Directions (1-10): Read the given passage and answer the following
questions based on the passage.
Viral Acharya made a “famous”
speech last year that a government that does not respect institutional autonomy
would incur the wrath of financial
markets. With some of the proposals presented in the Union budget for 2019-20
on 5 July, the government may have unwittingly rendered itself potentially
vulnerable to incurring the wrath of the bond market down the road.
In addition to the proposed borrowing by
the sovereign state in foreign currency, India has also liberalized foreign
financial flows. Since capital and current accounts have to balance, the
materialization of huge capital inflows will feature a concomitant large current account deficit. So, to cap that,
pre-emptively, India has resorted to higher import duties (and, maybe, to
curbing consumption demand through higher taxes on high income earners). In
other words, India has resorted to financial liberalization and trade
restrictions. This is the opposite of what a country with weak export potential
and performance, and with vulnerability to swings in external capital flows,
should do. It must also be noted that issuing sovereign masala bonds to foreign
lenders is not a better answer at all.
The second proposal in the budget with
potentially far-reaching consequences is the proposal to fund infrastructure
through deepening of the corporate bond market, including the market for credit
default swaps. At one level, measures to deepen the bond markets, especially on
infrastructure financing, are steps in the right direction. The book Economics
Of Derivatives, written by T.V. Somanathan and yours truly, has captured the perils of encouraging credit default
swaps. It is not a swap. It is an insurance contract. The word “swap” was
used to keep the product out of regulatory scrutiny. It played a big role in
precipitating and deepening the crisis of 2008. The alternative is the revival
of term-lending financial institutions. The excess reserves held by the Reserve
Bank of India that the government is seeking could be utilized as capital in
new term-lending financial institutions. Armed with the government’s credit
guarantee, they can then borrow in capital markets and also seek refinancing
from multilateral financial institutions.
India should be more open to foreign
trade than foreign finance. As the North East Asian economies have shown,
export discipline and export competition are the way to enhance resilience on the capital account.
Further, the bitter experience of the South East Asian economies in 1997-98 is
that illiberal trade practices and liberal finance will expose the country to
the excesses of Financialization, and to the whims of international financial
flows. Taking on additional external liabilities amid shrinking global trade
volumes and an inadequate export capability is to invite danger. Fixing the
latter must come first. Finally, with financial liberalization, India will be
exposing itself more than before to the dangers of ___________________________(A)___________________________even if
India’s economic fundamentals are solid.
The government’s rationale is easy to
understand. In the context of an impaired domestic credit (banking and
non-banking) market and stagnant domestic savings, the government has thought
it fit to tap foreign savings to provide growth finance. However, India’s
financial market challenges are different. On one hand, a significant share of
its citizens is financially excluded, and its bank-dominated credit markets
suffer from several deficiencies. On the other, pockets of the economy
involving asset prices, the attendant leverage, and cross-border capital flows
are experiencing an increasing trend of financialization. The measures
announced in the budget will exacerbate
this trend.
In the past, India has avoided the
excesses of financialization because it has been a bank-dominated rather than a
capital-market dominated economy. Instead, India’s problem has been the
politicization of finance, reflected in the periodic occurrence of bad debts in
the banking system, just as the global crisis of 2008 reflected the
consequences of the Anglo-Saxon economies’ financialization. Public ownership
of Indian banks facilitated their politicization and limited their operational
autonomy. Combined with financial repression, it made it difficult to fix
accountability on either banks or the regulator. That ought to be the focus of
the executive.
Q1. As per the given passage, what
decision did India take to abate the imminent current account deficit?
(a) The banking system in India has been
politicized as per the recent decision
(b) The import duties have been
increased and higher taxes have been imposed on high income earners.
(c) The RBI has decided to lend the
extra reserves to the government to deal with the deficit.
(d) The government has borrowed from the
global market in the Indian currency.
(e)None of these
Q2.
How can the term-lending financial institutions be resuscitated as per
the passage?
(a) The masala bonds can be issued to
foreign lenders and the exports can be increased by these bonds.
(b) The increase in credit default swaps
can lead to financial inclusion.
(c) RBI can deploy the superfluous
credit that can be used as the capital for the institutions.
(d) Both (b) and (c)
(e) All of these
Q3. Which of the following phrase/s
should fill the blank (A) to make it contextually and grammatically meaningful
and correct respectively?
(a) spillovers from the ill-conceived
monetary policies of advanced nations
(b) GST being the best example of a tax
implemented towards the betterment of the nation
(c) lowered the fiscal deficit target to
3.3 per cent for the current fiscal
(d) Both (a) and (c)
(e)
None of the above
Q4. What are the various challenges that
the Indian financial market needs to tackle as per the given passage?
(I) Financial exclusion of a vast number
of people in the country.
(II) The cross-border capital flows are
experiencing plummeted financialization.
(III) Banks are the central institutions
that provide credit in the market but are inefficient in several ways.
(a)Only (I)
(b)Only (II)
(c)Both (I) and (III)
(d)Both (II) and (III)
(e)All (I), (II)and(III)
Q5. What has/have been the impact of
politicization on banking system as per the given passage?
(a) Politicization has led to public
ownership of the banks, which resulted in their limited operational autonomy.
(b) The emergence of bad loans in the
banking system redundantly can be attributed to politicization.
(c) Politicization has been the main
reason for the financial repression.
(d)Both (b) and (c)
(e)None of the above
Directions (6-7): Which of the following is most similar in meaning
to the given words as used in the passage?
Q6. Wrath
(a) Bludgeon
(b) Haven
(c) Gaiety
(d) Indignation
(e) None of these
Q7. Which of the following word is
similar to word “concomitant” as used in the passage?
(a) Adamant
(b) Eventuate
(c) Resuscitate
(d) Pompous
(e)None of these
Q8. Which of the following statements,
in the context of the passage, provides the exact meaning of the word “perils” as used in bold in each of the sentences?
(I) The book has captured the straits of encouraging credit default
swaps.
(II) The book has captured the menaces of encouraging credit default
swaps
(III) The book has captured the pitfalls of encouraging credit default
swaps
(a)Only (I)
(b)Both (I) and (III)
(c)Only (III)
(d)Both (II) and (II)
(e)All (I), (II) and (III)
Q9. Which of the following word/s is
antonym of the word “resilience” in
the passage?
(i) adaptability
(ii) acrid
(iii) vulnerability
(iv) shrewdness
(v) ferocious
(a)Only (iii)
(b)(i),(ii) and (iii)
(c)Both (i) and (v)
(d) (i),(iii) and (v )
(e)(i),(ii),(iii) and (iv)
Q10. What can be concluded from the
given passage?
(a) Financialization has led to the
immense growth of financial assets held by institutional investors.
(b) Financial over-liberalization can
hurt India that is vulnerable to volatile external capital flows
(c) Financial liberalisation lifted
price and quantity controls in domestic financial systems.
(d) The surge in international financial
flows global boom was driven by intensifying financialisation forces.
(e) None of these.
SOLUTIONS:
S1. Ans. (b)
Sol. As per the lines,
“Since capital and current accounts have to
balance, the materialization of huge capital inflows will feature a concomitant
large current account deficit. So, to cap that, pre-emptively, India has
resorted to higher import duties (and, maybe, to curbing consumption demand
through higher taxes on high income earners). In other words, India has
resorted to financial liberalization and trade restrictions.” option (b) is the
decision taken by India. So, option (b) is correct answer choice.
Abate means make (something) less intense.
S2. Ans. (c)
Sol. The lines, “The alternative is the revival of term-lending financial
institutions. The excess reserves held by the Reserve Bank of India that the
government is seeking could be utilized as capital in new term-lending
financial institutions.” informs us that statement (c) is the right answer.
Thus, option (c) is correct answer choice.
Resuscitate means make (something) active or vigorous
again
S3. Ans. (a)
Sol. As per the line
India would be exposing itself more to dangers of “something”. And we need to
find that “something”. So, as per option (a) India will exposing itself more to
spillovers of poorly implemented monetary policies adopted from the advanced
nations. (b) is contradicting the complete line containing (A). Using (c) does
not make a grammatically correct sentence. Thus, option (a) is correct answer.
S4. Ans. (c)
Sol. The challenges challenges that the Indian financial
market needs to tackle can be inferred
from the lines, “On one hand, a
significant share of its citizens is financially excluded, and its
bank-dominated credit markets suffer from several deficiencies. On the other,
pockets of the economy involving asset prices, the attendant leverage, and
cross-border capital flows are experiencing an increasing trend of
financialization.” The statements
(I) and (III) are correct as per the lines. The statement (II) is incorrect
because the trends of financialization are increasing not decreasing. Thus, option (c) is correct answer choice.
S5. Ans. (b)
Sol. The line “Instead, India’s problem has been the
politicization of finance, reflected in the periodic occurrence of bad debts in
the banking system,” proves only
the statement (b) to be true. As for (a) line “Public ownership of Indian banks
facilitated their politicization and limited their operational autonomy.” tell us that Public
ownership of Indian banks facilitated their politicization. And statement (c)
is wrong because there is no mention of politicization leading to financial
repression.
Thus, option (b) is correct answer choice.
S6. Ans. (d)
Sol. The word “wrath” as used in the passage means “extreme anger”. And the word “Indignation” is the exact synonym of
the given word. “Indignation” means
“anger aroused by something unjust,
unworthy, or mean”. Hence, option (d) is the correct answer choice.
Bludgeon: a thick stick with a heavy end, used as a weapon
Haven: A place of safety or refuse, sanctum, sanctuary
Gaiety: the state or quality of being light-hearted or cheerful
S7. Ans. (b)
Sol. The word “concomitant” as used in
the passage means “something that is
found along with something else; accompanying”. Thus, among the given alternatives,
(d) “Eventuate” provides the exact
meaning of the word contextually. Hence option (b) is the correct choice.
Adamant means impossible to persuade, or unwilling to change an opinion or decision.
Resuscitate means revive (someone) from unconsciousness or apparent death.
S8. Ans. (d)
Sol. The word “perils” means “something that endangers”. The words “menaces” and “pitfalls” have the similar meanings as “perils”. Thus, option (d) is correct
answer choice.
Strait means a narrow passage of water connecting two seas or two other
large areas of water.
S9. Ans. (a)
Sol. The word “vulnerability” is the antonym of “resilience”. “Resilience” means
“the capacity to recover quickly from
difficulties; toughness.”. “Adaptability”
is the synonym of the given word. Thus, option (a) is correct answer choice.
Shrewdness means in a way that shows sharp powers of judgement; astutely
Acrid means unpleasantly bitter or pungent
S10. Ans. (b)
Sol. The passage given discusses about
that Financial liberalisation can have negative impact on the Indian economy.
Hence option (b) can be concluded from the given passage.
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