Daily Quiz: UPSC Prelims Marathon (Economy) – April 21, 2020

Statement 1 is incorrect: Price makers are able to influence the market price and enjoy pricing power. Price makers are found in imperfectly competitive markets such as a monopoly or oligopoly market.

Statement 2 is correct: An example of a perfectly competitive market is the agricultural market. Companies operating in an agricultural market are price takers because:

• The goods are homogenous – A bushel produced by one farmer is essentially identical to the bushel produced by another farmer. Therefore, there is no brand loyalty.
• There are a large number of buyers and sellers – There are a large number of sellers, such that none of them is able to influence the market price. A farmer cannot deviate from the market price of a product without running the risk of losing significant revenue.
• Buyers can access perfect information – Buyers can easily obtain price information and therefore would seek out the lowest price.
• Ease of entry and exit – Although agricultural production offers some barriers to entry, it is not difficult to enter the market.

An allocation of the scarce resource of the economy gives rise to a particular combination of different goods and services. Given the total amount of resources, it is possible to allocate the resources in many different ways and, thereby achieving different mixes of all possible goods and services. The collection of all possible combinations of the goods and services that can be produced from a given amount of resources and a given stock of technological knowledge is called the production possibility set/frontier of the economy.

The agricultural subsidies which cause minimal or no distortions to trade are put under the green box. They must not involve price support. This box basically includes all forms of government expenses, which are not targeted at a particular product, and all direct income support programmes to farmers, which are not related to current levels of production or prices. This is a very wide box and includes all government subsidies like—public storage for food security, pest and disease control, research and extension, and some direct payments to farmers that do not stimulate production like restructuring of agriculture, environmental protection, regional development, crop and income insurance, etc.

Both statements are incorrect.

Statement 1 is incorrect: The era of economic reforms had given the same option to the PSUs to tap new capital. As the AIFIs had more or less fixed rate of interest as compared to the banks which could mobilise cheaper deposits to lend cheaper—the AIFIs seemed to become irrelevant. The AIFIs witnessed a sharp decline in recent years. At this juncture the government decided to convert them into Development Banks (suggested by the Narasimhan Committee-I) to be known as the All India Development Banks (AIDBs).

Statement 2 is incorrect: In 2000, the government allowed ICICI to go for a reverse merger (when an elder enterprise is merged with a younger one) with the ICICI Bank—the first AIDB emerged with no obligation of project financing—such entities in coming times will be known as the universal banks.

Assets Reconstruction Companies (ARCs) acquire non-performing assets (NPAs) from banks or financial institutions along with the underlying securities mortgaged and/or hypothecated by the borrowers to the lenders. The ARCs then try and manage or resolve these NPAs acquired from banks. It can even infuse more funds in order to reconstruct the asset. If reconstruction is not possible and the borrower is unwilling to repay the loan, the ARCs even sell the secured assets. ARCs acquire NPAs by way of ‘true sale’, i.e., once an NPA has been sold, the seller has no further interest in that asset. ARCs are a product of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).