Passage 1:
Private investment in general is volatile. Foreign private investment is more volatile because the available investment avenues are significantly greater (i.e., the entire world). Therefore, the responsibility of providing employment cannot be left to Foreign Direct Investment (FDI). The current FDI inflows are volatile over time and across sectors and regions, which is a necessary consequence of their search for the highest returns. The adverse consequences are unstable employment and an accentuation of income and regional inequalities. A probable positive consequence of foreign investment is the inflow of new technology and its subsequent diffusion. However, the technology diffusion is not at all certain because the existing state of physical and human capital in India may prove inadequate for the diffusion.

With reference to the above passage, the following assumptions have been made:
1. Relying on foreign investment in the long run is not an economically sound policy.
2. Policies must be undertaken to reduce volatility in foreign private investment.
3. Policies must be undertaken to strengthen domestic private investment.
4. Public investment should be given priority over private investment.
5. Substantial public investment in education and health should be undertaken.

Which of the above assumptions is/are valid?

Question

Passage 1:
Private investment in general is volatile. Foreign private investment is more volatile because the available investment avenues are significantly greater (i.e., the entire world). Therefore, the responsibility of providing employment cannot be left to Foreign Direct Investment (FDI). The current FDI inflows are volatile over time and across sectors and regions, which is a necessary consequence of their search for the highest returns. The adverse consequences are unstable employment and an accentuation of income and regional inequalities. A probable positive consequence of foreign investment is the inflow of new technology and its subsequent diffusion. However, the technology diffusion is not at all certain because the existing state of physical and human capital in India may prove inadequate for the diffusion.

With reference to the above passage, the following assumptions have been made:
1. Relying on foreign investment in the long run is not an economically sound policy.
2. Policies must be undertaken to reduce volatility in foreign private investment.
3. Policies must be undertaken to strengthen domestic private investment.
4. Public investment should be given priority over private investment.
5. Substantial public investment in education and health should be undertaken.

Which of the above assumptions is/are valid?

Accepted Answer

Correct Option: (b) 1, 3 and 5 Assumption 1: Valid, because the passage states that foreign private investment is volatile and its adverse consequences include unstable employment and inequalities, meaning relying on it long-term is unsound. Assumption 2: Invalid, the passage highlights volatility as an inherent characteristic of foreign private investment due to global avenues, but does not suggest policies can easily reduce this volatility. Assumption 3: Valid, since foreign investment is unreliable and private investment is volatile, strengthening domestic private investment is a logical corollary. Assumption 4: Invalid, the passage discusses private vs. foreign investment and the need for public intervention in education/health, but does not give blanket priority to public over all private investment. Assumption 5: Valid, because the passage notes that human capital and physical infrastructure (education and health) are inadequate for technology diffusion, necessitating substantial public investment there. Thus, assumptions 1, 3, and 5 are valid. Option (b) is correct.

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