Daily Quiz: UPSC Prelims Marathon (Economy) – June 9, 2020

Invisible hand.

• Scottish Enlightenment thinker Adam Smithintroduced the concept Invisible hand in several of his writings, but it found this economic interpretation in his book An Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.
• The invisible hand is part of laissez-faire, meaning “let do/let go,” approach to the market. In other words, the approach holds that the market will find its equilibrium without government or other interventions forcing it into unnatural patterns.
• The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled.
• The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.

Public goods are goods that can be consumed simultaneously by a large number of people without the consumption by one imposing an opportunity cost on others.

The characteristics of a public good:

• Non excludabilitye., the citizens can enjoy its benefits at no explicit financial cost.
• Non rival consumptione., the marginal cost of supplying this public good to an extra citizen is zero.

Non Rejectable i.e., collective supply for all citizens means that it cannot be rejected.

Adjusted Gross Revenue (AGR).

• The telecom sector was liberalized under the National Telecom Policy, 1994after which licenses were issued to companies in return for a fixed license fee.
• To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model.
• Under this, mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC).
• License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the latter.
• AGR is then computed after allowing for certain deductions spelt out in these license agreements.

The LF and SUC were set at 8 per cent and between 3-5 per cent of AGR respectively, based on the agreement.

Core Investment Companies.

A CICs-ND-SI is a Non-Banking Financial Company

• with asset size of Rs 100crore and above
• carrying on the business of acquisition of shares and securitiesand which satisfies the following conditions as on the date of the last audited balance sheet,
• it holds not less than 90% of its net assetsin the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;
• its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (iii) above;
• it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
• it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.
• it accepts public funds

The RBI has made it compulsory for banks to link their new floating rate home, auto and MSME loans to an external benchmark so that the borrowers can enjoy lower rate of interest. All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to one of the following:

• Reserve Bank of India policy repo rate
• Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
• Government of India 6-Months Treasury Bill yield published by the FBIL
• Any other benchmark market interest rate published by the FBIL.

There are several direct and indirect instruments that are used for implementing monetary policy.

• Repo Rate:The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).
• Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
• Marginal Standing Facility (MSF): A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.
• Corridor:The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.
• Bank Rate:It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
• Cash Reserve Ratio (CRR):The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net demand and time liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India.
• Statutory Liquidity Ratio (SLR):The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. Changes in SLR often influence the availability of resources in the banking system for lending to the private sector.
• Open Market Operations (OMOs):These include both, outright purchase and sale of government securities, for injection and absorption of durable liquidity, respectively.

Market Stabilization Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The cash so mobilized is held in a separate government account with the Reserve Bank.

Negative rate policy.

• Under a negative rate policy, financial institutions are required to pay interest for parking excess reserves with the central bank.
• That way, central banks penalize financial institutions for holding on to cash in hope of prompting them to boost lending.
• The euro area, Switzerland, Denmark, Sweden and Japanhave allowed rates to fall slightly below zero.

When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members of broadly comparable economic size and characteristics. The IMF uses a quota formula to help assess a member’s relative position.

• The current quota formula is a weighted average of GDP(weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent).
• For this purpose, GDP is measured through a blend of GDP—based on market exchangerates (weight of 60 percent) and on PPP exchange rates (40 percent).
• The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members.

Today, we live in the most prosperous time in human history. Poverty, sicknesses, and ignorance are receding throughout the world, due in large part to the advance of economic freedom. In 2020, the principles of economic freedom that have fueled this monumental progress are once again measured in the Index of Economic Freedom, an annual guide published by The Heritage Foundation, Washington’s No. 1 think tank.

The economic freedom is based on 12 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

• Rule of Law(property rights, government integrity, judicial effectiveness)
• Government Size(government spending, tax burden, fiscal health)
• Regulatory Efficiency(business freedom, labor freedom, monetary freedom)
• Open Markets(trade freedom, investment freedom, financial freedom)

Each of the twelve economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these twelve economic freedoms, with equal weight being given to each.

Economic Census.

Statement 1 is incorrect: The Economic Census is being conducted by Ministry of Statistics and Programme Implementation (MoSPI) to provide disaggregated information on various operational and structural aspects of all establishments in the country.

Statement 2 is correct: All entrepreneurial units in the country which are involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.