E 07 Economy

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Economy Reverse Repo rate ..................................................... ..l

Contents MSF - Marginal Standing facility .............................. ..l
Economy M Market Stabilization scheme (MSS) _
Overview of Indian Economy.............................................. .. Qualitative Method ........................................................ ..l
Role of State in Economy................................................ .. _ Margin Requirements .................................................... ..l
Sectors of the Economy .................................................. .. Consumer credit Regulation .......................................... ..l
Economic systems ............................................................... .. Moral suasion ................................................................ ..l
(l) Capitalist Economy ................................................... .. -l>-I>-I>uJuJ Publici ty .................................................................... .. 1
(2) Socialist Economy ..................................................... .. Important Note ............................................................... ..l
(3) Mixed Economy ........................................................ .. Banking .............................................................................. .. 1
National Income Accounting ............................................... .. Banking in India ............................................................ .. _
VVhy to measure national income? .................................. .. Banking Structure in India ............................................. ..l
How to measure production in an economy .................... .. RBI ................................................................................ ..l
National Income Measure ............................................... .. Scheduled and Non-scheduled banks ............................. ..l
Gross Domestic Product (GDP) .................................. .. Commercial Bank .......................................................... ..l
Gross National Product (GNP) or GNI ....................... .. Scheduled Commercial Banks ....................................... ..l
NFLA (Net Factor income from abroad) .......................... .. Cooperative Banks ......................................................... ..l
Gross vs Net ............................................................... .. Diagram of banking structure ........................................ ..l
Net National Product (NNP) or NNI ........................... .. UIKJ AQKIU IKAUI->§ Operations by RBI ......................................................... ..l
Relation between Factor Cost, Base Price and Market Banking sector reforms .................................................. ..l
Price ................................................................................ .. 6 IBC ................................................................................ ..l
Economic policy .................................................................. .. 7 Basel norms ................................................................... ..l
Two types as standard procedures operated across Classification of assets ................................................... ..1
.
COllI1lI"1€S .......................................................................... . . Non-Performing Asset ................................................... ..1
.
l\/lO11€'[8.I'y pOl1C y .............................................................. . . Differentiated Banking .................................................. ..1
Fiscal policy .................................................................... .. Domestically Systematic Important Banks(D-SIB) ....... ..l
P L1bl‘1C I€C€1pt
' ................................................................... .. NBFC: Non-Banking Financial Companies ................... ..l
.
Mandates Of Ll1’11011 budget ............................................... .. Inf_ation .............................................................................. ..l
P ll . . - Q Q Q > ~ » - Q ~ - - - » - - - » » » » - » - » - - - - » - - - » » » » - » - » - - - - » - - - » » » » Q » - » . » Q Q Q - Q Q Q Q Q Q \l\l\l\l\l\l T es of Inflation .......................................................... ..l
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Non-debt capital receipts ................................................. .. Some important terms related to inflation ................. ..1
Public expenditure........................................................... .. Deflation ........................................................................ ..1
Nature of government budget.......................................... .. 000000 Inflation Tax ( sei gnories) ............................................... ..1
Fiscal consolidation ......................................................... .. Inflation Spiral ............................................................... ..1
Types of government budget ........................................... .. Inflation Accounting .......... .. 2 lu _1\O0 o ~_J-1O\ uwi uwi-lk|>IhD
Objectives of fiscal policy ............................................... .. Inflation Premium .............. .. 2 Qt
Components of budget .................................................... .. Phillips Curve: .................... .. 2 {Si
The consolidated fund of India (Art.266) ........................ .. Reflation: ................................ .. 2 {Qt
The Contingency fund of India (Art.267) ........................ .. Stagflation (recession-inflation): ................................... .. 2 O
The Public Account of India (Art.266(2)) ....................... .. Skewflation: ............................ . . 2 Q»
Other documents presented along with the budget .......... .. \O \O \O \O Inflation Targeting: ................. .. 2 Qr
Fiscal Policy ...................................................................... .. I 1 l GDP Deflator: ......................... ..
V‘
Receipts — Debt Capital Receipts .................................. .. I 1) Bottleneck Inflation: ........... ..

W
Internal Borrowings ...................................................... .. I lu r Core inflation: .................... ..

W
External Borrowings ..................................................... .. I lu > Headline Inflation ............... ..

f\
Other Liabilities: ....................................................... .. I U Cause of Inflation ................... ..

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Other Liabilities: ....................................................... .. I lu r Factors Affecting Demand ...... ..

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Deficit ........................................................................... .. I lu r Factors Affecting Supply ........ ..

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Other Similar concepts ............................................. .. I Effects of inflation on individuals .................................. .. 22

Terminologies: .............................................................. .. I Effects on production and consumption......................... .. 22
Monetary policy ................................................................ .. I Other Effects ........................... .. 22
Monetary Policy Committee ......................................... .. I Measures to control Inflation . . .. 22
Quantitative Tool .......................................................... .. I Monetary measures ............ .. 22
Bank Rate ................................................................. .. I Fiscal measures .................. .. 22
Open Market Operations ........................................... .. I Administrative Measures .... .. 22
Variable Reserve Ratios: CRR, SLR ........................ .. I Inflation Indices ...................... .. 22
Policy Repo Rate ........................................................... .. I -l>-l>-I>-l>-l>\Jl Revision In CPI: ..................... .. 23
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Synopsis IAS, 20 7, Apsara Arcade, Karolbagh, Delhi — 5 +91-9620206040
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CPI combined Components: .......................................... .. 23 Appreciation .................................................................. ..28

Financial Markets in India ................................................. .. 23 Current account.............................................................. ..28
Indian Money Market .................................................... .. 23 Capital account .............................................................. ..28
Unorganised market ...................................................... .. 23 Balance of Payment (BOP) ............................................ ..28
Organised market .......................................................... .. 23 Convertibility ................................................................. ..28
Indian Capital Market ................................................... .. 24 Convertibility in India.................................................... ..28
Instruments of Capital Markets ..................................... .. 24 Current account deficit (CAD): ..................................... ..28
Financial Institution ...................................................... .. 24 Net Income: ................................................................... ..28
Financial Regulation ..................................................... .. 24 NEER (Nominal Effective Exchange Rate) .............. ..29
Planning in India ............................................................... .. 24 REER (Real Effective Exchange Rate) ..................... ..29
Planning ........................................................................ .. 24 EFF (Extended Fund Facility) ....................................... ..29
National Planning Committee (1938) ............................ .. 24 Foreign Exchange Management Act, 1999 (FEMA) ..... ..29
The Bombay Plan (1944) .............................................. .. 24 Hard currency ................................................................ ..29
Gandhian Plan (1944) ............................................... .. 24 Hot currency .............................................................. ..29
People’s Plan (1945) ..................................................... .. 24 Heated currency ........................................................ ..29
Sarvodaya Plan (1950) .................................................. .. 24 Cheap currency .............................................................. ..29
Five-year plans after independence ............................... .. 24 1 Q Dear currency ................................................................ ..29
Functions and Responsibilities of the Planning Special drawing rights (SDR): ....................................... ..29
Commission .................................................................. .. 24 Reserve Tranche: ........................................................... ..29
lst Five year plan(l95l-56) .......................................... .. 25 India’s Top Imports ....................................................... ..29
2nd Five year plan(l956 to 1961) ................................ ..25 India’s Top Exports: ...................................................... ..30
3rd five year plan (1961 to 1966) .................................. .. 25 India’s Trade Report ...................................................... ..30
Three Annual Plans (1966- 69): Plan Holiday .............. .. 25 Special Economic Zone ................................................. ..30
4th five year plan(1969 to 1974) ................................... .. 25 GAAR (General Anti-Avoidance Rules) ....................... ..30
5th five year plan (1974-1979) ...................................... .. 25 1 Risks in foreign currency borrowings ............................ ..30
Rolling Plan (1978 — 80) ............................................... .. 25 BOT Versus BOP .......................................................... ..30
¢
6th five year plan(1980-1985) ....................................... .. 25 Foreign Investment ........................................................... .. _

7111 five year plan 1985 to 1990 ...................................... .. 25 Types of Foreign Investment: ................................... .. L
2 annual plans 1990 to 1992 .......................................... ..25 FDI ................................................................................ .. 1
8111 five year plan 1992 to 1997 ...................................... .. 25 FII 1
9111 five year plan 1997 to 2002 ...................................... .. 25 Foreign portfolio investment (FPI): .............................. .. 1
10111 five year plan 2002 to 2007 .................................... .. 25 Qualified foreign investment (QFI): ...................... .. L
llth five year plan (2007-2012): ................................... .. 25 Depository Receipts .................................................... .. _
12th five year plan(20l2-2017): .................................... .. 26 Offshore Funds ............................................................ .. 1
NITI Aayog ................................................................... .. 26 International Financial Institutions ..................................... ..32
The drawbacks of the planning adopted via PC includes:26 World Bank Group ........................................................ ..32
Indian Financial Institutions .............................................. .. 26 International Development Association (IDA) .............. ..32
NABARD ...................................................................... .. 26 Inteniational Finance Corporation (IFC) ....................... ..32
SIDBI: Small Industries Bank of India ......................... .. 26 Multilateral Investment Guarantee Agency (MIGA)...32
NHB: National Housing Bank....................................... .. 26 International Centre for Settlement of Investment Disputes
DICGC: Deposit Insurance and Credit Guarantee (ICSID ........................................................................... ..32
Corporation ................................................................... .. 27 IMF: International Monetory fund ................................. ..32
External Trade and Balance of Payment ............................ .. 27 Main Objectives of IMF ................................................ ..32
Balance of Payment and external trade ......................... .. 27 Function of Il\/1F ............................................................. ..32
Forex Reserve ............................................................... .. 27 India and Il\/IF ................................................................ ..32
Types of currency regimes ............................................ .. 27 Reports by IMF .............................................................. ..32
Fixed currency regime .............................................. .. 27 Principles guiding WTO are: ......................................... ..32
Floating currency regime .............................................. .. 27 Principles of WTO ......................................................... ..33
Managed exchange rates ............................................... .. 27 1 .National Treatment ................................................. ..33
Foreign exchange market .............................................. .. 27 2.Most Favoured Nation ............................................ ..33
Exchange rate in India ................................................... .. 27 Special and Differential Treatment ................................ ..33
Trade balance ................................................................ .. 27 WTO important Agreements ......................................... ..33
Trade policy .................................................................. .. 28 AoA (agreement on agriculture) ................................ ..33
Depreciation .................................................................. .. 28 Export Subsidies ............................................................ ..33
Devaluation ................................................................... .. 28 Market Access ........................................................... ..33
Revaluation ................................................................... .. 28 Special Products (SP) .................................................... ..33
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Special Safeguard Mechanisms (SSM) .......................... .33 Overview of Indian Economy

TRIPS ............................................................................. .33 Economics is a study of the utilization of the scarce resources
Types of intellectual property: . ...................................... .33 and choices made by the economic agents like producers,
Anti-counterfeiting Trade Agreement (ACTA) .............. .33 government for the proper allocation ofthose scarce resources.
Geographical Indication ................................................ .. 34 Thus, it is a branch of social science that deals with the
production, distribution and consumption of the goods and
services.
Economic agents: individuals or institutions that take
economic decisions, may be —Producers, Consumers,
Government, Corporations, Banks etc.
The economy of India is characterized as a developing
market economy.
It is the World's fifth-largest economy by nominal GDP and
the third largest by purchasing power parity as per IMF.
The Indian Economy is characterized as a
0 mixed economy model.
0 It is a developing market economy.
0 India is the fifth largest economy in the world.
0 It stands third in the purchasing power parity.
0 India has the lowest per-capita GDP as it has a large
population.
0 It has a high dependance on the primary sector.
0 The maximum contribution to the Indian growth and
GDP is from the service that is the tertiary sector.
Role of State in Economy
There are three major school of thoughts:
Adam Smith
0 The state shall not intervene in the economy.
0 In his work the Wealth of Nations he talks of an
Invisible Hand that let loose the economy and the
market forces will freely determine the demand and
supply.
¢ This ideology did paved Way for the free-market
economy (Laissez faire) and the capitalism.
¢ The negative fallout was lack of addressal of the
great depression (1929)
0 To prevent this fallout to become a reality India
adopted a mixed economy model.
John Maynard Keynes
0 Post Great Depression of 1929 a ‘strong state
intervention’ as suggested by Keynes helped to
mitigate the crisis.
0 He linked fiscal policy with the economic
performance.
0 Thus, Keynesian economics is used as a post-
recession strategy where the governments are
suggested for raising the investment so that the
economy grows and emerges strong.
0 The increasing expenditure of the Indian government
on the infrastructure so that the Investment increases
with it the demand too increases. Eg the National
Infrastructure Pipeline.
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Liberals & Neoliberals Economic systems

0 These are a set of reform policy as suggested by the
Intemational Monetary Fund, World Bank to the (1) Capitalist Economy
developing countries faced with economic crisis. Guided by the Adam Smith principle of "Laissez
0 This policy prescription is called for as the Faire" or open economy or free market economy
Washington Consensus by John Williamson. where not the government but the forces of the
0 This suggests that the markets can handle everything. demand and supply determines the economy.
Pushing further the goals of Liberalisation, The Factors of Production are owned by merchant
Privatisation and Globalisation. or capitalist class. The government has a role of non-
0 The Adam Smith’s call of ‘free market’ (liberalism) interference in the economy.
has taken rebirth (as in neo-liberalism). This model has wide support as it reaps the
Sectors of the Economy environment for individual success, innovation and
business activities.
Limitations faced-
Teriian Sector
There was ahnost no tool to look after those who have
(Senna) lower purchasing power.
frsdr ivazis frz:;»:v-or‘.
~d1;r.i?ior. ."uI'u'~.~ i'£'?.ll’l‘i
Negligible to total absence of welfare actions from
the state.
Scroodan Sector Widening economic inequality
111'°‘1"‘"°' °1*°°"" (2) Socialist Economy
Z!:¢l3:YYi'_‘ :omt:1.-ztauz 0! rat‘.
Based on the principles of social welfare.
Pnlan Sector The factors of production are guided by community
ibmc production
l;Z'f!C'.‘.lTi.Zz‘ forest?» 2:112:22 l_l3::'."f'» ownership. Thus individual liberty iis
compromised in this.
Economic activities in a country are divided into three broad It is not the forces of demand and supply that
sectors. determines the market.
0 Primary Sector - economic activity that exploits Limitations of the system
the natural resources like mining, agricultural The aim was to serve all, but lacked the idea ofwealth
activities, oil exploration, etc.
creation.
0 Secondary Sector- where economic activities
State used to prioritise the uses ofresources—thus the
under which the raw material extracted out of the
best uses of resources (driven by market forces) were
primary sector are processed (also called industrial
sector). denied leading to their misallocation and wastage.
¢ Tertiary Sector- economic activities where The absence of property rights lead to virtual absence
services are produced falls in this sector, such as of innovation (i.e., research and development)—a
education, healthcare, banking, communication, process of internal decay which has caught attention
etc. Experts have created two more sectors of when USSR disintegrated.
economy—quaternary and quinary that are There was further evolution of the mixed economic
subsectors of the tertiary sector. model due to this.
Quaternary Sector: it is the ‘knowledge’ sector, (3) Mixed Economy
the activities related to education, research and
It has the characteristics of both the capitalist and
development. It defines the quality of the human
socialist economy like India
resources an economy has.
Public + Private participation.
Quinary Sector: The highest level of decision
World Bank has arrived on to a conclusion that
makers falls under it. The ‘brain’ behind socio-
neither of the economic systems (market and non-
economic performance of an economy.
market) are free from flaws and the best economic
For the Stages of growth, a theory proposed by W.W. Rostow
system is the mixture of the both.
in 1960 where economies grow following five linear stages
Private sector to play those roles where invisible hand
through the three main sectors i.e., agriculture, industry and
(the motive of profit) can work properly.
services.
The economic roles played by either state or private
It is often seen that the countries moved from the stage of sector may not remain fixed for all times to come and
agrarian to service economy without much healthier may get modified as per the needs of the time.
expansion of their industrial sector. India has seen a transition Mixed economic system is not a kind of finality
from the dominance of the agriculture to services sector by which the market or non-market economic systems
late 1990s when the contribution of services was more than use.
the industrial sector. Therefore, in the mixed economy model the
distribution system was a hybrid of the former two
models of distribution—state and market.
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National Income Accounting 0 India has transactions with the rest of the world in
Income is an indicator ofprogress. To use it as a better measure the form of exports, imports loans etc.
the idea of the gross domestic product (GDP) was put forth by 0 GNP = GDP + ‘Net’ factor income from abroad.
the US economist Simon Kuznets in 1934. In calculating the GNP trans-boundary economic activities of
Why to measure national income‘? an economy is also taken into account. The items counted in
Domestic level: Get an idea about growth, economic the segment ‘Income from Abroad’ are:
prosperity, development and get a tailor-made solution to the (i) Private Remittances
problems of each region. (ii) Interest on External Loans
International level: To compare the situation of different (iii) External Grants
economies, to get an overview about the areas that need 0 Net Factor income from abroad = Income earned by
major boost and accordingly improvement. the domestic factors of production employed in the
How to measure production in an economy rest of the world — Factor income earned by the
There are four classical concepts. factors of production of the rest of the world
(1) GDP: The final value of all goods and services employed in the domestic economy.
produced within the geographical limits of a country. 0 India’s GNP is always lower than its GDP.
(2) GNP: The ultimate value of all goods and services NFIA (Net Factor income from abroad)
produced by a citizen anywhere in the world. NFIA = The total amount earned by the citizens of the country
(3) NDP: GDP — Depreciation and firms working abroad — the total amount earned by foreign
NNP: GNP — Depreciation nationals and foreign firms employed in the country.
National Income Measure GNP = GDP+ NFLA
NNP = NDP+NFIA
{=1-'=1r'.?'ii".-1" .~"i.*'i-:11" ;T‘r'.‘ Gross vs Net
0 Net = Gross - Depreciation
v Net GDP (NDP) = GDP — Depreciation
C‘.-nnarimer aiqienditii re
0 Net National Product (NNP) = GNP —
depreciation
i_ 5 | , Wages reni iIl|'u’iIIl-BI"riflS V IJEI EllI El l1:Il Il1ElI'.lE]El :1
EI‘:1 lIil]lIl Elijl jElnun
Households V Finns Net National Product (NNP) or NNI
0 It is the value of GNP after deducting depreciation of
I‘—.fT!:."|;.:'|",_’~'|1 .I'};:--‘ ,r_.T-.i‘-:;.?5"-,.-.11".-.;_fI."?
plant and machinery.
¢ NNP = GNP — Depreciation
Fig- Flow of national income 0 Net National Product (@Market Price) = Gross
Gross Domestic Product (GDP) National Product — Depreciation
0
Market value of all the final goods and 0 NNP (@Factor Cost) = NNP (@Market Price) —
services produced within a country for a given Net indirect taxes
time period. 0 Depreciation includes the ‘wear and tear’ that
0 There are three ways of calculating GDP - all of happens to the assets While the goods and services
which in theory should sum to the same amount: were being produced. Every asset depreciates in the
Gross National Product (GNP) or GNI process of their uses.
0 The Net National Product at factor cost is known as
lGROSS DOMESTIC PRODUCT (GDP) I National Income. (NCERT)
V
0 This is the purest form of the income of a nation.
i
i
_
0 While dividing the NNP by the total population of a
' V Y
nation we get the ‘per capita income’ (PCI) of that

Expenditure Income Production
method Method Method nation, i.e., ‘income per head per year’
0 The Central Statistics Office (CSO) under the
Consumption Wages Final value of
+ + all goods and
Ministry of Statistics and Program Implementation
Investment Rental rate on services defnies National Income of India as Net National
+ Capital
Government + Intermediate Income at Market Price
+ Firm Profits costs
Net Exports
0 The gross national income, previously known as

gross national product. While being conceptually
identical, it is calculated differently.
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Relation between Factor Cost, Base Price and Market Market price = Basic price + (product taxes -
Price product subsidy)
Product taxes or subsidies are paid or received on per unit of
product. Some examples of product taxes are excise tax,
+ Net Indirect Taxes sales tax, service tax and import and export duties.
Market price = Factor cost + (Production taxes —
Production subsidy) + (product taxes - product
subsidy)
Factor Cost Market price Market price = Factor cost + Net Indirect Taxes
+1 Production Taxes + l Product Taxes Net Indirect Taxes = (Production taxes —
- Production Subsidies] - Pmducr gubgidieg} Production subsidy) + (product taxes - product
subsidy)
Base Year
Basic price = Factor cost + (Production taxes — Production subsidy}
0 The base year of the national accounts is chosen to
Market price = Basic price + (product taxes - product subsidy}
enable inter-year comparisons.
lllailtct price = Factor cost + Net Indirect Taxes 0 It gives an idea about changes in purchasing
power and allows calculation of inflation-
Factor cost adjusted growth estimates.
Factor Price is total cost of all factors of production (such as 0 The last series has changed the base to 2011-12
labour, capital, land etc) used in producing goods or services. from 2004-05.
0 It is the price of the commodity from the producer’s 0 The Ministry of Statistics and Programme
side Implementation (MOSPI) is considering changing
0 Land 9 Rent of base year for GDP calculation from 2011-12
0 Capital 9 Interest to 2017-18.
0 Labour 9 Wages v In 2015, the Central Statistics Office (CSO) did
0 Entrepreneurship 9 Profit away with GDP at factor cost and adopted the
0 Factor cost is the input cost that the producer incurs international practice of GDP at market price
in the process of producing something (such as cost and the Gross Value Addition (GVA) measure to
of capital, i.e., interest on loans, raw materials, labor, better estimate economic activity.
rent, power, etc.). This is also termed as ‘factory Headline growth rate will be measured by the GDP at
price’ or ‘production cost/price’. constant market prices, which will henceforth be referred to
Basic Price as ‘GDP’ (as is the practice internationally). Earlier, growth
0 Income can be derived at two prices Constant and was measured in terms of growth rate in GDP at factor cost
Current. The difference in the constant and and at constant prices.
current prices is only that of the impact of
inflation.
0 Inflation is considered stand still at a year of the past
i.e., the ‘base year’ in the case of the constant price,
while in the current price, present day inflation is
added.
0 Current price is, the maximum retail price (MRP)
0 It is the value or amount which a producer expects
to receive from the consumer by selling one unit of
product.
Basic price = Factor cost + (Production taxes —
Production subsidy)
Basic price (producer’s price) is equal to production cost.
Where production tax and production subsidy are determined
in reference to production and don’t necessarily depend upon
the volume of actual production.
E.g. stamp duty, registration fee, land revenues, etc.
Marketprice
Also known as buyer’s price or Consumer price is a measure
of the amount at which goods or commodities are made
available to the general consumer for sale.
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Economic policy
0 Every economy goes through a cycle of ups and Fiscal policy
downs and transitional phase is always a situation of Basically, framed by the government keeping in
dilemmas. consideration the needs and demands of the economy
0 Government being the sole caretaker of the country primarily macroeconomic consideration.
and fulfilling its democratic goals retains an eagle
eye on the different economic fundamentals like Fiscal policy has been defined as ‘the policy of the government
inflation, employment, and growth etc. with regard to the level of government purchases, the level of
0 It ascertains that different stakeholder’s interest in transfers, and the tax structure.
kept intact and trade-off between different interest Fiscal policy is also defnied as the policy which handles public
groups can be balanced as per the requirement. expenditure and tax to direct and stimulate the level of
Two types as standard procedures operated across economic activity (numerically denoted by the Gross
countries Domestic Product).
It was J. M. Keynes, the first economist who developed a
Monetary policy theory linking fiscal policy and economic performance.
Framed in order to ensure circulation of money in economy Fiscal policy is also defined as ‘changes in government
from the demand side to supply side and vice versa. expenditures and taxes that are designed to achieve
So that various purposes like production activities and other macroeconomic policy goals’ (such as growth, employment,
aspects related to assistance of fiscal policy can be ensured. investment, etc.). Therefore, we say that ‘fiscal policy denotes
It is framed by the central bank of the country like RBI. the use of taxes and govemment expenditures’
Framed in order to ensure circulation of money in economy
from the demand side to supply side and vice versa. Public receipt
It is framed by the central bank of the country like RBI. Ex. Union budget, taxation norms.
The objective of monetary policy is to primarily maintain Key concepts involved in fiscal policy
price stability and keeping the objective of growth. Mandates of union budget
It ensures allocation of funds from the fniancial system. The It is also known as the annual financial statement, a
monetary policy is prepared and it ensures the ‘monetary constitutional obligation under art. 112 of Indian Constitution.
transmission. The statements of receipts and expenditure of the
Considered as the most dynamic and sensitive function of a government of India are shown under three heads of
central bank (i.e., RBI in case of India) this macroeconomic government accounts
policy is related to monetary matters—that regulates the size Public receipt
and cost of fund/money in the economic system. Receipts
Monetary policy is a bi-monthly affair announced 6 times in a Every receiving or accrual of money to a government by
financial year by the monetary policy committee (MPC) that revenue and non-revenue sources is a receipt. It includes all
came into being in 2016. incomes as well as non-income accruals of a government.
There are few types of monetary policy stances which keep Revenue receipts:
coming into media from time to time— 0 These are recurrent receipts.
(i) Neutral stance means interest rates may move either 0 These include revenue raised from tax and non-tax
way—upward or downward. sources.
(ii) Calibrated tightening means interest rates can only move 0 Ex: Tax resources: Income tax, corporation tax,
upward. corporation tax, excise duty etc.
(iii) Accommodative stance (also known as expansionary Non-Tax resources: User charges, interest receipts, interest
stance) means injection of more funds into the fmancial dividends etc.
system. Falling ‘headline inflation’ inspires RBI for it and such
a stance is aimed at expansion in lending, investment and Revenue Receipts
growth. Revenue receipts of a government are of two kirids—Tax
(iv) Contractionary stance means syphoning out of fund Revenue Receipts and Non-tax Revenue Receipts.
from the fniancial system. Such a stance is generally followed Tax Revenue Receipts This includes all money earned by the
once more than optimum fund is believed to be available in the government via the different taxes the government collects,
fniancial system. At times, it is also aimed at taming inflation i.e., all direct and indirect tax collections.
in long-term. Non-tax Revenue Receipts This includes all money earned by
(v) Hawkish stance means the contractionary stance aimed at the government from sources other than taxes. In India they
checking inflation from rising (linked to the statutory goals of are:
inflation targeting the ‘headline inflation’). To put in place the (i) Profits and dividends from its public sector undertakings
desired kind of monetary policy, RBI uses a range of (PSUs).
instruments and tools.

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(ii) Interests received by the government out of all loans 0 Recovery of loans.
forwarded by it, be it inside the country (i.e., internal lending) 0 Disiiivestment other than PSU (Public Sector Units).
or outside the country (i.e., external lending). It means this There has been a National Investment Fund (NIF) that is
income might be in both domestic and foreign currencies. created by the government to deposit proceeds from
(iii) Fiscal services also generate incomes for the government, disinvestment of PSUs. The proceeds are credited to the
i.e., currency printing, stamp printing, coinage and medals ‘Public Account of India. The fund is utilised for
minting, etc. Subscribing to the shares being issued by the Central Public
(iv) General Services also earn money for the government as Service Enterprises.
the power distribution, irrigation, banking, insurance, 0 Recapitalization of Public sector banks and
community services, etc. insurance companies.
(v) Fees, Penalties and fnies received by the govemment. 0 Investment by the government in the RRBs.
(vi) Grants which the governments receive—it is always 0 Equity infusion in various metro projects etc.
extemal in the case of the Central Government and internal in Public expenditure
the case of state governments. The different sources via which the government makes any
Revenue budget: expense be it any agenda of public welfare, infrastructure
0 Include income and expenditure incurred regularly creation, poverty reduction or driving growth.
in the running of businesses. Subsidy, construction of roads and railways etc.
0 Ex: sales, purchase, salaries, wages, and rent. Revenue expenditure:
0 Revenue Budget The part of the Budget which deals 0 It does not create any assets.
with the income and expenditure of revenue by the 0 It is incurred on maintenance and consumption of
government. the govemment.
0 Ex: Salaries, interest payments, defense,
Capital Budget the part of the Budget which deals with the 0 subsidies
receipts and expenditures of the capital by the government. Revenue Expenditure
This shows the means by which the capital is managed and the All expenditures incurred by the government are either of
areas where capital is spent. revenue kind or current kind or compulsive kind. The basic
Capital Budget: identity of such expenditures is that they are of consumptive
0 A capital budget estimates inflows and outflows on kind and do not involve creation of productive assets. They are
account of capital expenses either used in running of a productive process or running a
0 Capital expenses means those expenses which will government. A broad category of things that fall under such
be incurred for asset creation. expenditures in India are:
¢ Ex: plant & machinery, shares, fumiture etc. (i) Interest payment by the government on the internal and
1 Capital Budget the part of the Budget which deals external loans;
with the receipts and expenditures of the capital by (ii) Salaries, Pension and Provident Fund paid by the
the government. This shows the means by which the governnient-to-governrnent employees;
capital is managed and the areas where capital is (iii) Subsidies forwarded to all sectors by the government;
spent. (iv) Defence expenditures by the govemment;
Capital account receipts: (V) Postal Deficits of the govemment;
0 These are money raised through borrowing (debt) or (vi) Law and order expenditures (i.e., police & paramilitary);
sale of assets (non-debt) (vii) Expenditures on social services (includes all social sector
0 Ex: Recoveries of loan; borrowing from India and expenditures as education, health care, social security, poverty
abroad; disinvestment proceeds alleviation, etc.) and general services (tax collection, etc.);
Capital Receipts All non-revenue receipts of a government (viii) Grants given by the government to the Indian states and
are known as capital receipts. They are for investment purpose foreign countries.
and are supposed to be spent on plan-development by a Capital account expenditure:
government. 0 Expenditure made for asset creation.
The capital receipts in India include the following capital 0 Ex: Loans repaid, asset creation in infrastructure and
kind of accruals to the government: social areas
(i) Loan Recovery This is one source of the capital receipts. Nature of government budget.
(ii) Borrowings by the Government This includes all long-term Three types of government budget
loans raised by the govemment inside the country (i.e., internal Surplus budget
borrowings) and outside the country (i.e., external Deficit budget
borrowings). Balanced budget
(iii) Other Receipts by the Govemment.
Non-debt capital receipts
Following are the Components ofthe non-debt capital receipts.
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Fiscal consolidation Other documents presented along with the budget

To maintain a balance between income and expenditure side 0 Demand for grants (Art. 113), Finance Bill
in govemment budgetary process. (Art. 1 10(A)).
Types of government budget Rest other documents presented are not constitutional
(1) Zero-base budgeting Based on periodic evaluation. obligations rather those are considered legal or statutory
(2) Performance budgeting Based on the performance of the obligations under FRBM (Fiscal Responsibility and Budget
expenditure involved. Management) act. Ex. Macroeconomic Framework statement,
(3) Outcome budget Based on the output. Medium term fiscal policy cum strategy statement.
Fiscal policy is that part of government policy concerned with
raising revenue through taxation and spending programs
Whatever that seems relevant from the angle of economic
consideration from the side of Govemment of a country like
taxation policies, union budget etc comes under the ambit
of Fiscal Policy.
Objectives of fiscal policy
0 To ensure the national priorities.
0 To rationalise the effective use of limited resources,
say Resource optimization.
0 Just and effective taxation policies.
0 To ascertain the welfare of the economy.
Components of budget
Annual Financial Statement [Article 112]: This document
comprises the receipts and expenditures of the goverrnnent
of current year, previous year, and budget year in three
separate parts as.-
0 Consolidated Fund of India,
0 Contingency Fund of India
0 Public Account of India.
The consolidated fund of India (Art.266)
0 All the revenues received by the government, loans
raised by it and receipts from recoveries of loans
granted by it.
0 No amount can be withdrawn from this account
without the due authorization from the Parliament.
The Contingency fiind of India (Art.267)
0 It is placed at the disposal of the President of India
to meet the unforeseen expenditure by the
govemment pending authorization from the
Parliament.
0 Currently stands at Rs. 5000 crores.
The Public Account of India (Art.266(2))
0 Moneys held by government in trust. Ex. Provident
funds, small saving collections, income of
govemment set apart for expenditure on specific
objects.
0 Money held by government in trust. Ex. Provident
funds, small saving collections, income of
government set apart for expenditure on specific
objects.
0 Does not require parliamentary approval.
0 Requires approval if the money kept in Public
account is withdrawn from consolidated fund of
India.

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Fiscal Policy 2.Bilateral loans: Raised from foreign government

directly.
Receipts — Debt Capital Receipts Extemal Borrowings are the best way to manage fiscal deficit
Borrowings Public debts are money raised on the security of with the condition that the external loans are comparatively
consolidated fund of India and repayable out of it. cheaper and long-term. External loans are considered an
Deficit financing became an established part ofpublic finance erosion in the nation’s sovereign decision-making process.
around the world, the means of going for it were also evolved (a) External borrowing brings in foreign currency/hard
by that time. They are the ways in which the govermnent currency which gives extra edge to the govermnent spending
utilizes the amount of money created as the deficit to sustain as by this the government may fulfil its developmental
its budget for developmental or political needs. These are done requirements inside the country as well as from outside the
through a source of External Aid. country.
Types of Borrowings- (b) It is preferred over the internal borrowings due to
I Internal ‘crowding out effect’.
I External
Internal Borrowings Other Liabilities:
Money borrowed within the same country from various Money that is not borrowed directly from the people but is
sources and various instruments. Market loans by issuing available for goveinment’s expenditure purpose.
bonds to public and fniancial institutions, long-tenn, interest It is kept in Public Accounts of India. Its components are:
bearing. 0 Small Saving scheme
1. Treasury bills: Securities issued by government 0 Provident Funds
treasury, Short —term in nature, non- interest- 0 Other Accounts
bearing instrument, zero coupons, issued at a 0 Reserve funds
discount rate. Other Liabilities:
2. Funded securities: Short term treasury bills are Money not borrowed directly from people but available for
converted to long term market loans to defer the government’s expenditure purpose.
repayment. It is kept in Public Accounts of India. Components are:
3. Other Special securities issued to RBI: Bonds ¢ Small Saving scheme
issued outside goveniment’s annual borrowing 0 Provident Funds
programme. e.g. oil bonds. 0 Other Accounts
4. Ways and Means Advances: If the government ¢ Reserve funds
account balance goes negative, RBI lends short Deficit
interest-bearing advance to govemment, like an Deficit refers to the gap between receipts and expenditure.
overdraft facility. Budget Deficit
5. Special floating and other loans: Launched to raise
¢ Budget Deficit= Total expenditure — Total Receipts.
money and their interest is subject to revision
v In India, the way it is calculated it is always zero.
periodically.
The balance of total revenue receipts and total revenue
6. Securities against small savings: National Small
expenditures tums out to be negative and is known as
Savings fund under Public account of India.
revenue deficit.
7. Compensation Bonds and others: Bonds issued by
Revenue Deficit
govemment to affected persons by its policy
0 Revenue Deficit: Revenue Receipt — Revenue
decision.
Expenditure
8. Non — negotiable, non- interest-bearing securities
Effective Revenue Deficit Effective revenue deficit (ERD)
issued to International Financial Institutions:
is a new tenn introduced in the Union Budget 201l—
World Bank, Asian Development Bank.
Conventionally, ‘revenue deficit’ (RD) is the difference
Internal Borrowings come as the third preferred route of
between revenue receipts and revenue expenditures. This
fiscal deficit management. But going for it in a huge way
revenue expenditures contribute to the growth in the economy
hampers the investment prospects of the public and the
and therefore, should not be treated as unproductive in nature
corporate sector. Economy heads for a double negative
like other items in the revenue expenditures.
irnpact—lower investment and lower demands in the
Effective revenue Deficit
economy—the economy moves either for stagnation or for a
0
Effective Revenue Deficit = Revenue Deficit-
slowdown.
Grants to states/ UTs.
External Borrowings
Revenue expenditures includes all the grants which the
Money borrowed from outside the country from various
Union Government gives to the state governments and the
sources and instruments
UTs—some of which create assets (though these assets are not
1. Multilateral loans: Like Il\/IF, World bank, not
borrowed against securities

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owned by the Government of India but the concerned state The fiscal consolidation which followed in 1991 failed to give
govemments and the UTs). the desired results as there was no defnied mandate for it.
Capital Deficit There are any statutory obligation to do so. This is why the
Fiscal Deficit When balance of the government’s total receipts Fiscal Reforms and Budget Management Act (FRBMA)
(i.e., revenue + capital receipts) and total expenditures (i.e., was enacted on 26 August, 2003 to provide the support of a
revenue + capital expenditures) turns out to be negative, it strong institutional/statutory mechanism.
shows the situation of fiscal deficit. The situation of fiscal The FRBM Bill, 2000 is considered a watershed in the area of
deficit indicates that the govermnent is spending beyond its fiscal reforms in the country. Main highlights of the
means. The government is spending more than its income FRBMA, 2003 are as given below
(though in practice all receipts of the government are not 0 Gol to take measures to reduce fiscal and revenue
income. Basically, receipts are all forms of money accruing to deficit so as to eliminate revenue deficit by 31 March,
the government, be it income or borrowings). 2008 (which was revised by the UPA Govemment to
Fiscal Deficit March 31, 2009) and thereafter build up adequate
0 Budgetary deficit = Budgetary deficit + Market revenue surplus.
Borrowing. 0 Rules to be made under the Act to specify annual
Twin Deficit = Fiscal Deficit + CAD targets for the reduction of fiscal deficit (FD) and
Primary Deficit The fiscal deficit excluding the interest revenue deficit (RD) contingent liabilities and total
liabilities for a year is the primary deficit. It shows the fiscal liabilities (RD to be cut by 0.5 per cent per annum and
deficit for the year in which the economy had not to fulfil any FD by 0.3 per cent per annum).
interest payments on the different loans and liabilities. This is 0 FD and RD may exceed the targets only on the
considered a very handy tool in the process of bringing in more grounds such as national security, calamity or on
transparency in the governinent’s expenditure pattem. exceptional grounds.
Primary Deficit 0 Gol not to borrow from RBI except by Ways and
0 Primary Deficit = Fiscal Deficit- Interest Payment. Means Advances (WMAs).
Monetised Deficit The part of the fiscal deficit which was v RBI not to subscribe to the primary issue of the Gol
provided by the RBI to the govermnent in a particular year is securities from 2006-07 (it means that these
Monetised Deficit. To fmance its expenditures Govermnent of government bonds/papers will become market—
India depends on short and long-term borrowings. based instrument to raise long term funds by the
Monetary deficit = Government deficit from RBI borrowings. government).
When the budgetary proposals of a govermnent for a particular 0 Steps to be taken to ensure greater transparency in
year proposes higher expenditures than the receipts, it is fiscal operations.
known as a deficit budget. ¢ Along with the Budget and Demands for Grants, the
Other Similar concepts Go: to lay the following three statements before the
Trade deficit = Balance of Trade (Export — Import) Parliament in each fniancial year:
Revenue Shortfall = Estimated collection — Actual collection (a) Fiscal Policy Strategy Statement (FPSS);
Revenue Forgone (tax expenditure) = Revenue could have (b) Medium Term Fiscal Policy Statement
been collected by the Government if not tax exemptions. (l\/ITFPS); and
The fiscal policy of an economy has been considered as the (c) Macroeconomic Framework Statement (MFS).
building block for enabling macro-enviromnent by 39 40 41 42
economists, policymakers and the IMF. It provides stability 0 The Finance Minister to make quarterly review of
and predictability to the policy regime, and it ensures that the trends in receipts and expenditure in relation to the
national resources are allocated well. Unproductive Budget and place the review before the Parliament.
government expenditures, tax distortions and high deficits are As per the Budget, the govemment must remain committed to
considered to have constrained the Indian economy from fiscal prudence and consolidation but a time has come when
realising its fiill growth potential. At the beginning of the fiscal the working of the FRBMA needs a review—especially in the
reforms in 1991, the fiscal imbalance was identified as the context of the uncertainty and volatility which have become
root cause of the twin problems of inflation and the difficult the new nonns of global economy.
balance of payments (BoPs) position. Terminologies:
Since then, the medium-term fiscal policy stance of the Fiscal drag: It is a situation where inflation pushes income
government has been on the following lines: into higher tax bracket. The result is increase in income taxes
(i) reducing the deficits (revenue and fiscal); but no increase in real purchasing power.
(ii) prioritising expenditure and ensuring that these resulted in The restraining effect of the progressive taxation economies
intended outcomes; and feel on their expansion —fall in the total demand in the
(iii) augmenting resources by widening tax base and economy due to people moving from lower to higher tax
improving tax-compliance while maintaining moderate rates. brackets and the government tax receipts go on increasing. To

Economy
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neutralise this negative impact, governments usually increase Monetary policy

personal tax allowances. Monetary Policy is a macroeconomic policy by RBI. Framed
Fiscal neutrality: \Vhen the net effect of taxation and public in order to ensure circulation of money in economy from the
spending is neutral. demand side to supply side and vice versa by the central bank
A stance in policy making by governments when the net effect of the country like RBI. Its objective is to primarily maintain
of taxation and public spending is neutral neither encouraging price stability, Growth, and Development. It is used to
nor discouraging the demand. As for example, a balanced control inflation, interest rates, supply of money and credit
budget is the same attempt of fiscal policy when the total tax availability.
revenue equals the total public expenditure. It ensures allocation of funds from the financial system. The
Crowding out: Excessive govemment borrowing can lead to monetary policy is prepared and it ensures the ‘monetary
shrinkage of the liquidity in the market, it forces the interest transmission. The most dynamic and sensitive function of a
rates to go up which in turn affect private investment. central bank this macroeconomic policy is related to monetary
Twin deficit: Worsening of both Current Account deficit matters that regulates the size and cost of fund/money in the
(CAD) and Fiscal deficit (FD) simultaneously in the economic system. Monetary policy is a bi-monthly affair
economy. announced 6 times in a fniancial year by the monetary policy
Fiscal cliff: The fiscal cliff refers to a combination of committee (MPC) constituted by the RBI it is tasked with
expiring tax cuts and across-the-board govemment. framing monetary policy using tools like the repo rate,
reverse repo rate, bank rate, Cash Reserve Ratio (CRR) it
came into being in 2016.
Monetary Policy Committee
0 It is a statutory and institutionalized framework
under the RBI Act, 1934.
0 Ex-officio Chairman of the committee - The
Governor of RBI.
0 The committee comprises six members - three
officials of the RBI and three external members
nominated by the Government of India.
0 The MPC determines the policy interest rate (repo
rate) required to achieve the inflation target (4%).
0 The meetings of the MPC are held at least 4 times
a year.
0 The committee is answerable to the Government
of India.
0 Urjit Patel committee in 2014 recommended the
establishment of the l\/IPC.
0 It regulates the money supplies in market for which
credit control is important.
0 Credit control refers to control of lending and
deposit creating capacity of the bank these control
result in control of money supply.
The method of credit control (Instrument of monetary policy)
is of 2 type one is quantitative method, and another is
qualitative method.
There are few types of monetary policy stances which keep
coming into media from time to time—
(i) Neutral stance means interest rates may move either
way—upward or downward.
(ii) Calibrated tightening means interest rates can only move
upward.
(iii) Accommodative stance (also known as expansionary
stance) means injection of more funds into the fniancial
system. Falling ‘headline inflation’ inspires RBI for it and such
a stance is aimed at expansion in lending, investment and
growth.

Economy
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in Redefine Education
(iv) Contractionary stance means syphoning out of fund (v) Hawkish stance means the contractionary stance aimed
from the fniancial system. Such a stance is generally followed at checking inflation from rising (linked to the statutory goals
once more than optimum fund is believed to be available in the of inflation targeting the ‘headline inflation’). To put in place
financial system. At times, it is also aimed at taming inflation the desired kind of monetary policy, RBI uses a range of
in long-term. instruments and tools.
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Quantitative Tool Reverse Repo rate

0 RRR is the short-term borrowing rate at which
Bank Rate RBI borrows money from banks.
0 The bank rate is the minimum lendingl interest 0 The Reserve bank uses this tool when it feels there
rate charge by the central bank for loans of reserve is too much money floating in the banking
funds to commercial banks. The interest rate which system.
the RBI charges on its long-term lendings is known Repo Rate signifies the rate at which liquidity is injected in
as the Bank Rate. the banking system by RBI, whereas Reverse Repo rate
0 Penal rates are linked with Bank rate. signifies the rate at which the central bank absorbs liquidity
0 For example, if a bank does not maintain CRR, SLR from the banks.
as per the prescribed limit, penalty is prescribed as In practice, financial institutions operating in India park their
per bank rate. surplus funds with the RBI for short-term period and earn
I The clients who borrow through this route are the money. It has a direct bearing on the interest rates charged by
Government of India, state governments, banks, the banks and the financial institutions on their different fonns
fniancial institutions, co-operative banks, NBFCs, of loans. This tool was utilised by the RBI in the wake of over
etc. The rate has a direct impact on long term lending money supply with the Indian banks and lower loan disbursal
activities of the concemed lending bodies operating to serve twin purposes of cutting down banks losses and the
in the Indian financial system. prevailing interest rate. It has emerged as a very important tool
Open Market Operations in direction of following cheap interest regime—the general
It refers to sale and purchase of securities in the money policy of the RBI since reform process started.
market by the central bank of the country. OMOs are MSF - Marginal Standing facility
conducted by the RBI via the sale/purchase of govermnent 0 It is a special window for banks to borrow from RBI
securities (G-Sec) to/from the market with the primary aim of against approved government securities in an
modulating rupee liquidity conditions in the market. OMOs are emergency situation like an acute cash shortage.
an effective quantitative policy tool in the armory of the RBI, 0 MSF rate is higher than Repo rate.
but are constrained by the stock of govemment securities v Only scheduled commercial bank.
available with it at a point in time. v Bank can also use its SLR quota securities.
Market Stabilization scheme (MSS)
Variable Reserve Ratios: CRR, SLR 0 MSS is a monetary policy intervention by the RBI to
0 Under this method, CRR and SLR are two main withdraw excess liquidity (or money supply) by
deposit ratios. selling government securities in the economy.
¢ Which reduce or increases the idle cash balance of ¢ The MSS was introduced in April 2004.
the commercial banks. 0 MSS is used when there is high liquidity in the
Every bank is required to keep a certain percentage of its total system. The Market Stabilization Scheme (which
deposits in the form of a reserve fund in its vaults (SLR) and was abolished in 2014)
also a certain percentage with the central bank (CRR). The issued securities are government bonds and they are
Banks operating in the country are under regulatory obligation called as Market Stabilisation Bonds (MSBs).
to maintain ‘reserve ratios’ of two kinds, one of it being the Qualitative Method
cash reserve ratio (the other being ‘ statutory liquidity ratio’). Selective credit controls are used to influence specific types
Under it, all scheduled commercial banks operating in the of credit for particular purposes. They usually take the form
country are supposed to maintain a part of their total deposits of changing margin requirements to control speculative
with the RBI in cash form as the cash reserve ratio (CRR). activities within the economy.
The RBI could fix it between 3 to 15 per cent of the ‘net Margin Requirements
demand and time liabilities’ (NDTL) of the banks. RBI can prescribe margin against collateral. For instance, lend
Policy Repo Rate only 70 Rs for 100 Rs value gold, margin requirement being
0 Also known as the benchmark interest rate is the 30%. In case if RBI raises the margin requirement, customers
rate at which the RBI lends money to the banks for will be able to borrow less as prescribing to a loan will become
a short term. more expensive. In case if the margin is reduced the loan
0 When the repo rate increases, borrowing from RBI subscription will become cheaper and thus could be easily
becomes more expensive. availed.
0 The rate of interest the RBI charges from its clients Consumer credit Regulation
is the repo rate in India. 0 Refers to a personal debt taken by a consumer on the
I The Call Money Market of India (inter-bank market) purchase of goods and services for the satisfaction
operates at this rate and banks use this route for of wants.
overnight borrowings.

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0 It is a qualitative credit control measure of the Banking

central bank.
0 At the time of inflation or deflation, they regulate the Banking in India
consumer credit on a certain relative product which 0 Bank is a financial intermediary.
are affected by inflation or deflation. 0 Ensures circulation of money in economy.
0 Rationing of credit Banking Structure in India
0 The maximum amount of credit flow to a particular
sector is controlled. RBI
0 In banking, credit rationing is a situation when banks 0 It is the Central monetary authority in India.
limit the supply of loans to consumers. 0 Keeps the reserves of the commercial banks.
Moral suasion 0 Established in 1935, nationalised in 1949.
The Reserve Bank of India (RBI) uses moral suasion as a 0 Fully owned by the Government of India.
qualitative instrument of monetary policy, unlike statutory Scheduled and Non-scheduled banks
liquidity ratio or cash reserve ratio. 0 Scheduled banks are banks that are listed in the 2nd
Moral suasion is a request by the RBI to the commercial banks schedule of the Reserve Bank of India Act, 1934.
to take specific measures as per the economy's trends. For The bank’s paid-up capital and raised funds must be
instance, RBI may direct banks not to give out certain loans. It at least Rs5 lakh to qualify as a scheduled bank.
includes psychological means and informal means of selective Scheduled banks are liable for low-interest loans
credit control. from the Reserve Bank of India and membership in
Publicity clearinghouses.
0 Publicity denotes the publication of weekly or 0 They must, however, meet certain requirements,
monthly statements of assets and liabilities of such as maintaining an average daily CRR (Cash
commercial banks through periodicals and websites. Reserve Ratio) balance with the central bank at the
It generates greater transparency. rates set by it. The RBI allows Scheduled Banks to
Important Note raise debts and loans at bank rates.
0 Net Demand Liabilities - Bank accounts from which v
All commercial banks, including nationalized,
you can withdraw your money at any time like your international, cooperative, and regional rural banks,
savings accounts and current account. fall under scheduled banks. Scheduled Commercial
0 Time Liabilities - Bank accounts where you cannot Banks can be divided into: Scheduled Commercial
immediately withdraw your money but have to wait Public Sector Banks SBI and its associates
for certain period. e.g. Fixed deposit accounts. Scheduled Commercial Private Sector Banks Old
Private Banks New Private Sector Banks Scheduled
Foreign Banks in India the benefits enjoyed by
scheduled banks are often denied to non-scheduled
banks.
0 These banks have certain privileges and benefits,
such as:
o The ability to obtain a refinancing facility
from the central bank.
o Access to currency storage facilities.
o Membership in the clearinghouse is
automatic.
Commercial Bank
0 Any banking organization that deals with the
deposits and loans of business organization.
0 It can issue cheques and drafts as well as accept
money on term deposits.
0 They are guided by profit motive.
0 A commercial bank is a kind of fniancial institution
that carries all the operations related to deposit and
withdrawal of money for the general public,
providing loans for investment, and other such
activities. These banks are profit-makirig institutions
and do business only to make a profit.

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0 The two primary characteristics of a commercial SCBs come under the NABARD, the RBI and the
bank are lending and borrowing. The bank receives RCSs.
the deposits and gives money to various projects to 0Most co-operative banks are lacking in skill and
earn interest (profit). The rate of interest that a bank expertise.
offers to the depositors is known as the borrowing 0 Recruitments are politicised.
rate, while the rate at which a bank lends money is Income recognition and prudential norms that were
known as the lending rate. introduced for commercial banks in the early 1990s (under
Scheduled Commercial Banks Reserve Bank ol India
Types of Scheduled commercial banks iffrnirnl Bank iii Monriary Authority!
l
0 Public sector Banks- SBI, Bank of
Scheduled Banks Unscheduled Banks
Baroda etc.
0 Private sector Banks -ICICI Bank,
HDFC etc.
0 Foreign Banks-HSBC, Standard
Chartered Bank etc. Si I (. I
Publnfietloi Reoiooalflural Private Sector " 1‘ 8:::f'° 1"‘
0 Regional Rural Banks lianlv. Barrio Banks " Mi
\/ Established under RRB Act
1976. '1' Lenual to-operative
state Bonk O iii-er iiaiiuiiaim-d 4 1_i_"'1_15?.
\/ Jointly held by GOI (50%), O Group IL‘I\ii'.
State Govermnent (15%) and Primary En-dii
Sponsor Banks (35%). Snricim
Cooperative Banks the process of banking reforms) are still to be this sector. Co-
~/ Initially set up to supplant indigenous sources of operative banks have been in news mostly for fraudulent
rural credit, particularly money lenders today they deals.
mostly serve the needs of agriculture and allied Diagram of banking structure
activities, rural-based industries and to a lesser
extent, trade and industry in urban centres. Operations by RBI
Co-operative banks have a three-tier structure—
~/ 1. Primary Credit Societies-PCSs (agriculture or A liquidity management framework (LMF) was provisioned
urban), by the RBI in 2014 to check volatility in the inter-bank call
~/ 2. District Central Co-Operative Banks-DCCBs, and money market (CMM) and allow banks manage their needs
~/ 3. State Co-Operative Banks-SCB (at the apex of short-term capital.
level). 0 The combined repo borrowing of all banks put
UCBs Primary credit societies (PCSs) in urban areas that meet together on a day cannot be more than 1 per cent of
certain specified criteria can apply to RBI for a banking license the combined NDTL of the banks.
to operate as urban co-operative banks (UCBs). They are 0
After exhausting the option of the various repos,
registered and govemed under the co-operative societies acts banks can borrow upto 1 per cent of their NDTL
of the respective states and are covered by the Banking directly from the RBI for one day (called ovemight)
Regulation Act, l949—thus are under dual regulatory control. under the marginal standing facility (MSF).
The managerial aspects of these barrks—registration, Banking sector reforms
management, administration, recruitment, amalgamation, The govemment commenced a comprehensive reform process
liquidation, etc. are controlled by the state governments, while in the fniancial system in l992—93. There were certain
the matters related to banking are regulated by RBI. weaknesses in the banking system. In December 1997 the
Traditionally, the area of operation of the UCBs is confined to govemment did set up another committee on the banking
metropolitan, urban or semi-urban centres and caters to the sector reform under the chairmanship of M. Narasimhan to
needs of small borrowers including MSMEs, retail traders, ensure that there are fniancial sector reforms that necessitates
small entrepreneurs, professionals and the salaried class. the strengthening of the India’s fniancial system and make it
Problems of Co-operative banks play a very vital role in internationally competitive.
India’s fniancial system they have been faced with certain Narasimhan Committee I aimed at:
long-drawn problems. 1. Internal autonomy for public sector banks (PSBs)
I Regulation remains the biggest issue as they are under in their decision-making process.
dual regulatory control—the UCBs come under the 2. Greater degree of professionalism in banking
RBI and the Registrar of Co-operative Societies operation.
(RCS) of the respective states while the DCCBs and 3. Ensuring a degree of operational flexibility.

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The Narasimhan Committee-II (popularly called by the 3. The third amendment has been primarily focused upon the
Govermnent of India) handed over its reports in April 1998, revival of a CD (Corporate Debtor) by ensuring timely
that included the following major suggestions: admission and completion of the resolution process. The
(i) mergers of the PSBs and the financial institutions (AIFIs) amendment ensures that 14 days period deadline given to the
stronger banks and the DFIs (development financial NCLT for admitting or rejecting a resolution application shall
institutions, i.e., AIFIs) to be merged while weaker and be strictly adhered to. The amendment further specifying the
unviable ones to be closed. mandatory time frame of 330 days to complete the Corporate
(ii) A 3-tier banking structure was suggested after mergers. Insolvency Resolution Process (CIRP) without exception, tries
(iii) Higher norms of Capital-to-Risk—Weighted Adequacy to iiistil discipline amongst the stakeholders to avoid
Ratio (CRAR). inordinate delays in the insolvency resolution process.
(iv) Budgetary recapitalisation of the PSBs is not viable and Performance of the Code IBC boasts of a strong ecosystem
should be abandoned. perfonning much better than the previous regimes—the
(v) Legal framework of loan recovery should be strengthened debtors and creditors alike are initiating the processes under
(the govemment passed the SARFAESI (Act, 2002). the Code.
(vi) Net NPAs for all banks suggested to be cut down. Basel norms
(vii) Rationalisation of branches and staffs of the PSBs F Basel Committee on Banking Supervision is an
suggested. international committee formed in 1974 to develop
(viii) Banks’ boards should be depoliticised under RBI standards for banking regulation.
supervision. F It consists of central bankers from 27 countries
IBC and the European Union.
Govermnent/RBI to resolve the ‘twin balance sheet’ (TBS) F It is headquartered in the office of Bank for
crisis faced by the economy, Govemment decided to make the International Settlements (BIS) in Basel,
insolvency procedure effective to address the issue. The Switzerland.
lenders (banks) and borrowers (private corporate sector) both F It developed a series ofpolicy recommendations wit.
have been paying a high financial cost of country’s complex Capital risk, market risk and operational risk
and time-taking process of insolvency and bankruptcy process. known as Basel Accords.
The new Insolvency and Bankruptcy Code, 2016 (IBC) was Tier 1 capital which can absorb losses without a bank being
amended and enforced by the Government in November 2017. required to cease trading.
F The Code provides clear, coherent, and speedy Tier 2 capital absorb losses in the event of winding up, which
process for early identification of financial provide lesser degree of protection to depositors.
distress and resolution of entities if the underlying Tier 3 capital tertiary capital ofbanks which are used to meet
business is found to be viable. market risk, commodity risk and foreign currency risk.
F It suggests two options — a restructuring if the firm Classification of assets
is viable and liquidation if it is not financially F Stressed Assets: It is a broader term and comprises
viable. of NPAs, restructured loans and written off assets.
F Timeframe: 180 days after the process is initiated, F Restructured Loans: Assets/loans which have been
plus a 90-day extension — for resolving insolvency. restructured by giving a longer duration for
Amendments in the Code. repayment, lowering interest or by converting them
The Government has been proactively addressed the issue to equity.
that come up in implementation of the IBC, 2016. To ensure F Written off Assets: Assets/loans which aren’t
proper operationalisation there have been three important counted as dues, but recovery efforts are continued
amendments in it— at branch level — Done by banks to clean up their
1. The first amendment introduced in Section 29A, that deals balance books.
with the provision introduced to bar promoters from bidding F Non-Performing Assets (NPAs) are the bad loans of
for their own companies. It prevented defaulters from the banks. The criteria to identify such assets have
regaining control of their companies at a cheaper value. been changing over the tirrie. In order to follow
2. The second amendment introduced in Section 12A to international best practices and to ensure greater
provide creditors the option to withdraw insolvency transparency, the RBI considers a loan as an NPA if
application within 30 days of filing the petition. The it has not been serviced for one term (i.e., 90 days).
amendment also stated that home buyers shall be treated as This is known as ‘90 day’ overdue norm. For
financial creditors. This move was aimed at mainly two agriculture loans the period is tied with the period of
issues—frrstly, giving home buyers a voice in the insolvency the concerned crops— ranging from two crop
proceedings as they, also provide funding for projects by seasons to one year overdue norm.
making advance payments, and secondly, to discourage real F NPAs were classified into three types:
estate developers from defaulting on commitments not only to F 1. Sub-standard: remaining NPAs for less than or
banks but also to their customers. equal to 12 months;

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F 2. Doubtful: remaining NPAs for more than 12 Area Banks Wholesale and Long-Term Finance
months; and (VVLTF) banks etc.
F 3. Loss assets: where the loss has been identified by F Wholesale and long-term finance banks focused
the bank or intemal/extemal auditors or the RBI primarily on lending to infrastructure sector and
inspection, but the amount has not been written off. small, medium and corporate businesses.
Non-Performing Asset Domestically Systematic Important Banks(D-SIB)
Priority Sector Lending All Indian banks have to follow the 0 Based on the principle to too big to fail. If they fail
compulsory target of priority sector lending (PSL). The the entire economy will be clamped down.
priority sector in India are at present the sectors—agriculture, 0 Assets cross 2 % of GDP.
small and medium enterprises (SMEs), road and water 0 Ex. SBI, HDFC and ICICI Bank
transport, retail trade, small business, small housing loans (not NBFC: Non-Banking Financial Companies
more than $10 lakhs), software industries, self help groups NBFC: A Non-Banking Financial Company (NBFC) is a
(SHGs), agro-processing, small and marginal farmers, company
artisans, distressed urban poor and indebted non-institutional 0 Registered under the Companies Act, 1956
debtors besides the SCs, STs and other weaker sections of 0 Engaged in the business of loans and advances,
society. acquisition
In 2007, the RBI included five minorities— Buddhists, 0 of shares/stocks/bonds/debentures/securities
Christians, Muslims, Parsis and Sikhs under the PSL. In its issued by Government or local but does not include
new guidelines of March 2015, the RBI added ‘medium any institution whose principal business is that of
enterprise, sanitation and renewable energy’ under it. The PSL agriculture activity, industrial activity, purchase
target must be met by the banks operating in India in the or sale of any goods (other than securities)
following way: Small banks and Payment banks are established with a
(i) Indian Banks need to lend 40 per cent to the priority sector common objective of fuitheririg fniancial inclusion.
every year (public sector as well as private sector banks, both) The guidelines to set up both the banks are same
of their total lending. There is a sub-target also—18 per cent 0 The minimum capital requirement would be $100
of the total lending must go to agriculture and 10 per cent of crore.
the total lending or 25 per cent of the priority sector lending
¢ Promoter contribution would be at least 40 per cent
(whichever be higher) must be lent out to the weaker sections.
for the first five years. Excess shareholding should be
Other areas of the priority sector to be covered in the left
brought down to 40 per cent by the end of fifth year,
amount, i.e., 12 per cent of the total lending.
to 30 per cent by the end of 10th year and to 26 per
(ii) Foreign Banks (having less than 20 branches) have to fulfil
cent in 12 years from the date of commencement of
only 32 per cent PSL target which has sub-targets for the
business.
exports (12 per cent) and small and medium enterprises (10 per
v Foreign shareholding in these banks will be as per
cent). It means they need to disburse other areas of the PSL
current FDI policy.
from the remaining 10 per cent of their total lending (lesser
¢ Voting rights to be line with the existing guideline for
burden). The committee on fniancial System (CFS, 1991) had
private banks.
suggested to immediately cut it down to 10 per cent for all
0 Entities other than promoters will not be permitted to
banks and completely phasing out of this policy for the
have shareholding in excess of 10 per cent.
betterment of the banking industry in particular and the
0 The bank should comply with the corporate
economy in general. The committee also suggested to shuffle
govemance guidelines, including ‘fit and proper’
the sectors covered under PSL every three years. No follow up
criteria for Directors as issued by RBI.
has been done from the govemment except cutting down PSL
0 Operations of the bank should be fully networked and
target for the foreign banks from 40 per cent to 32 per cent
technology driven from the beginning.
(remaining same for those which have less than 20 branches).
Small Banks
Meanwhile, some new areas have been added to the PSL.
The purpose of the small banks will be to provide a whole
Differentiated Banking
F The banks which could be differentiated on the suite of basic banking products such as deposits and supply of
credit, but in a limited area of operation.
account of capital requirement, scope of activities
The objective of the Small Banks to increase financial
and serve the needs of a certain demographic
inclusion by provision of savings vehicles to under-served and
segment of the population are called as
unserved sections of the population, supply of credit to small
Differentiated Banks or Niche Banks.
F The idea of Differentiated Bank was given by farmers, micro and small industries, and other unorganised
Nachiket Mor Committee 2014, for Financial sector entities through high technology low-cost operations.
Other features of the small banks are as follows:
Inclusion.
F It can be classified as Payment Banks, Small (i) Resident individuals with 10 years of experience in banking
and finance, companies and Societies will be eligible as
Finance Banks, Regional Rural Banks, Local

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promoters to set up small banks. NBFCs, microfrnance Inflation

institutions (MFIs), and Local Area Banks (LABs) that can 0 Inflation refers to a sustained/continuous rise in the
convert their operations into those of a small bank. Local focus general price level of goods and services in an
and ability to serve smaller customers will be a key criterion economy over a period of time.
in licensing such banks. Types of Inflation
(ii) For the initial three years, prior approval will be required Different Inflations Based on Rate of Rise in Prices
for branch expansion. 0 Creeping Inflation or Low Inflation
(iii) The area of operations would normally be restricted to I Price rise at very slow rate (less than 3%)
contiguous districts in a homogenous cluster of states or union I Regarded safe and essential for economic
territories so that the Small Bank has a ‘local feel’ and culture. growth
(iv) The bank shall primarily undertake basic banking 0 Walking or Trotting Inflation
activities of accepting deposits and lending to small farmers, I Price rise moderately at the rate of 3% to
small businesses, micro and small industries, and unorganised 7%
sector entities. 0 Running inflation
(v) The promoters other financial and non-fmancial service I Rapid price rise at a rate 10-20%
activities should be distinctly ring-fenced and not co-iningled 0 Hyperinflation or Runaway or Galloping
with banking business. inflation
(vi) A robust risk management framework is required and the I The price rise is at very fast rate 20-100%
banks would be subject to all prudential norms and RBI I It brings total collapse ofmonetary system
regulations that apply to existing commercial banks, including Some important terms related to inflation
maintenance of CRR and SLR.
(vii) In view of concentration of area of operations, the Small Deflation
Bank would need a diversified portfolio of loans, spread over 0 If general level of prices is falling over a period.
its area of operations. 0 Also referred as disinflation means a reduction in
Payments Banks The objective of payments banks is to the level of national income and output in policy
increase financial inclusion by providing small savings terms.
accounts, payment/remittance services to migrant labor, low-
¢ Inflationary Gap: Excess of total government
income households, small businesses, other unorganized
spending above national income (i.e. fiscal deficit).
sector entities and other users by enabling high volume-low
¢ Deflationary Gap: Shortfall in total spending of the
value transactions in deposits and payments/remittance
government over the national income (fiscal
services in a secured technology-driven environment.
surplus).
v Those who can promote a payments bank can be a
Inflation Tax (seignories)
non-barik PPIs, NBFCs, corporate’s, mobile
0 Inflation erodes the value of money and the people
telephone companies, super market chains, real sector
who hold the money suffer in the process. It reduces
cooperatives companies and public sector entities.
the purchasing power of the money. It seems that a
Even banks can take equity in Payments Banks.
general rise in the prices of the goods and the
0 Payments Banks can accept demand deposits (only
services puts an additional pressure on the pockets
current account and savings accounts). They would
of the people and that it’s a tax been paid to the
initially be restricted to holding a maximum balance
govemment.
of ?100,000 per customer. Based on performance, the
0 As the govemment is the authority of printing and
RBI could enhance this limit.
circulating money in economy (as in deficit
0 The banks can offer payments and remittance
financing)
services, issuance of prepaid payment instruments,
Inflation Spiral
intemet banking, functioning as business
0 A situation where “wages push prices up and
correspondent for other banks.
prices pull wages up”.
0 As in the case of small banks, other fniancial and non-
0 The cause-and-effect relationship between rising
fmancial services activities of the promoters should
wages and rising prices, or inflation
be ring-fenced.
0 The wage-price spiral suggests that rising wages
0 The Payments Banks would be required to use the
increase disposable income raising the demand for
word ‘Payments’ in its name to differentiate it from
goods and causing prices to rise.
other banks.
0 Rising prices increases the demand for higher
I No credit lending is allowed for Payments Banks.
wages, which leads to higher production costs and
I The float funds can be parked only in less than one
further upward pressure on prices creating a
year G-Secs. By April 2020, a total of 6 Payment
conceptual spiral.
Banks were operating in the country.

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Inflation Accounting takes some economic policy decisions to revive the

A situation where due to inflation the profit of economy from recession, certain goods see sudden
corporates gets overstated. and temporary increase in their prices, such price
A term popular in the area of corporate profit rise is also known as reflation.
accounting. Basically, due to inflation the profit of Stagflation (recession-inflation):
firms/companies gets overstated. When a firm 0 A situation in economy when inflation and
calculates its profits after adjusting the effects of unemployment both are at very high levels.
current level of inflation, this process is known as 0 High inflation and low growth. As the economy is
inflation accounting. Such profits are the real profit passing through the cycle of stagnation (i.e., long
of the fnm which could be compared to a historic period of low aggregate demand in relation to its
rate of inflation (inflation of the base year), too. productive capacity) and the government shuffles
Inflation Premium with the economic policy, a sudden and temporary
Bonus brought to borrowers due to inflation. price rise is seen in some of the goods—such
Rising inflation premium shows depleting profits of inflation is also known as stagflation.
the lenders. 0 Stagflation is basically a combination of high
To calculate the real cost a borrower is paying on its inflation and high growth.
loan, the nominal rate of interest is adjusted with the Skewflation:
effect of inflation and thus the interest rate we get is 0 Inflation in ceitairi category of goods and services.
known as the real interest rate.
Real interest is always lower than the nominal Inflation Targeting:
interest rate, if the inflation is taking place—the 0 Official target range done by central bank to
difference is the inflation premium. stabilize inflation.
At times, to neutralise the effects of inflation 0 Fonnally amiounced by the GOI and RBI (4+/-2%).
premium, the lender takes the recourse to increase 0 The announcement of an official target range for
the nominal rate of interest. inflation is known as inflation targeting. It is done
Phillips Curve: by the Central Bank in an economy as a part of
It shows relationship inverse relationship between their monetary policy to realize the objective of a
inflation and unemployment. stable rate of inflation and also to maintain price
The curve suggests that lower the inflation, higher the stability, while keeping in mind the objective of
unemployment and higher the inflation, lower the growth.
unemployment. ¢ The RBI will aim to bring CPI-C Inflation below
Inflation 6 per.
Phillips Curve
rate % 0 they have an unwavering impact on the macro-
8% financial conditions.
7% The RBI shall be seen to have failed to meet the target if
6%
inflation is:
(i) More than 6 per cent for three cons-ecutive
5% . . . . . . .. B
0
quarters for the fmancial year.
4%
(ii) Less than 2 per cent for three cons-ecutive
3% quarters.
A
2% ~ u Q u Q Q u Q u Q u Q ¢ u ¢ u 0 u
0
If the RBI fails to meet the target it shall set out in a report to
0
0
the Gol:
u
0
o
0
0
c
3% 4% 5% 6% 7% 8% Unemployment Rate% (i) the reasons for its failure to achieve the target
iwmtecoiioriiicshelporg
under set in this agreement;
Reflation (ii) remedial actions proposed to be taken by the
Situation deliberately brought by the government RBI; and
to reduce unemployment. (iii) an estimate of the time-period within which the
It is done by Increasing the demand by going for target would be achieved pursuant to timely
higher levels of economic growth. implementation of proposed remedial actions.
Governments go for higher public expenditures, tax Any dispute regarding the interpretation or
cuts, interest rate cuts, etc. implementation of the agreement to be resolved between
Reflation can also be understood from a different the Govemor, RBI and the Gol. This way India joined the
angle—when the economy is crossing through the club of inflation targeting countries such as USA, UK,
cycle of recession (low inflation, high European Union, Japan, South Korea, China, Indonesia
unemployment, low demand, etc.) and govemment and Brazil. It was New Zealand which went for inflation
targeting in 1989 for the first time in the world.
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GDP Deflator: Headline Inflation

Ratio of GDP at current prices and GDP at constant prices. A 0 It includes all aspects within an economy that
better measure of price behavior since it covers all good and experience inflation.
services. 0 It is not adjusted by removing the\ highly volatile
0 Base Effect: effect of base year on inflation. figures like the food articles and energy.
0 This is the ratio of the GDP at current prices to that 0 It is closely related to shifts in the cost of living.
of the constant prices. It is derived by using the 0 It is reported through the Consumer Price
following fonnula— GDP Deflator = GDP at Index (CPI).
Current Prices + GDP at Constant Prices ¥ 100 This Cause of Inflation
shows the increase in the value of GDP due to Demand Pull Inflation
increase in inflation in between the period —base 0 Arises due to higher demand for goods and services.
year (i.e., the year of constant prices) and the current 0 When increase production lags behind the increase
year. in money supply.
0 This is why it is used as a measure of inflation (also 0 Due to rise in income, money supply, change in
known as ‘implicit price deflator’).Though, taste.
countries use inflation indices to measure inflation, 0 It is too much money chasing too few goods.
these indices are not able to capture all goods and Cost Push Inflation
services produced by them. 0 Prices rise due to increased input cost like raw
0 In case of India, while services are not included in material, wages etc.
the wholesale price index (WPI), the consumer price Note: Both are affected by forces of demand and supply
index (CPI) contains only those goods and services 0 Pre -1970 era — Demand Pull Inflation (mismatch
which households purchase for consumption (such between demand and supply).
as food, cloth, health, education, etc.) and misses 0 Post-1970 era-Demand Pull and cost Push Inflation
several other goods and services (such as (related to of money extra creation in economy like
intennediate goods, services required by firms, etc.).
deficit financing) both.
Since the deflator covers the entire range of goods
Factors Affecting Demand
and services produced in the economy, it is seen as
¢ Increase in money supply
a more comprehensive measure of inflation.
o It induces people to purchase more goods
Bottleneck Inflation:
and services.
0 Structural Inflation With few exceptional years,
o Therefore, an increase in demand.
India has been facing the typical problem of
¢ Increase in Disposable income
bottleneck inflation (i.e., structural inflation) which
o It leads to higher spending on the parts of
arises out of shortfalls in the supply of goods, a
households.
general crisis of a developing economy, rising
o It is also increased by the fact of the
demand but lack of investible capital to produce the
increase in the purchasing power parity.
required level of goods. Whenever the government
0 Cheap monetary policy
managed to go for higher growths by managing
o It means loan availability at low interest
higher investible capital it had inflationary pressures
rate done in order to increase the demand.
on the economy
o Leads to more investment in capital
0 Thus, the supply-side mismatch remained a long-
goods. And further contributes in the
drawn problem in India for higher inflation. After
growth and development.
some time even if the government managed higher
0 Increase in Public Expenditure
expenditure, most of it went to the non-
o It leads to deficit budget.
developmental areas, which did show low growth
0 Repayment of Public Debt
with higher inflation—signs of a stagnating
o It leaves public with more money.
economy.
o It induces people to spend more
Core inflation:
Factors Affecting Supply
0 Based on inclusion or exclusion of the goods and
0 Shortages of Factors of production
services while calculating inflation.
I Shortage of land, labor and capital
0 Excludes food articles and energy.
increases the cost of production
0 Westem Borrowed concept.
0 Industrial Disputes
0 Since 20l5—l6, a new core-core inflation is also
I It leads to strike or lay off thus affecting
measured by India which excludes food, fuel &
production
light, transport and communication
I It results in increased prices
0 Natural Calamities

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0 Artificial Scarcities 0 Administered price system and subsidy from the

I Increase in Exports government.
I Leads to shortage of goods in domestic FiSCfll m€aSlll‘€S
price These are the measures adopted by the government
0 International Factors Reduction in unnecessary Expenditure
I Oil price hike, shortage in production of I It means less demand from govemment
commodities side.
I It leads to higher import price. I It brings down the price level.
Effects of inflation on individuals I Aim is to reduce the fiscal deficit.
The effect of inflation varies it is and stands different for Increase in Direct Taxes
different individuals as some benefit from it and there are I It reduces the disposable income available
few who loose. with people.
Redistribution of income and wealth I It means low demand from household.
0 Debtors Vs Creditors Decrease in Indirect Taxes
o Debtor is gainer and creditor are loser. I Reduction in taxes like excise duty.
0 Producers Vs Consumers I It brings the prices down.
o The producers gain and consumer lose. I Increases production and further
0 Flexible income group Vs Fixed income group investment.
o The salaries of flexible income group get Surplus Budget
adjusted. I It means less expenditure than receipts.
o The purchasing power of fixed income group I It reduces money supply and government
reduces. demand for goods and services.
0 Debentures or Bond holders and Savers Vs Trade measures
Equity holders I It refers to export and import of good and
o The bond issuers gain, and bond holders lose. services.
o In inflationary situation companies earn more I Reduction in import duty leads to higher
profit. supply.
0 The equity holders earn more income. I It brings down the price.
Effects on production and consumption Administrative Measures
0 It may curtail the amount of production as price Rational Wage Policy: It keeps the cost of
will be high so less demand. production under control.
¢ The producers reduce the quality or quantity to Price control
maintain the same price in package. I By fixing maximum price limits.
0 It leads to less production and consumption. I Administered price system and subsidy
Other Effects from the govemment.
0 Balance of Payment (BoP) Rationing: During short supply it keeps demand
0 High prices reduce the export and under control.
increases import. Inflation Indices
o It results in unfavorable BoP. VVholesale Price Index (VVPI)
0 Exchange Rate Released by: Office of Economic advisor to the
o High import and low export mean high government of India (DIPP, Ministry of commerce
demand for foreign currencies. and Industry).
o This depreciates domestic currency. Calculates inflation at the wholesale level.
0 Social and Political arises only when the inflation Base Year:20l 1-12
goes beyond control. It constitutes three major groups: Primary articles,
Measures to control Inflation Fuel and Power, Manufactured goods.
It Does not include services.
Monetary measures Consumer Price Index (CPI)
Decided on by the RBI to make the loans expensive and for It calculates inflation at the consumer level. It is
that come up with a hawkish stance and a tight monetary compiled by Labour Bureau.
policy. o CPI-IVV (Industrial workers): Base
Credit Control year:2001.
0 Price can be controlled by fixing maximum price o CPI-RL (Rural Labour): Base year: 1983
limits. o CPI-AL (Agricultural labour): Base
year: 1986-87

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Revision In CPI: Financial Markets in India

0 In 2011 GOI announced a new CPI
0 CPI-Rural, CPI-Urban and CPI- Combined Financial
0 Base Year:2012
Long Term, M a r ket Short Term,
0 Released by: NSO, MoSPI Governed by SE8! Governed By RBI
CPI combined Components: I I l
I Food and Beverages — 49.17%
0 Housing — 9.77% Capital Money
0 Fuel and Light — 9.49 % Market Market
Clothing and Footwear etc. ~ 31% New 5°‘“"“e’
Issued
i
Primary Secondary issuedsewriw

Market Market 111111
The market where the transactions take place
between fund scarce and firnd surplus groups.
Two categories: Short-term funds referred as
Money Market and Long-term funds referred as
Capital Market.
The short-term funds are available for less than a
year while in the capital market the time period
ensues for more than a year.
Indian Money Market
Short-term financial market
Repo Rate serves as guiding rate.
Necessary to address short term fund mismatch
normally on fortnight basis.
Categorised into organised and unorganised.
Unorganised market
Unregulated Non-Bank Financial Intermediate
(chit funds, indigenous works, Nidhi)
Indigenous Bankers (Gujrati Sliroffs, Marwaris)
Money Lenders
Organised market
Chakravarthy Committee (1985) underlined the
need of organised money market for the first time.
Basically, eight instruments.
Treasury Bills: used by central government to fulfil
its short-term liquidity requirement up to period of
364 days-91 Days,l82 Days and 364 -Days.
The state Treasury bill has been abolished.
Certificate of Deposit: used by banks and issued to
the depositors.
Commercial Paper: used by Corporate houses.
They need a credit rating from an agency approved
by RBI.
Commercial Bill: issued by All India Financial
Institutions, NBFC, SCB, Merchant Banks and
others.
Call Money Market: an inter-bank money market
for one day generally.
Money Market Mutual Fund: to provide for short-
term investment opportunity. Issue of double
regulation-RBI and SIDBI.

Synopsis IAS, 207, Apsara Arcade, Karolbagh, Delhi — 5 +91-9620206040
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0 Repos and Reverse Repos Planning in India

I Cash Management Bill: Non-standard and
discounted instruments to meet the temporary cash Plamiing
flow mismatches, GOI in consultation with the RBI I A five-year plan formed the most basic unit of
issues it. plamiiiig in India.
Indian Capital Market I Efforts towards economic planning in India began
0 To raise long-term money. even prior to independence.
0 Categories of Capital Market: I It is way through which the govemment identifies a
Primary Market: list of a problems that plagues the country and the
0 Initial Public Offer are issued, i.e. new shares goal and targets it sets to be achieved so that the
0 Companies raises capital through this market. problems seeks an effective redressal.
National Planning Committee (1938)
0 But the recent trend due to rise of protectionism and
Subhas Chandra Bose set up National Planning
Pandemic impact has seen a negative growth in the
Committee in 1938 under the chairmanship of J.Nehru.
issuance of the new IPO shares.
The Bombay Plan (1944)
Secondary Market
In 1944 Eight Industrialists of Bombay viz. Mr. JRD
0 Follow on Public Offer are issues. They are raised
Tata, GD Birla, Purshottamdas Thakurdas, LalaShriram,
for another time to increase the capital availability.
Kasturbhai Lalbhai, AD Shroff, Ardeshir Dalal, & John
0 Shares are traded
Mathai working together prepared what is known as
0 Companies/Individuals earn profit
“Bombay Plan”.
Instruments of Capital Markets
It recommended a substantially interventionist state and an
0 Equity
economy with a sizeable public sector. Also framed to expand
0 Shares
the investment opportunities.
0 Debentures and Bonds
Gandhian Plan (1944)
0 Mutual Funds This plan was drafted by Sriman Nayaran, principal of
Financial Institution Wardha Commercial College.
0 All India Financial Institution-ICICI, IDBI, SIDBI It emphasized the economic decentralization with primacy
0 Specialised Financial Institution-IFCI, TFCI to rural development by developing the cottage industries.
0 Investment Institution-LIC, UTI, GIC Thus the emphasis was laid on the rural economy.
0 Banking Industry. People’s Plan (1945)
0 Insurance Industry. People’s Plan ( 1945) was drafted by MN Roy.
¢ Security Market. It gave equal importance to both agriculture and ind ‘ustries.
Financial Regulation It had an socialist leanings. There should be a distribution of
0 Regulatory Agencies: IRDA, SEBI, PFRDA, FMC resources by the state only. And delivered on the
0 Quasi-Regulatory Agencies: -SIDBI, NABARD, mechanization of the agrarian sector.
NHB Sarvodaya Plan (1950)
0 FSDC (Financial Sector Development Council): Sarvodaya Plan as drafted by Jaiprakash Narayan.
0 Council is convened by Ministry of This plan itself was inspired by Gandhian Plan and Sarvodaya
Finance. Idea of Vinoba Bhave. This plan emphasized on agriculture
o does not have statutory authority. and small and cottage industries.
o Finance Minister is the chairman. Five-year plans after independence
o The other members are from the RBI, I The concept of economic planning in India is
IRDAI ,SEBI etc. derived from the Russia (then USSR).
I India has launched 12 five year plans so far.
I First five- year plan was launched in 1951.
Functions and Responsibilities of the Planning
Commission
0 On 1950 the Planning Commission was formed.
The body dissolved in 2014. Its chairman was the
Prime Minister. The Finance Minister and the
Planning Minister being the ex officio members.
0 Make assessment of all resources of the country
0 Augment deficient resources
0 Formulate plans [Five Year Plans (FYP)] for the
most effective and balanced utilization of
resources and determining priorities.

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0 Determine the stages of plan implementation 0 In this plan top priority was given to agriculture,
0 Determine the nature of machinery required. next came to industry and mines.
0 Indicate the factors which tend to retard economic 0 Overall this plan was successful which achieved the
developments. growth of 4.8% against the target of 4.4%.
0 Monitor and evaluate. 0 The draft of this plan was prepared and launched by
1st Five year plan(1951-56) the D.P. Dhar. This plan was terminated in 1978
0 It was based on the Harrod-Domar model. because of Janata government.
0 Its main focus was on the agricultural Outcomes
development of the country. After promulgation of emergency in 1975, the emphasis
0 This plan was successful and achieved growth rate shifted to the implementation of Prime Ministers 20 Point
of 3.6% (more than its target growth rate 2.1%). Prograrmne
0 Outcomes: Mettur dam, Hirakud, Bhakra dams Rolling Plan (1978 — 80)
were started in this period. It was Morarji Desai idea. This plan was started with an
2nd Five year plan (1956 to 1961) annual plan for 1978-79 and as a continuation of the
terminated fifth year plan.
0 Target Growth: 4.5% Actual Growth: 4.3%
6th five year plan(1980-1985)
0 It was based on the P.C. Mahalanobis Model.
0 Target Growth: 5.2% Actual Growth: 5.7%.
0 Its main focus was on the industrial development
0 The basic objective of this plan was poverty
of the country. It focused on the rapid
eradication and technological self-reliance.
industrialization.
0 It was based on investment yoj ana, infrastructural
0 This plan was successful
changing and trend to growth model.
0 Based on the socialist model.
0 Outcomes of the plan
Outcomes of the plan
As many as five steel plants including the ones in Durgapur, 0 Economic Liberalization was introduced for the
Jamshedpur as well as Bhilai were set up as per the 2nd five first time in India during this period.
year plan 0 Family Planning was implemented for the first time
3rd five year plan (1961 to 1966) in hidia.
0 Target Growth: 5.6% Actual Growth: 2.8%. 711‘ five year plan 1985 to 1990
Pranab Mukherjee Model.
0 This plan is called ‘Gadgil Yojna’ also.
The focus of this plan was the employment. The private sector
0 The main target of this plan was to make the
was more prioritized than the government sector.
economy independent and to reach self-active
2 annual plans 1990 to 1992
position of take off.
There was an ensuing political instability faced at the centre.
0 Due to China war and Indo-Pak war, this plan could
811‘ five year plan 1992 to 1997
not achieve its growth target of 5.6%.
It was the John W Miller Model.
0 It was based on the Sukhmoy Chakraborty and John
The start of the LPG refonns. Wherein the human resources
Sandy model.
was better enhanced that is education, employment and public
Three Annual Plans (1966- 69): Plan Holiday
health.
0 Emphasis on agriculture during the Annual
It was successful to get more GDP than the target. There was
Plans.
an achieved fall of the fiscal target.
0 Green revolution started:
9111 five year plan 1997 to 2002
o Usage of high-yielding varieties of seeds,
It was an indicative planning to increase the social justice and
o extensive use of fertilizers,
equity.
o exploitation of irrigation potential and
Earmarked the 7 Basic Minimum Services. It failed due to a
Soil Conservation
global slowdown.
4th five year plan(1969 to 1974)
10111 five year plan 2002 to 2007
0 Target Growth: 5.7% Actual Growth: 3.3% This model too failed. The growth target was 8% of the GDP.
0 There were two main objective of this plan i.e. 11th five year plan (2007-2012):
growth with stability and progressive 0 Target Growth 9 % Actual Growth 8%
achievement of self reliance.
0 It was prepared by the C. Rangaraj an.
0 During this plan the slogan of “Garibi Hatao” was
0 Its main theme was “faster and more inclusive
given by Indira Gandhi.
growth”.
0 The planning failed due to the consequences of 1971 Objectives of the plan
war. It was called the Ashok Rudra and Alon
0 Reduction in unemployment( to less than 5 % among
Maririey model.
educated youth ) and headcount ratio ofpoverty (by
5th five year plan (1974-1979)
10 %).
0 Target Growth: 4.4% Actual Growth: 4.8%.

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0 Improvement in sex ratio, forest & tree cover, air Indian Financial Institutions
quality in major cities.
0 Ensuring electricity connection to all villages & NABARD
BPL households (by 2009) & reliable power by end It is an apex development and specialized bank established
of lltli Plan. on 12 July 1982 by an act by the parliament of India. Thus
I Providing broad band connectivity to all villages by it is a statutory body.
2012. Its main focus is to uplift rural India by increasing
12th five year plan(20l2-2017): the credit flow for elevation of agriculture & rural
0 Its growth rate target is 8%, real growth rate 7% non farm sector.
0 Its main theme is “Faster, More Inclusive and It was established based on the recorrimendations of
Sustainable Growth”. the Committee set up by the Reserve Bank of India
0 In this plan govermnent embraced 25 monitorable (RBI) under the chairmanship of Shri B.
targets on enhancement of the human development Shivaraman.
but due to global economic slowdown the targets It replaced the Agricultural Credit Department
were unachieved. (ACD) and Rural Planning and Credit Cell (RPCC)
NITI Aayog of Reserve Bank of India, and Agricultural
Govermnent scrapped Planning commission and in its place it Refniance and Development Corporation (ARDC).
has introduced NITI Aayog. It has been accredited with “matters conceming
0 FULL~TlME ORGANIZATION policy, plamiing and operations in the field of credit
for agriculture and other economic activities in rural
areas in India”.
The Reserve Bank of India divested its entire stake
1.- . in the National Bank for Agriculture and Rural
Development (NABARD) and National Housing
Bank (NHB).
1 1' 1 With this divestment, the Government of India
1-— -‘-.
holds 100% stake in both of these financial
(Meixrmtim tw-0_ (Mmrrmum four, from
institutions.
from rclcvant council of ministers.
institutions) nonirnntcd by PM) SIDBI: Small Industries Bank of India
O GOVERNING COUNCIL
SIDBI is the principal development financial
Chief ministers and Lt governors of Union territories institution for promotion, financing, and
development of Micro, Small and Medium
Enterprises (MSMIE) sector in India.
O SPECIAL INVITEES
Experts. soedalsts. practitioners with domah lmovvledge It was established on April 2, 1990 through an Act
The drawbacks of the planning adopted via PC includes: of Parliament (thus, it is statutory body).
Q No structural mechanism for regular engagement It is headquartered in Lucknow, Uttar Pradesh.
with states. SIDBI aims to facilitate and strengthen credit flow
0 Ineffective forum for the resolution of centre-state to MSMEs and address both financial and
and inter-ministerial issues. developmental gaps in MSME eco-system across the
0 Inadequate capacity expertise and domain country.
knowledge; weak networks with think tanks and Currently, the shares of SIDBI are held by Central
lack of access to expertise outside government. Government and 29 other institutions including
0 Failed to implement land reforms. public sector banks (PSBs), insurance companies
0 It was a toothless body, was not able to make owned and controlled by Central Govermnent.
union/states/UTs answerable for not achieving the NHB: National Housing Bank
targets. NHB is an All India Financial Institution (AIFI),
0 Designed plans with ‘one size fit for all’ approach. set up in 1988, under the National Housing Bank
Hence, many plans failed to show tangible results. Act, 1987.
0 Weak implementation, monitoring and evaluation. It is an apex agency established to operate as a
principal agency to promote housing finance
institutions both at local and regional levels.
To provide financial and other support incidental
to such institutions and for matters comiected
therewith

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The Reserve Bank of India (RBI) has sold its entire External Trade and Balance of Payment
stakes in the National Housing Bank.
DICGC: Deposit Insurance and Credit Guarantee Balance of Payment and external trade
Corporation Definition of BOP
DICGC came into existence in 1978 after the merger 0 All economic activities of an economy which take
of Deposit Insurance Corporation (DIC) and place in foreign currency fall in the extemal sector.
Credit Guarantee Corporation of India Ltd. 0 The BOP keeps a systematic record of all the
(CGCI) by Deposit Insurance and Credit transactions taking place between the residents and
Guarantee Corporation Act, 1961 of Parliament. the non residents of a country during a specific time
It serves as a deposit insurance and credit guarantee period that is one year.
for banks in India. 0 Example: export, import, foreign investment,
It is a fully owned subsidiary of and external debt, current account, capital account,
is governed by the Reserve Bank of India . balance ofpayment etc.
DICGC last revised the deposit insurance cover Forex Reserve
to $5 lakh in Feb, 2020, raising it from $ 1 lakh 0 Foreign currency assets + gold reserves+ SDRs
since 1993. (Special Drawing Rights) + Reserve Tranche in the
This amount is termed ‘deposit insurance’- the . IMF.
insurance cover against the deposits of an individual Types of currency regimes
in banks.
The Damodaran Committee on ‘Customer Fixed currency regime
Services in Banks’ (2011) had recommended a 0 In this system exchange rate of a currency was fixed
five-time increase in the cap to $5 lakli due to rising by the Il\/IF keeping the currency in front of a basket
income levels and increasing size of individual of irnpoitant world currencies.
bank deposits. This in the recent amendment has 0 (they were UK£, US S, Japanese ¥, German Mark
also been made a reality as the insurance cover DM and the French Franc FFr ).
has been raised to 5 lakh. Floating currency regime
The NBFC are uncovered by this body. ¢ In the floating exchange rate system, a domestic
Banks, including regional rural banks, local area currency is left free to float against several foreign
banks, foreign banks with branches in India, and currencies in its foreign exchange market and
cooperative banks, are mandated to take deposit determine its own value.
insurance cover with the DICGC Managed exchange rates
A managed-exchange-rate system is a hybrid or mixture of
the fixed and flexible exchange rate.
Foreign exchange market
0 The market where different currencies can be
bought and sold.
Exchange rate in India
0 Indian currency was historically linked with the
British Pound Sterling since 1928-1948.
0 After Il\/[F came to existence fixed currency regime
was followed.
0 In 1975 it was delinked from the fixed currency
regime.
0 In 1992-93, India shifted to floating currency
regime.
0 RBI can intervene at times thus currently it is
managed currency regime.
0 RBI thus keeps a lot of factors in mind that is the
reserves with the RBI, extemal stability, inflation
rate etc thus keeping the economy more stable and
developed.
Trade balance
0 The monetary difference of the total export and
import of an economy in one fmancial year.

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Trade policy
Balance of Payment
the economic policy which regulates the export-
import activities of any economy.
Depreciation
Current Account Capital Account
It means two terms.
In foreign exchange market, it is a situation when
domestic currency loses its value in front of a
\/iSib|e nVi5ib|e Investment oan Banking Capital
foreign currency.
(Goods) _ Foreign Assets and
In domestic economy, it means an asset losing its
*'="\"°“-‘S El
“Fl
5°“""g" 1°” liabilities of
value due to either its use, wear and tear. External Commercial Bank
-ri E
N 8 t l HCOITTE
The second concept is also known as capital Commercial
consumption. Net Transfer fli Borrowing
Devaluation
when exchange rate of a domestic currency is cut Convertibility
down by its government against any foreign 0 An economy might allow its currency full or
currency. partial convertibility in the current and the capital
It means official depreciation is devaluation. accounts.
Revaluation 0 If domestic currency is allowed to convert into
a government increasing the exchange rate of its foreign currency for all current account
currency against any foreign currency. purposes, it is a case of full current account
It is official appreciation. convertibility.
Appreciation 0 In cases of capital outflow, if the domestic
If a free-floatirig domestic currency increases its currency is allowed to convert into foreign
value against the value of a foreign currency. currency, it is a case of full capital account
Current account convertibility.
In the banking industry, a business firms bank Convertibility in India
account is known as current account. ¢ Initially FERA regulated all the activities.
In the external sector, it refers to the account ¢ But later economic reforms changed this scenario.
maintained by every govemment of the world in ¢ Current account is fully convertible since 1994.
which every kind of current transactions is shown. ¢ On recommendations of S.S. Tarapore Capital
It is maintained by the central bank of India. account is not fully convertible till the economy
It accrues the goods and services of an economy. fundamental don’t be strong enough.
It accounts for the wages, dividend, interest, LERMS (Liberalised exchange rate mechanism system)
remittances etc. introduced since 1993 delinked currency from the fixed
It could be positive or negative. currency regime.
Capital account Current account deficit (CAD):
It shows the capital kind of transactions of the I Current account deficit = balance of trade
economy with outside economies. (exports —imports) + net factor income (interest,
Every transaction in foreign currency (inflow or dividends etc.) + net transfer payment (foreign
outflow) considered as capital is shown in this aid).
account. India had a current account surplus in 2004. But since then
Example: extemal lending and borrowing, foreign we have been facing a deficit. In the past three years the
currency deposits ofbanks, extemal bonds issued by deficit has increased due to the rising crude oil prices,
the Govermnent of India, FDI, PIS and security protectionism policies that had been adopted.
market investment of the QFIs (Rupee is fully Net Income:
convertible in this case). 0 It is the income eamed through business or
There is no deficit or surplus in this account like the economic activity outside India.
current account. 0 The term ‘net’ stands for receipts of current
Balance of Payment (BOP) income by residents abroad minus disbursements
The outcome of the total transactions of an economy of current income to non-residents in India.
with the outside world in one year is known as the Net transfer:
balance of payment. The world’s net balance of 0 Current transfers are transactions in which a
payment turns out to be net zero. resident entity in one nation provides a
Laws like FEMA 1999, Rupee Convertibility, Extemal nonresident entity in another nation without any
Commercial Borrowing, Exchange Rate Determinations exchange, such as worker remittances.

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0 It can be between 2 govemments as well. Heated currency

I It includes Current transfers include workers’ 0 Domestic currency which is under enough pressure
remittances, donations, tax payments, foreign (heat) of depreciation due to a hard currenc-y’s high
aid, and grants. tendency of exiting the economy (since it has
NEER (Nominal Effective Exchange Rate) become hot).
0 A weighted average of exchange rates before the 0 It is also known as currency under heat or under
currencies of India’s major trading partners. hammering.
REER (Real Effective Exchange Rate) Cheap currency
0 When the weight of inflation is adjusted with the 0 A term fnst used by the economist J. M. Keynes
NEER, we get the (REER) of the rupee. (l930s).
0 Due to inflation REER>NEER. 0 If a govemment starts re-purchasing its bonds
EFF (Extended Fund Facility) before their maturities (at full-maturity prices) the
0 A service provided by IMF to its members which money which flows into the economy is known as
allows them to raise any amount of foreign exchange the cheap currency, also called cheap money.
from it to fulfil their BOP crisis. 0 In the banking industry, it means a period of
Foreign Exchange Management Act, 1999 (FEMA) comparatively lower/softer interest rates regime.
I Came into force by an act of Parliament. Dear currency
0 It was enacted on 29 December 1999. 0 This term was popularised by economists in early
0 This new Act is in consonance with the frameworks 1930s to show the opposite of the cheap currency.
of the World Trade Organization (VVTO). 0 When a govemment issues bonds, the money which
0 It also paved the way for Prevention of Money flows from the public to the govemment or the
Laundering Act, 2002 which came into effect from money in the economy in general is called dear
July 1, 2005. currency, also called as dear money.
It is a set of regulations which empowers Reserve Bank of v In the banking industry, it means a period of
India to pass regulations and enables Government of India to comparatively higher/costlier interest rates regime.
pass rules relating to foreign exchange in tune with foreign Special drawing rights (SDR):
trade policy of India v It refers to an international type of monetary
0 FEMA replaced an act called Foreign Exchange reserve currency created by the International
Regulation Act (FERA) Monetary Fund (IMF) in 1969
0 FERA (Foreign Exchange Regulation Act) v The value of the SDR is calculated from a weighted
legislation was passed in 1973 to regulate the basket of major currencies, including the U.S.
financial transactions conceming foreign exchange dollar, the euro, Japanese yen, Chinese yuan, and
and securities. British pound.
0 FERA did not comply with the post-liberalisation 0 SDR is called as the paper gold as it is an accounting
policies of the Government and an artificial currency without any gold involved.
0 FEMA made all the criminal offences as civil 0 SDR is traded among the member countries to settle
offences. the BOP crisis. India is the 8111 largest quota holder
0 It gives powers to the Central Govermnent to in this as it helps in determining the voting rights.
regulate the flow of payments to and from a Reserve Tranche:
person situated outside the country. It is a portion of the required quota of currency each
Hard currency member country must provide to the Intemational Monetary
0 It is the intemational currency in which the highest Fund (IMF) that can be utilized for its own purposes in
faith is shown. emergency situation. It is the part of the forex reserve of the
0 The strongest currency of the world is one which has RBI as well.
a high level of liquidity. India’s Top Imports
0 US Dollar, the Euro (€), Japanese Yen (¥), UK There is a difference in the world trade during and the post
Sterling Pound (£), the Chinese ‘Yuan’. COVID times.
Hot currency The top 10 import commodities are
1. Crude oil
0 It is a temporary name for any hard currency.
2. Petroleum products.
0 If a hard currency is exiting an economy at a fast
. Gold
pace for the time, the hard currency is known to be
Telecom instruments
hot.
. Coal
0 As in the case of the SE Asian crisis, the US dollar
Pearl precious stones
had become hot.
\1_O\LJ1_.-l>uJ Electronic components

Economy
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8. Organic chemicals o Longer maturity.

9. Vegetable oil o Capital gains.
10. COmpL1l€r hardware. 0 Issues related to borrowings
Il1difl’S TOP EXPOITSI o Increase in debt service liability.
1. Petroleum products o Erosion in profit.
2. Drugs phanna products as India aims to become the BOT Versus BOP
phannacy of the world.
Pearl stones ..
Iron and Stgd i Basis _ Balance of Trade (BOT) Balance of Payments (BOP)
E1€CtriC machingry l. Nature of Transactions concerning trade of All transactions concerning
or amc . Chmmcals
. transac ti ons
good sonl yare recorded . goods, services' and capital
'
g transfers are recorded.
Marine products 112 . ‘ '. 1
Capital Transactions of capital nature are not 1 Transactions of capital nature
Gold jewellery transactions included in Balance of Trade. are also recorded in Balance of
Cotton ; .2.
Payment.
_’ I
10. Pfgducts drawn ffgm jfgn and Stggl MUIUBI BGIBIICC Of TIZICIEISG part Of CUTTEHI IS lTlUCl'\ lflfgfif BS ll I135
relation account of Balance of Paymentcurrent and capital accounts
India s Trade Report '
hich_ I d BOP
_ _ _ _ _ _ w inc u e too.
The top 5 import destniation ni the COvid times I4 V * _ ~ sss*
Favourable When exports of goods are higher When net balance of current
l China BOT/BOP than the imports of goods, BOT is account and capital accoimt is
2. USA considered as favourable. in plus. BOP is considered as
__ A g favourable.
UAE
u Hong Kong
K11-I309
0 Saudi Arabia
The top 5 exports destination
l. USA
2. China
UAE
Hong Kong
Singapore
Special Economic Zone
It was announced by the govermnent in 2000 which
was concretised through the SEZ Act, 2005.
It aimed to develop export zones.
Asia’s first export processing zone was set up in
Kandla in 1965.
These are specifically earmarked area in the Indian
territory but are deemed as the foreign territory for
the purpose of the Tax and Trade laws.
They tend to enjoy a tax holiday.
They get benefits in the form of the rise of the
exports\, employment and growth.
Baba kalyani report on the SEZ has also give certain
recornrnendations.to convert them into employment
and economic enclave and ensure a growth in the
infrastructure.
GAAR (General Anti-Avoidance Rules)
The GAAR (General Anti-Avoidance Rules) was
originally proposed in the Direct Taxes Code 2010.
The general trend is to use the loopholes in the
current tax regime and avoid in the payment of the
taxes. Hence the GAAR provisions to empower tax
authorities to send notices in order to avoid tax
evasion.
Risks in foreign currency borrowings
I During nonnal times:
0 Lower interest rates.

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Foreign Investment Note: -

Modes of Financial Investments in India ADR: ADR is traded on US stock exchanges
Foreign investment involves capital flows from one country GDR: GDR is traded on European stock exchanges.
to another, granting extensive ownership stakes in Offshore Funds
domestic companies and assets. I These are money raised from offshore destination
Types of Foreign Investment: (lox tax or no tax countries) like Cayman Islands,
Foreign Direct Investment (FDI) Isle of Man, Mauritius, and British Virgin Islands,
Foreign Institutional Investment (FII) etc. by mutual funds.
Qualified foreign investment (QFI)
Foreign Portfolio Investment (FPI)
FDI
0 Foreign direct investment (FDI) is when a foreign
company or individual establishes new business
operations or acquiring business assets, including
controlling interests, in an already existing Indian
company.
0 It involves more than l0 per cent share or equity
investment.
0 It is generated the highest in the computer software
and the highest FDI is reaped to Singapore .
0 Foreign investment is permitted through
0 Automatic route where the government
permission by a foreign entity is not
required.
o Government route where prior permission
of the government is required.
FII
FII is when foreign institutional investors like Investment
companies, Insurance funds etc. invest in the shares of an
Indian company, or in bonds offered by an Indian company
Foreign portfolio investment (FPI):
0 Investment through stock exchange like- shares,
debenture, etc.
0 In the Indian context, FIIs and QFIs can be
collectively classified as Foreign Portfolio
Investment (FPI).
0 Others are Depository Receipts, offshore funds.
0 It is regulated by SEBI and the investment ranges
upto l0 per cent. Originally they were called the
FII. They are not involved in actual operation of the
business policy.
Qualified foreign investment (QFI):
I Refers to any foreign individuals, groups or
associations, or resident, who are allowed to
Directly Invest in Indian Equity Market.
0 The QFI should be a resident in a foreign country
that is compliant with the standards of Financial
Action Task Force (FATF)
Depository Receipts
0 Companies of a country can go abroad to sell
their shares in foreign capital market.
I ADR (American Depository receipts) and GDR
(Global depository receipts) are commonly used by
the Indian companies to raise funds from the
foreign capital market.

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International Financial Institutions 6. India Development Update

7. Global Economic Prospect (GEP) report
World Bank Group 8. Global Financial Development
The World Bank Group is an international partnership IMF: International Monetory fund
comprising 189 countries and five constituent institutions that The formation of the IMF was initiated in 1944 at the Bretton
works towards eradicating poverty and creating prosperity. Woods Conference.
The five development institutions under the World Bank IMF came into operation on 27th December 1945 and is today
Group are: an international organisation that consists of 189 member
0 International Bank for Reconstruction and countries
Development (IBRD) The United Nations is the parent organisation that handles the
0 -nternational Development Association (IDA) proper functioning and administration of the IMF.
0 International Finance Corporation (IFC) Main Objectives of IMF
I Multilateral Guarantee Agency (MIGA) 1. To improve and promote global monetary
I International Centre for the Settlement of cooperation of the world.
Investment Disputes (ICSID) 2. To secure fmancial stability by eliminating or
The United Nations Monetary and Financial conference, also minimizing the exchange rate stability.
known as the Bretton Woods Conference held in 1944 led to q 3. To facilitate a balanced international trade.
the formation of the (IMF in 1945) and the Intemational Bank 4. To promote high employment through economic
for Reconstruction and Development (IBRD in 1944). assistance and sustainable economic growth.
The IBRD calls itself a global development cooperative. 5. To reduce poverty around the world.
It has a membership of 189 countries. Function of IMF
0 It is the world’s largest development bank. 0 Regulatory functions: IMF functions as a
regulatory body and as per the rules of the Articles
0 It provides loans, guarantees, advisory services and
of Agreement, it also focuses on administering a
risk management products to middle-income and
code of conduct for exchange rate policies and
creditworthy low-income countries.
restrictions on payments for current account
International Development Association (IDA)
transactions.
The main objective of the IDA is to provide grants and
v Financial functions: IMF provides financial
concessional loans to the world’s poorest countries.
support and resources to the member countries to
International Finance Corporation (IFC)
meet short term and medium term Balance of
The IFC is a sister organization of the World Bank (IDA +
Payments (BOP) disequilibrium.
IBRD).
¢ Consultative functions: IMF is a centre for
It is the largest international development institution focused
international cooperation for the member countries.
on the private sector in developing countries.
It also acts as a source of counsel and technical
0 It functions as the private sector arm of the WBG.
assistance.
0 It works for economic development by investing in
India and IMF
for-profit and commercial projects for poverty
0 India's current quota in the IMF is SDR (Special
reduction and augmenting development.
Drawing Rights) 5,821.5 million,
Multilateral Investment Guarantee Agency (MIGA)
0 Making it the 13th largest quota holding country
MIGA’s chief goal is to enhance cross-border investment in
at IMF
developing countries by giving guarantees (political risk
0 Shareholdings of 2.44%
insurance and credit enhancement) to lenders and investors.
Reports by IMF
International Centre for Settlement of Investment
1. Global Financial Stability report
Disputes (ICSID)
2. World Economic Outlook
ICSID engages in international investment dispute settlement.
Principles guiding VVTO are:
0 It settles disputes between investors and
0 Non-discriminatory and rule-based trading system.
governments.
0 Elimination of trade barriers and free
0 It also settles state-state disputes under investment
international trade.
treaties and free trade agreements and acts as an
0 Preferential treatment to less developed countries.
administrative registry.
0 WTO is not a party of United Nations.
Reports by World Bank
0 It is based on system of ‘one country, one vote .
1. Ease of Doing Business
2. World Development Report
3. Universal Health Coverage Index
4. Remittance Report
5. Ease of Living Index

Economy
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Principles of WTO countries for reasons of food security. livelihood

security and rural development.
l.National Treatment O During Doha Development Round of VVTO
It prohibits discrimination between imported and domestically negotiations, it was decided that special
produced goods. Example is solar panel case 2016. Productions would attract lower levels of tariff
reduction commitment than other agricultural
2.Most Favoured Nation products.
A party should treat others equally in on the principle of non- 0 ‘Special Products‘ is a component of the WTO's
discrimination. special and differential(S&D) provision and is
Special and Differential Treatment available only to developing country members of the
is provisioned in special cases like developed countries WTO.
treating developing countries in a favorable way. Special Safeguard Mechanisms (SSM)
O These are a set of provisions through which a VVTO
WTO important Agreements member country can temporarily impose higher
than bound tariff rates on the import of a. particular
AoA (agreement on agriculture) agricultural product if there is sudden surge in
I Its three pillars are Domestic support, export imports of that product into the country.
subsidies and market access. . These provisions will be available to all the
0 Domestic Support refers to the subsidies that developing and least developed country members
government give to the farmers like food, fertilizer, of the VVTO.
power, water etc.
0 The domestic subsidies are grouped into three TRIPS
classes called boxes-Green Box, Amber Box, and 0 Intellectual Property is the work of intellect or
the Blue Box. mind to create products that have commercial users
0 Green Box includes subsidies on which there are no -products like drugs, literature, paintings etc.
limits as they are not considered trade distorting. 0 It is protected like the physical property with
0 To qualify for the green box, WTO says that a trademarks, patents etc.
subsidy must not distort trade or at most cause ¢ Holders of patents are entitled to the commercial
minimal distortion. proceeds for a specified time period.
0 These subsidies must be government funded-not by Types of intellectual property:
charging consumers high prices ans they must not ¢ A Patent may be granted for a new, useful and non-
involve price support. obvious invention for a certain period of time
0 Amber Box is used for all domestic support (typically 20 years from the filing date of patent
measures considered to distort production and trade. application).
0 WTO members are required to maintain their amber 0 A Copyright is given for creative and artistic
box supports within 5%(developed) to works (e.g. books, movies, music, paintings,
10%(developing) of their value of production. photographs and software) .
0 Subsidies that are trade distorting and are subject to 0 Give a copyright holder the exclusive right to
limitations and disciplines fall into the amber box. control reproduction or adaptation of such works
0 Blue Box subsidies are direct payments under a for a certain period of time.
production limiting program. There are no limits on O A Trademark is a distinctive sign which is used to
them. distinguish the products or services of different
Export Subsidies business.
0 Agricultural export subsidies are to be limited by 0 An Industrial Design of right protects the
the developed countries either in value or volume appearance, style and design of an industrial object
terms so that intemational prices are not lowered (e.g. spare parts. furniture or textiles).
below a point and exports and domestic markets of Anti-counterfeiting Trade Agreement (ACTA)
the developing countries are not prices out. O It is a multinational treaty for the purpose of
Market Access establishing international standards for
It means all the member countries should throw open their intellectual property rights enforcement.
domestic market to agricultural imports by reduction of . The agreement aims to establish an international
tariffs and removal of non-tariff banters. legal framework for targeting counterfeit goods,
Special Products (SP) generic medicines and copyright infringement on
0 These are agricultural products of particular the internet
importance to fanning communities in developing

Economy
1“ RedefEdu _
0 It would create a new governing body outside

existing forums such as the World Trade
Organization.
Geographical Indication
0 There are some goods that owe their properties to the
region in which they originate and are nurtures.
0 The climate, soil and the native efforts of the
region account for their fame, utility and
qualities.
There are many benefits when a product is given a
geographical indication:
0 It confers legal protection to geographical
indications in India.
0 It prevents unauthorized use of a registered
geographical indication by others.
It provides legal protection to Indian Geographical
Indications which in turn boost exports. Like the
Darjelling tea. lkkat toys of Andhra Pradesh.

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RedefEdu W

Economy Reverse Repo rate ..................................................... ..l

Receipts — Debt Capital Receipts .................................. .. I 1) Bottleneck Inﬂation: ........... ..

Internal Borrowings ...................................................... .. I lu r Core inﬂation: .................... ..

External Borrowings ..................................................... .. I lu > Headline Inﬂation ............... ..

Other Liabilities: ....................................................... .. I U Cause of Inﬂation ................... ..

Other Liabilities: ....................................................... .. I lu r Factors Affecting Demand ...... ..

Deficit ........................................................................... .. I lu r Factors Affecting Supply ........ ..

Other Similar concepts ............................................. .. I Effects of inﬂation on individuals .................................. .. 22

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CPI combined Components: .......................................... .. 23 Appreciation .................................................................. ..28

6th ﬁve year plan(1980-1985) ....................................... .. 25 Foreign Investment ........................................................... .. _

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Special Safeguard Mechanisms (SSM) .......................... .33 Overview of Indian Economy

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Liberals & Neoliberals Economic systems

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nation we get the ‘per capita income’ (PCI) of that

0 The gross national income, previously known as

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Fiscal consolidation Other documents presented along with the budget

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Fiscal Policy 2.Bilateral loans: Raised from foreign government

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neutralise this negative impact, governments usually increase Monetary policy

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/,4 \'iiriabi.e ltesem Ratio H

Qualitative l i)inr~5inalSiondirig Facility I 1&4_ 7*

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Quantitative Tool Reverse Repo rate

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0 It is a qualitative credit control measure of the Banking

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promoters to set up small banks. NBFCs, microfrnance Inﬂation

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Inﬂation Accounting takes some economic policy decisions to revive the

GDP Deﬂator: Headline Inﬂation

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0 Artiﬁcial Scarcities 0 Administered price system and subsidy from the

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Revision In CPI: Financial Markets in India

Primary Secondary issuedsewriw

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0 Repos and Reverse Repos Planning in India

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0 It can be between 2 govemments as well. Heated currency

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8. Organic chemicals o Longer maturity.

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