UPSC Prelims 2021 Economy questions: topic-wise weightage
UPSC Prelims 2021 asked 19 economy questions in GS Paper I, spread over 6 topics. See the economy weightage for 2021 below, then attempt each question with the official answer and an explanation.
Economy 2021: questions by topic
- Money, banking, monetary policy and inflation7
- Fiscal policy, budget and taxation2
- External sector and international economic institutions2
- Financial markets and instruments2
- Agriculture, food security and allied sectors4
- Industry, infrastructure, poverty, employment and social sector2
Counted from the 19 questions on this page, tagged by topic in the Battle IAS PYQ bank.
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Money, banking, monetary policy and inflation 7
Consider the following statements :
- 1. The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
- 2. Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
- 3. The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
Answer (c) & explanation
Statements 1 and 3 are correct (c). The RBI Act, 1934 creates the Reserve Bank and its Central Board. Statement 1 is right: under Section 8 of the Act, the Central Government appoints the Governor and Deputy Governors. Statement 3 is right: the Governor's powers flow from the RBI Act. Statement 2 is wrong: the government's power to give directions to the RBI "in the public interest", after consulting the Governor, is in Section 7 of the RBI Act, not in the Constitution. The Constitution does not mention the RBI at all.
Notice that Section 7 was reportedly discussed for the first time in 2018, during differences between the government and the RBI. The RBI was nationalised in 1949, and it began work in 1935, with headquarters first in Calcutta.
statement 2 is true in substance but names the wrong source. Always check where a power comes from.
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Answer as per the official UPSC answer key.
With reference to 'Urban Cooperative Banks' in India, consider the following statements :
- 1. They are supervised and regulated by local boards set up by the State Governments.
- 2. They can issue equity shares and preference shares.
- 3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966.
Which of the statements given above is/are correct?
Answer (b) & explanation
Statements 2 and 3 are correct (b). Statement 1 is wrong: no local boards regulate Urban Cooperative Banks. They have dual control: the State Registrar of Cooperative Societies handles registration and management, and the RBI regulates their banking business. Statement 2 is right: the 2020 amendment to the Banking Regulation Act allowed UCBs to raise capital through equity shares, preference shares and bonds, with RBI approval. Statement 3 is right: cooperative banks came under the Banking Regulation Act through an amendment in 1966.
Notice the PMC Bank crisis of 2019, which pushed the 2020 amendment giving the RBI more power over cooperative banks. Multi-State cooperative banks are registered under the Central Registrar instead.
Answer as per the official UPSC answer key.
Which one of the following is likely to be the most inflationary in its effects?
Answer (d) & explanation
Creating new money is the most inflationary (d). Option (a) is wrong: repaying public debt returns money to lenders and does not add demand much. Options (b) and (c) are wrong: borrowing from the public or from banks only moves existing money to the government, so total money in the economy changes little. Option (d) is right: creating new money, where the central bank finances the deficit (called monetisation or deficit financing), adds fresh money without adding goods, so prices rise the most.
Notice that India ended automatic monetisation through ad hoc Treasury Bills in 1997 (agreement of 1994). The FRBM Act, 2003 barred the RBI from buying government bonds in primary auctions, with an escape clause used during COVID.
Answer as per the official UPSC answer key.
The money multiplier in an economy increases with which one of the following?
Answer (c) & explanation
The money multiplier rises with a stronger banking habit (c). The money multiplier shows how much broad money banks create from each rupee of reserve money. When people keep more money in banks and less as cash, banks have more to lend, and each loan comes back as a fresh deposit to be lent again. So option (c) is right. Options (a) and (b) are wrong: a higher CRR or SLR locks up funds, leaving less to lend, so the multiplier falls. Option (d) is wrong: population size alone does not change the multiplier.
Notice the formula in its simplest form: multiplier = 1 ÷ reserve ratio. Broad money is M3; reserve money (M0) is the RBI's own money base.
Answer as per the official UPSC answer key.
With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
- 1. Expansionary policies
- 2. Fiscal stimulus
- 3. Inflation-indexing wages
- 4. Higher purchasing power
- 5. Rising interest rates
Select the correct answer using the code given below.
Answer (a) & explanation
Items 1, 2 and 4 cause demand-pull inflation (a). Demand-pull inflation comes from too much spending chasing too few goods. Item 1 is right: expansionary policies, such as low rates, raise demand. Item 2 is right: a fiscal stimulus, such as tax cuts or more public spending, raises demand. Item 4 is right: higher purchasing power lets people buy more. Item 3 is wrong: indexing wages to inflation raises firms' costs, which is cost-push inflation. Item 5 is wrong: rising interest rates make borrowing dearer and reduce demand, so they curb inflation.
Notice cost-push causes: dearer oil, supply shocks, and higher wages. A wage–price spiral happens when rising prices push wages up, which push prices up again.
wage indexation does raise prices, but through costs. Sort each cause into demand side or cost side.
Answer as per the official UPSC answer key.
With reference to 'WaterCredit', consider the following statements :
- 1. It puts microfinance tools to work in the water and sanitation sector.
- 2. It is a global initiative launched under the aegis of the World Health Organization and the World Bank.
- 3. It aims to enable the poor people to meet their water needs without depending on subsidies.
Which of the statements given above are correct?
Answer (c) & explanation
Statements 1 and 3 are correct (c). WaterCredit was started by the non-profit Water.org, co-founded by Gary White and actor Matt Damon. Statement 1 is right: it puts microfinance tools to work, through partner lenders that give small loans to poor households for a tap connection or a toilet. Statement 3 is right: the idea is to help people meet water needs through credit they repay, not through subsidies. Statement 2 is wrong: it was not launched under the WHO or the World Bank.
Notice India's own water programmes: the Jal Jeevan Mission (2019), which aims at a tap connection for every rural home, and the Swachh Bharat Mission for toilets. SDG 6 covers clean water and sanitation.
Answer as per the official UPSC answer key.
In India, the central bank's function as the 'lender of last resort' usually refers to which of the following?
- 1. Lending to trade and industry bodies when they fail to borrow from other sources
- 2. Providing liquidity to the banks having a temporary crisis
- 3. Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
Answer (b) & explanation
Only statement 2 describes the lender of last resort (b). As lender of last resort, the RBI gives emergency funds to a basically sound bank that faces a sudden shortage of cash, so that panic does not spread to other banks and the system stays stable. The Marginal Standing Facility is one such window. Statement 1 is wrong: the RBI does not lend directly to trade or industry bodies. Statement 3 is wrong: lending to governments through ways and means advances is its role as banker to the government, not as lender of last resort.
Notice the idea came from Walter Bagehot's Lombard Street (1873): lend freely to solvent banks, against good collateral, at a penalty rate.
Answer as per the official UPSC answer key.
Fiscal policy, budget and taxation 2
Which among the following steps is most likely to be taken at the time of an economic recession?
Answer (b) & explanation
Raising spending on public projects is the likely step (b). In a recession, demand is weak, factories cut output and jobs are lost. The government tries to add demand through expansionary fiscal policy. Spending more on public works such as roads, housing and irrigation creates jobs and incomes, and those incomes are spent again (the multiplier effect). Option (a) is wrong: it pairs a tax cut (expansionary) with a rate hike (contractionary). Option (c) is wrong: it pairs a tax hike (contractionary) with a rate cut (expansionary). Option (d) is plainly contractionary and would deepen the slump.
Notice Keynes, who argued for public spending in the Great Depression. India raised capital expenditure sharply after COVID to revive growth.
options (a) and (c) each contain one correct half. In a recession, both tax and interest should move down.
Answer as per the official UPSC answer key.
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
Answer (d) & explanation
The main worry is loss of tax revenue (d). Black money is income hidden from the tax authorities, whether earned legally or illegally. All four options describe real effects, but the government's main concern is the loss of revenue from tax evasion, which shrinks its ability to spend on health, education and infrastructure, and forces honest taxpayers to carry more of the load. Options (a) and (b) describe where black money is parked, such as real estate, gold and jewellery. Option (c) describes its political misuse.
Notice the White Paper on Black Money (2012), the Black Money (Undisclosed Foreign Income and Assets) Act, 2015, and demonetisation of ₹500 and ₹1,000 notes in November 2016.
Answer as per the official UPSC answer key.
External sector and international economic institutions 2
Consider the following :
- 1. Foreign currency convertible bonds
- 2. Foreign institutional investment with certain conditions
- 3. Global depository receipts
- 4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
Answer (a) & explanation
FCCBs, FII investment with conditions, and GDRs can count as FDI (a). FDI means a lasting stake in a company. Item 1 is right: Foreign Currency Convertible Bonds turn into equity when converted, so they are counted as FDI under the rules. Item 2 is right: a foreign investor holding 10% or more of a listed company is treated as FDI, not portfolio investment. Item 3 is right: Global Depository Receipts represent shares of an Indian company held abroad. Item 4 is wrong: NRE deposits are bank deposits by non-resident Indians, a debt flow, not investment in a company.
Notice ADRs, the US-listed version of GDRs. The Arvind Mayaram Committee (2014) set the 10% line between FDI and FPI.
NRE deposits come from abroad and are large, but they are deposits, not ownership.
Answer as per the official UPSC answer key.
Consider the following statements :
The effect of devaluation of a currency is that it necessarily
- 1. improves the competitiveness of the domestic exports in the foreign markets
- 2. increases the foreign value of domestic currency
- 3. improves the trade balance
Which of the above statements is/are correct?
Answer (a) & explanation
Only statement 1 is correct (a). Devaluation is a deliberate cut in the value of the currency against foreign currencies, under a fixed or managed rate. Statement 1 is right: Indian goods become cheaper abroad, so exports become more competitive. Statement 2 is wrong: devaluation reduces, not increases, the currency's foreign value. Statement 3 is wrong because of the word "necessarily": imports such as oil become dearer, and if demand does not respond quickly, the trade deficit may first widen. This is the J-curve effect.
Notice India's big devaluations in 1966 and 1991. Note the difference: devaluation is a policy step under a fixed rate; depreciation is a market fall under a floating rate.
the word "necessarily". It turns statement 3 from possible into wrong.
Answer as per the official UPSC answer key.
Financial markets and instruments 2
Indian Government Bond Yields are influenced by which of the following?
- 1. Actions of the United States Federal Reserve
- 2. Actions of the Reserve Bank of India
- 3. Inflation and short-term interest rates
Select the correct answer using the code given below.
Answer (d) & explanation
All three influence Indian bond yields (d). A bond yield is the return investors demand for holding a bond; it moves opposite to the bond's price. Item 1 is right: if the US Federal Reserve raises rates, US bonds pay more, foreign investors sell Indian bonds, and Indian yields rise. Item 2 is right: RBI moves on the repo rate, and its bond purchases through open market operations, move yields directly. Item 3 is right: higher inflation and higher short-term rates make investors ask for a higher return on long bonds.
Notice that Indian government bonds joined JP Morgan's emerging market bond index in 2024, which drew foreign inflows. The 10-year G-Sec yield is India's benchmark interest rate.
Answer as per the official UPSC answer key.
With reference to India, consider the following statements :
- 1. Retail investors through demat account can invest in 'Treasury Bills' and 'Government of India Debt Bonds' in primary market.
- 2. The 'Negotiated Dealing System-Order Matching' is a government securities trading platform of the Reserve Bank of India.
- 3. The 'Central Depository Services Ltd.' is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange.
Which of the statements given above is/are correct?
Answer (b) & explanation
Statements 1 and 2 are correct (b). Statement 1 is right: retail investors can bid for Treasury Bills and government bonds in primary auctions through their demat accounts and stock exchanges, as non-competitive bidders. Statement 2 is right: NDS-OM (Negotiated Dealing System–Order Matching) is the RBI's electronic, screen-based platform for trading government securities. Statement 3 is wrong: CDSL was promoted by the BSE together with banks such as SBI, Bank of Baroda and HDFC Bank, not by the RBI.
Notice the RBI Retail Direct scheme (2021), which lets individuals open a gilt account directly with the RBI. India's other depository is NSDL, promoted by IDBI, UTI and NSE.
Answer as per the official UPSC answer key.
Agriculture, food security and allied sectors 4
How is permaculture farming different from conventional chemical farming?
- 1. Permaculture farming discourages monocultural practices but in conventional chemical farming, monoculture practices are predominant.
- 2. Conventional chemical farming can cause increase in soil salinity but the occurrence of such phenomenon is not observed in permaculture farming.
- 3. Conventional chemical farming is easily possible in semi-arid regions but permaculture farming is not so easily possible in such regions.
- 4. Practice of mulching is very important in permaculture farming but not necessarily so in conventional chemical farming.
Select the correct answer using the code given below.
Answer (b) & explanation
Statements 1, 2 and 4 are correct (b). Permaculture designs a farm like a natural ecosystem, with many plants and animals working together and no chemicals. Statement 1 is right: it discourages monoculture, while chemical farming relies on it. Statement 2 is right: heavy irrigation and chemical fertilisers in conventional farming can raise soil salinity, which permaculture avoids. Statement 4 is right: mulching is central to permaculture, to keep moisture in and feed the soil. Statement 3 is wrong: permaculture suits dry and semi-arid areas well, because it saves water.
Notice that the term was coined by Bill Mollison and David Holmgren in 1970s Australia. Related Indian approaches include natural farming and Subhash Palekar's zero budget natural farming.
Answer as per the official UPSC answer key.
With reference to 'palm oil', consider the following statements :
- 1. The palm oil tree is native to Southeast Asia.
- 2. The palm oil is a raw material for some industries producing lipstick and perfumes.
- 3. The palm oil can be used to produce biodiesel.
Which of the statements given above are correct?
Answer (b) & explanation
Statements 2 and 3 are correct (b). Statement 1 is wrong: the oil palm is native to West Africa, though Indonesia and Malaysia now grow most of the world's palm oil. Statement 2 is right: palm oil goes into lipsticks, perfumes, soaps, shampoos and processed food, because it is cheap and stable. Statement 3 is right: palm oil is a feedstock for biodiesel, especially in Indonesia and Malaysia.
Notice India's angle: India is the world's largest importer of palm oil and of edible oils. The National Mission on Edible Oils–Oil Palm (2021) aims to expand oil palm in the North-East and the Andaman and Nicobar Islands. Critics warn of deforestation and harm to biodiversity, as seen in South-east Asia.
today's production map points to Southeast Asia. The plant's original home is Africa.
Answer as per the official UPSC answer key.
Among the following, which one is the least water-efficient crop?
Answer (a) & explanation
Sugarcane is the least water-efficient crop (a). Sugarcane stays in the field for 10–18 months and needs about 1,500–2,500 mm of water. In India, roughly 2,000 litres or more go into one kilogram of sugar. Sunflower (b) needs only moderate water. Pearl millet (c), or bajra, is a hardy dryland crop that grows with little rain. Red gram (d), or arhar, is a deep-rooted pulse that also tolerates drought.
Notice that much of India's sugarcane is grown in water-scarce Maharashtra and Karnataka, which worsens groundwater stress. Drip irrigation can save a lot of water in sugarcane. 2023 was the International Year of Millets, which promoted water-thrifty crops such as bajra.
Answer as per the official UPSC answer key.
In the context of India's preparation for Climate-Smart Agriculture, consider the following statements :
- 1. The 'Climate-Smart Village' approach in India is a part of a project led by the Climate Change, Agriculture and Food Security (CCAFS), an international research programme.
- 2. The project of CCAFS is carried out under Consultative Group on International Agricultural Research (CGIAR) headquartered in France.
- 3. The International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) in India is one of the CGIAR's research centres.
Which of the statements given above are correct?
Answer (d) & explanation
All three statements are correct (d). Statement 1 is right: Climate-Smart Villages in Haryana, Punjab, Bihar and other States were set up under CCAFS (Climate Change, Agriculture and Food Security), an international research programme. They test farm practices that adapt to climate change and cut emissions. Statement 2 is right: CCAFS ran under the CGIAR, whose system office is in Montpellier, France. Statement 3 is right: ICRISAT at Patancheru, Hyderabad, is one of the CGIAR research centres.
Notice other CGIAR centres: IRRI (Philippines, rice), CIMMYT (Mexico, maize and wheat) and IWMI (Sri Lanka). India's own programme is NICRA (National Innovations in Climate Resilient Agriculture) of the ICAR.
Answer as per the official UPSC answer key.
Industry, infrastructure, poverty, employment and social sector 2
With reference to casual workers employed in India, consider the following statements :
- 1. All casual workers are entitled for Employees Provident Fund coverage.
- 2. All casual workers are entitled for regular working hours and overtime payment.
- 3. The government can by a notification specify that an establishment or industry shall pay wages only through its bank account.
Which of the above statements are correct?
Answer (b) & explanation
Statements 2 and 3 are correct (b). Statement 1 is wrong: the EPF scheme covers only establishments with 20 or more workers, and members earning within the wage ceiling (₹15,000 a month), so not every casual worker is covered. Statement 2 is right: labour laws on working hours and overtime apply to all workers, including casual ones. Statement 3 is right: the Code on Wages, 2019 lets the government notify that an establishment or industry must pay wages only by cheque or into the worker's bank account.
Notice the four labour codes: Wages (2019), Industrial Relations, Social Security, and Occupational Safety, Health and Working Conditions (2020). They merged 29 central labour laws and came into force in November 2025. The e-Shram portal registers unorganised workers.
Answer as per the official UPSC answer key.
Consider the following statements :
Other things remaining unchanged, market demand for a good might increase if
- 1. price of its substitute increases
- 2. price of its complement increases
- 3. the good is an inferior good and income of the consumers increases
- 4. its price falls
Which of the above statements are correct?
Answer (a) & explanation
Statements 1 and 4 are correct (a). Statement 1 is right: if a substitute gets dearer, people switch to this good. If tea costs more, demand for coffee rises. Statement 2 is wrong: if a complement gets dearer, demand falls. If petrol costs more, people buy fewer cars. Statement 3 is wrong: for an inferior good, such as coarse grain, demand falls as income rises, because people switch to better goods. Statement 4 is right: by the law of demand, a fall in a good's own price raises the quantity demanded.
Notice the exceptions to the law of demand: Giffen goods and Veblen goods (luxury status goods). Also note the difference between a movement along the demand curve (own price) and a shift of the curve (other factors).
Answer as per the official UPSC answer key.
All years by topic
Every question from 2011 to 2026, grouped by syllabus topic, with year-wise trends.