reading comprehension section 3 Detailed Explanation And More Example

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DIRECTIONS:

Read the following passage carefully and answer the questions given below it. Certain words in the passage are printed in bold to help you to locate them easily while answering some of the questions.

PASSAGE

The debt swap scheme is one among the various market based debt restructuring measures available to provide debt relief without hampering the Interest of the creditor. The basic notion of debt swap/conversion is relatively simple. The principle is that instead of continuing to make interest 1 payments on outstanding loans contracted in past at a very high rate, the debtor is able to find some other means of settling the debt which is satisfactory to both the debtor and creditor. The debt swap can be of various types, the most prominent being the debt equity swaps, or debt-to-debt swaps. Debt equity swaps are exchange of bonds or bank loans for ownership rights to equity. Such debt equity swaps have formed part of private corporations restructuring process for some time. The debt swap whether internal or external has an array of macroeconomic effects. It is to be noted that in any debt swap scheme, the debtor must surrender an asset in return for having a liability extinguished. For example, in case of debt equity swap, debt is exchanged by a claim on capital stock owned by the debtor.

In the case of external debt, if the government retires external debt by issuing domestic bonds, in a balanced budget there are no real effects beyond those created by the initial wealth effect 1 the economy will display a current account surplus, accompanied by an initial appreciation of parallel exchange rate and a high real interest rate. These effects are independent of the discounts received by the government. The practice of debt equity swap or debt to debt swap particularly in the context of external debt has given rise to active controversy. The debate covers wide ranging issues such as welfare characteristics of such swaps, their potential for reducing net capital flows, and the degree to which swap can reduce the negative incentive effects of debt overhang. Attention has also been paid on the effect of debt swap on the secondary market prices of debt. In the case of external debt, Mexico and Brazil suspended the debt conversion programme, because they can be inflationary as they put excessive pressure on the free market for foreign exchange or because swapping No foreign debt with domestic debt can be expensive. If the debt is swapped through money financing, it leads to an expansion of money supply.

If the government can run sustained deficits, the fiscal side provides a key link through which swaps can create macroeconomic disequilibrium. In a deficit situation, if the supply of bond is increased to swap the debt, and if the discounts obtained by the government due to interest rate differential are not large enough to cover the deficit, government will have to issue fresh bonds, which in turn may push up the interest rate. Finally, if the government continues to run a fiscal deficit and to avoid inflationary effects if it relies mostly on debt for bonds swapped and if this in turn leads to an accumulation of domestic debt, which the public expects will eventually be monetized, the domestic rate of inflation will immediately begin to rise. In the case of the debt swap scheme between central and state governments in India, states can restructure their debt by prepayment of high cost central debt with additional market borrowing at a lower rate of interest. Essentially, this should result in the reduction in the average cost of debt of the state government, However, that would largely depend on the volume of savings in the Interest cost in relation to the outstanding debt stock available for swapping. Despite the savings in interest cost due to debt swap, if a large gap is to be filled by additional borrowing, there is a possibility that swap induced additional market borrowing may put pressure on the interest rate. Also, in an extreme case, continuous financing of swappable debt through bond financing may fuel inflation if the holder of the bond expects that debt will eventually be monetized. It is evident from this discussion that aggressive debt restructuring proposed to reap the benefit of low interest rate regime a times may itself become the cause of hardening of future interest rates.

The following question based on reading comprehension topic of general english mcq

Questions : In order to achieve expansion of money supply the Central Government should

(a) swap foreign debts with issue of bonds.

(b) insist on State government for prepayment of debts.

(c) exchange public debts with foreign debts.

(d) convert debts through money financing.

e) Not clearly mentioned in the passage.

The correct answers to the above question in:

Answer: (e)

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Read more reading comprehension Based General English Questions and Answers

Question : 1

Which of the following will be the consequences if domestic bonds are issued in a balanced budget?

  1. A current account surplus will be displayed.
  2. The real interest rate will get appreciation.
  3. Eminent will become Independent.

a) Only (A) and (B)

b) Neither (A) nor (B) nor (C)

c) All (A). (B) and (C)

d) Only (A) and (C)

e) Only (B) and (C)

Answer: (b)

DIRECTIONS:

Read the following passage carefully and answer the questions given below. Certain words/phrases are printed in bold to help you to locate them while answering some of the questions.

PASSAGE

Since July 1991, the government of India has effectively put the liberalisation policy into practice. The drastic steps even include some administrative reforms for pruning the government agencies. Last year the Japanese business circles represented by the Ishikawa Mission called attention of their Indian counterparts to what they considered to be the major impediments in India. However, thanks to the almost revolutionary reforms put into effect by the Indian government, those impediments either have been removed or now are on their way out. This development gives a new hope for the future of economic co-operation between the two countries. At the same time, it should be borne in mind that there is a stiff competition with other countries, notably China and South-East Asian countries, in this regard. The success stories of ASEAN countries welcoming Japanese investments with adequate infrastructure are already known in India but it may be useful if further studies of Japanese joint ventures in ASEAN countries be made by Indian business circles. The coastal areas of China have initiated a very active campaign to welcome foreign economic participation.

Beyond our bilateral relationship, India's more active participation in global economy is needed. India certainly deserves a far bigger share of world trade considering its vast resources. It is strongly hoped that the Indian government's recently initiated effort of enlarging its export market would bear fruit.

India has steadfastly maintained its parliamentary democracy since independence. Considering its size, its population and its internal complexity, the overall maintenance of national integrity and political stability under parliamentary democracy is remarkable and admirable indeed. Here lies the base for the status of India in the world. By effectively implementing its economic reform with the support of public opinion, this democratic polity of India has again demonstrated its viability and resilience. At the same time, it gives hope and inspiration to the whole world which faces the difficult problem of North-South confromation.

Question : 2

The Ishikawa Mission during its visit to India emphasized on:

a) striking down revolutionary reforms.

b) need for a stiff competition.

c) need for removing policy and/or implementation hurdles.

d) future economic co-operation between Japan and India.

Answer: (c)

Japanese business circles represented by the Ishikawa Mission called attention of their Indian counterparts in what they considered to be major impediments in India.

Question : 3

How did the Indian government react to the hurdles in the way of bilateral trade between India and Japan?

a) The Japanese delegation could not forcefully argue their case.

b) Government thought it was against liberalisation policy.

c) Bureaucracy succeeded in maintaining a status quo.

d) The government, in principle, agreed for removal of these hurdles.

Answer: (d)

The Indian government put into effect revolutionary reforms to remove the hurdles.

Question : 4

Which factors may raise the inflation rate on the domestic side?

  1. If accumulated internal debts start getting monetized.
  2. If interest rates start reducing for public borrowings.
  3. If a debt swap is done through the issue of bonds in a deficit situation.

a) Only(B)

b) Either (A) or (C)

c) Only (A)

d) Only (A) and (B)

e) Both (A) and (C)

Answer: (d)

Question : 5

What will happen if government , decides to issue fresh bonds in deficit situation ?

a) The price of initial bonds will decrease.

b) The interest rates will start increasing.

c) The microeconomic equilibrium will shift to negative side.

d) This step will mess up the economy completely.

e) None of these

Answer: (b)

Question : 6

what is the suggestion me author to the State Governments?

a) Pay market debts first, thereafter think for Central Government.

b) Present a balanced budget.

c) Borrow from the market and pay Central Government immediately.

d) Swap the domestic debt with foreign debt.

e) None of these

Answer: (e)

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