Solutions Of BECC-113 TEE Questions (June 2023)

Here are model answers for the exam questions, structured as per the sections and word limits (approximately). I’ve selected representative questions to cover the paper comprehensively.

Section—A

1. Discuss the specific objectives of monetary policy.

Monetary policy in India, primarily managed by the Reserve Bank of India (RBI), refers to the actions taken to regulate the supply of money, credit availability, interest rates, and overall financial conditions to achieve macroeconomic goals. The Reserve Bank of India Act, 1934 (as amended) outlines the framework, with the primary objective being to maintain price stability while keeping in mind the objective of growth.The specific objectives include:

• Price Stability: This is the cornerstone objective. High inflation erodes purchasing power, distorts resource allocation, and discourages savings and investment. The RBI targets inflation through a flexible inflation-targeting framework (introduced in 2016), aiming for 4% consumer price inflation with a ±2% band. By controlling money supply and credit, the policy curbs demand-pull and cost-push inflation, ensuring stable prices for sustainable economic activity.
• Economic Growth: Monetary policy supports growth by ensuring adequate credit flow to productive sectors. It provides liquidity during slowdowns via tools like repo rate cuts and open market operations, stimulating investment and consumption. Concessional loans for priority sectors (agriculture, MSMEs) and special schemes for unemployed youth promote employment generation and output expansion.
• Financial Stability: The policy maintains stability in financial markets by preventing excessive volatility in asset prices, banking sector risks, and systemic crises. It regulates banks’ credit creation, monitors non-performing assets, and ensures overall financial system resilience.
• Foreign Exchange Market Stability and External Balance: It manages the external value of the rupee by intervening in forex markets to prevent sharp depreciations/appreciations. This supports export competitiveness, controls imported inflation, and maintains balance of payments equilibrium.
• Employment Generation: Indirectly, by fostering growth and directing credit to labor-intensive sectors, monetary policy aids job creation. During downturns, expansionary measures boost aggregate demand and employment.
• Control of Business Cycles: The policy counters booms (by contracting credit to curb inflation) and depressions (by expanding credit to revive demand), moderating economic fluctuations.

According to former RBI Governor Dr. D. Subba Rao, the objectives are price stability and growth, pursued through credit availability, rupee stability, and financial stability. The Monetary Policy Committee (MPC) decides on key rates like repo rate to balance these goals.In practice, the RBI uses quantitative tools (CRR, SLR, open market operations) and qualitative tools (moral suasion, credit rationing) to achieve them. For instance, during high inflation, contractionary policy raises rates; during slowdowns, accommodative policy lowers them.

Overall, monetary policy in India is growth-oriented yet inflation-anchored, contributing to macroeconomic stability in a developing economy with structural challenges like supply-side bottlenecks and external shocks.

3. Describe the instruments of ‘agricultural policy’ in India.

Agricultural policy in India aims at food security, farmer income enhancement, productivity growth, and rural development. Key instruments include:

• Price Support Mechanisms: The Minimum Support Price (MSP) is announced for 23 crops (e.g., rice, wheat, pulses) based on CACP recommendations. It ensures remunerative prices, protecting farmers from market volatility. Government procurement (via FCI) at MSP builds buffer stocks for the Public Distribution System (PDS), subsidizing food for consumers.
• Input Subsidies: Major subsidies cover fertilizers (urea, DAP), irrigation (electricity/diesel), seeds, and credit. These reduce production costs, encouraging adoption of HYV seeds, fertilizers, and mechanization. Power subsidies for tubewells and fertilizer subsidies (despite environmental concerns) boost output.
• Credit and Insurance: Institutional credit via Kisan Credit Card (KCC) and priority sector lending provides low-interest loans. PM Fasal Bima Yojana (PMFBY) offers crop insurance against natural calamities, pests, reducing risk and encouraging investment.
• Direct Income Support: PM-KISAN provides ₹6,000 annual transfer to small/marginal farmers, supplementing income and aiding consumption/investment.
• Trade Regulations: Import restrictions (e.g., duties on edible oils) and export incentives/promotions stabilize domestic prices and protect farmers. Export policies fluctuate based on domestic availability.
• Public Distribution System (PDS) and Food Subsidies: PDS ensures affordable foodgrains to vulnerable sections, supported by procurement and buffer stocks.
• Investment and Infrastructure Support: Subsidies for irrigation (PMKSY), storage, and rural roads improve productivity. Schemes like Soil Health Cards and extension services promote sustainable practices.

These instruments have increased foodgrain production (from ~50 MT in 1950s to over 300 MT recently), but face challenges like fiscal burden, environmental degradation, and market distortions. Reforms aim at diversification, efficiency, and direct benefit transfers.

Section—B

5. Differentiate between the terms fiscal deficit, revenue deficit and primary deficit.

• Revenue Deficit: It is the excess of revenue expenditure (day-to-day expenses like salaries, subsidies, interest) over revenue receipts (taxes, non-tax revenue). It indicates borrowing for current consumption, not asset creation. Formula: Revenue Deficit = Revenue Expenditure – Revenue Receipts. High revenue deficit signals fiscal indiscipline and reduces savings for investment.
• Fiscal Deficit: It measures the total borrowing requirement, as total expenditure exceeds total receipts (excluding borrowings). It includes revenue and capital expenditure minus revenue receipts and non-debt capital receipts. Formula: Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts excluding borrowings). It reflects overall resource gap and impacts macro stability.
• Primary Deficit: It is fiscal deficit minus interest payments on past borrowings. It shows borrowing for current year’s non-interest expenses, indicating fresh debt burden without legacy interest. Formula: Primary Deficit = Fiscal Deficit – Interest Payments. A lower/negative primary deficit signals fiscal consolidation.

In India, revenue deficit funds consumption, fiscal deficit shows total borrowing needs, and primary deficit assesses current fiscal effort excluding past liabilities. FRBM targets focus on reducing these for sustainable finances.

6. Distinguish between FDI and FII.

• FDI (Foreign Direct Investment): Involves long-term investment by foreign entities establishing/expanding businesses in India (e.g., factories, subsidiaries). It brings capital, technology, management skills, and jobs. Investors gain significant control/management stake (usually ≥10%). Entry/exit is difficult, stable, and growth-oriented. Routes: Automatic or government approval. Benefits: Boosts employment, exports, infrastructure.
• FII (Foreign Institutional Investment): Short/medium-term portfolio investment in Indian stock/debt markets by institutions (mutual funds, pension funds, hedge funds). No management control; focus on financial returns via shares, bonds. Easy entry/exit, volatile (hot money), impacts stock markets/currency. Regulated by SEBI.

Key differences: FDI is strategic/long-term with control; FII is financial/short-term without control. FDI aids real economy growth; FII influences liquidity/volatility.

10. Highlight the major features of the New Industrial Policy, 1991. Bring out the features of SSIs in India in terms of ‘units, employment, output and exports’.

The New Industrial Policy, 1991 marked liberalization, ending License Raj.Major features:

• Abolition of industrial licensing for most sectors (except 18, later reduced).
• Promotion of FDI up to 51% automatic approval in priority sectors.
• Disinvestment in public sector enterprises.
• MRTP Act relaxation for large firms.
• Focus on globalization, privatization, and export promotion.

SSIs (now MSMEs) features:

• Number of units: Over 6 crore (mostly micro), dominant in informal sector.
• Employment: Largest employer (~11-12 crore jobs), labor-intensive.
• Output: Contribute ~30% to GDP, key in manufacturing/services.
• Exports: ~45-50% of total exports, vital for forex earnings (gems, textiles, engineering goods).

SSIs drive inclusivity and resilience.

Section—C (Short notes on any two, 100-150 words each)

(a) Market constraints

Market constraints refer to barriers limiting agricultural/industrial produce sales, such as inadequate infrastructure (roads, storage, cold chains), fragmented markets, middlemen dominance, price volatility, and information asymmetry. In India, farmers face distress sales due to poor market access, leading to low realizations despite MSP. APMC reforms and e-NAM aim to address these by enabling pan-India trade and better prices. Constraints reduce farmer income and efficiency.

(d) Subsidies

Subsidies in India support agriculture (fertilizers, power, irrigation), food (PDS), and exports. They lower input costs, ensure food security, and boost production. However, they cause fiscal strain, environmental issues (overuse of water/fertilizers), and inefficiencies (leakages, mis-targeting). Reforms like DBT (direct benefit transfer) and targeting aim to rationalize them for sustainability.