Direction for the following 7 (seven) items: Read the following five passages and answer the items (21-27) that follow. Your answers to these items should be based on the passages only.

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?

Correct Answer: The valid assumptions are 1, 3 and 5.

Let us analyze the validity of each assumption step-by-step based strictly on the logical framework provided by the passage:

1. Relying on foreign investment in the long run is not an economically sound policy:
Valid. The passage highlights that Foreign Direct Investment (FDI) is highly volatile, leads to unstable employment, and accentuates income and regional inequalities. Hence, relying on it as a primary long-term economic driver for employment is not economically sound.

2. Policies must be undertaken to reduce volatility in foreign private investment:
Invalid. The passage explicitly states that volatility in foreign investment is a "necessary consequence of their search for the highest returns." Since it is an inherent characteristic of global capital movement, the focus is not on stopping FDI's global search for returns, but rather on managing domestic economic policies to counter its negative impacts.

3. Policies must be undertaken to strengthen domestic private investment:
Valid. The passage notes that foreign private investment cannot be solely entrusted with providing stable employment due to its volatility across sectors and regions. Therefore, strengthening domestic private investment is a necessary underlying assumption to ensure stable growth and job creation.

4. Public investment should be given priority over private investment:
Invalid. While the passage points out the limitations of foreign private investment, it does not state or imply a general priority of public investment over all private investment in every sector.

5. Substantial public investment in education and health should be undertaken:
Valid. The passage mentions that technology diffusion from foreign investment is uncertain because the existing state of physical and human capital in India may prove inadequate. Building adequate human capital requires substantial public investment in core areas like education and health.

Thus, assumptions 1, 3, and 5 are valid based on the logical implications of the text.