BLS LLB 5 Years Sem 1 Economics 2025-26 - ATKT Set 2 75/25 Question Paper with Solutions

Green GDP is Gross Domestic Product adjusted for the environmental cost of producing it. Conventional GDP counts the output of a factory but ignores the forest cleared, the groundwater drawn down and the air polluted to produce it. Green GDP subtracts the monetary value of natural resource depletion and environmental degradation from conventional GDP:

Green GDP = GDP − (cost of natural resource depletion + cost of environmental degradation)

It is a measure of sustainable national income: how much a country could consume without leaving itself poorer in natural capital.

In India the concept was taken up by the Expert Group on Green National Accounting, chaired by Prof. Sir Partha Dasgupta, which submitted its report to the Ministry of Statistics and Programme Implementation in 2013. India has not yet adopted Green GDP as an official headline figure; it remains a supplementary framework.

NITI Aayog (National Institution for Transforming India) is the Government of India's policy think tank. It was established on 1 January 2015 by a resolution of the Union Cabinet, replacing the Planning Commission which had functioned since 1950.

It is neither a constitutional nor a statutory body: it exists by executive resolution alone.

Its composition is:

1. Chairperson: the Prime Minister.
2. Governing Council: the Chief Ministers of all States, the Chief Ministers of Delhi and Puducherry, and the Lieutenant Governors of other Union Territories.
3. A Vice-Chairperson, full-time members, part-time members, ex-officio Union Ministers and a Chief Executive Officer.

Its core function is to advise, not to allocate. Unlike the Planning Commission it does not approve State plans or release plan funds; it promotes cooperative federalism, acts as a knowledge hub, and monitors programmes.

A trade cycle (business cycle) is the recurring wave-like fluctuation in the level of output, income and employment in an economy over a period of years, moving alternately above and below the long-term trend of growth.

Its phases are:

1. Expansion (recovery and prosperity): output, employment, income, investment and prices all rise; business confidence is high.
2. Peak (boom): the economy reaches the top of the cycle; resources are fully employed, costs and prices are at their highest, and further expansion becomes difficult.
3. Contraction (recession): demand falls, output and employment decline, investment is postponed, prices soften.
4. Trough (depression): the lowest point; unemployment is at its highest and capacity lies idle.
5. Recovery: replacement investment revives, demand picks up and the cycle turns upward again.

Balance of Payments disequilibrium is a situation in which a country's autonomous receipts do not equal its autonomous payments in its transactions with the rest of the world over a given period.

In the accounting sense the BoP always balances, because every entry has a matching credit or debit. Disequilibrium refers to an imbalance in the autonomous items (trade and investment undertaken for their own sake), which then has to be met by accommodating items such as drawing down foreign exchange reserves or official borrowing.

It takes two forms:

1. Deficit (adverse) disequilibrium: payments exceed receipts; reserves fall and the currency comes under pressure.
2. Surplus (favourable) disequilibrium: receipts exceed payments.

Its main causes are a persistently high import bill, weak export growth, heavy debt servicing and volatile capital flows.

Meaning

Elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in one of the factors that determines it. It is a ratio of percentage changes, so it is a pure number with no unit.

The three kinds of elasticity

1. Price elasticity of demand (Ep): responsiveness of quantity demanded to a change in the good's own price.

Ep = percentage change in quantity demanded ÷ percentage change in price

Because demand and price move in opposite directions, Ep is negative, and the minus sign is conventionally ignored.

Its five degrees are:

It is positive for normal goods, greater than one for luxuries, between zero and one for necessities, and negative for inferior goods such as coarse cereals.

3. Cross elasticity of demand (Ec): responsiveness of demand for one good to a change in the price of another.

Ec = percentage change in quantity demanded of X ÷ percentage change in price of Y

It is positive for substitutes (tea and coffee: if coffee dearer, demand for tea rises), negative for complements (cars and petrol), and zero for unrelated goods.

Why it matters

Elasticity decides pricing strategy, the incidence of a tax, and how much revenue a government raises. A tax on an inelastic good such as petroleum raises revenue reliably and falls largely on the consumer; a tax on an elastic good drives demand away and may raise little.

M2 = M1 + Savings deposits with Post Office savings banks

M3 (Broad Money, or Aggregate Monetary Resources)

M3 = M1 + Time deposits with the banking system

M3 is the measure the RBI actually targets and reports for policy purposes.

M4

M4 = M3 + All deposits with Post Office savings banks (excluding National Savings Certificates)

The order runs from most liquid to least: M1 > M2 in liquidity, and M4 > M3 > M2 > M1 in size.

Recent change

Following the Working Group on Money Supply (1998), chaired by Dr Y. V. Reddy, the RBI additionally publishes a new set of aggregates on a residency basis, NM0, NM1, NM2 and NM3, along with three measures of liquidity, L1, L2 and L3. NM0 is reserve money or high-powered money, the RBI's own monetary liabilities.

What BRICS is

BRICS is a plurilateral grouping of major emerging economies. The acronym BRIC was coined by the economist Jim O'Neill of Goldman Sachs in 2001; the countries began meeting formally in 2006, held their first summit in 2009, and South Africa joined in 2010, making the name BRICS.

From 2024 the grouping expanded, and with Indonesia's entry on 6 January 2025 it has eleven members: Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, Saudi Arabia, the United Arab Emirates and Indonesia. India hosts the eighteenth summit at New Delhi in September 2026.

It has no charter, no secretariat and no binding decisions: it is a consultative grouping with a chair that rotates annually.

Its objectives

1. Reform of global economic governance. To secure a greater voice for developing countries in the IMF, the World Bank and the United Nations Security Council, whose voting structures still reflect 1945.

Meaning

Public revenue is the income of the government from all sources, used to finance public expenditure. It is classified into tax revenue and non-tax revenue.

A. Tax revenue

A tax is a compulsory contribution to the government for which the payer receives no direct or proportionate benefit in return. Article 265 of the Constitution provides that no tax shall be levied or collected except by authority of law.

1. Direct taxes are paid by the person on whom they are levied, so the impact and the incidence fall on the same person and the burden cannot be shifted:

• Income tax on individuals and Hindu Undivided Families
• Corporation tax on the profits of companies
• Capital gains tax and, historically, wealth tax (abolished in 2015)

2. Indirect taxes are levied on one person but the burden is shifted to another, usually the final consumer:

6. Escheat: property that passes to the State when a person dies leaving no legal heir.
7. Borrowings: internal and external loans. These are revenue in the wide sense only, because they create a future liability and must be repaid with interest.

(a) Which product has more elastic demand

Tea has the more elastic demand.

The test is the size of the response, not the size of the price change. Both prices rose by the same ₹10, but the quantity responses were completely different:

• Tea: a small price rise produced a sharp fall in customers. Quantity changed more than proportionately, so Ep > 1, which is relatively elastic demand.
• Snacks: the same price rise left demand almost unchanged. Quantity changed less than proportionately, so Ep < 1, which is relatively inelastic demand.

Why tea is the more elastic of the two:

1. Reverse the price rise on tea, or reduce it below the old price. Because tea is elastic, the rise has cut his revenue, and a lower price will bring back more than proportionately more customers.
2. Retain, and if necessary raise further, the price of snacks. Because snacks are inelastic, the higher price is already earning more revenue on nearly the same quantity.
3. Use tea as a loss leader and earn on snacks. Cheap tea brings footfall through the door; the customer who comes for tea buys the higher-margin snack. This is price discrimination by product rather than by customer.
4. Bundle them. A tea-plus-snack combo at a single price hides the snack margin inside a package the customer judges as a whole, and raises the average bill.

The reason behind the law is profit. At a higher price each bracelet yields a larger margin over cost, so it becomes worth Riya's while to work longer hours, buy more materials and take on extra help. At a lower price the margin narrows, marginal units become unprofitable, and she withdraws effort.

The assumptions ("other things equal") are that the cost of inputs, technology, the prices of other goods she could make, the number of sellers, government policy and her expectations all remain unchanged.

(b) If the price continues to rise further

Three things follow, in order:

1. In the short run, supply rises but at a decreasing rate. Riya can work longer hours and buy more silver, but her workshop, her tools and above all her own pair of hands are fixed. As she pushes output up against a fixed factor the law of diminishing returns operates, each extra bracelet costs more to make, and supply becomes progressively less elastic. Because the jewellery is handmade, this limit binds quickly.

(a) Converting population into an economic advantage

A large population is a liability when it is unskilled and unemployed and an asset when it is educated, healthy and productively engaged. The transformation is from a population burden into a demographic dividend, the growth advantage a country enjoys while the share of its working-age population is high and its dependency ratio low.

The measures required are:

1. Education and skilling. Universalise schooling, raise its quality, and expand vocational training so that the workforce is employable. India's counterparts are the Skill India Mission, the Pradhan Mantri Kaushal Vikas Yojana and the National Education Policy 2020.

Reasons for making domestic employment the priority:

1. Migration can absorb only a small fraction of a large labour force. A country with crores of unemployed cannot export its way out of unemployment.
2. Emigration of the skilled is a brain drain. The State bears the cost of educating a doctor or engineer and another country receives the return.
3. Domestic employment builds productive capacity at home: factories, skills and institutions that keep yielding output.
4. Migration is outside the country's control. Visa regimes tighten with the politics of the receiving country, so a strategy built on it is fragile.

Reasons for not rejecting migration:

1. Remittances are a large, stable inflow of foreign exchange that supports the balance of payments and raises household consumption directly. India is the world's largest recipient, receiving roughly 129 billion US dollars in 2024 according to the World Bank.
2. It relieves pressure on the domestic labour market in the short run.
3. Returning migrants bring back skills, capital and business networks.

(a) The organization and its main functions

The organization is the World Trade Organization (WTO).

It was established on 1 January 1995 under the Marrakesh Agreement, at the close of the Uruguay Round (1986 to 1994), succeeding the General Agreement on Tariffs and Trade (GATT) of 1947. Its headquarters are at Geneva, and it has 166 members accounting for roughly 98% of world trade. India is a founding member of both the GATT and the WTO.

Its main functions are:

1. Administering the covered trade agreements, which is its central task.
2. Providing the forum for trade negotiations between members.

4. Removal of non-tariff barriers: quotas and unjustified technical restrictions are disciplined.
5. A rules-based dispute settlement system, which allows a small economy to compel a larger one to comply. This is the single most valuable feature for a developing country, because bilateral bargaining would always favour the stronger party.
6. Special and differential treatment for developing countries: longer transition periods, technical assistance and greater flexibility.
7. Transparency, since members must publish their trade rules and notify changes.

An important limitation, worth stating

Since December 2019 the Appellate Body has been unable to function because appointments to it have been blocked, so the appeal tier of dispute settlement is paralysed and a party can appeal "into the void". The Doha Development Round, launched in 2001, was never concluded. The system therefore works less well than the answer above describes.

Introduction and classification

MSMEs are enterprises classified under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. The classification was made a composite criterion of investment in plant and machinery and annual turnover, with the distinction between manufacturing and service enterprises abolished, with effect from 1 July 2020. The limits were raised again in the Union Budget 2025-26, with effect from 1 April 2025:

Their importance is not in dispute: MSMEs contribute roughly 30% of India's GDP, about 45% of its exports, and employ on the order of 11 crore people, second only to agriculture.

5. Raw material and infrastructure constraints. They buy in small quantities and so pay more than large buyers, and they suffer from irregular power, poor roads and inadequate storage.

6. Shortage of skilled labour. They cannot match the wages, training or job security offered by large firms, so skilled workers leave.

7. Regulatory and compliance burden. Multiple registrations, inspections, labour law and tax compliance impose a fixed cost that a small firm bears disproportionately. GST compliance, though it simplified the tax itself, added a filing burden for very small units.

8. Competition from large firms and imports. Liberalisation exposed small units to competition from domestic large-scale industry and from cheap imports, particularly from China, without a corresponding rise in their own competitiveness.

9. Informality. A large majority of units remain unregistered, which keeps them outside the reach of credit, schemes and protection alike.

10. The COVID-19 shock. The pandemic and the lockdowns of 2020 hit MSMEs hardest, since they had the thinnest cash reserves, and many closed permanently.

Critical assessment

The schemes are numerous, but three criticisms hold. First, credit guarantees address collateral, not the underlying reluctance to lend, and disbursement has consistently lagged sanction. Second, the delayed payments problem persists despite a clear statutory right, because the remedy requires the small supplier to litigate against a customer it cannot afford to lose. Third, the benefit of every scheme flows to the registered minority, so the informal majority is untouched, and the raising of the classification limits in 2025, while welcome for growing firms, does nothing for the micro units at the bottom.

3. Employment. Agriculture absorbs the largest share of the labour force, and in the absence of alternatives it also absorbs surplus labour, which is why disguised unemployment is concentrated in it.

4. A market for industrial goods. Rural India is the market for fertiliser, tractors, pumps, two-wheelers, cement and consumer goods. Rural demand determines the fortunes of much of Indian industry, which is why a poor monsoon shows up in the sales figures of companies with no connection to farming.

5. Contribution to national income. Though its share has fallen from over 50% at independence to about 18%, agriculture remains a large component of GVA and a decisive influence on the growth rate.

6. Foreign exchange earnings. Rice, spices, marine products, cotton and tea are significant exports. India is the world's largest exporter of rice.

7. Capital formation. Agricultural surplus historically financed industrial investment, through savings, taxation and the terms of trade between agriculture and industry.

8. Source of government revenue and of transport traffic, particularly for the railways.

3. Poor quality inputs, including uncertified seed and imbalanced fertiliser use, driven by a subsidy structure that has long favoured urea over other nutrients.
4. Soil degradation, salinity and falling water tables, the accumulated cost of intensive cultivation in the Green Revolution belt.

C. Economic and general causes

1. Inadequate and costly credit at the point in the season when it is needed.
2. Defective marketing: too many intermediaries, distress sales immediately after harvest, and a small share of the consumer's rupee reaching the farmer.
3. Lack of storage and cold chains, causing large post-harvest losses.
4. Disguised unemployment: more people work on the land than the land needs, so output per worker is low even where output per hectare is not.
5. Low literacy and weak extension services, which slow the spread of better practice.

Meaning and definition

National income is the total money value of all final goods and services produced by the normal residents of a country during an accounting year.

"The labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is the true net annual income or revenue of the country, or the national dividend."
(Alfred Marshall, Principles of Economics, 1890)

In technical usage National Income = Net National Product at factor cost (NNP at FC).

The related concepts

The three methods of measurement

Because the circular flow of income shows that production = income = expenditure, national income can be measured at any of the three points, and all three should give the same figure.

1. Product method (value added or output method)

Add up the value added by every producing enterprise in the economy, sector by sector: primary (agriculture, mining), secondary (manufacturing, construction) and tertiary (services).

Value added = Value of output − Value of intermediate consumption

Precautions: count only final goods, to avoid double counting; exclude the sale of second-hand goods, since they were counted when first produced; include the imputed value of goods produced for self-consumption, such as the farmer's own grain and the imputed rent of an owner-occupied house.

2. Income method (factor income or distributive shares method)

Add up all the incomes earned by the factors of production:

National income accounting in India

The first attempt was by Dadabhai Naoroji in Poverty and Un-British Rule in India (1901). Scientific estimation began with the National Income Committee (1949) under Prof. P. C. Mahalanobis, with V. K. R. V. Rao and D. R. Gadgil as members. Estimates are now prepared by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation, formed in 2019 by merging the Central Statistical Office with the National Sample Survey Office. The current base year is 2011-12.

India uses a combination of methods: the product method for agriculture and manufacturing, the income method for services, and the expenditure method as a cross-check.

Difficulties in measurement in India

1. A large non-monetised subsistence sector, where output is consumed rather than sold.
2. A very large informal sector with no accounts.
3. Illiteracy and the absence of reliable records among small producers.
4. The black economy, which by definition escapes measurement.

Meaning

Money supply is the total stock of money in circulation held by the public at a given point of time. Three features define it:

1. It is a stock, measured at a point of time, not a flow measured over a period.
2. It is money held by the public, so it excludes money held by the government and by the banking system itself, since these are producers rather than holders of money.
3. It includes only money that can be used for transactions, which is why the measures are ordered by liquidity.

Components of money supply

The Reserve Bank of India has published four monetary aggregates since the Second Working Group on Money Supply (1977).

M1 (Narrow Money)

M4 = M3 + Total deposits with Post Office savings banks, excluding National Savings Certificates

The four run from most liquid to least, and from smallest to largest: M1 < M2 < M3 < M4 in size.

Following the Working Group on Money Supply (1998) under Dr Y. V. Reddy, the RBI additionally publishes residency-based aggregates NM0, NM1, NM2 and NM3 and three liquidity aggregates L1, L2 and L3. NM0 is reserve money, the RBI's own monetary liabilities.

High-powered money and the money multiplier

The RBI does not create the whole money supply directly. It creates reserve money (high-powered money, H): currency in circulation plus bankers' deposits with the RBI plus other deposits with the RBI. Commercial banks then multiply it by lending, since a loan creates a deposit which is itself money.

Money supply = Money multiplier × High-powered money
Money multiplier = M3 ÷ H

where M is money supply, V its velocity of circulation, P the price level and T the volume of transactions. If V and T are stable, an increase in M raises P: too much money chases too few goods and inflation follows.

Control of the money supply is therefore the core of monetary policy. Since the amendment of the RBI Act in 2016, India follows flexible inflation targeting, under which a six-member Monetary Policy Committee is charged with keeping consumer price inflation at 4%, within a band of plus or minus 2%. Its instruments are the repo and reverse repo rates, the CRR and SLR, and open market operations.

• State List: land revenue, State excise on alcohol, stamp duty, taxes on agricultural income, taxes on vehicles.
• Concurrent List: no independent taxing power of consequence; taxation entries are kept out of it deliberately, so that the two levels do not tax the same base under the same name.

Article 265 provides that no tax shall be levied or collected except by authority of law. The residuary power of taxation rests with the Union under Article 248.

2. The Goods and Services Tax: shared sovereignty

The Constitution (One Hundred and First Amendment) Act, 2016 introduced GST from 1 July 2017 and changed the structure fundamentally. Both the Union and the States now tax the same base concurrently through CGST and SGST, with IGST on inter-State supply.

The GST Council, created by Article 279A, is the joint forum which decides rates, exemptions and thresholds. It is chaired by the Union Finance Minister, with the Union having one-third of the votes and all the States together two-thirds, and decisions requiring a three-fourths majority. Neither level can now change the rate on its own, which is the clearest instance of shared fiscal sovereignty in the Indian system.

• Borrowing: the Union may borrow on the security of the Consolidated Fund under Article 292; a State may borrow within India under Article 293, but requires the Union's consent while it is indebted to the Union, which in practice is always.
• NITI Aayog, since 2015, as the forum for cooperative federalism, though it has no financial powers.

B. The role these relations perform

1. Correcting vertical imbalance: the gap between the Union's revenue capacity and the States' expenditure responsibilities is closed by devolution.
2. Correcting horizontal imbalance: the gap between richer and poorer States is narrowed by the Finance Commission's formula, which weights income distance, population, area, forest cover and demographic performance.
3. Ensuring minimum standards of service across the country, so that a citizen's access to health or education does not depend entirely on the wealth of the State they live in.

5. Horizontal disputes. Southern States argue that a formula weighted by population penalises those which successfully controlled population growth; the Fifteenth Finance Commission's shift to the 2011 census intensified this.
6. Weak devolution to the third tier. Panchayats and municipalities remain heavily dependent on transfers and have very limited own revenue, so the constitutional promise of the 73rd and 74th Amendments is only partly realised.

Conclusion

India's fiscal federalism is quasi-federal and Centre-leaning by design, and its institutions, the Finance Commission and now the GST Council, exist to reconcile that design with the States' need for resources and autonomy. It has succeeded in preventing fiscal collapse and in transferring resources towards poorer States. It has been less successful in preserving State autonomy, and the growth of cesses, conditional transfers and shared indirect taxation has moved the balance further towards the Centre than the constitutional text alone suggests.