Economics; an introduction

Trade-offs-
making choices in policies wherein there is a compromise in 1 goal to achieve another
goal. RBI AIMS at moderating inflation that is of its monetary policy, even as some
growth is eroded in the process thus a bit of growth is traded off price stability. Similarly,
the government wants to give subsidies to the poor and weak. It means more borrowing
and some fiscal excess but poverty is addressed thus political stability.

Adam Smith- father of economics- " the science of wealth" " the science relating to the
laws of production distribution and exchange"

economics is usually divided into 2 main branches-

● microeconomics- examine the economic behaviour of individual factors such as
consumer businesses household
● macroeconomics- studies the economy as a whole and its features like national
income employment poverty balance of payment and inflation
● mesoeconomics- study of the sector of economics like auto infrastructure

great depression of the 1930-

● no convincing economic theory
● the entire focus was on free markets
● British economist John Maynard
○ asserting that free markets have no self balancing mechanism that lead to
full employment.
○ justify government intervention thoughts public policies that aims to advise
full employment and price stability in times of slowdown and recession
○ he argued that an economy's output of goods and services is the sum of
four components consumption, investment, government purchases and net
exports
● during a recession demand slows down, even turn negative> consumer
confidence collapses> reduce their spending> firms operations are closed down>
people out of work
● such a recessionary condition government has to lead by borrowing and investing
○ According to him his theory state intervention is necessary to moderate the
booms and busts in economic activity otherwise known as business cycle.
intervene when there is bust and withdraw when there is boom
● Indian government stopped expenditure with fiscal and monetary stimuli in the
2008-10 period to withstand the recessionary winds from the west, with growth
spurting began in 2010-11, when growth declared in 2017-18 GoI launched
bharatmala as a keynesian stimulus.
 ● economics resource management, politics is about the redistributive side of
resources through government power. politics sets the values economist set the
prices

Neoliberalism-
associated with free market economics, free trade, privatization, prize deregulation, a
reduced size of government, flexible labour market.
● It is the underlying philosophy of Washington consensus, the free market
approach of the IMF and other institutions individualism, competition and
efficiency are its core values
● Francis fukuyama- American political economist who wrote the book the end of
history and the last man argued that the worldwide popularity of free market after
the demise of Soviet communism show that free markets are the highest point of
human evolution and cannot be improved upon
● neoliberalism proposes that human well-being can best be advanced by liberating
individual enterprise entrepreneurial freedoms and skills within an institutional
framework characterized by strong private property rights, free markets and free
trade
● India's economic reforms are largely centred around it
● critics of neoliberalism- large role of market forces

socialist economy-
believes that the large part of economics resources should b in governments hand so
that inequality can be minimised and give the workers greater control of the means of
production

nehruvian socialism-
where there is a public and private sector coexisting and complimenting called mixed
economy

nehruvian economics-
● It is a subset of socialist economics based on state owned ownership of basic
parts of the economy like infrastructure higher education metal and other
industries.
● Nehru believed in the values of equity that supports self Reliance in economic
growth and the modern foundation of it is revealed in its emphasis on capital
goods industry technical education and R&D. all being interconnected

Gandhian economics-
"Earth provides enough to satisfy every man's need but not for every man's greed"
the principle of Gandhian economics small-scale and socially oriented production
promoting the idea of Sarvodaya aims to boost employment machinery are welcome
opposed to labour displacing technology
Marchantilism-
The best way of ensuring a country's prosperity is to reduce imports and promote
exports there by generating net inflow of foreign exchange and maximizing the country's
gold stock. believe that a country that has more gold is stronger.

behavioural economics-
field that combines insight from various fields of study to generate a more accurate
understanding of human behaviour. Richard thaler won the Nobel memorial prize in
economic sciences in 2017 by writing about anomalies in people's behaviour creation of
behavioral science teams

green economics-
where there is sustainability of economic growth without damaging the growth rate it is
called green economics. supports the harmonious interaction between humans and
nature
New india- green GDP, social progress index, and environmental performance index,
millennium development goals, and SDG also advocate green economics

measuring economic growth-

common measures are gross National product (GNP) & GDP.

national income accounting-

set of rules and techniques that are used to measure the output of the country.

GDP-
total market value of all final goods and services produced within the country in a given
period of time. GDP can be real or nominal
● nominal GDP- current year production of final goods and services valued at
current year market price
● real GDP- current year production of goods and services valued at base year price
in calculating GDP certain transactions are excluded-
● gains from resell are excluded but the services provided by the agents are
counted
● only final goods are included when measuring national income only new product
produced goods are counted
● GDP is considered as only marketed goods. if one does the work himself, care
economy is outside the GDP
● intermediate goods not counted separately as if it amounts to double counting

3 Ways of calculating GDP-

1) the expenditure approach 2) the income approach 3) output approach.three methods
must yield the same result
gross GDP-
● means depreciation is not affected if depreciation is subtracted it becomes net
domestic product.
● allows us to determine if production increased or decreased. The data from the
current prices is adjusted to the constant price by using deflator- it helps take out
the contribution of inflation to the value of the output.
● GDP deflator is a price index

GDP and GNP-

● GNP includes net foreign income, what foreigners produce in the country is
subtracted from what Indians produced abroad or vice versa.
● GDP shows us how much is produced within the country's boundary by both
citizens and foreigners. GDP focuses on where the output is produced rather than
who produced it.
● Ireland- its GDP larger than its GNP. in Ireland Google Apple Microsoft Accenture
and other headquarter due to the tax advantage they get as corporate tax rate and
very low only have registered offices in Ireland these MNCs contribute to its GDP
through exports
● India's GDP is little more than its GNP

national income = NNP - indirect taxes + subsidies

per capita income is per capita GDP. the real GDP per capita of an economy is often used
as an indicator of the average standard of living of individuals in the country

GDP deflator-
GDP deflator is a measure of inflation that tracks the price changes in the entire economy
and not a specific limited basket of goods and services as in price indices of wholesale
price index (WPI) and consumer price index (CPI).
● At present the GDP deflator is available only annually with a long lag of over 1
year and hence has a very limited use for the conduct of policy.
● when the GDP deflator is in the negative, nominal GDP is less than real GDP it
means there is deflation in the country

seasonality-
seasonal adjustment ensures that the moments in GDP more accurately reflect through
patterns in economic activity

potential GDP-
level of output that an economy can produce without inflating the economy. If actual GDP
rises and stays above potential output it is inflationary.

reliability of GDP as a measure of progress-

 ● GDP does not value intangible like leisure quality-of-life
● impact of economic activity on the environment
● economic inequality is not revealed by GDP
● condition of poor is not indicated
● gender disparities are not revealed
● GDP does not measure the sustainability of a growth
● using GDP per capita as an indicator of standard of living
● disadvantage of using GDP as an indicator and standard of living is that it is not
strictly speaking a measure of standard of living but in general standard of living
tends to increase when GDP per capita increases

market price and factor cost-

● market price- refers to the actual transacted price and it include indirect tax
custom duty excise duty sales tax service tax
● factor cost- actual cost of the various factors of production and it includes
government grants and subsidies but it excludes indirect taxes

relationship between market price and factor cost-

● GNP at factor cost = GNP at market price - indirect tax + subsidies
● GDP at factor cost = GDP at market price - indirect taxes + subsidies

3 factors of production- land labour and capital

two types of factors- primary and secondary
● primary factors- land labour and capital goods materials and energy. facilitate
production but neither become part of the product as with the raw material.
● secondary factors they are obtained from land labour and capital the primary
factors

transfer payments-
● made by the government as one-way payment of money for which no money good
or service is received in exchange.
● The government uses such payments as a means of income redistribution under
social welfare programs, social security, old age or disability. A student grants
unemployment compensation.
● transfer payments are a part of personal income subsidies paid to exporters
farmers manufacturers are not considered transfer payments because they are
linked to an economic transaction

net National product (NNP) -

● repair or replace the machine the expense incurred for this is called depreciation
expenditure.
● NNP= GNP - depreciation
base year-
● base year is a specific year from which the economic growth is measured. termed
"at constant prices".
● The current year is valued at base year prices so that the real growth is worked
out by deducting the impact of inflation or deflation.
● base year needs to be brought closer to the current year. first official estimate of
national income where prepared by the central statistical officer (CSO) with base
year 1948 49

India's national income statistics -

the central statistical office {CSO} is responsible for the compilation of NAS. at the state
level state directorate of economics and statistics (DESs) have the responsibility of state

need to measure economic growth-

● Growth adequate or not
● can adjust growth rates for their sustainability
● can prevent inflation or deflation to some extent
● target appropriate levels of employment creation and poverty alleviation
● forecast tax revenues for government objectives
● corporates can plan their business investments

economic growth; its benefits and side effects

● benefit-wealth creation create jobs increase income increase in the standard of
living government has more tax revenue fiscal dividend boost tax revenues,
encourage investment in New capital machinery which helps accelerate economic
growth and to create more employment
● Side effects- self defeating effect violate the principle of fairness and equity thus
setting of social conflicts, environmental cause,

problems in calculating national income-

black money
illegal activities like smuggling
unreported incomes due to tax evasion and corruption
GDP does not take into account the parallel economy as the transactions of Black money
are not registered
non monetization rural economy transaction in formally and they are called as a non
monetized economy
household services care economy
social service it ignores voluntary and charitable work
environmental cost does not account
green GDP = GDP value - environmental cost

alternatives to GDP -
Robert F Kennedy said "country's GDP measures everything except that which makes
life worthwhile"
philosopher John stuart mill noted that "once decent living standard where assured
human efforts should be directed to the pursuit of social and moral progress and the
increase of leisure not the competitive struggle for material wealth"

human development index (HDI)-

● standard means of measuring well being, developed in 1990 by Pakistan
economist mahbub ul haq.
● Its annual report measures average achievement in a country. three basic
dimensions-
○ measured by life expectancy at birth
○ adult literacy rate
○ gross enrolment ratio

human poverty index-

indication of the standard of living in a country developed by the UN to compliment the
HDI.

genuine progress indicator {GPI) -

● designed to take a fuller account of a well being of a nation incorporating
environmental and social factors.
● GPI separates the concept of social progress from economic growth
● GPI deducts environmental cost and social cost like increase in crime and family
breakdown

social progress index-

● measures the extent to which countries provide for the social and environmental
needs of their citizens
● published by the nonprofit social progress imperative and is based on the writings
of Amrita Sen and Joseph stiglitz
● include wellness equality inclusions sustainability personal freedom and safety
health sanitation ecosystem sustainability shelter personal rights tolerance
● define social progress as the capacity of a society to meet the basic human needs
of its citizens

Gross national happiness (GNH) -

● attempt to define quality of life in more holistic and psychological term
● term was coined by bhutan's former king in 1972 to indicate his commitment to
building an economy that would serve bhutan's unique culture based on Buddhist
spiritual values based on the premise that true development takes place when
material and spiritual development occur side-by-side to complement and
reinforce each other
Natural resources accounting and green GDP-
● National biodiversity action Plan published by GOI ministry of environment and
forest in 2008 highlights as an action point the valuation of goods and services
provided by biodiversity
● in the Japan meet in 2010 on biodiversity protection India declared that it will
adopt natural resources accounting

Sarkozy's alternative-
President Sarkozy decided to establish this commission aims to identify the limits of
GDP as an indicator of economic performance and social process.

happiness index-
● measure of happiness, published by the United Nations sustainable development
solution network in 2011
● Bhutan the first only country to have officially adopted GHI instead of GDP as their
main development indicator
● first World Happiness report was released in 2012, India ranks 122 out of 155
countries in the world

Madhya Pradesh department of happiness MP joined hands with the IIT Kharagpur to
develop happiness index.Andhra Pradesh second state

environmental performance index-

it is a method of quantifying and numerically marking the environmental performance of
a state's policies

purchasing power parity (PPP)-

● defined as a number of units of a currency required to buy the same amount of
goods and services in the domestic market as $1 would buy in the US
● allows us to estimate what exchange rate between two currencies is needed to
express the accurate purchasing power of the currency in relation to another

big Mac index-

developed by economist magazine, based on the theory of purchasing power parity

How is PPP more reliable than market exchange rate ?

● market exchange rates can quickly change are dominated by demand and supply
of currencies that includes speculation and expectation and confidence

business cycles-
● alternating periods of expansion and decline in economic activity is called
business cycle that is the ups and downs of the economy
 ● four stages expansion growth slowdown and recession
● recession may not follow every time

recetion-
● degrowth which results in the general slowdown in economic activities>
unemployment rate rises
● may be triggered by financial crisis 2008 and external trade shock and adverse
supply shock for the bursting of an economic bubble
● governments usually respond to reception by adopting expansionary monetary
micro and macro economic policy such as increasing money supply, increasing
government spending and decreasing taxation
● it does not end and relapse for any reason due to external or internal shocks it is
called double dip recession
● when recession worsens it is called depression

great recession 2008-9

● economic decline in world economics particularly developed World during the late
2000 and early 2010 international monetary fund concluded that it was the most
global recession since the 1930's .
● The causes of the decision largely originated in the US. particularly related to the
real estate market
● it begin in December 2007 and ended in June 2009, collapse of the financial sector
in US banks bailed out by the US government
● new development economics suffered less impact India and China who is
economics grew substantially during this period

2008 subprime crisis-

● financial crisis linked to reckless lending practices by financial institutions in the
US.
● the US mortgage backed securities, when these securities lost value and
considered toxic financial institutions went into heavy losses are went bankrupt
fully
● Indian banks had negligible exposed to them
● credit boom fed a global speculative bubble in real estate and equities

depression-
● most economic downturn in the recession slowdown in economic activity over the
course of a normal business cycle unusual and extreme form of reception
● Greece was in depression in 2012 with 50% of the young people out of work

structural composition of the economy- classified into three sectors-

 ● primary- involves changing natural resources into primary products. ( Raw
materials for other industries} includes agriculture fishing forestry mining
quarrying industry.
● secondary- include those economic factors that create a fine and finished usable
product, manufacturing and construction this sector is often divided into light
industry and heavy industry.
○ light industry- less capital intensive and more labour intensive. operations
largely consumer goods clothes shoes furniture and household items
○ heavy industry- capital intensive and produces goods for businesses auto
Steel cement petroleum. large quantities
● tertiary sector- service sector
● quaternary sector- includes activities which provide information services
computing ICT information and communication technologies
● quinary sector- not clearly conceptualized. highest level of decision making in an
economy so in government science universities healthcarethe

The first word referred to those prosperous market economies like the west, Japan.

Economic development and niti aayog

history of economic planning in India-
Bombay plan-
● In 1994 businessman and industrialist jrd Tata Birla put forward a plan of
economic development for India known as the Bombay plan.
● expansion of the textile and consumer already flourished industries in Bombay
and Ahmedabad
● it's an important role of state in post independent India to provide infrastructure
invest in basic industries like Steel and protect Indian industries from foreign
competition
○ Bombay plan was premised on the view that the economy could not grow
without government intervention and regulation

sir mokshagundam Visvesvaraya-

● designed the Krishna Krishna Sagar dam, sponsored the bhadravathi iron works.
Admirer of Japan's industrial progress, studies the Soviet five year plan.
● published his own suggestion 10 year plan for India's first attempt at economic
planning in India. plan to double the income of the country within 10 years
● private enterprises industries will not make satisfactory progress. government
should take the laid; bold policies should be laid down,
● an official organisation should be brought into existence, and correct
comprehensive reports of progress supported by adequate statistics and should
be published yearly.
MN Roy-
stressed on employment and wage goods
S.N Agarwal-
emphasized on the decentralisation; agricultural development employment cottage
industry

mixed economy-
India is a mixed economy. Since independence for the first three four decades the public
sector dominated and in fact sectors like banking saw nationalisation.

planning goals-
● India launched the five year plan for rapid growth from 1951. goals common to all
the five year plans-
growth self-reliance modernization Social justice
● invitation to a MNC regenerated the fear of colonialism.
● opting for liberalisation privatisation and globalisation model since 1991 and later
become a foundation later become a founding,
● Become member of WTO in 1995 which made us depart from self-reliance as LPG
offered scope for faster growth
● financial resources for the five year plans-
Central budget State budget PSE's Domestic private sector FDI

gross budgetary support-

It is the amount from the central budget that goes to fund the plan investment during the
plan period of 3 units(centre assistant to state)

history of planning-
● first plan 1951-56- stressed on agriculture
● second plan 1956 61- stress on establishment of heavy industries based on nehru
mahalanobis model self-reliance and basic industry driven Growth.
● criticized- imbalance between the growth of the heavy industry sector and other
spares like agriculture and consumer goods. it relied on trickle down effect.
approach to eradicate poverty slowly.
● 3rd plan 1961 66- to balance industry and agriculture a self sustaining economy
○ first time India borrowing from IMF
○ conflict with Pakistan and repeated droughts also contributed in the failure
of this plan
● annual plan- war with China in 1962 and Pakistan in 1965. inflation floods forex
crisis, political instability
 ● fourth plan 1969 74- objective growth with stability emphasis on improving the
condition of the underprivileged and weaker section through provision of
education and employment
● Fifth plan 1974 79- growth for social justice
● plan holiday
● rolling plan- adopted in India in 1962 aftermath of Chinese attack on India
○ advantage- overcome the rigidity of fixed five year plan by bending targets
projection and allocation as per the changing conditions
○ disadvantage- if the targets are revise each year it becomes very difficult to
achieve them
● 6th plan 1980-1985- removal of poverty infrastructure
● seventh plan 1985 90- stress on rapid growth in food grain production and
increase in employment opportunity
● Eight plan 1992 97- process of economic reform and restructuring of the economy.
Based on rao-man mohan singh model
○ indicative planning-
the private sector is given a substantial role state would turn its role into a
facilitator from that of controller and regulator adapted since its eight plan.
trade and industry freed from government control and that planning in India
should become more and more indicative and supportive in nature
indicator planning was not contemplated at the beginning of 50's as a there
was hardly any corporate sector in India
● The ninth five year plan 1997 2002- plan is targeted at an annual average growth
rate of 6.5 % for the economy as a whole and growth rate of 3.9 % for the
agriculture sector. first India company was listed on the Nasdaq
● tenth five year plan 2002-2007 main objective-
○ Attain 8% GDP growth per year
○ reduction of poverty rate by 5% points by 2007
○ reduction in gender gaps in literacy and wage rates by at least 50%
● 11th plan- to lower poverty by 10%
● 12th plan- achieve annual average economic growth rate of 8% aimed to bring
down the poverty ratio

achievements of planning-
● national income has increased, the third largest economy in Asia after China and
Japan.
● By PPP measurements India is third in the world.
● literacy rate has increased 6 times since independent from 12 % to 74% in 2011

the failure of planning-

● unemployment is high
● regional imbalances are intensified
● malnutrition haunts about half of the children in India
economic reforms-
the force behind the reform is-
● Indian economy reach the level of growth and strength to benefit from an open
market economy
● private sector willing and capable of playing the major role
● Indian economy needed to integrate with the word with all the advantages like
capital flows technology higher level of export state of art stock markets, Indian
corporates can raise finances abroad
● Indian needed export FDI exports FDI and FII for stability on the balance of
payments front and higher growth rates for social development, so India could
make the historical shift from centralised planning to market based model of
growth
● reforms mainly targeted the following areas-
a. dismantling the licence Raj so that private sector and government were on
a level playing field
b. drive public sector towards sustainable profitability by dereservation,
disinvestment, professionalization of management
c. fiscal reforms for stable economic growth
d. banking sector is deregulated for higher competitive strength and
performance
e. aggressive export promotion FDI and FII inflow
● first generation reforms involved- essentially non legislative government
initiatives- reduce SLR and CRR for the banking sector
● Second generation reforms involve legislative reforms and touch a wider section
of the society- labour reforms, GST, FDI expansion, labour pension reforms,
liberalised FDI.
● positive results-
a. rates of growth went up
b. BOP crisis has been solved
c. service sector tertiary sector has grown
d. Resilience of the economy in the face of great recession
e. consumer choice has increased
f. Indian companies are listed on Nasdaq and New York stock exchange and
raise millions of dollars for investment
g. FDI and FII picked up
h. Indian corporates have acquired global measures like jaguar, anglo-dutch
steelmaker corus
● there are deficiencies as well-
a. poverty
b. jobless growth
c. regional economic imbalance
d. farmers are feeling directionless under the WTO region
 e. Still pressure on food security
f. globalisation threatens to destabilize agriculture with a cheaper imports
and a questionable provisions related to intellectual property rights impact
in negatively on availability of medicine
g. infrastructure received inadequate attention
h. PSU reforms have not made progress and disinvestment and privatization
are still to see steps substantial moment
● second generation reforms- reforms

IBIN (India backbone implementation network)-

● aims to seed new techniques into the service delivery system build a network of
partners to create capability to manage effective stakeholder dialogues resolves
dispute and conduct policy impact analysis

niti aayog-
in 2015, aims to involve the state in economic and development policy making in India. It
provides strategic and technical advice to the government. the prime minister of India
heads the ayog as its chairperson.

aims and objectives of niti aayog-

● provides a critical directional and strategic input into the development process
● think tank policy such as make in India digital India and swachh Bharat
● coordination and center state coordination
● will develop mechanism to formulate credible plans at the village level inclusive
economic growth
● knowledge innovation and entrepreneurship support system
● monitor and evaluate the implementation of programs technology upgradation
and capacity building
● the government is an enabler rather than a provider of first and last resort
● progress from food security to focus on mix of agricultural production
● leverage entrepreneur scientific and intellectual human capital
● use technology in governance
● leveraging of India's demographic dividend
● elimination of poverty
● redressal of inequality is gender bias economic disparities
● integrate villagers institutionally into development process
● policy support to more than 50 million small businesses
● safeguarding of our environmental and ecological assets

niti aayog vs planning commission-

● PC had allocative function- recommending plan financial transfer; centrally
sponsored scheme. niti aayog does not have such a function
 ● PC-many more members, all were full-time members
● PC was directed by the National development council. NA- has both the political
wing composed union ministers and CM as well as the think tank wing in a single
body
● NA-state governments play a more significant role. PC- state role was limited
● NA- has provision of regional council PC- did not have it
critical appraisal- it is the only nomenclature change

niti aayog achievements by 2017-

NA prepared the 15 year vision document. 7 year strategy document 2017-18 to 2023 24
to convert the longer term vision into implementable policy as part of National
development agenda

the three year action agenda for 2017-18 to 2019-20 predictability of a financial resources
during the 14th finance commission award period

reforms in agriculture-
● model land leasing law- formulated a model agricultural land leasing act 2016 to
both recognise the rights of the tenant and safeguard interest of land owners.
Madhya Pradesh has enacted separate land leasing law and Uttar Pradesh and
Uttarakhand have modified their land leasing laws
● reforms of agricultural produce marketing committee APMC act. NC concelted
state on critical reforms-
○ agricultural marketing reforms
○ agricultural land leasing
○ APMC act version 2 prepared state are being consulted to adopt
● agricultural marketing and farmer friendly reforms index, developed by NA first
ever, to sensitise the State about the need to undertake reforms in three key
areas: agriculture market reforms, land leasing reforms and forestry on private
land. Maharashtra ranks highest in implementation of various agricultural reforms.
Gujarat ranks second. the index aims to induce a healthy competition between
states and implementing farmers friendly reforms

reforming medical education-

scrapping of medical council of India with National medical commission

digital payment movement-

digital dhan Mela there also held for 100 days in 100 cities the lucky grahak Yojana and
the digit Vyapar Yojana

atal innovation mission-

to strengthen the country's innovation and entrepreneurship ecosystem by creating
institutions and programs that spur innovation in schools colleges and entrepreneur in
general, atal tinkering labs to foster creativity and scientific temper in students

indices measuring States performance in health education and water management-

competitive and cooperative federalism

subgroups of chief ministers on rationalisation of centrally sponsored scheme

subgroup of chief ministers on swachh Bharat abhiyan

task force on elimination of poverty in India

subgroup of chief ministers on skill development

task force on agriculture development

National development agenda include-

● vision of 15 year long vision between 2017-18 to 2031-32 that combines national
and international goals.
● strategy of five year long plan between 2017-18 to 2023-24 vision into
implementable policy
● action plan 3 years short term action plan 2017-18 2019-20 to translate policies
into action by 2019
● AIMS at good governance and best practices equitable development, it offers
resolution method for inter sector and inter departmental issues

India and manufacturing sector-

● In the 1950's had a foundational approach to manufacturing, the Nehru
mahalanobis model (2nd FYP) was premised on the capital goods industry and
self Reliance.
● India had the manpower technical institutions was set up and higher education.
R&D was focused manufacturing better technology
● However momentum could not be sustained. We did not have the land resources
necessary. Land acquisition was difficult in a Domestic private sector investment
was scarce. we did not open up to FDI and does competition suffered as did
productivity

following factors acted as a deterrent to India's manufacturing drive-

● infrastructure bottleneck- power roads telecom
● Chinese imports did not allow local manufacturing and in fact lead to
industrialisation in India
 ● reservation for the msms and favourable terms to them led to the moral hazard
that developed a vested interest is not scaling up
● not spend on R&D product development
● Lack of ease of doing business
● services sector emerged as a globally strong force and it seemed that we could
skip the secondary sector and focus on becoming a global back office
● More FDI into service sector than in manufacturing
● we opted to promote service sector in preference to manufacturing because our
land resources did not allow us to go for a large scale manufacturing witness the
friction in setting up the special economic zone
● India differs from China in this regard as well as the fact that China is authoritarian
and the government held all the land
● in the 1990 government policies favoured service and disadvantaged
manufacturing
● services have been lightly taxed and taxing began only in 1994.
● rise in per capita income also had a significant effect on a demand for better
services in the country- education health transport finance advertising telecom
insurance
● inadequate development of physical infrastructure
● Since the reforms of the early 1990 trade and foreign investment for services have
been more liberal than those for manufacturing
● the digital push to economic growth made globalisation inevitable & irresistible
and raised prospects for service sector growth in India
● Ghani's perception- investment in both physical and human infrastructure matters
greatly for attracting new enterprises in both manufacturing and service industries

service sector growth and jobs in India

three basic groups of services-
1. traditional services- wholesale, retail trade hotels, restaurants, transport and
storage
2. modern services- communication financial services real estate renting business
services
3. social services- public administration and defence community social and personal
services traditional and

● the social services are not tradable.

● modern services are internationally tradable
● traditional and modern services are mostly in the private sector while social
services are mostly in the public sector
● modern services- banking and insurance education computer related services,
R&D, health communication legal services and accounting together account for
about 16% of GDP
● modern and social services are produced in the organised sector and mainly by
formal employees and traditional services are essentially produced in the
unorganised sector and mainly by self employed workers and employee generally
low skilled workers while modern and social service employee high skilled
workers
● labour productivity in traditional services is much lower than that in modern
services
● In 2010 model services accounted for less than 11 % of total service employment
and 38% of service output while traditional services accounted for 50% of service
employment and 40% of service output. Thus modern services productivity is
higher.
● service provide quality employment and high skilled workers in comparison to
manufacturing
● for India the share of the service sector in GDP is 53.3% while in share of total
employment is much less at 28.6 percent
● India's service LED growth has not been jobless. It has created high quality formal
Highly skilled jobs.
● manufacturing is far less jobs intensive and creates low skilled jobs
● telecom connectivity has grown
● the organised retail sector has brought in efficiency in the supply chain
● rapid growth of e-commerce and online retail stores
● the automobile industry is a key contributor
● transportation and logistics service grew rapidly
● service sector not only creates direct output and direct employment but also the
ancillary services and employment generation
● travel sector is seeing growth as air and road travel grow
● sectors like media entertainment health care and education all benefited
● technology continues to drive innovation and creation of a new smart business
models
● demographic dividend
● India signed a comprehensive economic partnership agreement (CECA) with
Malaysia and Singapore
● and the comprehensive economic cooperation agreement (CEPA) with Japan and
South Korea. both have a service component
● after the trade facilitation agreement (TFA) in goods under the WTO came into
force in 2017. which is expected to help in a smooth moment of a professional
● the implementation of the GST would create a common national market and
reduce the overall tax burden on goods it is expected to reduce cost in the long
run on account of availability of GST input credit which will result in the reduction
in the price of services
● india-ASEAN free trade agreement (FTA) in service and investments came into
force from 2015 in countries which have ratified it.
 Fiscal system
fiscal policy definitions-
● government policy which is concerned with raising revenue through taxation and
with deciding on the amounts and purpose of government spending
● government policy is regarded to taxation and spending programs balance
between these two which can counter economic peaks and slumps
● policies that influence macro economy
● dealing with the budget especially with taxation and borrowing

Breaking up of a finance in revenue and capital streams-

Revenue account include-
● taxes sources- income tax corporation tax excise duty customs duty
● non taxes sources- user charges interest received dividend profits
Revenue account expenditure is essentially the non plan expenditure that does not
create assets that is interest payments, defence subsidies and public administration

capital account receipt are-

recoveries of loans and advances made by the union government to state, UT's and
PSU's, fresh borrowings from inside the country and from abroad

capital account expenditure-

is loan made to state, UT's and PSU's, expenditure for asset creation in infrastructure
and social areas, loans repaid.

Definition of deficits- RD=RR - RE

revenue deficit is the difference between the revenue receipts and revenue expenditure

ERD (effective revenue deficit)-

fiscal indicator, introduced in the frbm act by the finance act 2012 defined as the
difference between the revenue deficit and the grants for creation of capital assets"
(grants for creation of capital assets are the grants in aid given by the central
government to state government)

Fiscal deficit-
is the difference between Government earns and its total expenditure.

monetised deficit-
is the borrowing made from the RBI through printing free currency. Discontinued from
2006 as a part of the frbm 2003.

Primary deficit-
is the difference between the fiscal deficit and the interest payments.

Deficit financing-
When the resources from taxes users charge public sector enterprises public borrowing
small-scale borrowing and others are not enough RBI prints and gives to the government
it is called deficit financing. The money printed by the RBI is called high powered money
or reserve money or monetary base.

How much of the fiscal deficit is right ?

The sovereign debt crisis in Greece and the fiscal woes of the USA are the result of an
unsustainably high debt and borrowing.

government liabilities-
interest payments- increase and there is far less for development.

Reducing FD-
While FD reduction is needed for macroeconomic stability and inter-generational parity
introduction of GST, the DTC amendments, selective disinvestment broadening of tax
base tax buoyancy will yield enough to moderate borrowings.

Global crisis and the FD in India-

global recession impacted India >growth rate slipped> tax revenue were hit > massive fall
in demand> corporate sector postponed investment> threat to employment
>government spend more by borrowing >the result is fiscal deficit reached an abnormally
high level 6.8% in the year 2009-10

physical measures taken by government to counter the negative fall-

● 3 focused fiscal stimulus packages in the form of tax relief to boost demand and
increase expenditure on public projects to create employment and public assets
● RBI took number of monetary easing and liquidity enhancing measures
● deficit was financed by raising internal debt and from public account surplus cash

FRBM act 2003-

(fiscal responsibility and budget management) following salient features-
● annual targets of reduction in deficit
● government to annually reduce the revenue deficit by 0.5% and the fiscal deficit by
0.3%
● prohibits government to borrow from the RBI (primary borrowing) RBI cannot print
money to lend to the government
● quarterly basis, government shall placed before both the houses an assessment
of trends in receipts and expenditure
● annually present the macroeconomic framework statements, medium term fiscal
policy statements and fiscal policy strategy statements
 ● in case of deviations not only the government but the finance minister shall also
make a statement in both the houses
● borrowing from the RBI is permitted in exceptional situation like natural calamities
● frbm was brought in for fiscal discipline increase plan expenditure reduce the
amount of borrowings meat consumption from governments own fiscal resources,
leave the RBI with autonomy as far as money creation goes

FRBM 2.0-
● Act was amended by finance act 2012
● government would also have to lay a fourth statement wise the medium term
expenditure framework (MTF) statement in both the houses
● instead of targeting the revenue deficit the frbm act would target a new concept
the effective revenue deficit

fiscal consolidation-
means straightening government finances, providing macroeconomic stability, cuts
wasteful expenditure, can enable the government to spend more on infrastructure and
social sectors, tax reforms, disinvestment, better targeting of subsidies, are the
hallmarks of fiscal consolidation.
GST and revised DTC are an important federal efforts towards fiscal reforms and
consolidation
fiscal consolidation in India includes the following reforms-
● revenue reforms include tax reforms on both direct and indirect tax improving
efficiency of tax collection and text Stability
● on the expenditure side reform, cutting out non essential and unproductive
activity schemes and projects allocation of resources to priority areas reducing
cost of service rationalising subsidies reduction of time and cost overrun on
projects getting proper outcome from output

Kelkar committee 2012

roadmap for fiscal consolidation worked out by a committee headed by former chairman
of the 13th finance commission
● reduction in deficit could be achieved through a combination of shares sale of
state owned companies rising prices of diesel and LPG or cooking gas and
implementation of GST

Bimal jalan committee on expenditure management

in 2014 setup, to suggest ways to reduce food fertilizer and oil subsidies and narrow the
fiscal deficit

austerity-
be ban a five star venue for government meetings foreign locations for conference
exhibition exclusive class airline tickets for officials
NK Singh panel to review India's FRBM-
● suggested the creation of Fiscal council and focus on public debt to GDP ratio-
target of 60% debt to GDP by 2023 from the present level of about 68%

major budget reforms 2017-

● budget presentation on February
● railway budget merged

plan and non plan expenditure classification and its unsustainability -

● plan expenditure- annual plan project contributing to 5 year plan includes- dams
roads power plants
● non plan expenditure- relates to maintenance consumption and welfare. non plan
expenditure does not create assets

Rangarajan committee 2012-

set up in 2010, chairmanship of Dr Rangarajan to suggest measures for efficient
management of public expenditure to see whether the classification of expenditure in two
plane and non plane is rational and can be continued
the report following are the silent points-
● redefine role of planning commission and finance ministry
● plan and non plan distinction in the budget is not able to provide a satisfactory
classification of developmental and non developmental dimensions of
government expenditure it has therefore become dysfunctional the
● committee recommended the plan and non plan distinction in the budget should
be removed
● called for strengthening the central plan monitoring system (CPMC) to promoting
transparency and accountability

the reasons for scrapping the distinction from 2017-18 are-

● five year plan are discontinued
● planning commission is no longer there and
● undesirability of keeping the distinction for the reasons detailed above

public debt borrowing-

● inside the country & external dept
● public debt is justified as the government does not have adequate resources and
taxation cannot be done beyond a point

external debt management-

● monitoring long long and short term debt
● raising sovereign loans on concessional terms for longer maturities
● regulating external commercial borrowings through end-use,
 ● encouraging rupee denominated bond like masala bond
● rationalizing interest rate on non resident Indian deposits

rupee dept-
● rupee denominated debt refers to that part of India's total external debt that is
denominated in India's domestic currency the rupee

external debt consists of-

● long term external debt which is the bulk part
● NRI deposit
● multilateral loans
● commercial borrowings
● bilateral loans
● trade credit

internal debt includes-

● loans raised by the government in the open market through treasury bills and
government securities
● special securities issued to the RBI like the oil bond fertilizer bonds masala bonds

masala bond-
is the term used to refer to a financial instrument through which Indian entities can raise
money from overseas markets in rupees. by issuing bonds in rupees and Indian entities
are shielded against the risk of currency fluctuation. as masala bonds are denominated
in rupees foreign investors will be taking the currency risk
in 2016 HDFC issued masala bonds first Indian company to issue masala bonds NTPC
issued first corporate green masala bonds

the key for the success of these bonds-

● stable exchange rates
● also support the rupee
● step towards internationalisation of rupee and full rupee convertibility

ZBB (zero based budgeting)-

under the zero based budgeting a close and critical examination is made of the existing
government programs projects and other activities to ensure that funds are made
available to high priority. the objective of a zbb is to overhaul the functioning of the
government department and PSU so that productivity can be increased and wastage can
be minimised

ad hoc treasury bills and WMA-

The 89 union government replaced the ad hoc treasury bill with WMA. WMA given by RBI
to GOI do not require any collateral
fiscal drag-
this is a problem during period of a high inflation government gains due to higher tax
collections and the economy suffers as growth is drag down due to less demand

fiscal neutrality-
when the net effect of taxation and public spending is neutral

crowding out-
excessive government borrowings can lead to shrinkage of the liquidity in the market
forces the interest rate to go up. Private investment is crowded out for two reasons:
liquidity availability is less and the rate of high investment suffers and growth
decelerates.

pump primping-
deficit financing and spending by the government on public work in an attempt to revive
the economy during recession. Raise purchasing power of the people to the point that
deficit spending will no longer be considered necessary to maintain the desired
economic activity

public goods, merit goods and demerit goods-

● Public goods are those goods whose consumption by some does not diminish
them for others law and order and park Street lighting defence meant for the entire
public.
● merit goods are goods like education health care important for society as a whole
● demerit goods are those whose consumption should be discouraged tobacco
alcohol

giffen goods-
goods whose demand goes up when the price increases status market and exclusive
nature

twin deficit-
budget deficit (fiscal deficit) and current account deficit the former fuelling the letter as
the borrowing increase are known as twin deficit.

Monetary and credit policy

definition-
● the strategy of influencing moments of the money supply and interest rates to
affect output and inflation
 ● the regulation of the monetary supply and interest rates by a Central Bank in order
to control inflation and stabilize currency

monetary policy-
The use by the central bank of interest rates and other instruments to influence money
supply to achieve certain macro economic goals is known as monetary policy
credit policy is a part of monetary policy as it deals with how much and at what rate
credit is advanced by the banks

objectives of monetary policies are-

● accelerating growth of economy
● price stability
● exchange rate stabilisation
● balancing savings and investments
● generating employment
Monetary policy can be expansionary or contractionary. expansionary policy increase the
total supply of money in the economy, traditionally used to combat unemployment in the
recession by lowering interest rates

The tools available for the central bank to achieve the monetary policy ends are the
following- (​these are all quantitative tools​)
● Bank rate
● reserve ratio
● open market operations
● intervention in the forex market
● moral suasion

Quantitative tools Inflation Deflation

CRR SLR Increase Decrease

OMO Sale Buy

Bank rate Increase Decrease

Policy rate Increase Decrease

bank rate-
● bank rate is the rate at which RBI lends long-term to commercial banks, no
mortgage,

ready forward contract (repose)-

 ● It is a transaction in which two parties agree to sell and repurchase the same
security.
● RBI lends on a short term basis to banks on the security of Government bonds
(repo)
● reverse repo when RBI borrows from the market (absorbs excess liquidity)
● it is the reverse of the repo operation
● can't use SLR quota except in times of emergency called as MSF but only
scheduled commercial banks.
● the repo / reverse repo transaction can only be done in securities as approved by
RBI treasury bills Central state government securities
● RBI uses this instruments for liquidity adjustment in the system
● repo rate is known as policy rate

MSF (marginal standing facility)

● in 2011 RBI introduced the MSF as a window through which the commercial banks
can borrow from the RBI at the rate that is more than the repo rate
● it is meant to ease liquidity in the market
● only scheduled commercial banks use this route they use the collateral of
government securities including SLR

LAF (liquidity adjustment facility)-

● LAF are used by the banks for their day-to-day mismatches in liquidity.
● LAF covers credit at repo and reverse repo rates. under LAF minimum credit limit
are rupees 5 crore
● all the clients of RBI. money is lent by the RBI at repo rate, collateral used
included all the government securities

reserve requirements-
● banks keeps a fraction of the total deposit as reserves that are not to be lent
● in the form of RBI approved securities (SLR) kept with themselves or cash that in
is kept with the RBI (CRR)

statutory liquidity ratio (SLR) (FD + CA)-

● It is the portion of time fixed deposits and demand liabilities (savings banks bank
and current accounts) of banks that they should keep in the form of designated
liquid assets like government securities and other RBI approved securities like a
public sector bonds current account balances with the other banks and gold.
● SLR aims at ensuring that the need for government funds is partly but surely met
by the Banks.
● Brought down from 38.5% in 1991 to 19% in 2017

the main objective of maintaining the SLR ratio are the following-
● to control the expansion of bank credit
 ● to ensure the solvency of commercial bank
● to make the commercial banks to invest in government securities

CRR
● it is the portion of the bank deposits that a bank should keep with the RBI in cash
form
● CRR deposits earn no interest
● removed the limits (lower and upper) RBI has flexibility to make its monetary
adjustment
● CRR is adjusted to manage liquidity
● today it is 4% 2017 if inflation is high money supply needs to be taken out and so
CRR is generally increased
● RBI increases CRR to tighten credit and lower CRR to expand credit

incremental CRR-
● scheduled banks will have to maintain incremental CRR of 100%
● this major is intended to absorb part of the surplus liquidity arising from the
return of demonetised rupees 500 and 1000 notes

SLR vs CRR-
● both instruments is in the hands of RBI
● both manage liquidity but they are used for different purposes
● CRR has a short and medium term relevance, While SLR is a long-term tool
● SLR enables banks to earn money while CRR part does not earn any interest
● CRR is maintained in cash form with Central Bank, whereas SLR is money held as
government securities and kept with the banks themselves

OMO (open market operation) of RBI-

● OMO of the RBI can be described as outright purchase and sale of government
securities in the open market
● open market essentially means banks and financial institutions) by the RBI in
order to influence the volume of money and credit in the economy
● purchase of government securities injects money into the market and thus
expands credit; sales have the opposite effect
● OMO are RBI's most important and flexible monetary policy tool

2 methods that the RBI uses to control the money supply in the economy-
qualitative method & quantitative method

qualitative method-
● by quality we mean the uses to which bank credit is directed. particular sector.
● It is a selective method of control as it restricts credit for certain section and may
expand for the other known as priority sector depending on the situation
tools used under this method are-
● margin requirement-
lending to a select sector may be accompanied by having to set aside a certain
percentage of money for safety
● rationing of credit-
Under this method there is a maximum limit to loans and advances that can be
made to a particular sector which the commercial banks can not exceed. The RBI
fixes the ceiling.
both these tools makeup selective credit controls (SCC)
the basic and important needs of credit control in the economy are-
● To encourage the overall growth of the priority sector like agriculture
● to keep a check over the channelization of credit so that credit is not delivered for
undesirable purposes
● to achieve the objective of controlling inflation as well as deflation
● to boost the economy by facilitating the flow of adequate volume of bank credit to
different sectors to develop the economy

moral suasion-
● measures used by the Central Bank to influence and to pressure but not force
banks into adhering to policy.
● measures used are closed-door meetings with bank director, increased severity of
inspections, discussions, appeals to community spirit

MCLR (marginal cost of funds based lending rate)-

● this new methodology replaces the base rate system
● minimum interest rates of banks
● it is called monetary policy transmission
● mclr is based on current cost of funds rather than overall cost of funds which was
used to calculate based rate. this will ensure quicker transmission of RBI rate cuts
to borrowers

market stabilisation bonds-

● when the need to absorb huge amount of cash arises, market stabilisation scheme
to absorb excess liquidity from the market
● The normally available government securities are not enough for the RBI to suck
out the huge rupee supply (printed money) that was caused by buying dollars.
therefore the MSS was started

interest rates and their significance-

● inflation- the higher the inflation the higher the interest rates

Deregulation of interest rates-

interest rates have been deregulated as a part of banking reforms.

floating and flexible rates of interest-

● two types- fixed and floating
● if they are offered together flexible interest rate

urjit Patel committee 2014

to examine the current monetary policy framework of the RBI. suggested that
● The apex bank should adopt the new CPI (all India level rural + urban) as the
measure of the nominal anchor for policy communication. new CPI and not any
other index like WPI.
● the target for the inflation should be set at 4% with the band of + / - 2% around it
● government help RBI
● RBI fix accountability
● monetary policy decision-making should be vested with a monetary policy
committee (MPC).
● the governor of the RBI should be the chairman of the MPC committee
● RBI should fix inflation target
● What if the RBI fails ? Each member will sign it > reasons for failure >action
proposed >time frame for result.

Indian financial code (IFC), MPC and inflation targeting-

● financial code to replace the bulk of existing financial laws.
● Indian financial code (IFC) suggested an MPC to make a rate decisions by a
majority vote
three advantages-
● can represent different viewpoints. better than an individual
● spreading the responsibility, can reduce the internal and external pressure
● Ensure broad monetary policy continuity

reserve Bank of India RBI

● RBI act 1934 came into effect in 1935, was nationalised in the year 1949
● right to issue Bank notes of all denominations
● RBI should maintain gold and foreign exchange reserve
● banker to government- to act as a government banker agent and advisor agent of
Central Government and of all state governments in India
● bankers bank and lender of The Last resorte- the RBI Act as the bankers Bank. the
scheduled bank can borrow from the RBI on the basis of eligible securities by
rediscounting bills of exchange
● controller of credit- according to the banking regulation Act of 1949 the RBI can
ask any particular Bank or the whole banking system not to lend to particular
groups or persons
● it accept loan and manages public debt on behalf of the government
 ● it issues Government bonds treasury bills
● RBI as national clearing house-
RBI acts as a clearing house for settlement of banking transactions. it essentially
means the inter bank cheque clearing settlement
● RBI as lender of The Last resort-
● Custodian of foreign reserves- responsibility to act as the custodian of India's
reserve of international currencies. it takes up operations in the forex market to
stabilize the exchange rate of rupee and ensure that there is no speculation and
there is order. To be able to do so effectively it holds forex reserves which it
acquired from the market (purchase).
● supervisory functions- given the RBI wide powers of supervision and control over
commercial and cooperative banks relating to licensing and establishment,
branch expansion, setting reserve ratio. these are
a. granting licence to banks
b. periodical review of the work of commercial banks
c. giving directives to commercial banks
d. control the non banking financial corporations
● promotional functions- promotes banking habits extend banking facilities to rural
and semi urban areas and establish and promote new specialised financing
agencies
● functions of central bank in sum-
a. Monopoly on the issue of banknote
b. the government's banker
c. bankers Bank
d. lender of Last resort
e. manages the country's foreign exchange and gold reserve
f. regulation and supervision of a banking industry
g. setting the official interest rate- used to manage both inflation and the
country's exchange rate
h. The main responsibility is making monetary policy to ensure a stable
economy including a stable currency.

debt management office (DMO)

● public debt management agency (pdma) is a specialised independent agency that
manages the internal and external liabilities of the central government and renders
advice.
● PDMA manages the issue and trading of government securities and Undertakes
cash management for the government
● Dr Raghuram Rajan committee on financial sector reforms 2009 which is now
considered as best practice and favour it.
● justice BN Shri Krishna chaired FSLRC or financial sector legislative reforms
commission report 2013 also recommended setting up the independent public
debt management agency at earliest
autonomy of RBI-
architect of the monetary policy
the recent measures to make RBI independent are-
● replacement of ad hoc treasury bills with WMA from 1997
● frbm act empowers RBI with autonomy- no primary borrowing
● RBI act amendment in 2006 to give it more power for reserve requirement
management
the arguments in favour of autonomy are-
● monetary stability- system can be best achieved if professional Central bankers
with the long term perspective are given charge. otherwise political leadership
may be tempted to populism
the best courses to have a middle path like in the MPC where the RBI and other together
take decisions

RBI dividend-
RBI earns its profit through its open market operation, forex market interventions etc.
When what it costs the RBI is deducted from the gross profit, net is arrived at and that is
called surplus and goes to the GOI.

money supply-
refers to the total volume of money circulating in the economy. can be estimated as
narrow or broad money
● M1 equals the sum of currency with the public and demand deposits with the
banks. It is narrow money. (M1=CP+DD)
● M3 or the broad money, includes time deposits (fixed deposit) savings deposits
with post office saving bank and all the components of M1

liquidity trap-
The liquidity trap is a situation when the rates and reserve requirements are lowered to
stimulate demand but it does not impact one reviving demand and growth. There are no
takers for bank credit. It happens in times of recession that are getting worse. This
makes the monetary policy ineffective, to come out of the liquidity trap, QE is attempted.

quantitative easing-
● Involves printing fresh currency
● Central Bank uses on conventional means other than the usual monetary policy
tool to flood the financial system with new money through quantitative easing
● federal reserve of the US (it's Central Bank like a RBI)

taper tantrum-
 ● the unconventional monetary policy called qualitative easing means printing
money by the central bank and supplying it to the market to stimulate demand and
revive growth

FSDC (financial stability and development council)-

● is Apex level body constituted by GOI. first mooted by Raghuram Rajan committee
in 2008.
● The new body envisages to strengthen and institutionalize the mechanism of
maintaining financial stability, financial sector development, inter regulatory
coordination along with the monitoring macro prudential regulation of the
economy. its chairperson is the union finance minister of India
responsibilities-
● financial stability
● financial sector development
● inter regulatory coordination
● financial literacy
● financial inclusion
● macroprudential supervision of the economy including the functioning of large
financial conglomerates

India and financial stability board (FSB)

● fsb was established in 2009 under the aegis of G20 (G20 is international forum for
government and Central Bank governors) by bringing together the national
authority standard setting bodies and international financial institutions for
addressing vulnerabilities and developing and implementing strong regulatory
supervisory and other policies in the interest of financial stability

macroprudential analysis-
● It is a method of economic analysis that evaluates the health soundness and the
vulnerability of the financial system

monetary policy committee MPC

In 2016 the government amended the RBI act to create the monetary policy committee.
MPC was set up consequent to the agreement reached between Government and RBI to
task RBI with the responsibility for price stability through inflation targeting.
● responsible for containing inflation targets
● in the report give the reasons for failure, remedial actions as well as estimated
time within which the inflation target shall be achieved

inflation: concepts facts and policy

● inflation means a persistent rise in the price of goods and services
 ● reduces the purchasing power
● reduces savings
● Pushes up interest rates
● dampens investment

Inflation types-
● creeping inflation- is a rate of general price increase of upto 4% a year. It is
manageable. considered good for the economy.
● trotting inflation- increases a few more hundreds of bases. Is 1%. if not controlled
lead to
● galloping inflation- 8% to 10% year
● runaway inflation
● hyper inflation- is when prizes are out of control and a monthly inflation rate of 20
or 30% or more. the worst is a monetary collapse
developed countries have far lower tolerance level compared to developing countries

other related concepts are-

● deflation when there is a persistent general fall in the level of price, opposite of
inflation
● disinflation- is the reduction of the rate of inflation
● stagflation- combination of inflation and resigning unemployment
● Reflation- returns after a spell of deflation

measure of inflation-
● GDP deflator-
is the change in prices of all domestically produced final goods and services in an
economy.
● cost of living index-
standard of living is acquiring a specific set of goods and services is defined and
the basket is tracked for price rise to check affordability
● PPI (producer price index)-
The price at which the producer sells to the wholesaler / distributor is the
producer price. measures the increase in prices of inputs like raw material wages
rupee exchange rate
● WPI (wholesale price index)-
comprises transactions at first point of a bulk sale in the domestic market
● CPI (consumer price index)-
price paid by the consumer at the retail level

types of inflation based on causes-

● demand pull inflation-
increase in demand due to increased private and government spending. Real
Gross domestic product rises and unemployment falls
 ● cost push inflation-
when the cost of production goes up
● Structural inflation-
caused by deficiency in certain conditions such as backward agricultural sector,
unable to respond to people's increase demand leading to artificial shortage of
goods
● Cartelization-
when a group of industry participants come together and manipulate the price in
the market. For example , the Competition Commission of India CCI had imposed
penalties on cement manufacturers association CMA.
● hoarding-
accumulation of a huge quantities of goods and releasing them into market in
condition of scarcity at higher price

High inflation hurts-

● low income groups hurt
● people on a fixed income hurt
● discourage export as a domestic sales are attractive
● drag down growth as investment climate turns bad, interest rates are raised and
cost of credit increases
● may discourage saving
● inflation tax is a hidden tax, financial loss in the value of money incurred by
holders of cash
● strikes can take place for higher wages
● Government fiscal deficit may go up

A small amount of inflation can be good if it is a result of innovation. A small price rise is
necessary for wages to go up. help the economy keep off deflection which can otherwise
set off a recession. incentive to the producer. greasing The wheels of commerce.
losers: individual on fixed economics
gainers: individuals whose income rise faster than inflation; debtors

optimal inflation-
RBI & GOI signed a monetary policy framework agreement in 2015 which says that the
objective of monetary policy framework is mainly to maintain price stability, while
keeping in mind the objective of growth. the monetary policy framework would be
operated by the RBI.
inflation within 4% with the band off of + / - 2%. This level is considered optimal from
growth.

concepts-
open inflation-
 ● the inflation that results when the government does not support it with subsidies
and monetary policy is called open inflation

suppressed inflation-
● fiscal and monetary actions are taken to manage it

headline inflation-
● headline inflation is a measure of the total inflation. It is an unadjusted number.
overall inflation reported. headline inflation is what consumer experiences

Core or underlying inflation-

● measures the long run trend in the general price level

Phillips curve-
● the inverse relation between rate of inflation and rate of unemployment is shown
in the Phillips curve

deflation-
● definition is a prolonged and widespread decline in prices that causes consumers
and businesses to curb spending as they wait for prices to fall further. opposite of
inflation.
● Crashing demand, producers can not sell and go bankrupt, unemployment rises
reducing demand further.

remedy to deflation-
● Tax cut to boost demand from consumers and business
● Lowering central bank interest rate
● printing more currency
● capital injections into the banking system
● increase government spending

inflation and corruption link is as follow-

● through black Money
● hoarding
● commodity prices being manipulated

inflation targeting-
● inflation targeting focus is mainly on achieving price stability as the ultimate
objective of the monetary policy
● RBI entered into an agreement with the ministry of finance in 2015 that mandates
the RBI. target is set by GOI in constitution with RBI but the RBI is responsible for
achieving it
 ● In case of failure RBI has to explain the reason for its failure as well as give a
timeframe within which it will achieve

indices of inflation-
WPI-
● provides estimate of inflation at the whole sale transaction level for the economy
as a whole
● Indian WPI is updated on a monthly basis. WPI is established by The economic
advisory in the ministry of commerce and industry

limitations on WPI-
● Accuracy of WPI is unsatisfactory
● services such as rail and road transport healthcare postal banking and insurance
are not part of the WPI basket

new to all India WPI-

● number of item has been increased
● new definition of wholesale price index does not include taxes in order to remove
impact of fiscal policy
● present separate WPI food index

CPI-
● measures changes in the prices of a basket of consumer goods and services
purchased by households
● the dearness allowance of a Government employees and wage contracts between
labour and employer is based on this index
● CPI number known as cost of living index number

presently consumer price index compiled in India are-

● CPI for industrial workers (IW)
● CPI for agricultural labourers (AL)
● rural labourers CPI (RL)
● CPI (urban)
● CPI (rural)

new CPI series 2015-

● separate group for tobacco, egg as a separate subgroup

difference between WPI & CPI-

● WPI measures price rise at the wholesale level means sale in large quantities and
usually made for resale it covers goods that are traded at the wholesaler level
VS. CPI measures price rise at the retail level
 ● wholesale prices are more or less the same throughout the country. consumer
prices or retail prices vary across regions rural and urban and also across cities
according to the consumer preferences for certain product supplies and
purchasing power, beside taxes levied by State comprise an important component
of the variation in prices of many products

divergence between WPI and CPI-

● WPI reflects the change in average prices for bulk sale of commodities at the first
stage of transaction while CPI reflects the average change in prices at retail level
paid by the consumer.
● The prices used for compilation of WPI are collected at ex-factory level for
manufactured products, at ex-mine level for mineral products and mandi level for
agricultural products. retail prices applicable to consumers and collected from
various markets are used to compile CPI
● the CPI basket consists of services like housing education medical care recreation
while which are not part of WPI basket

Which index should one use ?

● The WPI is useful in certain contexts, for example for industrialists, the cost of
setting up a factory over the course of several years; and further to calculate the
cost of production and the returns over several years. the basket of a item in the
CPI does not include machinery chemicals and so on
● the price of electricity in the CPI is the consumer tariff not the industrial tariff and
so on

services and price index-

● WPI now does not include services, CPI meant for industrial workers including
certain services such as medical care education recreation and amusement
transport and communication

producer price index PPI-

● is underway in India. it means price of goods as they are sold to the wholesalers
by the producer
● the difference between WPI and PPI is accounted for by the margins and other
transport and distribution costs

food price index-

● WPI food index-
to capture the rate of inflation in food items
● consumer food price index CFPI-
measure of change in retail prices of food products consumed by the defined
population group in a given area with reference to a base year.
● FAO food price index-
 Released by the food and agriculture organisation of the UN. it is a measure of the
monthly change in international prices of basket of food commodities

National housing Bank Residex-

● the country's First official housing price index HPI. was launched in 2007 to track
the moment of housing prices across different cities in India on quarterly basis.

HPI of RBI-
● the RBI complies quarterly house price index for 10 major cities Mumbai Delhi
Chennai Kolkata Bengaluru Lucknow Ahmedabad Jaipur Kanpur

government steps to control inflation-

● fiscal measures-
a. reduced import duties on food items
b. import duties are raised on gold
● administrative measures-
a. ban on exports of food items
b. Dehoarding
● monetary measures-
a. repo rates were kept high to make credit dearer
● advising state to allow free moment of fruits and vegetable by delisting them from
the APMC act, banning of export of all pulses (except Kabuli chana and organic
pulses and lentils upto certain quantity)
● Zero import duty on pulses and onion empowering state to impose stock limits in
respect of onion pulses edible oil and edible oil seeds under the essential
commodities act
● modest increase in minimum support price in the last 2 years.

Money market and capital market in India: instruments and

dynamics
money market can be defined as a market for short term funds with monitor maturities
ranging from overnight to 1 year and includes financial instruments that are considered
to be close substitute of money

call money-
borrowed or lent for a very short period. 1 day and up to 14 days (notice money)

government securities-

treasury bills-
● short term investment opportunities upto 1 year at present
 ● three types- 91 days (auctioned every week), 182 days &364 days (auctioned every
alternative weeks)
● no treasury bills issued by State Government
● available for a minimum amount of 25000 and in multiples of 25,000 issued at a
discount rate
● treasury bills are also issued under the market stabilisation scheme MSS.
● treasury bills are zero coupon securities and pay no interest issued at a discount
and redeemed at the face value at maturity

cash management bills CMB-

● issued for maturities less than 91 days, generic character of t bills

certificates of deposits-
● issued by scheduled commercial banks and financial institutions regional rural
banks and local area banks cannot issue CDs.
● CD is a negotiable promissory note secure and short-term (up to a year) minimum
amount of a CD should be rupees 1 lac

Inter corporate deposit market-

commercial paper-
● short term unsecured promissory notes issued by top rated corporates, primary
dealers, satellite dealers, all India financial institutions.
● maturities between a minimum of 7 days and a maximum of up to 1 year. rupees 5
lac or multiples thereof
● the main features of these papers are-
a. corporates having tangible net worth of not less than rupees 4 cr. can issue
them
b. CPs require credit rating from a credit rating agency
c. minimum amount of amount invested by single investor is 5 lac on multiple
thereof
d. issued at discount to face value

ready forward contract (repos)- repurchase agreement

commercial bills-
● bills of exchange are negotiable instruments called Trade bills. called commercial
bills when they are accepted by commercial banks for discounting

money market reforms-

● Deregulation of the interest rate
● regulation of non banking financial companies
● introduction of new money market institution like CD, CP
 ● discount and finance house of India (DFHI) was setup in 1988 to impart liquidity in
the money market
● in the money market transaction the electronic dealing system has been started
● RBI set up special recovery tribunals for debt recovery

capital market-
● maturity of 1 year and above. medium and long term funds

G-secs (Gilt edged securities)-

● issued by the central government for the state government through RBI. short
term usually called treasury bills or cash management bills with original maturity
of less than 1 year for long term usually called Government bonds or dated
securities with original maturity of 1 year or more
● state governments issue only bonds or dated securities called the state
development loans
● special securities (oil bonds food corporation of India bonds fertilizer bonds
power bonds) are not eligible to be SLR securities. they are not issued through the
RBI
● G-secs are issued both in demat and physical forms. the minimum investment is
rupees 10,000
● G-secs could be of the following types-
a. dated securities- fixed maturity and fixed coupon rates payable half-yearly
b. floating rate bond- variable interest rate with a fixed percentage over
benchmark rate. cap and a flow rate attached. fixing a maximum and
minimum interest rate payable on it.
c. capital indexed bond- interest rate is a fixed percentage over the inflation
rate: WPI or CPI depending on the terms

DFIs or development banks-

● term lending institution (IFCI Ltd, IDBI, IDFC Ltd,
● Refinancing institutions (NABARD, SIDBI, NHB)
● sector specific / specialised institutions (EXIM Bank Ltd, TFCI Ltd, REC Ltd,
HUDCO Ltd, IREDA ltd.
● investment institutions (LIC, UTI, GIC, IFCI venture capital fund Ltd, ICICI venture
fund management co Ltd

merchant banks / investment banks-

● MBs are also called investment banks. they only deal with cooperates and not in
general public

collective investment scheme-

● scheme or arrangement which pulls funds from investors. Its arrangement where
investors pool in their funds to derive some return on investment
REITs (real estate investment trust)
● SEBI regular REITs. like mutual funds REITs will pull a money from investors and
issue units in exchange

mutual funds-
● raise money from the public and invest in stock market securities bonds. SEBI
regulation mutual funds.

hedge funds-
● like mutual funds. hedge funds use strategies far more complex than a typical
mutual fund. SEBI regulate them under alternative investment fund

venture capital-
● financial institutions who invest in startups generally

Angel investors-
● is an affluent individual who provides capital for a business start up business
startup
● Angel investor are allowed to be registered as alternative investment fund
● can make investment only in those companies which are incorporated in India
● need to be invested in a firm for at least 3 years can invest in companies not older
than 3 years.

hundi-
● hundis were legal financial instruments that evolved in India. used in trade and
credit transactions for the purpose of transfer of funds from one place to another
in the pre modern era is served as travelers cheque. an unconditional order in
writing made by a person directed another to pay a certain sum of money to a
person named in the order. now I have no legal status nor covered under the
negotiable instrument Act 1881

Chit funds-
● arrangement that a group of people arrive at to contribute money in a defined
manner at periodic intervals into a pool. It is a kind of saving scheme. may be
conducted by organised financial institutions or maybe unorganised schemes

NBFC (non banking financial company)-

● registered under the companies Act 1956.

ECBs (external commercial borrowings)-

● is an instrument used to facilitate the access to foreign money by Indian
corporations and PSUs
Euro issues-
● Indian companies are permitted to raise foreign currency resources through issue
of foreign currency convertible bonds (FCCBs)

stock market-
credit default swap-
● It is a form of insurance against debt default.

take out financing-

● method of providing finance for longer duration projects

external source of finance for India-

stock market like ADRs and GDRs. masala bonds in rupee IBRD and IFC

bilateral loans by governments abroad private equity ECB

Stock market
stock exchange in India-
● the first company that issued share was VOC or Dutch East India company in the
early 17th century
● There are five stock exchanges in the country BSE, National stock exchange NSE,
United stock exchange USE, MCX stock exchange Ltd MCX-SX, and India
international exchange INX.

Bombay stock exchange BSE-

● BSE is Asia's first stock exchange
● BSE includes the automatic online trading system "BOLT".
● Bombay stock exchange ltd, went for an IPO in 2017 and got listed on NSE

National stock exchange NSE-

● located in Mumbai, established in 1992
● world's 12th largest stock exchange 2017
● Nifty is a will diversified 50 stock index accounting for leading sectors of the
economy

metropolitan stock exchange of India MSE- earlier known as MCX-SX

United stock exchange of India USE- deals in currency for futures

INX 2017-
 ● is India's first international stock exchange, opened in 2017. located at the
international financial services centre (IFSC).IN GUJRAT. It is a wholly owned
subsidiary of the BSE.

classification of companies listed in BSE-

sensex-
● sensex or sensitive index is a value weighted index composed of 30 companies
● 30 largest and most actively traded Blue chip stocks (profit making),
representative of various sectors, on the BSC.
● generally regarded a mirror or barometer of the Indian stock market and economy

demutualization-
● Mutualization refers to ownership and management of the exchange being
combined in the same hands-brokers elected by the broker community from
among themselves. brokers are the owners of the BSE.
● F dematerialisation is when management and ownership are separated ownership
is divested from the brokers and the company become a public company

securities and exchange board of India SEBI-

● The capital market in India is regulated by the SEBI. It was published in 1988.
● SEBI regulate the working of stock exchanges and intermediaries such as stock
brokers and merchant bankers, accords approval for mutual funds and registers
foreign institutional investors who wish to trade in Indian stocks
● prohibits fraudulent and unfair trade practices relating to securities markets and
insider trading in securities with the imposition of monetary penalties
● carrying out inceptions, conducting enquiries and audit of the stock exchanges
and intermediaries and self regulatory organisation in the security market.
● SEBI has its head office in Mumbai and its three regional offices in New Delhi
Kolkata and Chennai

SEBI and the reforms-

● the stock exchange scam of 1992 Harshad Mehta and scam in 2000 Ketan Parekh
too.
● SEBI introduced reforms like improved, transparency, computerisation, enactment
against insider trading, restriction on forward trading, introduction of T + 2 system
of settlement. the restriction and elimination of forward or contango trading,
referred to in India as badla is a bold step to check speculation and manipulation
of the market
● some more steps taken by SEBI are as follows-
a. SEBI enforces corporate disclosures
b. protect retail investors
c. Enforces ban on insider trading
 d. SEBI is empowered to register and regular mutual funds
e. introducing a code of conduct for all credit rating agencies operating in
India
f. clause 49 of the listing agreement that SEBI introduced mandates that all
listed companies should have half the directors on the board as
independent directors
g. making it mandatory to have anchor investors

securities laws amendment Act 2014-

● SEBI with new powers to effectively pursue fraudulent investment schemes,
especially ponzi schemes.
● It also provides guidelines for the formation of special fast trial courts.

SEBIs role as a protector of investor-

● set up investor protection fund to compensate the investor
● keeping a check on fraudulent and unfair trading methods
● Carry out investor awareness and education program
● inspecting and auditing the exchanges
● assessment of fees and other charges
● banning insider trading
● strengthening of corporate governance in the listed companies

slogan "an informed investor is a safe investor". SEBI launched the securities market
awareness campaign.

capital market reforms-

● SEBI given statutory status- that is act of parliament
● electronic trade
● setting up of clearing house
● compulsory dematerialisation of share certificates so as to remove problems
associated with paper trading and speed up the transfer
● platform for MSME
● merger of FMC with SEBI

primary market-
● primary market deals with the issuance of new securities directly by the company
to the investor
● In case of a new stock issues, this sale is called an initial public offering IPO if the
company already issued shares and is going to the market again with the new
issue it is called follow on public offering (FPO)

secondary market-
 ● financial market for trading of securities that have already been issued in an initial
public offering

types of shares-
two types of share common stock and preferred stock
● preferred stock-
is generally issued to banks by companies through retail investors. given
dividends even if they are common stockholders are not.
preference stockholders are given money first and voting rights.

derivatives- (financial instrument)-

future and options are the two classes of derivatives
● futures-
this contract is an agreement between two parties to buy or sell an asset at a
certain time in the future for certain price
futures are different from forward as the former are traded on exchange while the
later maybe merely signed contract between two parties
● option-
These are a class of futures where the buyer or seller has an option whether to
buy or not option is a right but not the obligation to sell. the call option is right but
not the obligation to buy.

buyback of share-
reasons for buybacks includes-
● putting unused cash to use
● raising earnings per share
● reducing the number of shareholders to reduce the cost for servicing them

anchor investor-
● are institutional investors like mutual funds and a pension funds that are invited to
subscribe for shares ahead of the IPO to boost the popularity of the issue and
provide confidence to potential IPO investors

commodity exchange-
commodity exchanges are institution which provide a platform for trading in commodity
future
the commodities traded at this exchanges comprises the following-
● edible oil seeds- mustard cotton seed soybean oil
● food grain- wheat gram Bajra maize
● metals- gold silver copper zinc
● spices- turmeric paper jeera
● fibres- cotton jute
● other sugar rubber natural gas crude oil
FMC was merged into SEBI 2015-
● forward Market commission was a regulatory authority which was overseen by
ministry of consumer affairs and public distribution
● FMC only regulated the exchanges and had no direct control over brokers

mutual funds-
● Mops up money from a group of investors to invest in the capital market, does it
for fees.
two types of mutual funds-
● open ended funds-
issue shares units to the investor directly at any time. price based on funds net
asset value. no time duration and can be purchased or redeemed at anytime on
demand but on the stock market
● closed ended fund-
collective investment scheme issued by a fund. Only a fixed number of shares
units are issued in an IPO which may be called a new fund offer ring (NFO).

foreign portfolio investor-

● single investor or investor group cannot exceed 10% of the equity of an Indian
company beyond which it will now be treated as FDI
● NRI and foreign venture capital investor (FVCI) are excluded from the preview of
this definition
● FPI are not allowed to invest in unlisted shares
● FPI are permitted to invest in government securities with the minimum reschedule
maturity of one year it means FPI have been prohibited from investing in T-bills

FIIs (foreign institutional investor)

● means an institution established or incorporated outside India which purposes to
made investment in securities in India
● reasons for FIIs having India as an favourite destination-
a. growing economy
b. corporate profit are high
c. government policies are encouraging compared to other countries
d. India has brighter prospects

difference between FDI and FII-

● FDI invest in the setting up firms to produce goods and services that is why it is
called direct institution FII buys financial assets for profits

IOSCO (international organisation of security commissions)-

● is an association or organisation that regulates the world securities and futures
market.
 ● Assist its members to promote higher standards of regulation and act as a form
for National regulation, assist its members to promote high standards of
regulation and act as a forum for National regulator's and to cooperate with each
other and other international organisations. India is a member.
● It has a permanent secretariat base in Madrid

FATF (the financial action task force) on money laundering-

● it is an intergovernmental organisation founded in 1989 is to develop policies to
combat money laundering and terrorism financing
● secretariat is the housed at the headquarter of the OECD in Paris

global depository receipts (GDR)

● Indian companies are allowed to raise equity capital in the international market
through the issue of GDR

ADR (American depositary receipt)

● are like shares. similarly with Indian depository receipt (IDR)

participatory notes-
● are instruments used by foreign investors for making investment in the stock
markets
● FII who are SEBI registered use this instrument for facilitating the participation of
overseas funds like hedge funds and other who are not registered with SEBI and
thus are not directly eligible for investing in Indian stocks
● any entity investing in participatory note is not required to registered with SEBI,
whereas all FII is have to compulsory get registered
● participatory notes provide a high degree of anonymity

clearing house-
● an organisation which registers, monitors matches and guarantees the trades of
its members and carries out the final settlement of all futures transactions.
● The national securities clearing corporation is the clearing house for the NSE.

equity-
● funds provided to a business by the sale of stocks

debentures- (unsecured debt)

● convertible debentures-
can be converted into equity at a future date
● non convertible debenture- partly convertible debenture

bear- (sell) believe the market will go down

bulls- (buy) market will go up
gilt-
a bond issued by the government. gilt edged market is the market for government
securities

Blue chip-
shares of the companies that are the most valuable

retail investor-
whose subscription to securities is of a value less than ₹2 lack

negotiated dealing system-

electronic platform for facilitating dealing in government securities and money market
instruments

market capitalisation-
price per share X the total number of shares

insider trading-
● insider trading occurs when anyone with information related to strategic and price
influencing information purchases or sells stocks so as to make profits

Nasdaq-
● electronic stock market that uses a computerized system to provide brokers and
dealers with price quotes. It is the electronic stock market first in the world run by
the National Association of Securities dealers. many of the stocks traded through
Nasdaq are in the technology sector

dow Jones index- New York stock exchange

important index in the world-

● French CAC 40
● German DAX
● Ibex for Spain
● Japanese Nikkei
● Australian all ordinaries

decoupling-
● it means that a nation's economy may have an autonomous logic and need not be
entirely dependent on the global economy

ponzi scheme or pyramid scheme- fraudulent investment corporation

clause 49-
there should be certain independent directors on the board of a company

shariah index-
● Asia's oldest stock exchange the BSE launched its Shariah index in 2010.
● new index attracts investments from Arab and European countries
● Arab investors only invest in portfolios of clean stocks; they do not invest in
stocks of companies dealing in alcohol, conventional financial services (banking
and insurance), entertainment (cinemas and hotels) , tobacco , pork meat defence
and weapons.

Taxation
Pradhanmantri Garib Kalyan Yojana PMGKY, 2016-
It is an amnesty scheme launched by GOI.
● provides an opportunity to declare unaccounted wealth and black money in a
confidential manner and avoid prosecution after paying tax interest and a fine of
50% on the undisclosed income. an additional 25% of the undisclosed income is
invested in the scheme which can be refunded after 4 years without any interest
● the scheme can only be availed to declare income in the form of cash or Bank
deposits in Indian bank accounts and not in the form of jewellery stock immovable
property or deposits in overseas accounts

operation clean money 1 and 2-

● income tax department ITD initiated operation clean money in January 2017 initial
phase of the operation involve e verification of large cash deposits made during
19th November to 13th December 2016
● data analytics were used for comparing the demonetisation data with information
in databases
● 18 lakh people have been identified in whose case, cash transactions do not
appear to be in line with the taxpayers profile.

Inverted duty structure-

● lower tax on raw material, higher import duty on the raw materials and promote
export.
● Higher import duty on the raw materials and intermediates then on the finished
product is called inverted duty structure
● India levies one of the highest duties on import of raw materials and one of the
lowest duties on import of finished rubber goods leading to a surge in import of
finished goods

Tax expenditure-
 ● tax expenditure refers to revenue foregone as a result of exemptions and
concession (direct and indirect tax)

tax havens-
● a tax heaven is a country or territory where certain taxes are levied at a low rate or
not at all

Panama and Paradise papers-

● Panama papers- 11.5 million leak documents for more than 214,488 offshore
entities personal financial information about wealthy individuals and public
officials dealing in shell companies operations that were used for illegal purpose
including fraud tax evasion and evading international sanctions
● paradise papers- is a set of 13.4 million confidential electronic documents relating
to offshore investment

tobin tax (Robin hood tax)-

● James Tobin, an economist, proposed tobin bind worldwide tax on all foreign
exchange transactions when foreign capital enters a country and when it leaves
the aim is to check speculative flows.
● This tax can be imposed only if all the countries accept the propositions. India
does not prefer it as we need foreign inflow as we are a CAD country and don't
have a surplus.

Pigouvian tax-
● This tax is imposed on transactions that have a negative externality for example
population.
● externalities means impact of one person's actions on the well being of an
outsider carbon tax is one example in this context of the need to discharge fossil
fuel and encourage renewable sources due to climate change threat
● supreme court in 2015 imposed an environment compensation charge on
commercial vehicles entering Delhi

base erosion and profit shifting BEPS-

● refers to tax planning strategies that exploit gaps and mismatches in a tax rules to
artificially shift profits to low or no tax locations where there is little or no
economic activity
● it means a company shifts its headquarters to a jurisdiction like Mauritius or
Thailand where tax rates are low only to avoid taxes
● India suffers from BEPS due to double taxation avoidance agreement DTAA being
misused. India modified the its DTAA with Mauritius to tackle the BEPS issues
● the abuse not only weakens efforts to fight poverty but also weakens the fiscal
base needed for sustainable economic development
 ● OECD has a BEPS inclusive framework in which many countries are participants
including India

Base erosion and profit shifting (BEPS)

multilateral convention to implement tax treaty related measures

What is BEPS ?
● refers to the phenomenon where companies shift their profits to other tax
jurisdictions, which usually have lower rates, thereby eroding the tax base in India

about the multilateral convention to implement tax treaty related measures to prevent
BEPS-
● convention is an outcome of the OECD / G20 BEPS project to tackle base erosion
and profit shifting
● convention implements to minimum standards relating to prevention of treaty
abuse and dispute resolution through mutual agreement procedure
● it will help applied alongside existing tax treaties, modifying their applications in
order to implement the BEPS measures
● the convention insures consistency and certainty in the implementation of the
BEPS project also provide flexibility to exclude a specific tax treaty and to opt out
of provision or part of provisions through making of reservations
● A list of covered tax agreements as well as a list of reservations and options
chosen by the country are required to be made at the time of signature.

a.transfer pricing and APA (advance pricing agreement)-

● the need for the code is because of the profit shifting practices followed by the
MNCs
● the price of goods sold by the MNC to Indian subsidiary is shown higher in India
to show less profit and thus less tax outgo
● high profit in countries where the corporate tax rate is low and low profits / losses
where the rate is high
● Tax evasion and money laundering has to be checked by tightening the transfer
pricing regime. the solution is APA
● APA refers to an agreement between the taxpayer and the tax authorities on the
pricing of an existing or proposed transaction between related parties
● any taxpayer can file an application for an APA along with details of the
transaction and the proposed pricing for such transaction.
● the APA program enables the taxpayers and the revenue authorities to interact,
negotiate and come to a conclusion on the pricing of the transaction in question
 ● enter into an agreement which would be valid for A period of 5 years if they do not
sign the agreement it helps avoid dispute with the tax authorities over transfer
pricing
● it applies to foreign MNCs and Indian MNCs

double taxation avoidance agreement DTAA-

● Double taxation is the levying of tax by two or more jurisdictions on the same
declared income
● DTAA is a tax treaty signed between two or more countries.

2016 India Mauritius protocol-

● India and Mauritius signed a protocol to amend the 1982 India Mauritius DTAA.
● it will have an impact on the India Singapore DTAA as the capital gains tax
exemption provided there in is linked to the benefits available under the 1982

POEM (place of effective management)-

● If a company's place of effective management is India it will be treated as an
Indian resident and its global income will be taxable in India.
● the aim of POEM is to target shell companies set up for retaining income outside
India although effective control and management of affairs is located in India

GAAR (general anti avoidance rule)-

● GAAR is an anti tax avoidance rule of India it come into operation from 1 April
2017 assessment year 2018-19
● It allows tax officials to deny tax benefits if a deal is found without any commercial
purpose other than tax avoidance
● prevent tax evasion in the case of tax planning. there are firms and individuals
who either minimise tax payments or completely avoid it by taking advantage of
the rules in the book but government says that it is not acceptable as the entire
event is planned only to avoid taxes as was done by the Vodafone when it signed
the deal outside the country with hutch and put up a corporate veil for the
operation just to avoid paying taxes even while on the face of it, it is legal, GOI
applied the doctrine of look through and not look at and ordered them to pay tax
as tax avoidance in this case is tax evasion. as a result GOI made the rules framed
by the department of revenue under the ministry of finance

TIEA (tax information exchange agreement)-

● to promote international corporation in tax matters through exchange of
information
● according to the Panama papers expose in April 2016 at least 500 Indians are
reportedly said to have held offshore accounts / equity interest in offshore entities
in tax havens
service tax started from 1994

laffer curve-
● developed by author laffer, this curve shows the relationship between tax rates
and tax revenue collected by government

MAT (minimum alternative tax)-

● Zero tax companies in order to bring such companies under the income tax Act
MAT was introduced in 1996

rajasva Gyan Sangam-

● the objective of conference is to enable a two-way communication between the
policymakers and the senior officers in the field officers with a view to increase
revenue collection

dividend distribution tax-

Companies giving dividends have to pay tax on the amount distributed as dividend.

withholding tax- same as TDS

capital gains tax-

● It is the tax on the gains made from buying and selling assets like land shares.
● If the gain is made in the assets held for over 3 year (one year for shares) it is
called long term capital gain and taxed.

Tax shelter-
● any technique which allows to legally reduce or avoid tax liabilities

Tax evasion-
● is a punishable offence tax evasion involves failing to report income or improperly
claiming deductions that are not authorised it creates black money

Negative income tax- subsidy is a negative income tax

tax buoyancy-
● change in tax revenue with the growth of National income

tax elasticity-
● the percentage change in tax revenue is response to the change in tax rate and
the extension of coverage
● buoyancy is a response to economic growth when the base increases but there is
no change in the rate.
 GST
GST is an uniform tax levied on all goods and services launched 1 July 2017.
GST added by 101th CAA. it is calculated only in the value addition of goods and
services of any stage.
GST council chairman union finance minister

Gains of GST-
1. evolution of interstate check posts to enforce taxes on cross-border transaction
(long distance travel time reduced almost 20%)
2. improved supply chain management hence no longer necessary to create branch
offices merrily to avoid interstate sales tax
○ abolition of interstate sales tax has made the tax destination based and
reduced inequitable interstate tax exportation
3. reduced cascading due to more comprehensive mechanism to credit input taxes
against taxes on output
○ (earlier central excise duty was levied at the manufacturing stage and it
cascaded into the final retail value
○ beside there was no systematic mechanism for providing input tax credit
between excise duty and service taxes
4. creation of GST council is innovative cooperative federalism helped minimize
transaction cost of reforming the calibration of domestic consumption taxes of the
centre and state

losses of GST-
1. There are large lists of exemptions, multiplicity of rates and exclusion of several
items of consumption from the base.
a. all this resulted in erosion of the base
b. decision to exempt almost 50% of the items in the CPI basket has narrowed
the base
2. tax levied at four different rate (5% 12% 18% 28%) in addition special rates on
precious metals 0.20 5% gold 3% automobiles
a. multiplicity to tax rates enhanced administrative and compliance cost
b. high tax rate on automobile, building and construction material at the time
when demand conditions are compressed has caused for the slow down in
the sectors

reforms needed in GST-

1. technology platform- GST council to gain confidence in revenue performance this
requires stabilizing technology platform
2. raising threshold limit- threshold for registration is kept at reasonably high level
○ the international experience recommends in India 50 lakh rupees could be
reasonable
 ○ important to focus on Whales rather than minnows
3. invoice matching- 100% invoice matching is not followed anywhere but it is
desirable to a a some extent above let se 10000 rupees
4. only those that are difficult to tax for administrative reasons should be exempted
5. inclusion of petroleum and electricity in GST-
○ petroleum contributes 42% of the revenue from domestic indirect taxes
however this becomes feasible only when revenue from the Tax stabilizes.

Negative impact of GDP and demonetisation-

● Who was affected the most from Demonetisation and GST ? -informal sector. why
? because they mainly deal in cash
● pushed demand for work under nrega
● informal sector affected > good and services reduced > but demand remains same
> formal sector benefited > consumer spending decreased by time

assumptions made that isn't worked while implementation of GST-

● May increase indirect tax thus increase in GDP. (serious shortfall in revenue
receipt thus States complaining about non receipt of their GST share)

mistakes made on GST-

● extreme progressivity
● guarantee to States
● goods outside the scope
● governments drive in 2019 (cut down tax rates)

mistakes in implementation phase-

● fake bill industry
● too complex

GST good side-

● removed multiple tax system
● one country one tax India became unified market
● help curbing corruption by digitisation of process
● special provisions for state-
○ centre agreed to formulate to compensate states in event of a revenue loss
(centre to provide 100% compensation to States for their revenue loss for
first 3 years)

road ahead-
● introduction of e-tax invoicing expected to curb tax evasion
● government portal for B2B transaction.
 Banking system in India
The term commercial banks refers to both scheduled and non scheduled commercial
banks which are regulated under the banking regulation Act 1949.
The scheduled banks are those which are included under the 2nd schedule of The RBI
act 1934.
the scheduled banks are further classified into-
public sectors (nationalised bank, private sector domestic banks foreign banks
SBI, regional rural banks (RRBs)

GOI nationalised the imperial Bank of India in 1955 named SBI.

object is behind nationalisation-
● to break the ownership and control of banks by a few business families, prevent
the concentration of a wealth and economic power
● To make banks a part of socio-economic planning.
● to mobilize savings from masses
● To extend banks to rural and urban areas.
● To cater to the needs of the priority sectors
● from class banking to mass banking

domestic private sector banks-

they were either too small or specialist to be nationalised. the Nedungadi Bank was the
first private sector bank in India

SBI were the seven regional banks

development banks-
DBs are those financial institutions which provide long term capital for industries and
agriculture;
industrial development Bank of industrial credit and investment corporation of
India (IDBI) India (ICICI)

national housing Bank (NHB) small industrial development Bank of India (SIDBI)

industrial investment bank of National bank for agriculture and rural development
India (IDBI) (NABARD)

export import Bank of India industrial finance corporation of India (IFCI)

the first development Bank in India IFCI

cooperative banks-
 ● managed on the principle of cooperation, self help and mutual help, one member
one vote, no profit no loss, do not pursue the goal of profit maximization,
● provide working capital loans and term loans
● cooperative banks are the first Government sponsored and government
subsidized financial agency in India
● they get financial and other help from RBI, NABARD, Central Government and
state government
● cooperative banks belong to the money market as well as the capital market they
offer short term and long term loans
● some cooperative banks are scheduled banks while others are non scheduled
banks
● cooperative banks are subject to CRR and SLR requirements as other banks
however there requirements are less than commercial banks
● main aim to provide cheaper credit to their members and not to maximize profits

commercial banks and their weaknesses-

the reforms to set the the above problem-
● floor and cap on CRR removed and floor on SLR was removed in 2006
● interest rates were deregulated
● bessel norms adopted for safe banking
● FDI upto 74% in is permitted in private banks

Stressed assets-
● when an asset shows weakness and is likely to become an NPA, it is considered
as a stressed asset

AQR (asset quality review)-

● The RBI believed that asset classification has to be done effectively and that
banks should not resort to evergreening of accounts that are lent to the loanees
who are in the NPA category to show them to be standard. Banks were
Postponing bad-loans classification investors where also facing uncertainties as
guidance by banks on bad loans was not proper

PAC (prompt corrective action norms)-

● it can even cap a bank's lending limit to one entity or sector

NPAs can occur for a variety of reasons-

● bad lending practices
● slowdown in economy
● wilful defaulters due to crony capitalism
● still companies are running losses due to competition from imports
● discounts could not repay due to bad tariff policy
high levels of NPS means-
● banks profitability diminishes
● precious capital is locked up
● cost of borrowing will rise as lendable assets shrink
● stock prices of a banks will go down and investors will lose
● investment in economy suffers
● if banks have to close down employees and depositors lose

what is being done-

● capital adequacy norms according to basel 3
● securitisation law (process of pulling a group of assets such as loans on
mortgage and selling securities backed by these assets.)
● ARCs (asset reconstruction company)
● foreclosure (means taking over by the lender of the mortgaged property)
● one time settlement
● interest waiver
● debt recovery tribunal
● SDR (strategic debt reconstructing)
● IBC

SARFAESI act (securitisation and reconstruction of financial assets and enforcement of

security interest)-
● to expedite recovery of loans and bring down the non performing asset level of
the Indian banking and financial sector
● SARFAESI Act 2002, the law has given unprecedented powers to bans, financial
institutions to take over management control of a loan defaulter or even capture
its assets

ARC (asset reconstruction company)-

● RBI regulates them, ARC is empowered by the SARFAESI act, it allows selling of
the assets held by banks as collateral in case of NPS building up.
● resolution as the core activities.

banking regulation amendment act 2017-

● It amends the banking regulation act 1949 to allow the RBI to issue directions to
the bank for initiating recovery proceedings against loan defaulters. under the
recently enacted IBC 2016.

TBS (twin balance sheet) challenge-

● companies over borrowed and became distressed and their investments did not
yield and so could not repay to the banks who thus become mired in NPAs. Thus
the balance sheets of both the borrowing companies and lending banks are under
pressure.
PARA (public sector asset rehabilitation agency)-
● to solve the NPA problem of PSBs.
● will raise money by issuing government bonds which will buy the big bad loans of
the PSBs.

S4A-
● The scheme seeks to solve the TBS challenge by converting a portion of large
loan accounts into equity shares.

Basel norms-
● basel accords is a set of recommendations for regulations for the banks
Basel III-
● Under this banks need to keep a certain portion as CAR.
● bessel norms cover a variety of risks-
a. credit risk- borrows may not repay loan interest or both
b. market risk- in the form of SLR as the value of the investments depends on
market forces
c. operational risk- risk like fraud security privacy protection legal risk
physical environmental risk

BIS (bank for international settlements)-

● is an international financial institution owned by central banks. bank for Central
banks.

Bank run-
● there are times when people are not confident about their banks, the likelihood of
default increases thereby prompting more people to withdraw the deposits it is
known as a bank run

shadow banks-
● perform functions like banks but are not covered by the stringent regulation like
banks. like mutual funds, investment banks, housing finance bodies.

universal banking in India-

● is both a commercial bank and an investment bank as well as providing other
financial services such as insurance

writeoff, writedown and haircut-

● when an asset value is brought down as it cannot be realised in full. for example a
loan that is given may not be recovered fully or at all.

IBC {insolvency and bankruptcy code) 2016-

background-
● till IBC came into effect India did not have effective legal and instrumental
institutional mechanism machinery for dealing with debt defaults as per the global
standards.
highlights of the code-
● insolvency is a situation when an individual firm is unable to meet the financial
obligations due to its creditors. bankruptcy on the other hand is a legally declared
status that an individual firm cannot repay debts
● code creates various institutions to facilitate resolution of insolvency
○ insolvency professionals- will administer the resolution process, manage
the assets of the debtor and provide information for creditors to assist
them in a decision making
○ insolvency professional agencies
○ information utilities- creditors will report financial information of debt owed
to them by the debtor.
○ adjudicating authorities- the proceedings of the resolution process will be
adjudicated by the national companies law tribunal (NCLT) for companies
and the debt recovery tribunal (DRT) for individuals.
○ insolvency and bankruptcy board- the board will regulate insolvency
professionals, agencies, information utility setup under the code. board will
consists of representatives of RBI and the ministers of finance, corporate
affairs and law
● the code propose the following steps to resolve insolvency-
○ the insolvency professionals administers the process. this process last for
180 days and any legal action against the debtor is prohibited during the
period
○ decision for to resolve insolvency- if a decision is not taken in 180 days the
debtors assets go into liquidation
● significance of the code-
○ speedier insolvency resolution
○ more power to creditors
○ enhance ease of doing businesses
○ reduce bad loans

PJ Nayak committee-
● constituted to examine the working of banks boards, review RBI guidelines on
Bank ownership and representation in the board and investigate possible conflicts
of interest in bold representation

Indradhanush-
● to revive the NPA burdened PSBs. seven point plan called indradhanush-
○ appointments
○ Bank of board bureau
 ○ capitalisation
○ distressing PSBs
○ empowerment
○ framework of accountability
○ governors reform

BBB (banks board bureau)-

● autonomous body. The objective of BBB is to help prepare the banks in the public
sector to take on the competition, and have the ability to manage risk across
business cycles. to help build capacity and attract, retain and nurture both talent
and technology

balance of payments
balance of payments is an overall statement of a country's economic transactions with
the rest of the world over some period usually one year
it includes all outflows and inflows payments and receipts
balance of payments can be broken down into balance of trade export and import of
goods
balance of current account includes the balance of trade and balance of services and
remittance and capital account investment and borrowing.

Public sector
the objectives of PSUs are-
● to build a self-reliant economy
● to prevent / reduce concentration of private economic power
● establish economic infrastructure
● setup industries in the backward region
● assist in ancillarisation
● set standards in labour welfare
● invest in areas where the private sector would not invest. like in road, transport.

the importance of PSUs is-

● supplying many goods and services like coal transport power irrigation
● providing various facilities like education housing
● establishing industries in MP Rajasthan Bihar and so on reduce regional
economic imbalance
● non inflationary growth process is facilitated as a price of their goods and
services can be administered

list of industries reserved for the public sector-

 ● atomic energy
● minerals specified in the schedule to the atomic energy (control of production and
use) order 1953
● railway passenger transport

disinvestment and privatisation-

● disinvestment is the sale of shares of the government to the retail public or
employees or mutual funds or the FIIs. There is no change in the management
from public to private hands because either the government holds majority equity
(51%) or even if the government holds less than (51%) of equity, the rest of it is
sold to various individuals and institutions. It is a money raising exercise.
● disinvestment can be for less than 50% stake sale in which case the company
remains a government company

advantages of disinvestment / privatisation-

● it raises finances for the government that can be spent on restructuring the PSEs
● making additional finance available
● become more efficient and survive on their own financial and economic strength
● when units become more professionalised and profitable, budgetary support for
them can be minimised
● results in wider distribution of wealth through offering of shares to small investors
and employees
● beneficial effects on the capital market
● increase economic activity and benefits the economy, employment and tax
revenue
● reducing the public debt

government policy on disinvestment / privatization-

● strategic sale is considered for loss making companies niti aayog recommended
strategic disinvestment of 34 sick PSUs
● to raise money
● list all unlisted PSEs and sell a minimum of 25% of equity to the public as
mandated by SEBI by 2017
● buyback of shares for example CIL and EIL in 2017
● profit making PSU will not be privatised
● restructure and revive potentially viable PSU
● close down PSU which cannot be revived or sold
● fully protect the interest of workers

strategic and non strategic classification of PSEs-

● strategic public sectors would be those in the areas of arms and ammunitions
defence aircrafts and warships.
 ● atomic energy (except in the areas related to the generation of nuclear power and
applications of radiation and radioisotopes to agriculture medicine and non
strategic industries)
● railway transport
● all other PSEs where to be considered non strategic

buyback of shares-
● company buy back its shares from the existing shareholders usually at a price
higher than market price to gain name and also material advantages
● companies buy back shares on the open market over an extended period of time
● to support share price during periods of sluggish market conditions

cross holding-
● state owned companies like coal India NTPC and NHPC have significant cash on
their balance sheet it can be used by them to buy shares of a one another as the
companies are related and have synergies guide each other and work with a
common purpose

methods of disinvestment of minority stake in CPSEs-

● IPO (initial public offering)
● FPO (further public offering)
● OFS (offer for sale of shares)
● strategic sale
● IPP (institutional placement program)
● CPSE exchange traded fund (ETF)
● cross holding

AGE (ad hoc group of experts) report-

● empowerment of Central public sector enterprises recommended in 2006
a. greater autonomy for PSUs.
b. Central PSUs have to have truly independent boards
c. ministries should not interfere- their management should be accountable to
the board and not to the ministry.
d. Reworking of the accountability of the PSEs to parliament so that the
questions raised on their functioning
● the government accepted some of the recommendations

some recent initiatives in restructuring the PSEs-

● autonomy for PSEs-
a. maharatna
b. Navratna and miniratna status
c. disinvestment
 ● Poverty
● Equality
● Infrastructure
● Balance of payments
● IMF, WTO, WORLD BANK