UPSC IAS / IPS - MCQ Practice Questions

Understanding:

This question tests knowledge of the Gadgil Formula, a criteria-based method for distributing central plan assistance to states.

Step 1: Origin of the Gadgil Formula

The Gadgil Formula was formulated by D.R. Gadgil, Deputy Chairman of the Planning Commission, and was first applied during the Fourth Five-Year Plan (1969–74). It provided an objective basis for distributing central plan assistance to states.

Step 2: Criteria under the formula

The original formula weighted: population (60%), per capita income (10%), ongoing irrigation and power projects (10%), and special problems (20%). It replaced the earlier ad hoc distribution system.

Step 3: Subsequent modifications

The formula was revised in 1990 (Gadgil-Mukherjee formula) and was used until the abolition of the Planning Commission in 2015, after which the devolution framework changed under NITI Aayog and the 14th/15th Finance Commissions.

Step 4: Eliminate incorrect options

The Second Plan is associated with the Mahalanobis model. The Third Plan saw the Gadgil formula being discussed but it was formally applied from the Fourth Plan. The Sixth Plan adopted a modified version but the original adoption was in the Fourth Plan.

Answer:

The Gadgil Formula was first formally adopted for distributing central assistance to states during the Fourth Five-Year Plan (1969–74).

Understanding:

This question asks about the Twin Balance Sheet (TBS) problem, a macroeconomic challenge that was prominently highlighted in India's Economic Survey around 2015–17.

Step 1: Origin of the term

The term 'Twin Balance Sheet Problem' was popularized by the Economic Survey of India (2016–17) authored under Chief Economic Adviser Arvind Subramanian. It described the interconnected crisis afflicting two key sectors simultaneously.

Step 2: The two balance sheets

First, Indian corporates — particularly in sectors like infrastructure, steel, and power — had taken on excessive debt during the investment boom of 2004–08. When growth slowed, their cash flows were insufficient to service this debt, stressing their balance sheets. Second, public sector banks had lent heavily to these corporates. As corporate debt went sour, Non-Performing Assets (NPAs) of banks surged, weakening bank balance sheets and restricting fresh credit.

Step 3: Consequences

This created a vicious cycle: banks unwilling to lend, corporates unable to invest, leading to a prolonged investment slowdown. The government responded with the Insolvency and Bankruptcy Code (IBC), 2016, and bank recapitalization programmes.

Step 4: Eliminate incorrect options

Fiscal deficit plus CAD is sometimes called the 'twin deficit problem' — distinct from the TBS problem. The other options have no standard economic definition.

Answer:

The Twin Balance Sheet Problem refers to the simultaneous stress on balance sheets of over-leveraged Indian corporates and public sector banks burdened with rising NPAs.

Understanding:

This question tests knowledge of the institutional mechanism through which Minimum Support Prices are recommended in India.

Step 1: What is MSP?

Minimum Support Price (MSP) is a guaranteed price set by the Government of India at which it procures agricultural commodities from farmers to protect them from price crashes due to excess supply.

Step 2: Who recommends MSP?

The Commission for Agricultural Costs and Prices (CACP), an attached office of the Ministry of Agriculture and Farmers' Welfare, recommends MSPs for 23 mandated crops including kharif, rabi, and commercial crops. The final decision to fix MSP rests with the Cabinet Committee on Economic Affairs (CCEA).

Step 3: Role of other bodies

FCI procures, stores, and distributes foodgrains under MSP once it is declared — it does not recommend the price. NABARD provides refinancing for agricultural credit but does not recommend MSP. The Ministry of Consumer Affairs oversees the Public Distribution System.

Answer:

The Commission for Agricultural Costs and Prices (CACP) recommends MSPs to the government for major agricultural commodities.

Understanding:

This question tests knowledge of the criteria used by the 15th Finance Commission chaired by N.K. Singh for recommending horizontal devolution (distribution among states) of central taxes.

Step 1: Key departure — use of 2011 Census

The 15th Finance Commission used the 2011 Census population data (unlike earlier commissions which used 1971 data). This was a significant change, as states with higher population growth since 1971 benefited.

Step 2: Criteria for horizontal devolution

The 15th FC used a composite index:

Step 3: Vertical devolution

The 15th FC recommended 41% of the divisible pool to states (same as the 14th FC's 42%, but adjusted for the reorganization of Jammu & Kashmir).

Step 4: Eliminate incorrect options

The 1971 Census was used historically but not by the 15th FC. GSDP alone is not the sole criterion. The 14th FC used different weights.

Answer:

The 15th Finance Commission based its devolution recommendations on 2011 Census population figures along with criteria including income distance, demographic performance, forest cover, and tax effort.

Understanding:

This question examines the purpose and scope of the Insolvency and Bankruptcy Code, 2016 — a landmark economic legislation in India.

Step 1: Background

Before IBC, insolvency resolution in India was fragmented across multiple laws (Companies Act, SARFAESI Act, SICA, etc.) and took extremely long — sometimes over a decade. This created a poor credit culture and stressed banks.

Step 2: Primary objective of IBC, 2016

IBC was enacted to consolidate and amend laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The Corporate Insolvency Resolution Process (CIRP) must be completed within 180 days (extendable to 330 days).

Step 3: Institutional mechanism

The National Company Law Tribunal (NCLT) is the adjudicating authority for corporate insolvency. Insolvency Professionals (IPs) manage the resolution process. The Insolvency and Bankruptcy Board of India (IBBI) is the apex regulatory body.

Step 4: Eliminate incorrect options

IBC is not limited to income tax defaulters. RBI cannot unilaterally write off NPAs under IBC. NCLT was established under the Companies Act, 2013 — not under IBC, and it is not a constitutional body.

Answer:

IBC, 2016 provides a time-bound process for resolving insolvency of companies and individuals, consolidating laws relating to reorganisation and insolvency resolution.

Understanding:

This question tests the relationship between two important national income aggregates — GDP at Market Price and GDP at Factor Cost.

Step 1: Conceptual difference

GDP at Market Price measures output at the prices actually paid by buyers, which include indirect taxes (like GST, excise duty) but are reduced by subsidies. GDP at Factor Cost measures output at the cost of factors of production (wages, rent, interest, profit), excluding indirect taxes and subsidies.

Step 2: The relationship

The standard relationship is:

GDP at Market Price = GDP at Factor Cost + Indirect Taxes − Subsidies

Equivalently:

GDP at Factor Cost = GDP at Market Price − Indirect Taxes + Subsidies

Step 3: Indian context

India's MoSPI shifted to the GVA (Gross Value Added) at Basic Prices framework in 2015. The new relationship is:

GDP = GVA at Basic Prices + Taxes on Products − Subsidies on Products

Step 4: Eliminate incorrect options

Both GDP at Market Price and Factor Cost cover all sectors. GDP at Factor Cost can be higher or lower than GDP at Market Price depending on the relative magnitudes of taxes and subsidies. Imports are not included in GDP by definition regardless of the approach.

Answer:

GDP at Market Price = GDP at Factor Cost + Indirect Taxes − Subsidies; this is the standard relationship between the two aggregates.