Day-489 | Daily MCQs | UPSC Prelims | ECONOMICS

Answer: A
Explanation:
● Statement 1 is correct: They are a type of offshore derivative instrument issued by registered Foreign Portfolio Investors.
● Statement 2 is incorrect: They come under the regulatory ambit of SEBI but need not be registered and can be part of the stock market without registering themselves.
● Statement 3 is incorrect: They cannot be traded on Indian stock exchange directly and generally are sold directly to foreign investors.
Additional information:
● Participatory Notes also referred to as P-notes, or PNs, are financial instruments required by investors or hedge funds to invest in Indian securities without having to register with the Securities and Exchange Board of India (SEBI).
● SEBI permitted foreign institutional investors to register and participate in the Indian stock market in 1992. These notes are a unique Indian invention started in 2000 by SEBI to enable foreign corporates and high networth investors enter the Indian market without having to go through the process of registering as Foreign Institutional Investor.
● Participatory Notes are instruments used for making investments in the stock markets. However, they are not used within the country; they are used outside of India for making investments in stocks listed on Indian stock markets, which is why they’re also referred to as offshore derivative instruments
● P-notes are among the group of investments considered to be Offshore Derivative Investments (ODIs).
● Brokers and foreign institutional investors (FIIs) must register with the Securities and Exchange Board of India. Participatory notes allow non-registered investors to invest in the Indian market.
● Participatory Notes are popular investments due to the investor remaining anonymous.

Answer: D
Explanation:
● Statement 1 is incorrect: Corporate bonds are considered more risky as compared to government bonds.
● Statement 2 is correct: Corporate bonds usually offer higher interest rates as compared to government bonds.
● Statement 3 is correct: Corporate bonds can be issued by both private and public corporations and Government bonds can be issued by both central and state governments.
Additional information:
● Government bonds or G-sec are issued by the Government of India, either the Central Government or the State Government. When the government faces a liquidity crisis, such bonds are issued to fund infrastructure development. These bonds are primarily intended for long-term holding.
● A government bond’s interest rate is a coupon rate that can be fixed or floating on a biannual basis. Furthermore, because the government has very little chance of defaulting on interest or principal payments, these bonds are regarded as the safest form of investment.
● Corporate bonds are debt securities issued by corporations, which can be private or public. To raise funds for a variety of purposes such as establishing a new plant, purchasing equipment, or expanding the business.
● When a person purchases a corporate bond, he or she is lending money to the issuer in exchange for periodic interest payments on the principal at maturity. Though the individual investor lends money. He/she will not be considered a stakeholder or having ownership rights like an equity stockholder.

Answer: A
Explanation:
Examples of revenue expenditure as these do not lead to the creation of fixed assets includes:
● Pension of Defence Personnel because it neither reduces liability of the payer nor adds to assets.
● Interest Payment of loan because it neither reduces liability of the payer nor adds to assets.
● Implementation of PM-Kisan Scheme because it neither reduces liability of the payer nor adds to assets.
Examples of capital expenditure includes:
● Construction of school: Capital expenditure is expenditure that results in the acquisition, construction or enhancement of significant fixed assets including land, buildings as schools and equipment that will be of use or benefit for more than one financial year.
● Acquiring fixed and intangible assets
● Upgrading an existing asset
● Repayment of loan
Additional information:
● Capital expenditures or capex are the expenditures incurred for high value items and they fulfill the requirements for the long term. These expenditures are also called long-term expenditures.
● Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc. It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividends in future.
● Capital expenditure allow the economy to generate revenue for many years by adding or improving production facilities and boosting operational efficiency. It also increases labour participation, takes stock of the economy and raises its capacity to produce more in future.
● Further, capital expenditure increases the economy’s demand for products and services, and is essential for boosting private sector economic activity.
● Revenue expenditures are those expenses that do not result in the creation of assets. Basically, revenue expenditures are short-term expenditures done within a year.
● Grants that the central government awards to the governments of states and union territories are considered to be a form of revenue expenditure. For the government, revenue expenditures also include the interest payments on loans as well as the provision of subsidies such as those for food, fertilisers, and fuel.

Answer: A
Explanation:
● Statement 1 is correct: They are issued by the Reserve Bank of India.
● Statement 2 is incorrect: PSLC are issued for four categories: agri, micro enterprises, small and marginal farmers and one PSLC for general.
● Statement 3 is incorrect: Under GST, PSLCs are taxable as goods at a standard rate of 18%. It can be traded using RBI’s online trading platform i.e., e-Kuber platform to allow banks to trade in PSLCs to meet the sectoral sub-targets.
Additional information:
● Priority sector lending certificates (PSLCs) are certificates that are issued against priority sector loans for banks. They allow banks to meet their targets and sub-targets – when it comes to priority sector lending – by buying the instruments. The banks use PSLCs to guard against shortfalls.
● Priority Sector Lending Certificates (PSLCs) are instruments that enable banks to achieve their priority sector lending targets without actually disbursing loans to sectors outside their comfort zone.
● PSL certificates allow banks sitting on surplus loans to a priority sector to sell certificates to banks that haven’t met their targets, pocketing a sizeable fee for this trade. The said loans however do not change hands.
● The lending certificates also incentivize through surplus to lend more to priority sectors.
● Priority sector lending certificates (PSLCs) are financial instruments that can be borrowed against by banks in India, allowing them to make their target and sub-target goals in terms of loans being offered.
● Public sector lending (PSL) is mandated by the Reserve Bank of India (RBI), making it a requirement for domestic and foreign banks to offer loans to specific sectors and sub-sectors within the nation’s economy.

Answer: C
Explanation:
● Option 1 is incorrect: Increase in imports and decrease in exports leads to Current Account Deficit.
● Option 2 is incorrect: Increase in remittances and transfer payments leads to Current Account Surplus.
● Option 3 is correct: Inflation i.e., continuous rise in prices in a country makes foreign goods relatively cheaper. It increases imports which cause a deficit in Current Account.
Additional information:
● The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period. Usually, the BOP is calculated every quarter and every calendar year.
● All trades conducted by both the private and public sectors are accounted for in the BOP to determine how much money is going in and out of a country.
● The balance of payments (BOP) is the record of all international financial transactions made by the residents of a country.
● There are three main categories of the BOP: the current account, the capital account, and the financial account.
● The current account of the balance of payments includes a country’s key activity, such as capital markets and services. The four major components of a current account are goods, services, income, and current transfers. The current account is used to mark the inflow and outflow of goods and services into a country.
● The capital account flow reflects factors such as commercial borrowings, banking, investments, loans, and capital. The components of the capital account include foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve. The capital account is where all international capital transfers are recorded.
● In the financial account, international monetary flows related to investment in business, real estate, bonds, and stocks are documented.
● The current account should be balanced versus the combined capital and financial accounts, leaving the BOP at zero, but this rarely occurs.