quasi-money instruments. The Instruments traded in the money-market are Treasury Bills, Certificates of Deposits (CDs), Commercial Paper (CPs), Bills of Exchange and other such instruments of short-term maturities (i.e., not those exceeding 1 year with regard to the original maturity 

 Forex Exchange Market: The foreign exchange market (also referred to as the forex or currency market) is the marketplace for exchanging currencies between all stakeholders such as governments, central and commercial banks, firms, forex dealers, brokers and individuals. Such players can use the market for trading, hedging and speculating in currencies as well as obtaining credit. 

Hence, option c is correct.

2. The total fertility rate in an economy is defined as:

(a) the number of children born per 1000 people in the population in a year.

(b) the number of children born to a couple in their lifetime in a given population.

(c) the birth rate minus the death rate.

(d) the average number of live births a woman would have by the end of her child-bearing age.

2. Ans: d

Explanation:

Total Fertility Rate

The total fertility rate in a specific year is defined as the total number of children that would be born to each woman if she were to live to the end of her child-bearing years and give birth to children in alignment with the prevailing age-specific fertility rates. 

It is calculated by totalling the age-specific fertility rates as defined over five-year intervals.

 Assuming no net migration and unchanged mortality, a total fertility rate of 2.1 children per woman ensures a broadly stable population. 

Together with mortality and migration, fertility is an element of population growth, reflecting both the causes and effects of economic and social developments. 

The reasons for the dramatic decline in birth rates during the past few decades include postponed family formation and child-bearing and a decrease in desired family sizes. This indicator is measured in children per woman.

Hence, option d is correct.

3. Consider the following statements:

1. In India, Non-Banking Financial Companies can access the Liquidity Adjustment Facility window of the Reserve Bank of India.

2. In India, Foreign Institutional Investors can hold Government Securities (G-Secs).

3. In India, Stock Exchanges can offer separate trading platforms for debts.

Which of the statements given above is/are correct?

(a) 1 and 2 only

(b) 3 only

(c) 1, 2 and 3

(d) 2 and 3 only

3. Ans: d

Explanation:

SCHEME OF LIQUIDITY ADJUSTMENT FACILITY: 

Under the scheme, (i) Repo auctions (for absorption of liquidity) and (ii) Reverse Repo auctions (for injection of liquidity) will be conducted on a daily basis 

Eligibility  :  All Scheduled Commercial Banks (excluding Regional Rural Banks) and Primary Dealers (PDs) having Current Account and Subsidiary General Ledger account (SGL) with RBI, Mumbai will be eligible to participate in the Repo and Reverse Repo auctions. 

Hence, statement 1 is incorrect.

G-Secs market – Major players in the G-Secs market include commercial banks and PDs besides institutional investors like insurance companies. PDs play an important role as market makers in the G-Secs market. Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds. 

Foreign Portfolio Investors (FPIs) are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time.

 Corporates also buy/ sell the G-Secs to manage their overall portfolio. 

Hence, statement 2 is correct.

As advised by SEBI, the stock exchanges (like NSE, BSE, and MCX) have been asked to create dedicated debt segments in their trading platforms. In compliance with this, stock exchanges have launched a debt trading (G-Secs as also corporate bonds) segment which generally caters to the needs of retail investors. 

Hence, statement 3 is correct.

4. In India, which of the following can trade in Corporate Bonds and Government Securities?

1. Insurance Companies

2. Pension Funds

3. Retail Investors

Select the correct answer using the code given below:

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

4. Ans :d

Explanation:

Corporate bonds are debt securities issued by private and public corporations. Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business, the holder of which receives interest from the corporation periodically for a fixed period of time and gets back the principal along with the interest due at the end of the maturity period. 

The company which is planning to raise funds through corporate bonds will offer a public issue or a private placement. A private placement is usually made to institutional investors and not to retail investors. A public issue means an offer will be made to the public in genera (Retai lInvestors)  to subscribe to the bonds. 

Who can issue corporate bonds in India?                                                                                                                             In India, both public and private companies can issue corporate bonds. A company incorporated in India, but part of a multinational group, can also issue corporate bonds. However, a company incorporated outside India cannot issue corporate bonds in India. A statutory corporation like LIC can also issue corporate bonds. 

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short-term (usually called treasury bills, with original maturities of less than one year) or long-term (usually called Government bonds or dated securities with an original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. 

G-Secs market – Major players in the G-Secs market include commercial banks and PDs besides institutional investors like insurance companies. PDs play an important role as market makers in the G-Secs market.Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds. 

Foreign Portfolio Investors (FPIs) are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time.

 Corporates also buy/ sell the G-Secs to manage their overall portfolio. 

Under the retail direct scheme, individuals can invest in the G-Secs market.

Hence, option d is correct. 

5. Consider the following:

1. Exchange-Traded Funds (ETF)

2. Motor vehicles

3. Currency swap

Which of the above is/are considered financial instruments?

(a) 1 only

(b) 2 and 3 only

(c) 1, 2 and 3

(d) 1 and 3 only

5. Ans: d

Explanation:

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.  

A contract or agreement representing a tradable asset, liability, or equity instrument in financial markets is a financial instrument.

Classification of Financial Instruments:-

Financial instruments can be divided into several types, each with a specific function.  

Cash Instruments

These assets are easily convertible into cash and have a fixed value. Currency notes, bank deposits, and money market securities like Treasury bills are a few examples.

Debt Instruments

The loan an investor makes to an issuer in exchange for recurring interest payments; debt instruments represent the principal repayment. Examples include loans, mortgages, corporate debentures, and bonds.

Equity Instruments

Equity instruments reflect ownership in a business or enterprise and grant the holder voting rights and a share of the profits. Examples are equity mutual funds, Exchange-traded Funds, common stocks, and preferred stocks.

Derivative Instruments

An underlying asset, such as commodities, bonds, stocks, or currencies, gives derivatives their value. Examples include future contracts, swaps, options, and forwards.

Money Market Instruments

These financial instruments can borrow and lend money in the money market. They have a short-term maturity. Some examples are treasury bills and repurchase agreements.

Hence, option d is correct.

6. With reference to the sectors of the Indian economy, consider the following pairs:

How many of the pairs given above are con-exactly matched?

(a) Only one

(b) Only two

(c) Only three

(d) All four

6. Ans:b

Explanation:

Primary Sector  – Activities that are undertaken by directly using natural resources. Take, for example, the cultivation of cotton. It takes place within a crop season. For the growth of the cotton plant, we depend mainly, but not entirely, on natural factors like rainfall, sunshine and climate. The product of this activity, cotton, is a natural product. Similarly, in the case of an activity like dairy, we are dependent on the biological process of the animals and the availability of fodder etc. The product here, milk, also is a natural product. Similarly, minerals and ores are also natural products. When we produce a good by exploiting natural resources, it is an activity of the primary sector. 

Why primary? 

This is because it forms the base for all other products that we subsequently make. Since most of the natural products we get are from agriculture, dairy, fishing, and forestry, this sector is also called agriculture and related sectors. 

Secondary Sector – Activities in which natural products are changed into other forms through ways of manufacturing that we associate with industrial activity. It is the next step after the primary. The product is not produced by nature but has to be made and therefore some process of manufacturing is essential. This could be in a factory, a workshop or at home. For example, using cotton fibre from the plant, we spin yarn and weave cloth. Using sugarcane as a raw material, we make sugar or gur. We convert earth into bricks and use bricks to make houses and buildings. Since this sector gradually became associated with the different kinds of industries that came up, it is also called as industrial sector. 

Tertiary Sector – These are activities that help in the development of the primary and secondary sectors. These activities, by themselves, do not produce a good but they are an aid or a support for the production process. For example, goods that are produced in the primary or secondary sector would need to be transported by trucks or trains and then sold in wholesale and retail shops. At times, it may be necessary to store these in godowns. We also may need to talk to others over the telephone or send letters (communication) or borrow money from banks (banking) to help production and trade. Transport, storage, communication, banking, and trade are some examples of tertiary activities. Since these activities generate services rather than goods, the tertiary sector is also called the service sector.

Only 2nd and 4th pairs are correctly matched.

Hence, option b is correct.

7. With reference to physical capital in the Indian economy, consider the following pairs:

How many of the above pairs are correctly matched?

(a) Only one

(b) Only two

(c) Only three

(d) All four

7. Ans: b

Explanation:

Capital – Meaning 

Land and labor are commonly regarded as the primary or original factors of production. In contrast, capital is not considered a primary or original factor; it is classified as a produced factor of production. 

Capital is defined as “produced means of production,” a definition that sets it apart from both land and labor, as the latter two are not produced factors.

Capital is created by humans through interaction with nature and can therefore be defined as a man-made instrument of production. It encompasses physical goods that are specifically produced for use in future production. Examples of capital include machines, tools and instruments, factories, canals, dams, transport equipment, and stocks of raw materials—all of which are manufactured by humans to facilitate the production of additional goods.

Fixed Capital and Working Capital

Capital can be broadly categorized into two main types: fixed capital and working capital. 

Fixed capital refers to durable producer goods that are utilized repeatedly in the production process until they eventually wear out. Examples of fixed capital include machinery, tools, railway tractors, and factories. It’s important to note that the term “fixed” does not imply that these assets are immovable or static in location. Instead, it indicates that the funds invested in these long-lasting goods are committed for an extended duration. Unlike raw materials, which are quickly converted into finished goods and can then be liquidated, fixed capital investments remain tied up for a more prolonged period.

In contrast, working capital consists of those goods that are single-use in nature, such as raw materials, components in various stages of production, and fuel. These items are consumed entirely in one production cycle, meaning their value is completely utilized in the act of creating products. Additionally, the expenditure on working capital is typically recouped swiftly, as the investment is transformed into finished goods that can be sold in the market almost immediately after production. This fundamental distinction between fixed and working capital is crucial for understanding the dynamics of business financing and production planning.

Hence farmer’s plough, computer  would be part of fixed capital.

Hence yarn used by weavers, petrol would be part of the working capital.

Only 2nd and 4th pairs are correctly matched.

Hence, option b is correct.

8. With reference to the rule/rules imposed by the Reserve Bank of India while treating foreign banks, consider the following statements:

1. There is no minimum capital requirement for wholly-owned banking subsidiaries in India.

2. For wholly owned banking subsidiaries in India, at least 50% of the board members should be Indian nationals.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

8. Ans: b

Explanation:

Eligibility for setting up a wholly-owned subsidiary (WOS)

a) Setting up of WOS by a foreign bank in India should have the approval of the home country regulator/supervisor.

b) A foreign bank applying for setting up a WOS in India must satisfy RBI that it is subject to adequate prudential supervision as per internationally accepted standards, which includes consolidated supervision in its home country.

Minimum capital requirement

a) The initial minimum paid-up voting equity capital for a wholly-owned subsidiary (WOS) shall be Rs. 5 billion.

b) The newly set up wholly-owned subsidiary (WOS) of the foreign bank would be required to bring in the entire amount of initial capital upfront, which should be funded by free foreign exchange remittance from its parent.

c) The WOS shall meet the Basel III requirements on a continuous basis from the time. 

Hence, statement 1 is incorrect.

Corporate governance of  wholly-owned subsidiary (WOS)

The composition of the board of directors of WOS should meet the following requirements:

a) Not less than 51 per cent of the total number of members of the board of directors shall consist of persons as defined under Section 10A of the Banking Regulation Act, 1949;

b) Not less than two-third of the directors should be non-executive directors;

c) Not less than one-third of the directors should be independent of the management of the subsidiary in India, its parent and any subsidiary or other associate of the foreign bank parent;

d) Not less than 50 per cent of directors should be Indian nationals/NRIs/PIOs subject to the condition that one-third of the directors are Indian nationals resident in India;

e) WOS’s of foreign banks will have a Part-time Chairman and full-time Chief Executive Officer (CEO)

Hence, statement 2 is correct.

9. Consider the following statements:

Statement-I: If the United States of America (USA) were to default in its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.

Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement I is correct, but Statement II is incorrect

(d) Statement-I is incorrect, but Statement-II is correct

9. Ans: d

Explanation:

What is an Unsecured bond?

Unsecure bonds do not have specific collateral. These bonds are based solely on the creditworthiness of the issuer.

Investors in unsecured bonds depend on the financial strength and performance of the issuer to meet payment obligations.

Unsecured bonds are highly risky because there is no specific asset to be seized upon default. Investors in unsecured bonds rely solely on the repayment capacity of the issuer. 

To compensate for the increased risk, issuers of unsecured bonds typically offer higher interest rates. 

Unsecured bonds rely more on credit ratings because they lack collateral.

In the event of default, holders of unsecured bonds tend to have weaker positions.

Examples of unsecured bonds include corporate bonds, where investors rely on the financial strength and creditworthiness of the company, and government bonds, which depend on the creditworthiness of the issuing government.  

In the case of American Treasury Bonds – The Treasury Bond holders both domestic and foreign can sue the American government.

American debt holders can sue in the United States District Court and United States Court of Federal Claims.

Foreign debt holders can sue in their own Countrys court system, but not in United States court to redress the United States government’s failure to make good on debt payments.

However, recovery of payment may not be possible in either case because there is no specific asset to be seized upon default, i.e. holders of unsecured bonds tend to have weaker positions.

Hence, option d is correct.

10. Consider the following statements:

Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders.

Statement II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement I is correct, but Statement II is incorrect

(d) Statement I is incorrect, but Statement II is correct

10. Ans:  c

Explanation:

Syndicated loans are designed to facilitate large-scale lending to a single borrower by pooling resources from multiple lenders, thereby enabling the provision of sums that would exceed the risk appetite of any one lender. Typically, an investment-grade syndicated loan involves multiple lending institutions, often banks, which collectively agree to extend credit under standardized terms and conditions outlined in a common set of documents.

In a syndicated loan arrangement, a consortium of lenders collaborates to offer financial support to substantial borrowers, which may include corporations, specific projects, or government entities. Each lender contributes a portion of the overall loan amount, allowing them to share both the financial responsibility and the associated lending risks among themselves. This structure not only diversifies risk but also enhances the borrowers’ access to significant funding.

Hence, statement 1 is correct.

What is a Credit Line?

Credit Line is an amount of money a person or company is allowed to borrow during a particular period of time from one or more financial organizations. 

Syndicated loans can be a fixed amount or a credit line for a particular period. 

Hence, statement 2 is incorrect.

11. Consider the following statements in respect of the digital rupee:

1. It is a sovereign currency issued by the Reserve Bank of India (RBI) in alignment with its monetary policy.

2. It appears as a liability on the RBI’s balance sheet.

3. It is insured against inflation by its very design.

4. It is freely convertible against commercial bank money and cash.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 1 and 3 only

(c) 2 and 4 only

(d) 1, 2 and 4

11. Ans: d

Explanation: 

A Digital Rupee or Central Bank Digital Currency (CBDC) is a sovereign currency issued by the central bank, Reserve Bank of India with respect to its monetary policy.

Hence, statement 1 is correct.

CBDC will be a sovereign currency available in digital form. Like normal currency issued by the central bank, CBDC will also appear as a liability on the central bank’s balance sheet. 

Hence, statement 2 is correct.

Features of Digital Rupee

• The Digital Rupee is issued by the Reserve Bank of India and is legally recognized as a secure form of payment accepted by individuals, businesses, and governmental bodies.
• The issuance follows the central bank’s financial policies 
• Holders have the freedom to convert the digital Rupee into physical cash through commercial banks.
• Legal Tender: CBDCs are considered legal tender, usable for all types of transactions.
• Central Bank Control: CBDCs are controlled and regulated by the central bank, ensuring stability and trustworthiness.
• Programmable Money: CBDCs can have programmable features, such as smart contracts, enabling automated, self-executing financial agreements.
• It is a fungible legal tender for which individuals will not need a bank account to store

Hence, statement 4 is correct.

Reserve Bank of India – Liabilities and Assets

12.  Consider the following statements: 

1. India is a member of the International Grains Council.  

2. A country needs to be a member of the International Grains Council for exporting or importing rice and wheat.

Which of the statements given above is/are correct? 

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2 

12. Answer : a

Explanation:

INTERNATIONAL GRAINS COUNCIL 

The International Grains Council (IGC) is an intergovernmental organisation that seeks to further international cooperation in grains trade, promote expansion, openness and fairness in the grains sector; contribute to grain market stability and to enhance world food security. Grains, rice and oilseeds market conditions are monitored on a daily basis and made available through daily reports and web-based information services. Data monitored includes market information (price index) as well as export prices of grains (wheat, maize, barley, soybeans, rice) and oilseeds, global supply and demand, freight rates, and five-year global projections. 

Member countries of the International Grain Council

Argentina, Australia, Canada, European Union, India, Kazakhstan, Russian Federation, Serbia, Turkey, Ukraine, United States, Algeria, Côte d’Ivoire, Cuba, Egypt, Iran, Iraq, Japan, Kenya, South Korea, Morocco, Norway, Oman, Pakistan, Saudi Arabia, South Africa, Switzerland, Tunisia, Vatican City

Hence, statement 1 is correct.

A country need not be a member of the International Grains Council for exporting or importing rice and wheat. 

For example – The major destinations of India’s non-basmati white rice exports include Thailand, Italy, Spain, Sri Lanka and the USA. The importing countries from India like Sri Lanka, Thailand, Spain, and Italy are not members of the International Grain Council.

Hence, statement 2 is incorrect. 

13. Consider the following statements: 

Statement-I: India does not import apples from the United States of America.

Statement-II: In India, the law prohibits the import of Genetically Modified food without the approval of the competent authority.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I

(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I

(c) Statement-I is correct, but Statement-II is incorrect

(d) Statement-I is incorrect, but Statement-II is correct

13. Answer : d

Explanation:

Indo -US trade 

India’s largest trading partner is the US, and it is also one of the few countries with which India had a trade surplus in 2023-24. 

Major exported items from India to the US include Engineering goods (US$ 17.6 billion), Electronic goods (US$ 10.0 billion), Gems and Jewellery (US$ 9.90 billion), drug formulations and biologicals (US$ 8.72 billion, petroleum products (US$ 5.83 billion), and RMG cotton including accessories (US$ 4.71 billion), among others in FY24. 

India’s imports from the US include mineral fuels and oils (US$ 12.9 billion); followed by pearls, precious, and semi-precious stones (US$ 5.16 billion), nuclear reactors boilers and machinery (US$ 3.75 billion), electrical machinery etc. (US$ 2.38 billion) in FY24

In June 2023  Indian Government removed an additional 20% duty was imposed on US apples in 2019. An additional 20% duty was imposed on US apples in 2019 in response to USA’s measure to increase tariffs on certain steel and aluminum products.

Genetically Modified Food

The import policy of Genetically Modified Food, Feed, Genetically Modified Organism (GMOs) and Living Modified Organisms (LMOs) has been notified by Directorate General of Foreign Trade under General Notes regarding Import Policy in ITC (HS) 2012, Schedule-1 (Import Policy). As per the policy, import of GM food requires prior approval of the Genetic Engineering Approval Committee (GEAC) constituted by the Ministry of Environment Forest and Climate Change.

Further, the Customs Act, 1962 is the basic statue which governs /regulates entry/exit of different categories of goods into or outside the country. Various allied laws and regulations also apply. It is the responsibility of the Customs to ensure that all the imported/ exported goods fulfill the prescribed legal and procedural requirements laid down under Customs act, 1962 and allied laws including payment of the duties leviable, if any.

Import of food products is regulated under the Food Safety and Standards Act (FSSAI), 2006. Indian Customs can clear food products including Genetically Modified(GM) food products only after necessary approval/No Objection Certificate(NOC) by FSSAI. FSSAI has informed that no genetically modified food has been cleared for import through the FSSAI locations.

Hence, statement-I is incorrect, but statement-II is correct.