CAPITALISTIC ECONOMY An economy is a system which tries to balance the available resources of a country (land, labor, capital and enterprise) against the wants and needs of consumers. It deals with three key issues: 1. What is produced, 2. How it is produced, and 3. Who gets what is produced. Each country has a different economy. A. Socialistic Economy: An economy which is controlled by the government is called as socialistic economy. Here, the decisions what, when, how and from whom to produce etc. are taken by the centralized authority. Socialism is an economic system based on the central ownership of capital. While individuals work in various capacities, the government regulates how much income an individual can consume/regulates where that income will go. Citizens will also have a say in defining needs. Socialistic economies promote utopian societies, in which all are equal. The government in a socialistic economy is believed to act out of the common good of individuals. Although different types of socialism exist, socialism is thought to be a balance between capitalism and communism. Socialistic societies still have different classes of wealth, but just not to the degree that capitalistic societies have. In socialistic economy, government can utilize land, labor, and capital to fulfill its economic and political agendas. So the private players are reluctant to invest in a socialistic economy. Karl Marx is known in history for being the biggest supporter or most known supporter of socialism. B. Capitalistic Economy: Capitalistic economy is a type of economic system in which the trading and exchange of goods and services and information takes place in a free market, hence it is also called as free market economy. Capitalism gives each individual the ability to be rewarded for their effort to whatever degree they can rise to. The only limits are on the individual’s desire and commitment. This utilizes the inherit selfish motive in man to preserve himself and turns it into something that benefits the entire community. I want a well-kept house because the value is greater for me, but my neighbor benefits from my well-kept house as well in his property values. If I provide a productor service for less than a competitor I will have more customers and proper more than I would with a very high price and few customers. The customer benefits from a low price and I benefit from a prosperous business. Capitalism has the ability to become so successful in a given area of commerce that one has no competition to act as a check and balance to how the business conducts itself. This is known as monopoly, capitalist countries pass laws to prevent monopolies from controlling market sectors because competition is a necessary component in making capitalism work for the people. Capitalism is not a “system” it is what happens in the absence of a system. QS.2: EXPLAIN THE DIFFERENT INSTRUMENTS OF MONETARY POLICIES? Monetary policy refers to the measurement of growth rate and size of money supply; this process is carried out by the central bank. Monetary policy is a way in which the government controls the economy. The different instruments of monetary policies are: 1

manufacturing and telecom sectors have rated it as their top three risks. As John Maxwell said “if we are growing. the repo rate in India is 25 basis points from 5. When the repo rate increases.  Currently.75 percent to 6 percent. Strikes: An intensifying distress strikes have been graded as the sixth most critical risk to business establishments.  Currently. the prices in stock market tend to react to interest rate changes.” This is very true in the context of Indian economic growth. as per RBI (Reserve Bank of India) norms. 4. Banks are always happy to lend money to RBI since their money is in safe hands with a good interest.  An increase in reverse repo rate can cause the banks to transfer more funds to RI due to attractive interest rates. the bank rate is retained at 6 percent.5 percent to 3.. borrowing from RBI becomes more expensive. Respondents from outside India have rated strikes higher than terrorism. This is predominantly because Indian business units of multinational companies are not able to operate conveniently due to strikes and closures.  A reduction in the repo rate will help banks to get money at a cheaper rate. the CRR in India is 5. It is to be noted that respondents from outside of India rated terrorism at number four.1.75 percent. 2. 2. quite different from the popular conviction and foreign media reports that indicate terrorism to be their prime risk. 3. 3.  For e. The northern and eastern regions of India indicated terrorism as their prime whereas the western and southern regions placed it at number two and six respectively. Cash Reserve Ratio:  Cash reserve ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. we are always going to be out of our comfort zone. 1.0 percent to 5. QS.g. Reverse Repo Rate:  Reverse repo rate is the rate at which RBI borrows money from banks. resilience and sustainability which is wellacknowledged the world over. they face.25 percent. Outside this comfort zone awaits a plethora of risks that have to be mitigated well in time. A change in bank rates affects customers as it influences prime interest rates for personal loans.  This is typically done on a quarterly basis to control inflation and stabilize the country's exchange rates. Bank Rate:  A bank rate is the interest rate that is charged by a country's central or federal bank on loans and advances to control money supply in the economy and the banking sector. 2 . This economic sustainability leads to further investments and growth.  Currently the reverse repo rate in India is 25 basis points from 3. While IT and financial sectors count cyber insecurity as their apex risk.  It influences the country's economy. Terrorism: The perils of terrorism have primed to be a part of risks occupying minds at all times.3: WHAT ARE THE RISKS INVOLVED IN DOING BUSINESS IN INDIA? The prowess of the Indian economy is based on impetus. Repo rate is the rate at which banks borrow rupees from RBI.  In India. Information and cyber insecurity: The risk of information and cyber insecurity has been rated as the highest risk to business establishments by almost all the respondents across sectors and regions. Repo Rate:  Whenever the banks have any shortage of funds they can borrow it from RBI. This concern has also been put forward by respondents from outside India. A fluctuation in bank rates triggers a ripple-effect as it impacts every sphere of a country's economy. borrowing and interest rate. even the government.

agent and advisor to the government of India. the earthquake in Japan on 11th march 2011 led to a giant tsunami causing huge loss to life and property. The preamble of RBI describes the basic functions and the role of RBI as “to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The RBI acts as the banker. While on the one hand. India has a huge young population. most of Indian population resides in rural areas and illiteracy rates are still high in India. One of the important functions performed by the RBI is that of external value of the rupee. establishments such as hospitals.” As the preamble of the RBI itself states to operate the currency and credit system of the country to its advantage hence bad money is been removed out of the circulation which will in turn provide good quality notes in the hands of the general public. uncertainty associated with unstable political environment slows down investment and economic development. In addition. However. the employable English-speaking workforce is less than quarter of the urban population. Hence. Natural Hazards: Natural hazards are threats which cannot be averted at will. Hence. E. 7. Any instability in the political dispensation at the center would have a direct bearing on the governance of the country and would also negatively affect macroeconomic indicators. They have a negative effect on people and the environment. QS. the public attitude towards legal compliance is lax. As an apex bank the RBI acts as a banker of the banks and lender of the last resort. awareness towards fire safety has not been quite forthcoming. 5. It also results in the formulation of short-term macroeconomic policies while relegating the need of formulating long-term economic goals to a background. US are a large country with standardized city plans. Its aftermath even resulted in nuclear radiation from the nuclear power plant facility at Fukushima.4: WHICH ARE THE MAIN FINANCIAL INSTITUTES OF INDIA? WHAT ROLE DO THEY PLAY IN THE ECONOMY? 1. 6. also leads to governmental collapse and sociopolitical unrest. The American public wears. infrastructure and uniform customer requirements. Multinationals entering India assumes that India has a large workforce. poor economic growth on the other. Legal risks: Indian law enforcement is weak. Indian market and customer demands are different from US and other developed country markets. commercial houses and high rise buildings have been found flouting fire safety norms. Moreover. Consumer market risks: The one risk not covered in most multinationals’ business strategy is “Consumer Market Risks”. Political instability: Economic growth and political stability are interconnected. eats and drinks the same thing across the country. Under the RBI act. However. with increase in urban middle class incomes. Corruption has seeped into police and judiciary departments due to which justice is denied and delayed. 8. in recent times. Fire: Fire has been one of the oldest risks around us and much has been done to control it. It accepts payments for the account of the union and state governments and also makes payments on behalf of the government. Apart from adopting appropriate monetary policies for the economic stability in the country and thereby 3 . The taste differences vary but not significantly.4. the bank has been vested with extensive powers of supervision and control over all scheduled commercial and cooperative banks. Secondly. 9. it still continues to be the most destructive threat to life and property. For example. a high percentage of people even in urban areas are self-employed. The policies of the RBI are implemented with the help of board of directors. The Reserve Bank of India (RBI): The Reserve Bank of India was established in the year 1935 with a view to organizing the financial frame work and facilitating fiscal stability in India.g. Some natural hazards are interlinked to each other. the percentage of working women has decreased. The financial cost and time spent of legal cases is high as frequently they continue for 20 years or so. The attitude is that all illegal activities are fine until we are caught. During many incidents. Employee risks: The second premise for entering Indian market is to use the workforce at a lower cost.

undertaking inspection. It prohibits insiders trading in securities. 2. Providing vibrant. Calling for information. India was entering into period of liberalization and decontrol which was to accelerate and gather momentum in the 1990s. Stewing further flow of resources for the non-strategic activities. Reducing public debt and pressure on government resources. It also promotes investors education and training of intermediaries in the security market. The prime duty of the RBI is to regulate the banking system of our country in such a way that the people of the country can trust in banking up to perform its duty. It also registers and regulates the working of collective investment schemes including mutual funds. QS. the RBI has to ensure that the normal short-term fluctuations in trade do not affect the exchange rate. The term also refers to the reduction of investment in firms. Converting PSEs into strong private commercial enterprises. During the phase. The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act. The objective of the act is to provide for validation of certain proceedings in relation to direct taxes. Capital investment shrinkage caused by a firm’s failure to maintain or replace capital assets being used up or the firm’s sale of capital goods such as equipment. It registers and regulates the working of intermediaries associated with securities market. 4 . Initially the board was in charge of both direct and indirect taxes. It was in 1980s that India had witnessed a phenomenal growth and development of the securities market. It prohibits fraudulent and unfair trade practices in the security market. Disinvestment process leads only to dilution of ownership and transfer of full ownership. Disinvestment involves sale of only part of equity holdings held by the government to private investors. The CBDT is a part of Department of Revenue in the Ministry of Finance. Security and Exchange Board of India (SEBI): The SEBI is the national regulatory body for the securities market. intermediaries and self-regulatory organization in the securities market are some of their main roles.5: WHAT IS DISINVESTMENT? WHAT IS THE DIFFERENCE BETWEEN PRIVATIZATION AND DISINVESTMENT? WHAT ARE THE OBJECTIVES OF DISINVESTMENT? Disinvestment is the withdrawal of capital from a country or corporation. It regulates substantial acquisition of shares and takeover of stability in long term. when the administration of taxes became too unwieldy for one board to handle. large and deeper capital market with investment alternatives to investors as well as assuring them easy exit options. The central board of revenue as the department apex body charged with the administration of taxes came into existence as a result of the central board of revenue act. 3. Wordnet dictionary defines disinvestment is a process off transferring property from public ownership. The objectives of disinvestment are:       Redeploying resources locked up in non-strategic PSEs in areas that are much higher on the social welfare priority. 1963. Central Board of Direct Taxes (CBDT): An act to provide for validation of certain proceedings in relation to direct taxes and for matters connected there with. the board was split up into two. Ensuring that the tax payer’s money is not subjected to the volatility of the market. On one hand. 1924. industries or countries for reasons of political or social policy. namely the central board of taxes and central board of excise and customs. It promotes and regulates self-regulatory organization. at the same time it is also responsible for administration of direct tax laws through the Income Tax Department. However. conducting enquiries and audits of the stock exchanges. The SEBI regulates the business in stock exchange and any other securities market. The officials of the board in their ex-officio capacity also function as a division of the ministry dealing with matters relating to levy and collection of direct taxes. CBDT provides essential inputs for policy and planning of direct taxes in India.

Unless the rate of Capital Formation increases to a sufficient high degree. product contribution. Vanaspati industry are examples of some such industries which depend on agriculture for their development. Providing Raw Material to industries: Agriculture provides raw materials to various industries of national importance. a crisis is likely to emerge. Agriculture is the main sector of the Indian economy which is amply powered by the following points: a. Disinvestment is the reverse of investment. Share in National Income: The contribution from agriculture has been continuously falling from 55. economic development cannot be achieved. in this context it refers to the decision to sell the government’s share in the PSU to the private players.g. Disinvestment may or may not result in privatization. f. because with 26 per cent it can stall vital decisions for which generally a special resolution (three-fourths majority) is required. e. has already started happening. With the Government thus breathing down the neck of the strategic buyer. he can hardly take decisions that he wants to which privatization is all about.5% of the working population was engaged in agriculture. increased rural purchasing power is a valuable stimulus to industrial development. THE INDUSTRIAL AND THE SERVICE SECTORS. Meeting this demand would require 2% growth per annum. the telecom sector.  Disinvestment would result in wider distribution of wealth through offering of shares of privatized companies to small investors and employees..e. QS. This percentage fell to 66. d.6: EXPLAIN THE INDIAN ECONOMY WITH REFERENCE TO THE AGRICULTURAL. Therefore. which involves transfer of 51% of equity to the private players. thus the management and the ownership remains in the hand of the government. The challenge facing the country is clear as during the last 10 years the food-grains have been growing at a meager 0. c. 2011-2012). When the Government retains 26 per cent of the shares carrying voting powers while selling the remaining to a strategic buyer. Agriculture can play a big role in pushing the Capital Formation in India. Agricultural sector: Agriculture is the backbone of our Indian economy in at least four ways i. However. Jute industry.6 million tons. there is vital difference between the two.9% in 1991 & to 56.1% in 1950-51 to 37. it would have disinvested all right but would not have privatized. Sugar industry.6% in 1981-82 & further to 18. 5 . However in the case of disinvestment the transfer of equity is less than 51%.7% in 2001. the end of public sector monopoly would bring relief to consumers by way of more choices. In technical terms the transfer of ownership and management.e. Though these two terms are loosely used interchangeably. and cheaper and better quality of products and services.5% in 2006-07. market contribution. In many areas e. 1. b. But agriculture still continues to be the main sector because it provides livelihood to a majority of the people. the demand for food-grains is expected to increase to 280. unless agriculture is able to continuously increase its surplus of food-grains. Largest Employment Providing Sector: in 1951. Cotton textile industry.48%. Rural sector can transfer labor & capital to the industrial sector which can be effectively used to increase the productivity in the latter. Experts foresee that by the end of 11th five year plan (i. factor contribution and foreign exchange contribution. Market for Industrial Products: Since more than two-thirds of the population of India lives in rural areas. Provision of Food Surplus to the Expanding Population: Because of the heavy pressure of population in labor-surplus economies like India & its rapid increase the demand for food increases at a fast rate. with rapid increase in population the absolute number of people engaged in agriculture has become exceedingly large. Contribution to Capital formation: There is a general agreement on the importance of Capital Formation in economic development. 69. is termed as privatization.

India is rich in human resources. raw jute. Again. e. taken as a whole. These workers may not have the mathematical training to work as computer programmers or the English fluency needed for employment in call centers. 2. tobacco. While our analysis has been statistical. The critics object that much non-traditional service sector employment is little more than the relabeling of activities previously undertaken in-house by manufacturing firms. The implication is that it is no longer 19 obvious that manufacturing is the exclusive destination for the vast majority of Indian labor moving into the modern sector. required for turning the wheels of industries. required for the development of agro-based industries. there is anecdotal evidence consistent with these Polgreen (2009) describes how modern service sector jobs are now migrating from India’s urban centers to its small towns and rural villages. economic development is impossible. such as coal. Such is the importance of agriculture as far as earnings of foreign exchange are concerned. For our part. atomic energy. hydro-electricity. or that modern services are a viable destination only for the highly-skilled few. fisheries. The country is rich in commercial crops. As such. but there is also good scope for the development of industries in our country. The various favorable factors present in the country for the development of industries are: a. The country is fairly rich in power resources. in a backward and developing economy like INDIA. etc. creating employment for semi-skilled workers. read forms. American trucking companies seeking to process timesheets in India may not have the local knowledge to find rural workers to undertake the task. Others counter that much of the growth of service sector employment in fact represents new job creation. They argue that the skilled-unskilled mix of the manufacturing and service sectors. d. etc. Development of industries is not only indispensable for India. where the competition for labor is more intense and living costs are higher. oil seeds. 3. but companies like Rural Shores have been established to run service sector facilities in rural areas. raw cotton. communications and business services in particular.” The wages of these rural service sector workers are three to four times those in agriculture but only half those of workers in Bangalore. forests. b. Service sector: India is distinctive for the rapid growth of its service sector – high-tech information Technology. 20 data entry and 6 . they open up economic space for less educated workers capable of upgrading their skills. is not as different as commonly supposed. Industrial sector: Industries play an important role in the economic development of any nation . India has many favorable factors for the development of industries. Others counter that as more skilled and educated workers “graduate” from manufacturing and traditional services into modern services.g. however. but with some high school education they are sufficiently numerate and have adequate facility in English to “do basic data entry. Some say that the skill and education requirements of modern service sector jobs make them an impractical destination for the rural masses. Importance in International Trade: Agriculture constitutes about 75% of the total exports of the country. etc.without industries. By one estimate. and even writes simple e-mail messages. each taken as a whole. We also find that the skilled-unskilled mix of labor in the two sectors. we find little evidence that the growth of the service sector is simply disguised manufacturing activity. such as sugar-cane. required for the development of industries. Whether the service sector provides a route out of poverty for the masses is disputed. As the country has vast population. cheap labor required for the development of industries is also available in the country. such as minerals. are becoming increasingly similar. industries are indispensable. wide market required for the development of industries is also available in the country. The country is rich in natural resources. c.

call centers have been set up in small towns and villages in recent years. 7 . Thus. Rural Shores alone has plans to operate 500 such centers by 2017. there is growing anecdotal evidence of parents spending substantial sums on opportunities for children with only high-school education on the acquisition of England-language. conclusion that employment in modern services can be a useful supplement to employment in manufacturing as a route out of rural poverty. computer-utilization and other basic skills that might enable them to take better advantage of openings in the service sector. sustaining economic growth and rising living standards in India will entail shifting labor out of agriculture into modern services as well as manufacturing and not just into the latter. this simply underscores the importance for India of continuing to invest in labor skills.36 In addition. These observations are consistent with the view that employment in modern service sector activity can be a route out of poverty not just for the few and not just for urban residents. To the extent that the expansion of both sectors continues to be constrained by the availability of skilled labor.

8 .

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