UPSC Essentials | Daily subject-wise quiz : Economy MCQs on deflationary phase of Indian tea market, Effective Exchange Rate and more (Week 173)

Which one of the following is correct in respect of the above statements?

(a) Both Statement 1 and Statement 2 are correct and Statement 2 is the correct explanation for Statement 1.

(b) Both Statement 1 and Statement 2 are correct and Statement 2 is not the correct explanation for Statement 1.

(c) Statement 1 is correct but Statement 2 is incorrect.

(d) Statement 1 is incorrect but Statement 2 is correct.

Relevance: This question tests the linkage between geopolitical developments, emerging technologies, and economic policymaking, a growing focus in UPSC Economy. It also reflects the increasing importance of economic resilience, supply chain security, and investment climate in India’s growth strategy.

Explanation

— In the wake of persistent stand-off in West Asia, the Indian economy continues to face an upside risk to inflation, fiscal and current account deficits and downside risk to growth, the Ministry of Finance said. The recent resurgence in global crude oil prices, if sustained, could “reemerge as a source of pressure on financing of both the fiscal deficit and the current account balance”, the ministry said in its monthly economic review for July.

— Prices of industrial commodities, including critical minerals and rare earth elements, have stayed elevated throughout the month. “Instances such as flooding in Chile, one of the key copper suppliers, illustrate the concentration risk embedded in India’s industrial metal supply chains,” the ministry said.

— To achieve long-term resilience and strategic leverage, swifter policy responses and their implementation are vital to encourage foreign and domestic investment in the Indian economy, it said. “Global developments related to AI and weaponisation of supply chains in general are reminders of the distance India needs to travel to achieve long-term resilience and strategic leverage… recent years have been a time for hunkering down and battening down the hatches. Coming years will be no exception,” it said. Hence, statements 1 and 2 are correct.

Why Statement 2 correctly explains Statement 1: These global developments underscore the need for India to respond swiftly with appropriate policies to enhance resilience and investment attractiveness.

Therefore, option (a) is the correct answer.

QUESTION 2

With reference to the Effective Exchange Rate, consider the following statements:

1. The Nominal Effective Exchange Rate (NEER) and Real Effective Exchange rate (REER) indices of the weighted average of the rupee’s exchange rates vis-à-vis the currencies of the country’s key trade partners.

2. The REER is a summary index that captures movements in the external value of the rupee relative to a basket of global currencies without factoring in inflation.

3. The NEER is the REER index adjusted for the inflation differentials between India and its trading partners.

How many of the statements given above are correct?

(a) Only one

(b) Only two

(c) All three

(d) None

Relevance: The concepts of NEER and REER are fundamental to understanding exchange rate management, external competitiveness, and India’s external sector, which are recurring themes in the UPSC Economy syllabus.

Explanation

— Effective exchange rates, the most widely used gauges to measure whether a currency is over or undervalued is its so-called Nominal Effective Exchange Rate (NEER) and Real Effective Exchange rate (REER) indices. These reflect the rupee’s movement against not just the dollar, but a basket of currencies of countries that account for the bulk of India’s exports and imports.

— The NEER and REER are indices similar to the consumer price index (CPI). CPI is the weighted average retail price value of a representative basket of consumer goods and services for a given month or year, relative to a fixed base period.

— The NEERs/REERs are indices of the weighted average of the rupee’s exchange rates vis-à-vis the currencies of the country’s key trade partners. The basket here comprises 40 currencies and the base year (used as a reference for comparison, with its value set at 100) is taken as 2015-16. The currency weights are derived from the share of the individual countries in India’s total foreign trade, just as the weight of each commodity in the CPI is based on its relative importance in the overall consumption basket. Hence, statement 1 is correct.

— The 40 currencies are of countries having a combined share of about 88% in India’s annual trade flows.

— The NEER, however, is a summary index that captures movements in the external value of the rupee relative to a basket of global currencies without factoring in inflation. If a currency’s nominal exchange rate falls less than the domestic inflation rate during a particular period, it is actually appreciated in “real” terms. Hence, statement 2 is not correct.

— The REER is basically the NEER index adjusted for the inflation differentials between India and its trading partners. It is, hence, a true measure of whether the rupee is undervalued, overvalued or fairly valued against the currencies of other countries, after taking into consideration both exchange rate and relative price movements. If the rupee’s nominal exchange rates stay the same, but prices in India rise faster than in other countries, the REER goes up, resulting in Indian products becoming relatively more expensive and less competitive in the world market. Hence, statement 3 is not correct.

Therefore, option (a) is the correct answer.

QUESTION 3

The Indian tea market has been in a deflationary phase over the last year. Which of the following is/are the reason for this deflationary phase?

1. Adverse weather

2. An increase in cheaper tea imports from Nepal and Kenya

3. Prolonged dry spell

Select the correct answer using the codes given below:

(a) 1 and 2 only

(b) 2 only

(c) 2 and 3 only

(d) 1, 2 and 3

Relevance: This question integrates agriculture, trade, and inflation, requiring candidates to apply economic concepts to a current affairs issue. It also highlights how commodity prices are influenced by both production conditions and import competition, a theme increasingly tested by UPSC.

Explanation

— Tea may continue to be one of the most popular beverages for Indians, but a surge in cheap imports and lower prices are prompting many to switch to lower sub-brands or purchase from the unorganised sector.

— This shift has made the past four to five quarters challenging for listed companies and larger companies, pushing them to focus on premiumisation and diversify into other product categories to offset weak performance in the tea segment.

— The overall tea market has been in a deflationary phase over the past four to five quarters, driven by a combination of factors, including adverse weather and a rise in cheaper imports. Hence, 1 is correct.

— Goodricke, for example, stated that 2025-26 was “exceptionally challenging” due to adverse weather conditions, a sharp increase in production costs, and tea markets being “largely unsupportive”.

— The adverse weather refers to the summer heatwaves flagged by industry bodies. The prolonged dry spell led to higher pest infestations in tea plantations, affecting the quality of the crop, while extreme heat also dampened consumer demand for tea. Hence, 3 is correct.

— Further, rainfall has also been erratic over the past couple of monsoons, leading to both shortages as well as landslides in the hilly areas where tea is grown. This lowered the yield of high-quality tea, reducing its cost in auction houses where major companies such as HUL and Tata Consumer source the leaf.

— An increase in cheaper tea imports from other markets such as Nepal and Kenya has also led to prices falling in the Indian market. Hence, 2 is correct.

Therefore, option (d) is the correct answer.

QUESTION 4

The ‘Section 301’ measures are related to:

a) Imposition of unilateral trade sanctions against countries engaged in unfair trade practices

(b) Restrictions on foreign direct investment in strategic sectors

(c) Anti-dumping duties imposed under the World Trade Organization framework

(d) Export subsidies provided to domestic manufacturers

Relevance: The question tests conceptual understanding of international trade policy and WTO-related issues, which are recurring themes in the UPSC Economy syllabus.

Explanation

— Federation of Indian Export Organisations (FIEO) advised exporters to maintain detailed employee data such as wage records, age verification and supplier declarations as strong labour and supply chain documentation would become a “commercial necessity” for exporters aiming to cater to the US market.

— “Strong labour and supply chain documentation will become a commercial necessity. US buyers are likely to intensify supply chain scrutiny after Section 301 measures. Exporters should maintain employee and wage records, proof of voluntary employment, age verification, contractor or subcontractor details and supplier declaration,” FEIO said.

— Section 301 refers to a provision in the US Trade Act of 1974 that allows the Office of the United States Trade Representative (USTR) to investigate and impose retaliatory tariffs on foreign countries for unfair trade practices, excess manufacturing capacity, or the use of forced labour.

Therefore, option (a) is the correct answer.

QUESTION 5

Consider the following consequences of a sustained increase in international crude oil prices:

1. Widening of Current Account Deficit.

2. Depreciation pressure on the domestic currency.

3. Increase in cost-push inflation.

4. Improvement in fiscal balance through higher import duties.

How many of the above are correct?

(a) Only one

(b) Only two

(c) Only three

(d) All four

Relevance: This question tests the conceptual link between crude oil prices and key macroeconomic indicators such as the Current Account Deficit (CAD), inflation, exchange rate, and fiscal balance. UPSC can frame questions by connecting current geopolitical developments with their impact on the Indian economy.

Explanation

— The theatre of the West Asia conflict, earlier limited to the Strait of Hormuz from the perspective of India’s crude oil imports, has now widened. Last week, the Yemen-based Houthi militia announced that it will target Saudi Arabian tankers attempting to cross the Bab al-Mandab, and indeed attacked a few ships. Like the Strait of Hormuz, the Bab al-Mandab — which connects the Red Sea to the Gulf of Aden and the Arabian Sea — is another critical chokepoint for global trade, and energy supplies in particular.

— Saudi Arabia was using the route, which is independent of the Strait of Hormuz, to export its oil, including to India as maritime traffic through the Strait of Hormuz reduced to a trickle. The immediate impact of a Houthi blockade on Saudi Arabia-linked shipping and energy supplies would be delays in oil shipments to Asia, as tankers would be forced to sail westward instead, through the Suez Canal, and then taking the circuitous route around Africa.

— Higher crude oil prices increase India’s oil import bill, leading to a widening of the Current Account Deficit (CAD). Hence, statement 1 is correct.

— A greater import bill increases demand for US dollars, putting downward pressure on the currency. Hence, statement 2 is correct.

— Costlier crude increases transportation and production expenses, causing cost-push inflation. Hence, statement 3 is correct.

— In such a case, higher import duties have no positive impact on fiscal balance. In fact, governments frequently lower fuel taxes or raise subsidies to protect consumers from rising oil costs, which can exacerbate rather than alleviate economic difficulties. Hence, statement 4 is not correct.

Therefore, option (c) is the correct answer.

Previous Daily Subject-Wise-Quiz

Daily Subject-wise quiz — History, Culture, and Social Issues (Week 159)

Daily subject-wise quiz — Polity and Governance (Week 173)

Daily subject-wise quiz —  Science and Technology (Week 173)

Daily subject-wise quiz — Economy (Week 172)

Daily subject-wise quiz — Environment and Geography (Week 172)

Daily subject-wise quiz – International Relations (Week 172)

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