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Reserve Bank of India (RBI) Department of Economics and Policy Research (DEPR) Exam Solutions 2016

R. B. I. S. B. (OFFICER Gr. 'B' - DEPR) P.Y. – 2016 (Duration-3 Hours) (Maximum Marks-100) PAPER II DESCRIPTIVE TYPE

1. Critically explain Weber's theory of Industrial location.

Max Weber, a German sociologist and economist, developed a theory of industrial location in the early 20th century. His theory is based on the idea that the location of industry is influenced by three primary factors: transportation, labor supply, and agglomeration economies. Weber believed that transportation costs were the most significant factor in determining the location of industry. He argued that industries would locate near transportation hubs, such as ports or railway junctions, to minimize transportation costs. This is because the cost of transporting raw materials and finished goods is a significant component of the overall cost of production. Therefore, an industry would choose a location that minimizes these costs to increase profits. The second factor that Weber believed influenced the location of industry is the availability of labor supply. He argued that industries would locate near a labor supply that was both skilled and affordable. Skilled labor is essential for industries that require technical expertise, while affordable labor is necessary for industries that require a large workforce. Therefore, industries would locate where there is an adequate supply of skilled and affordable labor to reduce labor costs. Lastly, Weber believed that agglomeration economies played a role in determining the location of industry. Agglomeration economies refer to the cost savings and benefits that arise from clustering together. For example, industries located close to one another can share specialized suppliers and services, reducing costs. Furthermore, industries can also benefit from a pool of specialized labor and knowledge spillovers. Therefore, industries would locate in areas where there are already other industries to take advantage of these benefits. In conclusion, Weber’s theory of industrial location is based on the idea that the location of industry is influenced by transportation costs, labor supply, and agglomeration economies. Industries would choose a location that minimizes transportation costs, has an adequate supply of skilled and affordable labor, and can benefit from agglomeration economies. 2. Discuss the evolution of international monetary system from collapse of the Bretton Woods arrangements in 1971. What are the features of present international monetary system?

The collapse of the Bretton Woods arrangements in 1971 marked the beginning of the evolution of the international monetary system. The Bretton Woods system, which had been established in 1944, was based on a fixed exchange rate regime, with the U.S. dollar serving as the international reserve currency. Under the system, other countries’ currencies were pegged to the U.S. dollar, and the U.S. dollar was pegged to gold at a fixed rate. However, the U.S. faced significant balance of payments deficits, and by the late 1960s, the U.S. government had accumulated large amounts of debt, which made it difficult to maintain the fixed exchange rate system. In August 1971, the U.S. government unilaterally suspended the convertibility of the U.S. dollar into gold, effectively ending the Bretton Woods system. After this, the international monetary system went through several stages of evolution, with the major features being: Floating Exchange Rates: Following the collapse of the Bretton Woods system, most countries moved to floating exchange rates, where the value of a currency is determined by the market forces of supply and demand. In this system, countries do not target a specific exchange rate, but instead allow their currency to float freely. Managed Floating Exchange Rates: Some countries, particularly emerging market economies, have adopted a managed floating exchange rate regime. Under this system, the central bank intervenes in the foreign exchange market to prevent excessive fluctuations in the exchange rate. Increased Financial Integration: The international monetary system has become increasingly integrated, with financial markets becoming more interconnected. This has increased the speed and scale of international capital flows. Emergence of Regional Currency Arrangements: Some countries have entered into regional currency arrangements, such as the Eurozone and the CFA franc zone in West and Central Africa. These arrangements involve a fixed exchange rate regime and a common currency. Dominance of the U.S. Dollar: Despite the end of the Bretton Woods system, the U.S. dollar remains the dominant international reserve currency. Many countries still hold U.S. dollars as a reserve asset, and commodities such as oil are often priced in U.S. dollars. The present international monetary system is characterized by a mix of floating and managed floating exchange rates, increased financial integration, and the dominance of the U.S. dollar. However, there is ongoing debate about the future of the international monetary system, with some experts advocating for the use of a new international reserve currency or the adoption of a new fixed exchange rate system. 3. Discuss the role played by modern digitization technologies in achieving inclusive growth in India.

Modern digitization technologies have the potential to play a significant role in achieving inclusive growth in India. India is a rapidly developing economy with a large population, and the adoption of digital technologies can help create a more inclusive and accessible economic system. Here are some ways In which digitization technologies can help achieve inclusive growth in India: Financial Inclusion: Digitization technologies such as mobile banking and digital wallets have enabled millions of people to access financial services, particularly those living in rural and remote areas. This has allowed people to save money, access credit, and make transactions without having to travel long distances or deal with physical currency. Digital Education: Online education platforms have enabled people to access education and training programs regardless of their location or socioeconomic status. This has enabled people to gain new skills and knowledge that can help them access better-paying jobs and contribute to the economy. E-commerce: E-commerce platforms have enabled small and medium-sized enterprises (SMEs) to access a larger customer base and compete on a level playing field with larger businesses. This has helped to create more jobs and income opportunities, particularly in the informal sector. Government Services: Digitization technologies have enabled the government to deliver services more efficiently and transparently, particularly in areas such as healthcare, education, and social welfare. This has helped to improve access to essential services and reduce corruption. Digital Identity: The government’s digital identity program, Aadhaar, has enabled millions of people to access essential services and benefits, particularly those who do not have traditional forms of identification. This has helped to create a more inclusive and accessible system that does not discriminate based on socioeconomic status or identity. In conclusion, modern digitization technologies have the potential to play a crucial role in achieving inclusive growth in India. By enabling financial inclusion, digital education, e-commerce, government services, and digital identity, these technologies can create more opportunities for people to participate in the economy and improve their standard of living. However, it is crucial to ensure that these technologies are implemented in a way that does not exacerbate existing inequalities and that they are accessible to all, regardless of their socioeconomic status or location. 4. Explain Critical Minimum Efforts thesis of economic growth. The Critical Minimum Efforts thesis is a theory of economic growth that suggests that a certain minimum level of investment and effort is required to achieve sustainable economic growth. This theory was first proposed by economist Ragnar Nurkse in the 1950s and has since been further developed by other economists. According to the Critical Minimum Efforts thesis, economic growth requires a minimum level of investment in physical and human capital, technological development, and infrastructure. This investment is necessary to create the conditions for sustained growth by increasing productivity, creating employment opportunities, and improving the standard of living. However, the amount of investment required varies depending on the level of development of the economy. In less developed countries, a higher level of investment is required to achieve sustainable economic growth, whereas in more developed countries, the critical minimum level may be lower. In addition to investment, the Critical Minimum Efforts thesis also emphasizes the importance of institutional development and sound economic policies. These include stable macroeconomic policies, supportive legal frameworks, and good governance. One key implication of the Critical Minimum Efforts thesis is that external aid and investment can play an important role in promoting economic growth in less developed countries. By providing resources and technical assistance, developed countries and international organizations can help less developed countries achieve the critical minimum level of investment and effort required for sustained economic growth. Overall, the Critical Minimum Efforts thesis highlights the importance of investment, infrastructure, technological development, and sound economic policies in achieving sustainable economic growth. By focusing on these critical factors, policymakers can create the conditions for inclusive and equitable growth that benefits all members of society. 5. Examine the aftershocks of BREXIT. Find its implications on Indian economy? Brexit, the United Kingdom’s decision to leave the European Union, has had a significant impact on the global economy. The aftershocks of Brexit have affected the Indian economy in various ways, both positively and negatively. Here are some of the implications of Brexit on the Indian economy: Trade: Brexit has created uncertainty about the future of trade relations between the UK and the EU, which may impact India’s exports to these markets. However, it may also create new trade opportunities as the UK may seek to establish trade agreements with non-EU countries like India. Investment: Brexit has led to a decline in the value of the British pound, which may make it cheaper for Indian investors to acquire assets in the UK. However, it may also make UK-based companies less attractive to Indian investors. Financial Markets: Brexit has created volatility in financial markets, which may impact the flow of capital to India. However, it may also create opportunities for Indian companies to invest in the UK as they can acquire assets at lower valuations. Immigration: Brexit has led to stricter immigration policies in the UK, which may impact the movement of Indian professionals to the UK. However, it may also create opportunities for Indian companies to attract skilled workers who may have otherwise gone to the UK. EU-India FTA: Brexit has delayed negotiations on the proposed EU-India Free Trade Agreement (FTA). However, it may also create opportunities for India to negotiate a separate trade agreement with the UK. Overall, Brexit has created both challenges and opportunities for the Indian economy. The Indian government will need to carefully monitor developments in the UK and EU and take appropriate measures to mitigate any negative impacts while taking advantage of potential opportunities. 6. Discuss the latest activities undertaken by the government to encourage the manufacturing sector in India.

The manufacturing sector is a crucial part of the Indian economy, contributing to around 16% of the country’s GDP and employing over 100 million people. The Indian government has undertaken several activities in recent years to encourage and support the growth of the manufacturing sector. Here are some of the latest activities: National Manufacturing Policy: The Indian government has implemented a National Manufacturing Policy to promote the growth of the manufacturing sector in the country. The policy aims to increase the sector’s contribution to GDP to 25% by 2025 and create 100 million additional jobs. Make in India Initiative: The Make in India initiative was launched in 2014 to encourage domestic and foreign companies to manufacture their products in India. The initiative provides incentives such as tax benefits, easier access to financing, and reduced compliance burden to companies setting up manufacturing facilities in the country. Production Linked Incentive (PLI) Scheme: The government has introduced the PLI scheme to promote domestic manufacturing in specific sectors such as electronics, pharmaceuticals, and textiles. Under the scheme, companies that meet certain production targets are eligible for financial incentives. Atmanirbhar Bharat Abhiyan: The Atmanirbhar Bharat Abhiyan, launched in 2020, aims to make India self-reliant by promoting domestic manufacturing and reducing dependence on imports. The government has announced various measures such as providing incentives for local production, promoting exports, and encouraging innovation and research and development. Single Window Clearance: The government has implemented a single-window clearance system to simplify and expedite the process of obtaining licenses, approvals, and permits required for setting up a manufacturing unit. Overall, the Indian government’s efforts to encourage and support the manufacturing sector have been significant in recent years. These initiatives aim to increase domestic production, create employment opportunities, and promote self-reliance in the country. 7. Evaluate the recommendations of XIVth Finance Commission.

The XIVth Finance Commission was constituted by the Government of India in 2013 to recommend the sharing of tax revenues between the central government and the states for the period 2015-2020. The Commission made several recommendations aimed at promoting fiscal federalism and ensuring greater financial autonomy for the states. Here is an evaluation of the key recommendations: Increase in share of tax revenue to states: The Commission recommended an increase in the share of tax revenues allocated to the states from 32% to 42%, providing states with greater fiscal autonomy and flexibility in resource allocation. Performance-based grants: The Commission recommended the introduction of performance-based grants to incentivize states to improve their fiscal performance and implement reforms in areas such as power, urban development, and rural sanitation. Revenue deficit grants: The Commission recommended the introduction of revenue deficit grants to provide financial assistance to states that have a revenue deficit after meeting their expenditure obligations. Use of population data: The Commission used the 2011 census population data instead of the earlier 1971 census data to determine the share of tax revenue to the states. This move was aimed at addressing the concerns of the southern states, which have a lower population growth rate compared to other states. Overall, the recommendations of the XIVth Finance Commission were largely welcomed by the states as they provided greater fiscal autonomy and flexibility. The increased share of tax revenue to the states has enabled them to undertake more development activities and provide better public services to their citizens. The performance-based grants have incentivized states to implement reforms and improve their fiscal performance. However, the revenue deficit grants have been criticized for not being sufficient to address the revenue deficits of some states. Nevertheless, the Commission’s recommendations have been seen as an important step towards promoting fiscal federalism and strengthening the financial position of the states in India. 8. Discuss the measures undertaken by the government recently to improve the marketing of agricultural products in India. Agriculture is a critical sector of the Indian economy, contributing to around 17% of the country’s GDP and employing over 50% of the workforce. The Indian government has undertaken several measures in recent years to improve the marketing of agricultural products in the country. Here are some of the recent measures: e-NAM: The government has launched the Electronic National Agriculture Market (e-NAM) to create a unified national market for agricultural commodities. E-NAM is an online platform that enables farmers to sell their produce directly to buyers, eliminating intermediaries and ensuring better prices for farmers. Agriculture Infrastructure Fund: The government has introduced the Agriculture Infrastructure Fund (AIF) to provide financial assistance for the creation of agricultural infrastructure such as cold storage facilities, warehouses, and market yards. The AIF aims to strengthen the supply chain infrastructure and reduce post-harvest losses. Kisan Rail: The government has launched Kisan Rail, a special train service for the transportation of agricultural products. Kisan Rail connects major agricultural centers in the country and provides a cost-effective and efficient mode of transportation for farmers to transport their produce. PM-KISAN: The Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) is a scheme that provides financial assistance to small and marginal farmers. The scheme aims to provide income support to farmers and enable them to invest in the production of crops and marketing of agricultural products. Agricultural Produce and Livestock Marketing (APLM) Act: The government has introduced the APLM Act to ensure the fair market price of agricultural produce and livestock. The Act aims to create a competitive and transparent market for agricultural products and prevent farmers from being exploited by intermediaries. Overall, the Indian government’s measures to improve the marketing of agricultural products have been significant in recent years. These initiatives aim to improve the income of farmers, reduce post-harvest losses, and create a competitive and transparent market for agricultural products.

9. What are the challenges faced by the public sector banks in the changing environment due to privatization and globalization? What measures do you suggest to overcome these challenges?

The public sector banks (PSBs) in India are facing several challenges in the changing environment due to privatization and globalization. Here are some of the challenges: Competition from private sector banks: Private sector banks are increasingly becoming more competitive, agile, and customer-centric. They have better technology, product innovation, and customer service, which is a challenge for PSBs. Non-performing assets (NPAs): PSBs are burdened with high levels of NPAs, which have affected their profitability and creditworthiness. The high level of NPAs is due to a combination of factors such as policy lending, corruption, and weak credit appraisal processes. Governance issues: PSBs are often criticized for their weak governance, lack of accountability, and political interference. This has resulted in poor decision-making, inefficiencies, and corruption in the banking sector. Capital adequacy: PSBs require significant capital to meet the Basel III capital adequacy norms, which have increased due to the rising NPAs. To overcome these challenges, the government and PSBs need to take several measures, including: Merger and consolidation: The government has initiated the merger and consolidation of PSBs to create larger and stronger banks that can compete with private sector banks. This will also help in reducing the cost of operations, improving efficiency, and reducing NPAs. Governance reforms: The government and PSBs need to undertake governance reforms to improve transparency, accountability, and professionalism in the banking sector. This will help in strengthening the decision-making process, reducing corruption, and improving efficiency. Technological upgrades: PSBs need to invest in technology upgrades to improve their operational efficiency, customer service, and product innovation. This will help in competing with private sector banks and providing better services to customers. Capital infusion: The government needs to infuse more capital into PSBs to meet the Basel III capital adequacy norms and enable them to compete with private sector banks. Credit appraisal process: PSBs need to improve their credit appraisal processes to reduce NPAs. This can be achieved by adopting better risk management practices, strengthening internal controls, and implementing credit monitoring systems. Overall, overcoming the challenges faced by PSBs requires a combination of measures such as consolidation, governance reforms, technological upgrades, capital infusion, and improving the credit appraisal process. 10. Write notes on (any four) :-

(a) Highlights of COP21

COP21, also known as the 2015 Paris Climate Conference, was a major international conference held in Paris in December 2015. The conference was aimed at addressing global climate change and establishing a new international agreement on climate change. Here are some of the highlights of the conference: Paris Agreement: The Paris Agreement is a legally binding international treaty that was adopted by 195 countries at COP21. The agreement aims to limit global warming to well below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5 degrees Celsius. The agreement also includes provisions for financing, adaptation, and transparency. Nationally Determined Contributions: The Paris Agreement requires each country to submit a Nationally Determined Contribution (NDC) outlining its climate goals and plans for reducing greenhouse gas emissions. The NDCs are reviewed every five years and are expected to become more ambitious over time. Climate finance: Developed countries committed to providing $100 billion per year in climate finance to developing countries by 2020. The agreement also established a new funding mechanism, the Green Climate Fund, to support developing countries in their efforts to mitigate and adapt to climate change. Adaptation: The Paris Agreement recognized the importance of adaptation to the impacts of climate change and called for enhanced support for developing countries in this area. The agreement also established a Task Force on Displacement to address the issue of climate-induced displacement and migration.

Carbon pricing: The conference highlighted the need for carbon pricing mechanisms to incentivize emission reductions and shift investment towards low-carbon technologies.

Overall, COP21 was a significant milestone in the global effort to address climate change. The Paris Agreement represents a major step forward in international cooperation on climate action and provides a framework for countries to work together towards a more sustainable and resilient future.

(b) Golden age of Joan Robinson's Model

The Golden Age of Joan Robinson’s model refers to a period in economic history from the late 1940s to the early 1970s when the model developed by the British economist Joan Robinson gained widespread popularity and influence in the field of economics. This period is often referred to as the post-war period of economic growth and stability. Joan Robinson’s model was based on the concept of imperfect competition and argued that firms have the power to set prices in the market, rather than being price-takers in a perfectly competitive market. Robinson’s model challenged the traditional view that a free market economy would always lead to equilibrium and argued that government intervention was necessary to achieve full employment and economic stability.

During the Golden Age, many countries implemented policies based on Robinson’s model, such as Keynesian demand management policies, progressive taxation, and the welfare state. The post-war period was characterized by high economic growth rates, low unemployment, and rising living standards, which were attributed to the policies inspired by Robinson’s model.

However, the Golden Age came to an end in the 1970s due to a combination of factors such as the oil crisis, rising inflation, and the breakdown of the Bretton Woods system. The economic challenges of the 1970s led to a shift away from the Keynesian policies of the post-war period and a renewed focus on market-oriented policies. Despite the end of the Golden Age, Joan

Robinson’s model continued to influence economic thinking and policy-making in subsequent decades. Her work on imperfect competition and the need for government intervention in the economy remains relevant today, as economists continue to debate the role of the government in achieving economic stability and growth.

(c) Problem of lemon's market

The problem of lemon’s market is a well-known concept in economics that refers to the issue of information asymmetry in markets. Specifically, it is a situation where the quality of goods or services being traded is uncertain, and the seller has more information about the quality than the buyer.

In the context of a lemon’s market, lemons refer to used cars that are of low quality and prone to breaking down. Buyers are unable to determine the quality of the used car by simply looking at it, and the seller has more information about the condition of the car.

As a result, buyers are reluctant to pay a high price for used cars since they cannot be sure of the quality. Sellers, in turn, are incentivized to sell their lemons at a high price to maximize their profits, even though the cars may have significant problems.

The problem of lemon’s market can have a significant impact on market efficiency and can lead to market failure. It can result in a lower quality of goods and services being offered in the market, higher prices for buyers, and lower profits for sellers of higher-quality goods.

To overcome the problem of lemon’s market, various solutions have been proposed, including:

Quality certification: third-party certification agencies can provide quality certificates for used cars, which can increase buyer confidence and reduce the information asymmetry.

Warranties: warranties can provide assurance to buyers that the seller is confident in the quality of the product, and can also incentivize sellers to offer higher-quality goods.

Reputation: sellers can build a reputation for selling high-quality goods over time, which can help build buyer trust and reduce information asymmetry.

Overall, the problem of lemon’s market is a significant issue in many markets where information asymmetry exists, and addressing it is important for achieving market efficiency and fairness.

(d) Leontief Paradox

The Leontief Paradox is a phenomenon observed in international trade, named after the Nobel Prize-winning economist Wassily Leontief. It refers to the finding that a country with a relatively abundant endowment of capital exports relatively more labor-intensive products, while a country with a relatively abundant endowment of labor exports relatively more capital-intensive products, which is the opposite of what classical trade theory suggests.

Leontief’s study was conducted in the 1950s and was based on an analysis of the US input-output table. He found that the United States, which was relatively abundant in capital, was exporting more labor-intensive goods and importing more capital-intensive goods. This finding was contrary to the predictions of the Heckscher-Ohlin theory, which suggests that a country will export goods that are intensive in the factors of production that it has in abundance.

The Leontief Paradox sparked much debate and led to the development of new theories of trade that could explain the phenomenon. Some economists suggested that Leontief’s findings could be explained by the presence of non-traded goods and the role of technological differences in production processes. Others argued that the paradox was not actually a paradox but rather a reflection of the fact that capital and labor are not the only factors of production, and that other factors such as natural resources and human capital also play a role.

Despite the ongoing debate surrounding the Leontief Paradox, it has had a significant impact on international trade theory and policy. It has highlighted the importance of considering the role of technology and other factors of production in trade, rather than solely focusing on capital and labor. It has also demonstrated the need for more nuanced and complex trade theories that can explain the complexities of real-world trade patterns.

(e) Financial inclusion through Jan-Dhan Yojana

Jan-Dhan Yojana is a flagship financial inclusion program launched by the Government of India in 2014. The aim of the scheme is to provide access to financial services to all citizens of the country, especially those who are financially excluded and have no access to basic banking facilities.

The key features of the Jan-Dhan Yojana scheme are:

Financial Inclusion: The scheme aims to provide every household in India with a bank account, which would act as a gateway to various financial services such as credit, insurance, and pensions.

Zero Balance Account: The scheme provides zero-balance savings accounts to individuals who cannot afford to maintain a minimum balance.

Overdraft Facility: The scheme also provides overdraft facility of up to Rs. 10,000 to eligible account holders.

Mobile Banking: The scheme also provides mobile banking facilities to the account holders, which allows them to access banking services through their mobile phones.

The Jan-Dhan Yojana scheme has been highly successful in achieving its objective of financial inclusion. Since its launch, millions of bank accounts have been opened under the scheme, and it has brought millions of people into the formal banking system. The scheme has also enabled people to access various financial services such as insurance, credit, and pensions.

The benefits of the Jan-Dhan Yojana scheme are manifold. It has improved financial literacy, encouraged savings and investments, and reduced the dependence on informal money lenders. It has also facilitated the transfer of subsidies and other welfare benefits directly to the beneficiaries’ bank accounts, thus reducing leakages and ensuring better delivery of services.

Overall, the Jan-Dhan Yojana scheme has been a game-changer in promoting financial inclusion in India, and it has helped millions of people to access basic banking services and other financial products. The scheme has also played a significant role in achieving the government’s broader objective of inclusive economic growth and development.

(f) Recent trends in revenue impact of tax incentives.

Tax incentives are often used by governments to promote economic growth and development by providing tax breaks or exemptions to certain industries or individuals. However, the revenue impact of tax incentives can vary depending on the design and implementation of the incentives.

Recent trends in the revenue impact of tax incentives suggest that while they can be effective in promoting economic activity, they also have significant revenue implications for governments. In some cases, tax incentives have led to a reduction in tax revenues, which can have an adverse impact on public finances and limit the government’s ability to fund critical social and economic programs.

One trend that has emerged is the use of tax incentives to attract foreign direct investment (FDI). Many countries offer tax incentives to foreign investors in order to promote investment and job creation. However, the revenue impact of these incentives can be significant, as they often result in a reduction in tax revenues that could be used to fund public services.

Another trend is the use of tax incentives to promote research and development (R&D) activities. Many countries offer tax credits or deductions for companies that invest in R&D, as a way to encourage innovation and technological advancement. However, the revenue impact of these incentives can also be significant, as they reduce the amount of tax revenue that would otherwise be collected.

In recent years, there has been a growing awareness of the need to evaluate the effectiveness of tax incentives and their impact on government revenue. Many countries are now undertaking cost-benefit analyses to assess the impact of tax incentives on revenue and to ensure that they are targeted towards the sectors that offer the greatest economic benefits.

In conclusion, tax incentives can be an effective tool for promoting economic growth and development, but they also have significant revenue implications for governments. Recent trends suggest that there is a need for greater scrutiny of tax incentives and their impact on revenue, in order to ensure that they are designed and implemented in a way that maximizes their benefits and minimizes their costs.

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