UPSC Static Quiz – Economy : 1 December 2025

Solution: C

Statements 1, 2, and 3 are correct as PMI acts as a leading indicator, influences monetary policy decisions, and correlates with GDP and markets.

Statement 4 is incorrect because PMI does not directly measure inflation; it tracks business activity and supply chain conditions, which may have an indirect inflationary effect.

About Purchasing Managers’ Index (PMI):

• What is PMI?

• • PMI (Purchasing Managers’ Index) is an economic indicator derived from monthly business surveys.
  • It measures activity at the purchasing/input stage, unlike IIP (Index of Industrial Production), which tracks actual output.
  • There are two types:
    • Manufacturing PMI – Tracks industrial and factory activity.
    • Services PMI – Assesses the growth in the services sector.
  • PMI above 50 indicates economic expansion, while below 50 signals contraction.

• Who Releases PMI in India?

• • S&P Global (earlier released by IHS Markit) conducts PMI surveys in India.
  • Based on a survey of 500 manufacturing companies for the Manufacturing PMI.

• PMI Calculation Methodology:

• • Derived from qualitative responses of purchasing managers.
  • Five key indicators with assigned weights:

Solution: C

Domestic Systemically Important Banks (D-SIBs) are identified in India based on their significance to the stability of the financial system. The Reserve Bank of India (RBI) uses criteria such as size relative to GDP, which measures the bank’s scale in the economy, and cross-jurisdictional activity, reflecting its international operations. Additionally, interconnectedness within the financial system evaluates how closely the bank is linked to other institutions, and other factors like complexity and substitutability are also considered.

However, profitability ratios are not a criterion for identifying D-SIBs. Profitability measures such as return on assets or equity are more relevant to assessing a bank’s financial performance but do not directly indicate its systemic importance. The focus for D-SIB classification is on a bank’s potential to impact financial stability rather than its earnings.

Solution: A

Statement 1 is correct as CENVAT simplifies the taxation process by allowing credit for input taxes.

Statement 2 is incorrect because CENVAT reduces costs by eliminating cascading taxes.

Statement 3 is correct as businesses save costs, which can be reinvested into production and innovation.

Significance of CENVAT:

• Avoids double taxation:Prevents repeated taxation on the same value addition.
• Simplifies taxation:Reduces the tax burden on manufacturers and service providers.
• Promotes competitiveness:Encourages businesses to reinvest savings in production and innovation.
• Consumer benefit:Reduces the overall cost of goods and services by eliminating cascading taxes.

Solution: B

The FRBM Act, 2003, was introduced to institutionalize fiscal discipline and enhance transparency in fiscal management. It aimed to eliminate the revenue deficit and reduce the fiscal deficit, ensuring long-term macroeconomic stability, which makes Statement 1 correct.

However, the Act requires both the Centre and states to implement fiscal responsibility laws. Many states have enacted their fiscal responsibility legislation to align with the principles of the FRBM framework, making Statement 2 incorrect.

The FRBM Amendment Act, 2018, updated the framework to address changing economic realities. It introduced a specific target for the overall public debt: a combined debt-to-GDP ratio of 60%, split as 40% for the Centre and 20% for the states. This makes Statement 3 correct.

Solution: B

Statement 1 is incorrect—while two quarters of GDP contraction defines a recession, a bear market is determined by a 20% fall in stock indices, independent of formal GDP data.

Statement 2 is correct. In bear markets, investors become risk-averse and reallocate funds to safe-haven assets like gold, government bonds, and sometimes US dollars. This reflects a strategy to protect capital from equity market volatility.

Statement 3 is incorrect—economic forecasts are usually revised downward during bear markets due to declining corporate earnings, unemployment, and global uncertainty.