Day-404 | Daily MCQs | UPSC Prelims | ECONOMY

Answer: D
Explanation:
● Capital expenditure is the expenditure on the development of machinery, equipment, building, health facilities, acquisition of assets like land, research & development, education, etc. Examples of capital expenditure: Loans given by the government to states and public-sector undertakings (PSUs), loans that were taken in the past but are now returned, spending on infrastructure, machinery, land, road, etc. It does not include Productive wages and salaries to workers.

Answer: B
Explanation:
● Statement 1 is correct: It can generate more employment opportunities in the economy.
● Statement 2 is correct: It can adversely affect the exchange rate of a country as Foreign Direct Investment brings supply of foreign exchange and in case demand remain unchanged, it brings downward influence of exchange rate.
● Statement 3 is incorrect: It can degrade domestic investment and domestic companies as small companies in a country may not be able to withstand the onslaught of MNCs in their sector and there is the risk of many domestic firms shutting shop as a result of increased FDI.
Additional information:
FDI brings in many advantages to the country as it brings financial resources for economic development; Brings in new technologies, skills, knowledge, etc; Brings in a more competitive business environment in the country; Improves the quality of products and services in sectors.
There are two routes for FDI:
• AUTOMATIC ROUTE OF FDI: The automatic route stands for less restricted or more liberalized regulation. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.
• APPROVAL ROUTE OF FDI: Under the approval route or government route, the foreign investor or the Indian company should obtain prior approval of the Government of India agencies or bodies specified.

Answer: C
Explanation:
● Statement 1 is correct: It is issued by an Indian entity in foreign markets and its interest payments and principal reimbursements are denominated in rupees.
● Statement 2 is incorrect: Both the government and private entities can issue these bonds.
● Statement 3 is correct: Since these bonds are denominated in the domestic currency, they are protected against currency fluctuation risks .It benefits the borrower as there is no currency risk. It saves the borrower from currency fluctuations.
Additional information: Masala Bonds are debt instruments that are used to attract capital from international investors in the form of local currency. These are issued outside of India by an Indian entity as rupee-denominated bonds. These Bonds’ main purpose is to finance infrastructure projects, spur domestic growth through borrowing, and internationalize the Indian rupee. Given that the word “Masala” in Hindi refers to spices, the intention behind these was to promote Indian culture on a global scale. International Finance Corporation (IFC) issued the first Masala bond for Indian infrastructure projects in 2014. Masala Bonds are issued directly in Indian rupees, the exchange rate risks fall on the shoulders of the investors. The issuer of masala bonds is unaffected by a decline in rupee exchange rates.

Answer: B
Explanation:
● Statement 1 is correct: It refers to an account that a correspondent bank holds on behalf of another bank in another country. To settle trade transactions with any country, banks in India will open Vostro accounts (an account that a correspondent bank holds on behalf of another bank — for example HSBC vostro account is held by SBI in India) of correspondent bank/s of the partner country for trading.
● Statement 2 is incorrect: Vostro accounts is only denominated in the local or domestic currency.
● Statement 3 is correct: This arrangement is likely to be used only for Russia. There are sanctions on Russia post the Ukraine war and the country is off the SWIFT system (system used by banks for payments in foreign currency). This means payments do not have to be made in foreign currency and this arrangement would help both Russia and India.
Additional information: To settle trade transactions with any country, banks in India open Vostro accounts (an account that a correspondent bank holds on behalf of another bank for example HSBC vostro account is held by SBI in India) of correspondent banks of the partner country for trading. Indian importers can pay for their imports in rupee into these accounts. These earnings from imports can then be used to pay Indian exporters in Indian rupee.

Answer: B
Explanation:
● Statement 1 is incorrect: It is implemented and regulated by the Central Board of Direct Taxes (CBDT).
● Statement 2 is correct: This mechanism ensures transfer pricing issues in a transparent manner.
● Statement 3 is incorrect: It ensures certainty with respect to the tax outcomes in international transactions.
Additional information: Advanced pricing agreement is an agreement between the tax authority and mnc on the appropriate transfer pricing methodology for a certain period of time. Under this, the transfer price is fixed based on the “arm’s length principle”. This principle states that the transfer price must be closer to the price at goods and services are transacted between two unrelated entities.
Types of advanced pricing agreement :
● Unilateral APA: Agreement between the company and the tax authority of the country
● Bilateral APA: Agreement which involves taxpayer located in the country, tax authority of the taxpayer’s location, associated enterprise (AE) of the taxpayer in a foreign country and tax authority of the country where the associated enterprise is located
● Multilateral APA: Agreement involves multiple entities which get into an agreement about transfer pricing. These entities include the taxpayer in a country, the tax authority of the taxpayer’s company, two or more associated enterprises of the taxpayer and the respective tax authorities of the countries where these are located.