CSAT Paper 2 | Comprehensive Sample Questions

Read the following passage and answer the items that follow. Your answers to these items should be based on the passage only.

Inflation is likely to remain high and moderate only towards the latter part of the year to about 7 per cent by March 2012, the Reserve Bank of India said, while warning against accepting the present inflation level as the “new normal”. “The decline in global commodity prices has not been very significant. Should the global recovery weaken ahead, commodity prices may decline further, which should have a salutary impact on domestic inflation,” the RBI said in its Annual Report for 2010-11. However, the RBI said that the U.S. Fed's policy stance “may keep the commodity prices elevated”. The U.S. Fed has indicated that it would pursue its near zero rate policy at least till mid-2013. It has also hinted at another dose of quantitative easing. Further, it said that the pass-through of the rise in global commodity prices till had been incomplete, especially in the minerals and oil space. As such, “the benefit of a moderate fall in global commodity prices on domestic price level would also be limited,” The RBI noted. If global oil prices stay at current level, further increase in prices of administered oil products will become necessary to contain subsidies. Fertilizer and electricity prices will also require an upward revision in view of sharp rise in input costs. The high and persistent inflation over the last two years has brought to the fore the limitation in arresting inflation in the absence of adequate supply response. However, it said, monetary policy still has an important role to play in curbing the second round effects of supply-led inflation. “In the face of nominal rigidities and price stickiness, there are dangers of accepting elevated inflation level as the new normal,” the RBI warned. The annual report is a statutory report of the Central Board of the Reserve Bank that covers: the assessment of the macroeconomic performance during 2010-11 and the prospects for 2011-12, and the working and operations of the Reserve Bank and its financial accounts. The RBI further said that growth was expected to decelerate but remained close to the trend of about 8 per cent in 2011-12. If global financial problems amplify and slow down global growth markedly, it would impart a downward bias to the growth projection of around 8 per cent indicated in its Monetary Policy.
“Growth prospects for the year 2011-12 seem to be relatively subdued compared with the previous year. Global uncertainties, high global oil and commodity prices, persistent inflationary pressures, rising input costs, rise in the cost of capital due to monetary tightening and slow project execution are some of the factors that are weighing on growth. However, it said that crop prospects remained good, though on a high base the growth was likely to turn out to be less than last year. Downside risks to industrial growth in 2011-12 might arise from falling business confidence, but robustness of the services sector would continue to support the growth process, the RBI said, adding there was a strong structural dimension to services sector growth in India.

Fiscal deficit
Investment may remain soft in the near term, while private consumption may decelerate. In the face of moderating demand, expenditure-switching from government consumption expenditure to public investments would help. On current assessment, the RBI said that the fiscal deficit in 2011-12 was likely to overshoot the budgeted projections. If the economy slows down beyond what is currently anticipated, the resultant revenue erosion could magnify the fiscal slippage. At the same time, “the fiscal space to support any counter-cyclical policies is more limited than what existed at the time of the global crisis of 2008.” The continuance of robust performance of exports in 2010-11 and 2011-12 so far faces downside risks. The impact of growth slowdown in the advanced economies could partly be mitigated by continued diversification of exports. The impact could, nevertheless, turn material in case the slowdown in global growth is sharp and widespread. With the U.S. and Europe constituting the bulk of Indian software exports, some impact from a slowdown in advanced economies can be expected. Several pointers suggest that the growth could still be in line with National Association of Software and Service Companies (Nasscom) target. As regards capital flows, the RBI said, the impact was more difficult to gauge. Capital flows could surge or diminish, depending upon the degree of risk aversion. On the other hand, capital flows to India could increase in spells on relative returns basis and due to large interest differentials.

A. With reference to the passage, consider the following statements :
1. RBI expects a negative growth if global financial problems amplify.
2. Fiscal deficit widens due to high inflation
Which of the statements given above is/are correct ?
(a) 1 only 
(b) 2 only
(c) Both 1 and 2 
(d) Neither 1 nor 2

B. According to the passage, what could be the obstacles for India's growth ?
1. Global uncertainties.
2. Downside risks to industrial growth and agricultural growth.
3. High inflation.
4. Service sector not performing well.
Select the correct answer from the codes given below :
(a) 1 and 3 only 
(b) 2, 3 and 4 only
(c) 1, 3 and 4 only 
(d) 1, 2, 3 and 4

C. On the basis of the passage, consider the following statements :
1. Cost of Capital increases when RBI make measures to takle inflation
2. Diversification of exports helps to reduce the impact of global crisis.
Which of the statements given above is/are correct ?
(a) 1 only 
(b) 2 only
(c) Both 1 and 2 
(d) Neither 1 nor 2

4. Which one of the following statements conveys the key message of the passage ?
(a) Accepting the present inflation level as the “new normal is not advisable.
(b) Fiscal deficit of India likely to overshoot the budgeted projections.
(c) Software export growth could still be in line with what expected.
(d) US policies can affect Indian growth

A. d
B. a
C. c
D. a
source of passage :  Hindu(August 25, 2011)