Previous Year Question

The real sector of an economy comprises activities associated with the actual production, distribution and consumption of goods and non-financial services. Agriculture, manufacturing, mining, construction, transportation and trade involve real economic production.

In contrast, lending money, issuing securities and dealing in financial assets primarily belong to the financial sector of the economy.

Activity 1 constitutes the real sector. Harvesting crops is part of agricultural production. It results in actual agricultural output and contributes to the economy’s total production. Agriculture belongs to both the primary sector and the real sector.

Activity 2 constitutes the real sector. Conversion of raw cotton into fabric by a textile mill is a manufacturing activity. It transforms raw material into a new product with greater value. It is a real production activity belonging to the secondary sector.

Activity 3 does not constitute the real sector. Lending money by a commercial bank to a trading company concerns financial intermediation and credit creation. The bank provides funds through the transaction, but the principal amount of the loan does not itself represent the production of a good. Therefore, the activity belongs to the financial sector.

An important distinction is that the trading company may use the borrowed money for a real economic activity, but the activity mentioned in the question is the bank’s act of lending money.

Activity 4 does not constitute the real sector. Issuing rupee-denominated bonds overseas is an activity through which a corporate body raises resources from the financial market. Such instruments are commonly called Masala Bonds. The bond issue provides financial resources to the company, but it does not itself produce a good or a non-financial service.