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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-