Q1.

Discuss how monetary policy regulates the money supply in an economy through various
instruments.
There are various methods and instruments which the Reserve Bank uses. Some are general or
quantitative methods which control and adjust the total quantity or size or volume of deposits created by
the commercial banks. There are others known as selective or qualitative controls as they control certain
types of credits. The former controls the volume of money and credit, while the latter controls the
availability of money and credit.
General or quantitative controls
These are the controls that relate to the volume and cost of bank credit in general without regard to the
particular economic activity for which the credit is used. There are three instruments in this method:
(i) Bank rate or discount rate: This is the rate which the Reserve Bank charges for giving loans to the
commercial banks.
(ii) Open market operations: The direct buying and selling of government securities and Bills in the
money market by the Reserve Bank with the objective of expansion or contraction of credit and economic
activity is known as open market operations.
(iii) Reserve requirement: Commercialized banks are legally required to keep a part of their total deposits
with the Reserve Bank of India known as Statutory Liquidity Ratio (SLR).
Selective or qualitative controls
There are several methods by which selective controls can be imposed:
(i) Margin requirements: The Reserve Bank can order the commercial banks to lend an amount lower than
the volume of security..
(ii) Control throughDirectives: The Reserve Bank may give directions to commercial banks in respect of
their lending policies about the purpose for which advances may be made and the margin to be
maintained in respect of secured loans.
(iii) Moral suasion: It implies request and persuasion made by the Reserve bank to commercial banks to
follow the general policy of the Reserve Bank.
(iv) Regulation of consumer credit: The Reserve Bank can regulate the terms and conditions under which
consumer credit is to be given by the banks.
(v) Rationing of credit: Credit rationing is a method of controlling and regulating the purpose for which
credit is granted by the banks.

(vi) Direct Action: It refers to all the controls and directions which the Reserve Bank may enforce on all
banks or any bank in particular concerning the lending and investment.
Thus monetary policy can be used to cure recession by making the Reserve Bank undertake open market
operations and buy securities in the open market from banks and the general public.
Q2. Differentiate between capitalist and socialist economies
In a capitalist economic system the means of production and distribution are
privately owned and production is guided largely through the operation of markets.
It is prevalent in a large number of countries, they are, the USA, UK, France, Japan,
Australia and most of the countries in Western Europe.
Socialist is another type of economy which focuses on the welfare of the people. H.
Morrison defined socialism as, The important essentials of socialism are that all
great industries of the land should be publicly or collectively owned, and they
should be conducted (in conformity with a national economic plan) for the common
good instead of private profit. Soviet Russia was the first country to establish a
socialist (communist) economy. Most of the East European countries adopted the
communist system after the Second World War. Until its collapse in the recent years,
socialist economic system of one variety or another existed in over 50 countries
covering about 40 percent of the world population. However, the socialist economic
system continues to exist today in some countries like China, Cuba, and Vietnam.
There are eight differences between the two economies. They are
Capitalist Economy
1 Economic resources are owned by the private
sector
2 Competition is most important
3 The principal objective is to maximize profit
4 The price mechanism determines price
5 There is freedom of consumption and freedom of
production
6 Government intervention is minimum
7 Economic power in the hands of the capitalist
class is concentrated
8 Class conflict due to the inequality in the
distribution of income

Socialist Economy
1 The state owns all the economic resources
2 Co-operation is most important
3 The principal objective is social welfare
4 The central planning authority determines price
5 Economic freedom is lost
6 Economy is regulated by the state
7 Economic and political power is concentrated in
the hands of the government
8 The idea of power aims at establishing a classless
society

Q3. Discuss how regulatory role of Indian government is different from participatory role .
In Regulatory Role of Government
The Government plays a crucial role in the economy of a nation. Even the most open and liberal
economies exist and function within the parameters laid down by governmental rules, regulations and
laws. The extent and nature of State intervention may vary from country to country but one cannot ignore
the role of government in economic development.
The Major Functions of the government are
i) Basic Functions :A governments basic function is to provide social, political, legal and economic
stability to the people. These include the responsibility for ensuring measures for the public good such as
the provision of property rights, Macroeconomic stability, control of infectious diseases, potable water,
infrastructure, care for the underprivileged etc.
ii) Intermediate Functions: These include the management of external factors such as pollution, regulation
of monopolies and the provision of social insurance like pension etc. The Government functions as an
intermediary in such areas.
iii) Activist Functions: When the Government actively intervenes and takes steps and measures to
stabilize the economy, to promote the market forces and to redistribute assets and income, it plays an
activist function.
The four major roles of the government are:
i) Regulatory: The Government may exercise direct control over the economy by exercising discretionary
control over business units. It may also control business indirectly through fiscal policies, monetary
incentives or penalties etc. Regulation may cover the whole gamut of a business venture, from entry into
business through its conduct and finally its result and, at times, its exit. Regulation is very important in a
market economy.
ii) Promotional: Government can give a boost to business by providing better infrastructure and by
adopting policies that are conducive to enterprise. In developing economies this role assumes crucial
importance because of the need for speedy industrial and business development which requires that the
Government provide the necessary infrastructure and facilitating organizations.
iii) Entrepreneurial: Government may also establish business enterprises in the name of the State. Such
enterprises are known as public sector units. In many developing and socialist nations, public sector plays
a major role in economy. Direct involvement of the government in business is an important feature of
socialist economies. Major sectors are owned and managed by the State.
iv) Planning: Most economies, especially the developing ones are heavily dependent on the economic
planning of the Government. Good economic governance requires thorough and economically sound

planning for the proper utilization of national resources, especially scarce ones as well as prioritization of
development objectives.
Whereas in participatory role
Indian Government started playing a proactive role post 1991 crisis which led to the following measures
for addressing the macroeconomic and balance of payments crisis:
i) Fiscal consolidation and limited tax reforms.
ii) Removal of controls on industrial investment.
iii) Relaxation on imports (other than consumer goods initially).
iv) Reduction in import tariffs.
v) Creation of a favorable environment for attracting foreign capital.
vi) Prudent management of movements in foreign exchange rate.
vii) Allowing market forces to play a major role in the determination of exchange rate.
viii) Making the rupee convertible for current account transactions.
ix) Opening of energy and telecommunication sectors to private investment both domestic and foreign.

Q4. Discuss Privatization in India with some examples.

Privatization refers to transfer of ownership of public sector enterprises from the government to the
private sector. In a broader sense, it is the induction of private control and management in the public
sector units.
After independence and with the advent of planning, India opted for a public sector oriented planning. It
was believed that a dominant public sector would reduce the inequality of income and wealth, and
advance the general prosperity of the nation. Nehru looked towards public sector units as the building
blocks of Indias industrial growth. But none of the objectives could be realised. The performances of the
public sector enterprises have, by and large, been far from satisfactory. They often put large financial
burden on public budgets. There is a growing public discontent against them due to the following reasons.

Economic inefficiency in the production activities due to lack of incentives to perform, and lack
of accountability.

Lack of concern for the customer needs leading to ineffectiveness in the provision of goods and
services.

Instances of corruption and nepotism associated with the organization and management.

Strong trade-unionism resulting in instigated labour union strikes, unreasonable demand for high
wages and lock-outs.

Over-staffing in the name of eradicating unemployment resulted in disguised unemployment in

the industrial sector which affected the efficiency of the unit adversely.

Interferences by politicians and bureaucrats in the smooth functioning of the public sector
enterprises.

When everyone owns a firm, through the State, nobody has the incentive to design efficient
structures to develop the firm.

Inability to keep pace with technological growth and changed customer demands brings
obsolescence to goods and services produced.

Larger the public sector enterprise, more is the resistance to change in the organization.

Advantages
Countries like the UK have shown how they could solve the fiscal crisis of the State and could bring a
new industrial bureaucracy. The benefits of privatization may be listed down as follows:
a) Improvement in managerial efficiency

b) Creation of competitive environment

c) Ideological grounds
d) Greater flexibility
e) Reduction in Burden on Public Exchequer
f) Greater Attention to Consumer Satisfaction
g) Increase in financial discipline .
h) Fiscal support
Disadvantages
Some of the important arguments against privatization are as follows.
a) Social welfare neglected
b) Growth of private monopoly
c) Possibility of unemployment
d) Possibility of corrupt practices
e) Foregoing future streams of income

Q5. Discuss the basic difference between GATT and WTO.

Members of all the trading blocs and agreements are also part of the World Trade Organization, more
popularly known as WTO. WTO is now the only globally recognized trade organization that deals with
the rules of trade between nations. It administers the rule of law in international trade. It came into
existence on January1, 1995, which took the place of GATT (General Agreement on Tariffs and Trade) as
an effective formal organization.
GATT was a multinational treaty that was signed in 1948 by 102 countries with the objective of bringing
down tariff and non-tariff barriers of international trade. Until 1994, the main concerns of GATT were to
check dumping and unethical business practices. The Uruguay Round Agreements of GATT (held
from1986 to 1994) envisaged an increase in the coverage of the legal provisions and establishment of an
institution called the World Trade Organization.

The differences between WTO and GATT are

WTO
It is permanent
Its activities are full and permanent
Its rules are applicable to trade in merchandise,
trade in services and trade in related aspects of
intellectual property
Its dispute settlement system is fast and automatic
It is a formal organization

GATT
It was not an organization but it was only a legal
agreement
It was applied on a provisional basis
Its rules were applicable to trade in merchandise
goods. But it did not cover the trade in services
which is a dominating area in the world
Its dispute settlement system was not fast and
automatic
It is an informal organization

Q6. The Indian economy is the fourth largest economy of the world on the basis of Purchasing Power
Parity (PPP). Analyze India as an emerging economy with respect to different sectors.
The economy is made up of several sectors. Agricultural sector is the dominating sector of the Indian
economy. With economic development, the services sector and the industrial sector have gained
prominence. This has made the Indian economy more resilient. Over the years, the dominance of the
agricultural sector in terms of contribution to GDP has reduced and the importance of the services sector
has increased. Now the services sector contributes more than 50% of the GDP. India is now an emerging
economy and is being watched by the rest of the world, who want a part in the Indian growth story.
Agriculture
Agricultural sector was the most important sector in India after independence but it has seen the most
dismal performance in recent years. Whereas more than 52% of the countrys population depends on the
agriculture sector in 2007, it contributes only 16.6% of the GDP. From strong roots of a growth of 9.1% in
2003-2004, it fell to 2.7% during 2007-2008. Around 52.6% of the total land of the country was irrigated
in 2003-04, with farmers being dependent on the monsoons.
As of 2010, India is the largest producer of tea, jute and jute like fiber. India accounts for more than 15
percent of the global tea trade. Milk production in India is also the highest in the world.
The country is placed 3rd in cereal production, having the 2nd largest position when it comes to wheat and
rice and the largest in the world in production of pulses. Some of the main weaknesses of this sector are:

Indian agriculture is highly sensitive to the variability in rainfall.

Irrigation is another issue of concern.

Weak credit and insurance facilities

Low land productivity and

Low level of mechanization

Industrial Sector
Industrial sector in India contributes only about 27% of the countrys GDP. The manufacturing sector
growth in India has fallen sharply in the last seven years as compared to the first seven years, post
reforms.
Service Sector
The Services sector is the largest contributor to the country's GDP (more than half of Indias GDP). It has
maintained a steady growth since 96-97, except for a fall in 2000-2001 which was because of the global

dot com bubble bursting. India has the title of being the worlds second largest fastest growing economy,
in the services sector in particular. This growth has been fuelled by a growing urban middle class, largely
English speaking, which in turn has given rise to the growth in back-office operations such as call centers.
In India we find that the service sectors contribution in the GDP has sharply risen and that of the industry
sector has fallen.