Consider the following statements:
- If Indian economy is in equilibrium at the point where plans to save and to invest are equal, then government expenditure must be equal to government income.
- In pursuance with the recommendations of Narsimham Committee the RBI has framed new guidelines to setup more foreign exchange banks.
- Redistribution policies geared to reduce economic inequalities include progressive tax policies.
- The currency convertibility concept in its original from originated in Taylors Agreement.
Show Answer & Explanation
Correct Answer: (A)
Explanation:
- Statement 1 (Correct): In macroeconomic equilibrium, total injections must equal total leakages: $Investment (I) + Govt. Spending (G) = Savings (S) + Taxes (T)$. If $S = I$, then it must follow that $G = T$ (Balanced Budget) for equilibrium to hold.
- Statement 3 (Correct): Progressive taxation (taxing the rich at higher rates) is a primary fiscal tool used by governments for the redistribution of income and reducing inequality.
- Statement 2 (Incorrect): The Narasimham Committee focused on banking sector reforms (entry of private banks, lowering SLR/CRR), not specifically on setting up “foreign exchange banks”.
- Statement 4 (Incorrect): Currency convertibility is associated with the Bretton Woods system or IMF articles, not “Taylors Agreement”.
📚 Additional Info: Economy Concepts
1. Macroeconomic Equilibrium
- The Equation: For an economy with a government sector, equilibrium is reached when:
$$Injections = Leakages$$ $$I + G = S + T$$ - Logic: If Savings ($S$) exactly equal Investment ($I$), then the remaining variables, Government Expenditure ($G$) and Taxes ($T$), must also be equal ($G=T$) for the equation to balance.
2. Narasimham Committees (I & II)
- Focus: Banking Sector Reforms (1991 and 1998).
- Key Recommendations:
- Reduction in SLR and CRR.
- Deregulation of interest rates.
- Allowing entry of new private sector banks.
- Introduction of Capital Adequacy Norms.
3. Currency Convertibility in India
- Current Account: The Rupee was made fully convertible on the Current Account in 1994.
- Capital Account: India has only partial convertibility on the Capital Account.
- Committee: The S.S. Tarapore Committee was set up by RBI to provide a roadmap for full Capital Account Convertibility.