UPSC Static Quiz – Economy : 13 January 2025

Solution: d)

Stamp duties in India are a form of tax levied on legal documents, financial instruments, and certain transactions, governed by the Indian Stamp Act, 1899.

1. Stamp duties are applicable to cheques as financial instruments under the Indian Stamp Act.
2. Letters of credit, which are important financial instruments in trade, are subject to stamp duties.
3. Insurance policies, including life and general insurance, attract stamp duty as per the Act.
4. Stamp duty is levied on the transfer of shares in dematerialized and physical form, as it constitutes a taxable transaction.
5. Promissory notes, a common financial instrument, are subject to stamp duty.

Solution: a)

The nominal GDP growth rate — the rate at which GDP grows, inclusive of inflation — is possibly the most important data mentioned in the Budget since it forms the base for all other calculations. For instance, the fiscal deficit (read borrowings) targets are set as a percentage of (nominal) GDP. So if the nominal GDP is small, the amount of money that the government can borrow is also smaller.

Like all nominal data, the nominal GDP is the actual data that is observed in the economy; the real GDP and the real GDP growth rates etc. are essentially derived from nominal data after removing the effect of inflation.

The fiscal deficit is essentially the amount of borrowing that the government is forced to have when it can’t meet all its expenses with its income. 

The Fiscal Responsibility and Budget Management (FRBM) Act of 2003 stated that the fiscal deficit of the union government should not exceed 3% of GDP. It also set another key marker: The revenue deficit — the gap between the government’s everyday expenses (say salaries and pensions) and everyday earnings (taxes, cesses etc) — should be zero.

The dual stipulation — fiscal deficit at 3% and revenue deficit at 0% — is essentially meant to ensure that all the money that the government borrows is spent towards the creation of new productive assets.

Solution: d)

A hawkish stance indicates that the central bank’s top priority is to keep the inflation low. During such a phase, the central bank is willing to hike interest rates to curb money supply and thus reduce the demand. A hawkish policy also indicates tight monetary policy.

Solution: c)

Government debt is basically the outstanding domestic and foreign loans raised by the Centre and states – plus other liabilities, including against small savings schemes, provident funds and special securities issued to the Food Corporation of India, fertiliser firms and oil marketing companies – on which they have to pay interest and the principal amounts borrowed.

Solution: d)

What is the wage-price spiral?

If prices go up, it is natural that workers will ask for higher wages. But if wages go up, it only fuels the overall demand, while doing nothing to boost the supply. End result: inflation surges further because while a worker has more money, so does his colleague. When they go to the market then the only thing that changes is the price of the good — in other words, inflation rises.

Raising interest rates slows down overall economic activity and demand, often leading to job losses. Through this rather unjust and iniquitous method, the central banks prevent a wage-price spiral and consequent inflation.