ECONOMY 2021

Table Of Content

Topics Page no Topics Page no

Type of economic systems 1 Classification of bank capital 99

The green revolution 4 Leverage ratio 100

Industrial policy resolution 5 Project sashakt 101

Economic reforms 7 ONICRA 102

Liberalization 9 NIDHIS 103

Privatization 11 Urjit patel committee 104

Globalization 13 Small and payment banks 105

Basic concept of Business Correspondent 107

Macroeconomics 15
Universal payment interface 108
Elastic, engel curved and engel law/
engel’s elasticity 23 Government budgeting 109

Basics terminologies 24 Types of budgeting 116

Deflation 26 Balanced and unbalanced budgets 118

Import economic concepts 31 Indian tax structure 119

Borrowing/liabilities 34 Security market 124

Crisil & SIDBI 46 Stock Exchange 125

Balance of payments 50 Foreign investment 129

Poverty and development issues 54 Insurance in India 133

Financial market 63

The supply of money 64

Money market 67

Banking in India 78

Basel accords 98

TYPES OF ECONOMIC SYSTEMS
A. Market economy or Capitalism
• Production of those consumer goods
which are in demand i.e., goods that can
be sold profitably either in the domestic
or in the foreign markets
• Goods produced are distributed
among people not on the basis of what
people need but on the basis of what
people can afford and are willing to
purchase
B. Socialist society
• The government decides what goods
are to be produced in accordance with
the needs of society—assumed that the
government knows what is good for the
people of the country as well as how they
should be distributed.
• A socialist society has no private
property since everything is owned by
the state.
C. Mixed Economy
• Most economies are mixed
economies, i.e., the government and the
market togetheranswer the three
questions of what to produce, how to
produce and how to distributewhat is
produced
• The market will provide whatever
goods and services it can produce well,
and thegovernment will provide
essential goods and services which the
market fails to do.
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Plan
• A plan is how the resources of a
nation should be put to use. It contains
somegeneral goals as well as specific
objectives which are to be achieved
within a specifiedperiod of time.
Five Year Plan
In India plans are of five years duration
and are called five-year plans
TYPES OF ECONOMIC PLANNING
(i) Directional planning
Countries, which believe in socialism,
followed the directional type of
planning. The targets of plans are pre-
determined and executed with the help
of the government in power. In this form
of planning all the important position
and decision are taken by the state. In
this type of planning all things are under
control of state including, financial
institutions, industrial sector, transport,
and infrastructure.
Faults of Planning by direction
• It involves bureaucratic system,
which is time consuming, and there is
lack of clarity.
• People are not allowed to job of their
choice and are not even allowed to
spend andconsume as per their wish.
• Markets are under controls of state.
• Planning by direction is very rigid
process and there is very less flexibility
because ofabsence of accountability
towards consumers and producers.
• Planning by direction is goal oriented
which state wants to achieve at any cost
due towhich it becomes very tough and
sometimes there is exploitation of

resources andmanpower which can lead
to unrest.
• Planning by direction can lead to
standardization of process, which can
result intosimilar production capacities
and processes which diminish
innovation.
(ii) Planning by inducement
Planning by inducement is independent
planning. Process of production,
forming the enterprise and various
patterns of consumption by the people
are regulated and controlled by the
state. The government in power forms
various monetary and fiscal policies to
effectively regulate the economy. If the
authority wants to promote any industry
it can subsidy to that industry and its
ancillary industries. If authority finds
that there is black marketing or scarcity
of a particular commodity in market,
they can take measures to control price
and starting rationing of that
commodity. For increase the capital it
can take up investment and encourage
private investors.
It can adopt a suitable monetary policy
and can fine tune taxation in the system
to increase or decrease consumption.
Faults in planning by Inducement
As in this type of planning market forces
are free therefore situation of scarcity of
commodity arises and measures of
rationing and price control taken by
authority.
Monetary and fiscal policies are
insignificant to induce development of
the economy by raising the rate capital
formation. In an under developed
country rate of capital formation is low
due to level of income and saving.
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(iii) Perspective planning
Perspective planning contains plans for
longer period of time 20 to 25 years. A
perspective plan is an outline of
development to be undertaken over a
longer period in a phased manner. A
perspective plan does not mean a single
plan will take place for entire period of
20 years. In this planning targets are
framed for particular time period for
example five years like five years plan in
India they are also known as short
period plan. They can further divided
into annual plans.
These five-year plans generally maintain
continuity. They can be further
bifurcated as regional plan which
pertains to state and districts.
Faults of Perspective planning
• In perspective type of planning plans
are made for long period so they are
quite rigidthat it is very tough to do
necessary adjustment for advancement
of the plan.
• Administrative problems are main
concern for this kind of planning as
perspective planning highly efficient
bureaucracy to implement the plans.
(iv) Indicative Planning
Indicative planning is a flexible kind of
planning. It is also known as soft
planning as it different from
comprehensive or imperative planning.
It works decentralized principles in the
completion target plans. There is
minimum rigidity in this structure of
planning.
In Indicative planning the targets for
public sector are mandatory while for
private sector they are only indicative.
But it does not mean that government

cannot use its power to influence the
private sector in desired direction .It
was initially used in countries like
France and Japan.
Fault of Indicative Planning
• As indicative planning can only
influenced the players involved
economic planning and if all player
concerned are not performing as per the
expectations the Indicative canturned
out to be disaster .As in this planning
there is not much of a authority
somemonopolistic players can go for
personal benefit without caring about
overall systemwhich can cause inflation
in the economy.
(v) Imperative Planning
Under imperative planning, the
government in power directs and control
all the economic activities and resources
in the economy. All resources are used
with high efficiency to complete set
targets of the plan. In such planning
consumer get fixed amount of a
commodity at fixed price. Rule
regulation set by government is followed
in the production of a commodity so that
supply of the commodity can be kept on
checked for surplus and scarcity in the
market. Since government decision and
policymaking is very rigid they are to be
followed by the players. This kind of
planning is in use in countries like
Russia and china.
(vi) Democratic planning
In Democratic planning the basic
ideology is to form the democratic form
of government. Plans are prepared
according to the requirement and needs
of the people. A democratic plan is
characterize by discussion with various
parties involved in the economy whether
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different government agencies, private
parties or enterprises. This discussion
will take place at level of preparation the
plan. The plan will be debated at
parliament of a country. Main motive of
democratic planning is eradicating
inequalities of income and wealth.
People enjoy social, economic freedom.
(vii) Fixed planning
In this planning plans are prepared for
fixed period of time. The objectives and
targets of fixed plan are to be achieved
with in the plan period. While finalizing
the budget outlay the physical targets
should be keep in the mind. Physical
target and spending on these targets are
often not changed except during an
emergency. They are used in India.
Faults of Fixed Planning
• There is no correlation between
available resources and with planning.
The main aim is to complete financial
targets by foreign aid, heavy taxation,
large borrowing irrespective of it ill
effects on economy.
• This system of planning fails to take
into account future changes in the world
economy or any other natural calamity.
• This type of planning is not suitable
for projects, which have long execution
time frame, which is more than the
particular plan period as they will
spread into more than one plan the
intensity of their execution will also
change.
(viii) Centralized Planning
Under centralized planning the
centralized Authority plans and
formulates all planning activities in the
country. The authority fixes target for all
industries and fix priorities for all

sectors. It takes all the investment
decisions according to the goals and
targets set in the plan. Central authority
all aspect of the economy .It fixes price
for all products.
Faults of Centralized planning
• Centralized planning has authoritative
and undemocratic characteristic, which
havebureaucratic control and regulation.
• The mistakes and shortcoming of the
planning is not likely to be rectified.
(ix) Decentralized Planning
In decentralized planning the plans are
executed plan at grass root level. In this
scheme of planning plan is prepared by
central authority with discussion all the
administrative units in the country
whether at state level, district level.
Plans for industries are prepared with
full discussion with all the major
representative stakeholders in the
industries. But individual firm are free
to take decision on their investment and
output prices. There is a freedom
production and consumption under
decentralized planning.
Faults of Decentralized Planning
• Its reliance on the market mechanism
leads to shortages or surpluses in the
production of goods and services.
• It required lot of adjustment from
government for problem in supply side.
• It is very tough to have coordination
between planned & unplanned sectors.
Actual Growth 3.6 %
• It was based on Harrod-Domar
Model.
• Influx of refugees, severe food
shortage& mounting inflation
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confronted the country at the onset of
the first five year Plan.
THE GREEN REVOLUTION
During independence: About 75 per cent
of the country’s population
• dependent onagricultureMarred with
low productivity
• use of old technology + absence of
required infrastructureIndia’s
agriculture
• dependent upon monsoon and if the
monsoon fell short the farmers werein
trouble
• The large increase in production of
food grains resulting from the use of
high yieldingvariety (HYV) seeds
especially for wheat and rice
• This also meant usage of fertiliser and
pesticide in the correct quantities as well
as regular supply of water the need for
these inputs in correct proportions is
vitalCheck-list for farmers: Reliable
irrigation facilities as well as the
financial resources to purchasefertiliser
and pesticide
1ST phase of the green revolution
(approximately mid 1960s up to mid-
1970s)
• The use of HYV seeds was restricted
to the more affluent states such as
Punjab, AndhraPradesh and Tamil
Nadu.
• Use of HYV seeds proved beneficial
for the wheat-growing regions only2nd
Phase of the green revolution (mid-
1970s to mid-1980s):
• Spread of the HYV technology to a
larger number of states and this
benefited more varietyof crops thus,

enabling India to achieve self-sufficiency
in food grains
• To increase growth in agricultural
output & contribute to the country’s
economy—it isimportant to keep a
substantial amount of agricultural
produce to be sold in the market(and
not consumed by the farmers himself)
The portion of agricultural produce
which is sold in the market by the
farmers is called marketedsurplus.
INDUSTRY & TRADE
Poor nations can progress only if they
have a good industrial sector as industry
providesemployment which is more
stable than the employment in
agriculture; it promotesmodernisation
and overall prosperity
• more emphasis on its growth in the
FYPsPost-independence: Need to
expand the industrial base with a variety
of industries if theeconomy was to
growwith the public sector leading the
way.
INDUSTRIAL POLICY
RESOLUTION 1956 (IPR 1956)
Formed the basis of the Second Five
Year Plan—to build the basis for a
socialist pattern of thesociety
Classification of Industries—three
categories:
1ST: industries which would be
exclusively owned by the state
2nd: industries in which the private
sector could supplement the efforts of
the state sector, withthe state taking the
sole responsibility for starting new units
3rd: the remaining industries which
were to be in the private sector; was kept
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under statecontrol through a system of
licenses.
• Only with the issuance of license
could any industry be established—to
promoteindustry in backward regions
• it was easier to obtain a license if the
industrial unit wasestablished in an
economically backward areaWere given
certain concessions such as tax benefits
and electricity at a lower
tariffTopromote regional equality
• Even an existing industry had to
obtain a license for expanding output or
for diversifyingproduction to ensure that
the quantity of goodsproduced was not
more than what the economy required
• License to expand production was
given only if the government was
convinced that theeconomy required the
larger quantity of goods.
Small-scale Industry:
A ‘small-scale industry’ is defined
with reference to the maximum
investment allowed on theassets of a
unit
• More ‘labour intensive’ i.e., they use
more labour than the large-scale
industries and,therefore, generate more
employment
• Inability to compete with bigger
firms— reservation of a certain number
of products forthe small-scale industry;
the criterion of reservation being the
ability of these units tomanufacture the
goods
• Were given concessions- lower excise
duty and bank loans at lower interest
rates

TRADEPOLICY – from 11.8 per cent in 1950-51 to 24.6 per
IMPORTSUBSTITUTION
The industrial policy that we adopted
was closely related to the trade policy
1ST seven FYPs: Trade was characterized
by an inward looking trade strategy
• Import substitution; aiming at
replacing or substituting imports with
domestic production(‘Make in India’
should ring in your head at the moment)
Protection from imports took two forms:
Tariffs and Quotas
Tariffs: Tax on imported goods; they
make imported goods more expensive
and discourage their use.
Quotas: Specify the quantity of goods
which can be imported Both restrict
imports and, therefore, protect the
domestic firms from foreign
competition.
Policy of protection:
• Based on the notion that industries of
developing countries are not in a
position tocompete against the goods
produced by more developed
economies—assumed that ifthe domestic
industries are protected they will learn
to compete in the course of time
• Feared the possibility of foreign
exchange being spent on import of
luxury goods if norestrictions were
placed on imports Until the mid-1980s:
Hardly any promotion of exports until
the mid-1980s
Effect of Policies on Industrial
Development
• Proportion of GDP contributed by the
industrial sector increased in the period
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cent in 1990-91
• Rise in the industry’s share of GDP—
important indicator of development
• Witnessed six per cent annual growth
rate of the industrial sector
• Diversification of the Indian
industries was ensured—
• Promotion of small-scale industries
gave opportunities to those people who
did not have the capital to start large
firms to get into business
• Protection from foreign competition
enabled the development of
indigenousindustries in the areas of
electronics and automobile sectors
• Public sector enterprises sparked off
debated among economists—state
enterprisescontinued to produce certain
goods and services (often monopolizing
them)
• No distinction was made between
what the public sector alone can do and
what theprivate sector can also do
• Some scholars argued that state
should get out of areas which the private
sector canmanage and the government
should concentrate its resources on
important serviceswhich the private
sector cannot provide.
• The marathon continues for public
sector firms even after incurring huge
losses butthey continue to function
causing a drain on the nation’s limited
resources whereasa loss-making private
firm will not waste resources by being
kept running despite thelosses.
• Obtaining a license was a rigorous
part of the process—being widely
misused by theindustrial houses; a big
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industrialist would get a license not for
starting a new firmbut to prevent
competitors from starting new firms
• Permit license raj— preventedcertain
firms from becoming more efficient
• Restrictions on imports- proved to be
a bane as the Indian consumers had
topurchase whatever the Indian
producers produced—no incentive to
improve thequality of their goods.
• Public sector is not meant for earning
profits but to promote the welfare of
theNation
• should be evaluated on the basis of
the extent to which they contribute tothe
welfare of people and not on the profits
they earn.
Theabove points of
contention/arguments led the
government to introduce a new
economic policy in 1991.
ECONOMIC REFORMS
What happens when expenditure
is more than income?
• Government borrows to finance the
deficit from banks and also from people
within thecountry and from
international financial institutions.
• Government had to overshoot its
revenue to meet problems like
unemployment,poverty and population
explosion (revenues were very low; no
chance of generatingimmediate returns)
• was not very high to meet the
growing expenditure.
• Government borrowed foreign
exchange
• Spent on meeting consumption
needs. Government neither made any
attempt to reduce such profligate
spending nor sufficientattention was
given to boost exports to pay for the
growing imports.
In the late 1980s,
• Government expenditure began to
exceed its revenue by such large margins
thatmeeting the expenditure through
borrowings became unsustainable.
• There was sharp rise in the prices of
many essential goods.
• Imports grew at a very high rate
without matching growth of exports.
• Foreign exchange reserves declined to
a level that was not adequate to finance
imports for more than two weeks.
• No sufficient foreign exchange to pay
the interest that needs to be paid to
international lenders.
India took a step…
India approached the International
Bank for Reconstruction and
Development (IBRD)—World Bank and
the International Monetary Fund (IMF)
and received $7 billion as loan to
manage the crisis.
How to avail the loan?

• No generation of additional revenue International agencies expected India to

even via taxation. liberalize and open up the economy by

• Income from public sector • Removing restrictions on the private

undertakings sector

7

• Reducing the role of the government
in many areas
• Removing trade restrictions
What did India do?
India agreed to the conditionality’s of
World Bank and IMF—announced the
New EconomicPolicy (NEP) – which
consisted of wide ranging economic
reforms, such as:
• Creating a more competitive
environment in the economy by
removing the barriers toentry and
growth of firms;
• Introduced liberalization with a view
to integrate the Indian economy with the
worldeconomy
• to remove restrictions on direct
foreign investment as also to free the
domesticentrepreneur from the
restrictions of Monopolies and
Restrictive Trade Practices(MRTP) Act;
• to unshackle the Indian industrial
economy from the cobwebs of
unnecessarybureaucratic controls;
• to shed the load of public sector
enterprises which have shown a very low
rate of return or which were incurring
losses over the years.
The government initiated a variety of
policies which fall under three heads:
viz., liberalisation, privatisation and
globalisation.
Why India went for Economic
reforms?
The following are the reasons for
economic reforms:
1. Rise in Prices: Inflation surged from
6.7% to 16.7%. The rise in price is mainly
due torapid increase money supply. It
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was mainly to cater deficit financing.
Deficit financingmeans borrowing from
Reserve Bank of India by Government to
meet its deficit.
2. Rise in Fiscal Deficit: Due to increase
in non- development expenditure fiscal
deficit of the Government had been
increasing. Due to rise in fiscal deficit
there was rise in public debt and
interest. In 1991 interest liability became
36.4% of total govt. expenditure. The
Govt. caught in debt trap. So, Govt. had
to resort to economic reforms.
3. Adverse Balance of Payments: BoP, of
a country is the record of all economic
transactions between the residents of
the country and the rest of world in a
particular
period. When foreign exchange falls
short for payment otherwise total
imports exceedtotal exports, problem of
adverse balance of payments arise.
In 1980-81 deficit in balance of payment
was Rs. 2214 crore and rose in 1990- 91
to Rs. 17,367 crores. To cover this deficit
large amount of foreign loans had to be
obtained. So, liability of loan and its
interest payment goes on increasing. It
made balance of payments adverse.
4. Iraq-Kuwait War: In 1990-91, war in
Iraq broke, and this led to rise in petrol
prices. The flow of foreign currency
(remittances) from Gulf countries
stopped and this furtheraggravated the
problem.
5. Dismal performance of the main
drivers of socialism (Public Sector
Undertakings):
PSU’s are enterprises wholly owned by
Government have invested crores of Rs.
in these enterprises. These are no
performing well due to political

interference and became big liability for
Government.
6. Fall in Foreign Exchange Reserves:
Indians foreign exchange reserve fell to
low ebb in 1990-91 and it was
insufficient to pay for an import bill for
2 Weeks. In 1986-87 foreignexchange
reserves were Rs. 8151 crores ad in
1989-90, it declined to Rs. 6252 crores.
The IMF conditions put forth for
India were as follows.
• Devaluation of the rupee by 22 per
cent.
• Drastic reduction in the peak import
tariff from the prevailing level of 130 per
cent to 30 per cent.
• Excise duties to be hiked by 20 per
cent to neutralize the revenue short falls
due to the custom cut.
• All government expenditure to be cut
down by 10 per cent, annually.
The economic reform programme, that
India launched, consisted of two
categories ofmeasures:
LIBERALIZATION
The term “liberalization” in this context
implies economic liberalization. The
essence of this policy is that greater
freedom is to be given to the
entrepreneur of any industry, trade or
business and that governmental control
on the same be reduced to the
minimum.
Rules and laws which were aimed at
regulating the economic activities
became majorhindrances in growth and
development. Hence, Liberalisation was
introduced to put an end to these
restrictions and open up various sectors
of the economy.
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The main purpose of the process to
economic liberalization is to set business
free and to run on commercial lines. The
underlying belief is that commerce and
business are not matter to be contained
to fixed national boundaries; they are
global phenomena. Here, artificial govt.
restrictions which hinder economic and
commercial activities and flow of goods
and services were removed. The
liberalization intended to liberalize
commerce and business and trade from
the clutches of controls and obstacles.
Major economic activities are opened for
private participation keeping only key
issues ofwelfare and other regulatory
mechanism with the state. This opening
up of various sectors of the economy for
private participation and allowing them
to manage the businesses for
maximizing their profits will clearly
underline the freedom available for the
private-players to have their own labor
participation practices and deployment
of human resources.
Liberalization includes.
• Removal of Industrial Licensing and
Registration
• Reducing the quantitative restrictions
on imports also reducing import duties.
• Reduced control on foreign exchange
management both in current and capital
accounts.
• Reforms in financial systems.
• Reduction in the level of both
personal and corporate taxation.
• Liberalized rules for foreign direct
investment (FDI) and foreign portfolio
investment(FPI).

• Opening of the public-sector domains
like power, transport, banking etc to
privateplayers.
• Partial privatization of public sector
units.
• Change in approach towards
industrial sickness.
IMPORTANT MEASURES
1. Removal of Industrial Licensing:
• All industrial licensing was abolished
except a shortlist of 18 industries related
tosecurity and strategic concerns, social
reasons, hazardous chemicals and over-
ridingenvironmental reasons and items
of elitist consumption industries
reserved for thesmall scale sector which
were to continue under the reservation
list.
• Subsequently, all industries except
for a small group of five industries
[alcohol,cigarettes, hazardous chemicals
industrial explosives, electronics,
aerospace and drugsand
pharmaceuticals], industrial licensing
requirements have been done away with.
• Reservations for Public sector:
defence equipment, atomic energy
generation andrailway transport.
• Deregulation of goods produced in
small scale industries.
• Market mechanism to determine the
prices.
2. Financial Sector Reforms:
• Financial sector which includes
financial institutions such as
commercial banks,investment banks,
stock exchange operations and foreign
exchange market – areregulated by the
Reserve Bank of India (RBI).
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• All the banks and other financial
institutions in India are regulated
through variousnorms and regulations
of the RBI. RBI decided the amount of
money that the banks can keep with
themselves, fixed interest rates, nature
of lending to various sectors etc.
• One of the major aims of financial
sector reforms is to reduce the role of
RBI fromregulator to facilitator of
financial sector. i.e., the financial sector
was allowed to takedecisions on many
matters without consulting the RBI.
• For instance, the reform policies led
to the establishment of private sector
banks, Indian as well as foreign.
3. Liberalization of Foreign
Investment:
• While earlier prior approval was
required by foreign companies, now
automaticapprovals were given for
Foreign Direct Investment (FDI) to flow
into the country.
• A list of high-priority and
investment-intensive industries were
de-licensed and couldinvite up to 100%
FDI including sectors such as hotel and
tourism, infrastructure,software
development .etc.
• Use of foreign brand name or trade
mark was permitted for sale of goods.
4. Public Sector Reforms:
• Greater autonomy was given to the
PSUs (Public Sector Units) through the
MOUs(Memorandum of Understanding)
restricting interference of the
government officialsand allowing their
managements greater freedom in
decision-making.

5. MRTP Act :
• The Industrial Policy 1991
restructured the Monopolies and
Restrictive Trade Practices Act.
Regulations relating to concentration of
economic power, pre-entry restrictions
for setting up new enterprises,
expansion of existing businesses,
mergers and acquisitions etc. have been
abolished.
PRIVATIZATION
The policies through which the ‘roll
back’ of the state was done included
deregulation, privatization and
introduction of market reforms in public
services. Privatization at that time was
used as a process under which the state
assets were transferred to the private
sector.
But during the period several
connotations and meanings of the term
‘privatization’ have developed. We may
see them as follows:
Privatization in its purest sense and
lexically means denationalization, i.e.,
transfer of the state ownership of the
assets to the private sector to the tune of
100 per cent. India never ventured into
such type of privatization.
Another type of privatization is
disinvestment. This process includes
selling of the shares of the state-owned
enterprises to the private sector.
Disinvestment is de-nationalization of
lessthan 100 per cent ownership transfer
from the state to the private sector. If
the sale of shares of the state-owned
assets has been to the tune of 51 per
cent, the ownership is really transferred
to the private sector even then it is
termed as privatization.
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The third type, in which the term
privatization has been used around the
world, is very wide. Basically, all the
economic policies which directly or
indirectly seem to promote the
expansion of the private sector or the
market (economy) have been termed by
experts and the governments as the
process of privatization. We may cite few
examples from India—delicensing and
de-reservation of the industries, even
cuts in the subsidies, permission to
foreign investment, etc.
CONCEPT OF DISINVESTMENT
Another term for privatization is
Disinvestment. The objectives of
disinvestment were to raise resources
through sale of PSUs to be directed
towards social welfare expenditures,
raising efficiency of PSUs through
increased competition, increasing
consumer satisfaction with better
quality goods and services, upgrading
technology and most importantly
removing political interference.
• In the initial phase of development
planning in India, more especially after
the IndustrialPolicy of 1956, the
socialisation of the economy was
measured by the size of the publicsector
in the national economy. The greater the
share of the public sector, the greater
was the degree of socialisation of the
economy.
• Under economic reforms after 1991,
the main thrust is that the private sector
isconsidered as the engine of growth. By
placing restrictions on the public sector
and byreducing its role in several areas
where it earlier enjoyed a monopolistic
position, thenew environment assigned
an increasing role for the private sector.

Why disinvestment of Indian PSU
was undertaken?
• While evaluating the performances, it
was noted that PSUs had shown a very
negative rate of return on capital
employed.
• Inefficient PSUs had become and
were continuing to be a drag on the
Government’sresources turning to be
more of liabilities to the Government
than being assets.
• The national gross domestic product
and gross national savings were also
gettingadversely affected by low returns
from PSUs. About 10 to 15 % of the total
grossdomestic savings were getting
reduced on account of low savings from
PSUs.
Advantages and use of
disinvestment proceeds:
• For financing the increasing fiscal
deficit, Government can use the
proceeds fromdisinvestments to bring
down fiscal deficit to more manageable
levels.
• Resource mobilization, the proceeds
can be used to invest in other growth
sectors which can induce economic
activity and generate better returns for
the government
• Financing large scale infrastructure
through disinvestment. This creates
positiveexternality as it will facilitate
more production and trade.
• Improve efficiency of the PSEs
(Public Sector Enterprises), the
inefficient PSU’s will now be force to
make better missions, achievable targets
and strategies to achieve them, this will
increase the overall efficiency.
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ECONOMY 2021
• For social programmes like health
and education, as government is finding
is difficult to meet the increasing
demand from traditional tax revenues
alone.
Concerns about using
disinvestment as a policy tool:
• The financing of fiscal deficit is not
sustainable in the long term.
• Given the past trends and the recent
year 2016-17, govt. could divest Rs.
27,917 crore against the target of Rs.
45,500 crore. Hence resource
mobilization could not take place as per
the expectations of the government.
• Efficiency gains needed will
materialize only if disinvestment is
accompanied byextensive industrial
restructuring.
• There is also a concern of reduction
in employment as the privatization of
PSEs couldmake skills of the employees
redundant.
• Setting targets could lead to distress
selling of PSEs.Current Update on
Disinvestment Target
• In the Budget, the government had
set a revised target of Rs 1 lakh crore
from PSUdisinvestment, which was
higher than the budget estimate of Rs
72,500 crore.
• So far, the Department of Investment
and Public Asset Management (DIPAM)
has raised Rs 1,00,056 crore through
disinvestment.
• The disinvestment receipts for
finance year 2017-18 exceeds Rs 1 lakh
crore which ishigher than the figure of
last year at Rs 46,250 crore.

• Government also launched BHARAT
22 Exchange Traded Fund (ETF) to
meet thedisinvestment target.
GLOBALIZATION
Globalization is generally termed as ‘an
increase in economic integration among
nations’. The official meaning of
globalization for the WTO is movement
of the economies of the world towards
“unrestricted cross border movements
of goods and services, capital and the
labor force”.
Globalization means world economic
integration through free movement
across nationalborders of:
• Financial capital represented by
investment in capital markets and
money markets,
• Physical capital represented by plant
and machinery,
• Technology, and
• Labor.
MAINS ELEMENTS OF
GLOBALISATION:
The phenomenon of globalization
caught momentum in India in 1990s
with reforms in all the sectors of the
economy. The main elements of
globalization were:
1. To open the domestic markets for
inflow of foreign goods, India reduced
customs duties on imports. The general
customs duty on most goods was
reduced to only 10% and import
licensing has been almost abolished.
Tariff barriers have also been
slashedsignificantly to encourage trade
volume to rise in keeping with the World
tradeOrganization (WTO) order under
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(GATT) General Agreement on Tariff
and Trade.
2. The amount of foreign capital in a
country is a good indicator of
globalization andgrowth. The FDI policy
of the GOI encouraged the inflow of
fresh foreign capital byallowing 100 %
foreign equity in certain projects under
the automatic route. NRIs and
OCBs (Overseas Corporate Bodies) may
invest up to 100 % capital with
repatriability in high priority industries.
MNCs and TNCs were encouraged to
establish themselves inIndian markets
and were given a level playing field to
compete with Indian enterprises.
3. Foreign Exchange Regulation Act
(FERA) was liberalized in 1993 and later
ForeignExchange Management Act
(FEMA) 1999 was passed to enable
foreign currencytransactions.
4. India signed many agreements with
the WTO affirming its commitment to
liberalizetrade such as TRIPs (Trade
Related Intellectual Property Rights),
TRIMs (Trade Related Investment
Measures) and AOA (Agreement on
Agriculture).
Effect of Globalization on Indian
Economy:
Globalization has both positive and
negative effects on Indian economy.
These are as follow
Positive effects of globalization on
Indian economy
• Increase in Foreign Trade
• Increase in Foreign investment
• Increase in Foreign Exchange
Reserves
• Increase in Foreign
Collaborations: -
 ECONOMY 2021

• Expansion of Market 5. Globalisation by reducing tariffs and

• Technological Development quantitative restriction increases the
• Brand Development share offoreign trade as a percentage of
• Development of Capital Market GDP.
• Increase in Employment In brief, the advocates of globalisation
Negative Effect of Globalization: consider it as the engine of growth,
technologicaladvancement, raising
• Loss of Domestic industries levels of productivity, enlarging
• Problem of Unemployment employment and bringing about poverty
• Exploitation of Labour reduction with modernisation.
• Increase in Inequalities OVERALL ASSESSMENT OF LPG
• Bad Effect on Culture and Value ON INDIAN ECONOMY
System
Following are some of the positive
ADVOCACY OF GLOBAISATION impacts of LPG Reforms on Indian
In support of the movement for Economy
globalisation, the following arguments 1. Increase in GDP Growth Rate
are put forth:
2. Increase in Foreign Direct Investment
1. Globalisation promotes foreign direct (FDI):
investment and, thus, it enables
developingcountries to raise capital 3. Increase in per capita income
without incurring international 4. Labor Force and Employment
indebtedness.
5. Purchasing Power Parity
2. Globalisation helps developing
countries to make use of and adapt 6. Power generation and consumption
technologiesdeveloped by advanced
countries without undertaking heavy 7. Disinvestment
expenditures in Researchand 8. Monopolistic Market to Competitive
Development (R&D). Market
3. Globalisation widens the access of 9. Urban Concentration of Growth
developing countries to export their Process
goods andservices to developed
countries. Similarly, globalisation 10. Informalization of work
enables consumers indeveloping LIMITATIONS OF LPG POLICY ON
countries to acquire quality consumer INDIAN ECONOMY
goods, especially consumer durables,at
relatively much lower prices. 1. Low Growth of Agriculture Sector
4. Globalisation implies faster diffusion 2. Threat from foreign competition
of knowledge and, thus, it enables
3. Adverse Impact on Environment
developingcountries to attain
international standards of production 4. Increase in Income disparity
and productivity.
5. Growth and Employment
14

BASIC CONCEPTS OF
MACROECONOMICS
How to calculate total flow of production
in an economy?
For this, we need to have a quantitative
measure, which can measure the
aggregate level of final goods produced
in the economy.
This can be possible only if the
quantitative measure uses a common
value like monetary value of goods and
services to measure.
Nevertheless, we also need to take care
that same good is not counted twice i.e.
only monetary value of all the final
goods should be there and intermediary
goods value should be excluded to avoid
double counting.
Total final output produced in an
economy consists of consumer goods as
well as capital goods
Consumption goods are for population
to sustain themselves. To consume
goods people must have purchasing
power.
What are the two factors, which
enable the sale of goods and
services?
• One – Demand for products
• Second – Purchasing power of
people to buy the goods and
services.
o Purchasing power means they must
have income to pay for goods.
o People earn their income as owners of
factors of production.
o For example – A person X is owner of
land and another person Y owns a
company. X
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ECONOMY 2021
gets his income from the rent paid to
him for land while Y gets his income
fromprofits.
Calculation of National Income
NATIONAL INCOME
Figure-Methods of measuring national
incomeThere is no standard definition
of National Income. It depends on how
we calculate it.
In one of the reports of United Nations,
national income has been defined on the
basis of the systems of estimating
national income, as net national
product, as addition to the shares of
different factors, and as net national
expenditure in a country in a year’s
time. In practice, while estimating
national income, any of these three
definitions may be adopted, because the
same national income would be derived,
if different items were correctly included
in the estimate.
In general, the total amount of income
accruing to a country from economic
activities in a year’s time is known as
national income. It includes payments
made to all resources in the form of
wages, interest, rent and profits.
PRODUCTION METHOD OR
VALUE-ADDED METHOD
In this method, National income is
calculated by aggregate annual value of
goods and services produced in a
country in one year.
Now question arises do we calculate
aggregate of all goods and services
produced by all the firms. in an
economy?
Try to find answer in below example.

See this example – Suppose Indian
Terrain company buys some cotton
from farmer and give it to weaver who
weaves the cotton into cloth and return
it to company. Now company gives this
cloth to tailor to stitch a shirt. Tailor
stitches it and return it to the company.
Company added some more things in it,
packed it and sold in the market for
1500 rupees. This shirt produced by firm
is not entirely of its own contribution, it
also has contribution of tailors, weavers,
farmers etc. To calculate net
contribution of firm we have to subtract
the contributions made by famers,
weaver and tailors. If we do not do that
then it will lead to double counting.
The net contribution made by firm is
called its value added.
Value added of a firm = value of
production of the firm – value of
intermediate goods used by firm.
Value added by firm is distributed
among factors of production i.e. land,
labor, capital and entrepreneurship.
So, wages + interest + profits + rent
must be equal to value added of firm.
Here intermediate goods used by firm is
of 500 rupees for cotton while 1000
rupees is value added, out of which 500
is paid to weaver and tailor as wages.
Value added is a flow variable i.e.
measured over a period of time (weekly,
monthly, annually) Gross Value Added
and Net Value Added
A reduction in the value of an asset over
time, due in particular to wear and tear
is called depreciation. It is also known as
“Consumption of fixed capital”. But why
is it called so?
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ECONOMY 2021
Capital goods gradually undergo wear
and tear and so producer has to invest in
repair or replacing of wear parts to keep
the value of capital constant.
This replacement investment is same as
depreciation of capital. In other words,
it is same as using up of capital.
If we add depreciation into value added,
then we get Gross value added. Gross
value added = value added +
Depreciation.
If we deduct depreciation from Gross
value added, then we get Net value
added. Net Value added = Gross value
added – Depreciation
Inventory Definition - The stock of
unsold finished goods, or semi-finished
goods, or raw materials, which firms
carry from one year to the next, is called
inventory.
Example – Suppose BMW bought 500
airbags to use in manufacturing of cars.
Each car uses five airbags and company
has planned to sell 100 cars in this year.
However, because of low demand they
were able to sell only 50 cars. So, now
they have 50 cars and 250 airbags
unsold stocks. These unsold stocks are
called as Inventory.
Inventory is a stock variable i.e. measure
at a particular point of time.
Inventory increased means inventory’s
value at the beginning of year was lower
and higher at the end of year.
While inventory decreased is lower value
of inventory at end of year and higher at
thebeginning of the year. It is just like
water stored in tank.

Change of inventories of a firm during a
year ≡ production of the firm during the
year – sale of the firm during the year.
Change of inventories of a firm during a
year ≡ value added + intermediate goods
used by the firm – sale of the firm
during a year.
Production of the firm ≡ value added +
intermediate goods used by the firm.
For the above three statements consider
Times of India newspaper inventory.
The change in its paper roll inventory
will depend on how much newspaper it
prints and how much newspaper it sells
or how much newspapers the customers
read.
Change in the inventory takes over a
period of time i.e. newspaper roll will
accumulate daily, weekly or monthly
and so it is a flow variable.
INVESTMENT METHOD
Investment has 3 major categories –
o Investment expenditure
o Fixed business investment
o Residential investment
Investment expenditure
It is the expenditure incurred by either
an individual or a firm or the
government for thecreation of new
capitals assets like machinery, building
etc.
Fixed business investment
Remember it simply – investment in
fixed capital.Investment in fixed capital
or to the replacement of depreciated
fixed capital. Thus, it isinvestment in
physical assets such as machinery,
building, land etc.
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ECONOMY 2021
Residential investment- Investment on
buying homes.
Gross Value Added
In economics, gross value added (GVA)
is the measure of the value of goods and
services produced in an area, industry or
sector of an economy. In national
accounts GVA is output minus
intermediate consumption
Gross value added by firm (GVA) ≡ value
of sales by the firm + value of change in
inventories – value of intermediate
goods used by firm. (Recall that net
contribution of firm does not include
intermediate goods value)
Firm sales in not only domestic country
but it also sales to other countries.
Net value added of firm (NVA) ≡ GVA –
depreciation of the firm
GDP ≡ NVA + depreciation
GDP of the economy is the sum total of
the net value added and depreciation of
all the firms of the economy.NDP (Net
Domestic Product) is summing up of net
value added of all firms.
INCOME METHOD
The calculation of National Income by
compiling income of factors of
production is called as Income method.
National income = Total wages +
Total rent + Total interest + Total
profits
GDP = Compensation of employees +
Consumption of fixed capital + (Other
taxes on Production – subsidies on
production) + Gross operating surplus

Compensation of employees – Salaries
paid in cash and other benefits to
employees. In simple words – ‘wage’.
Consumption of fixed capital – Wear
and tear of machinery. These are
replaced with new parts or machinery. It
adds to income of the machinery and
spare parts producers.
Net tax production = other taxes on
Production – subsidies on production
Other taxes on Production– There is a
difference between Tax on product and
Tax onproduction.
Tax on product – It includes taxes like
Sales tax and Excise duty. It is the tax
imposed as it was produced and sold.
Tax on production - Tax imposed
irrespective of production like license
fees and land tax.
Gross operating surplus – balance of
value added after deducting the above 3
components. It goes to pay rent of land
and interest of capital.
EXPENDITURE METHOD
The GDP under this method is
calculated by summing up all of the
expenditures made on final goods and
services.
There are four main aggregate
expenditures that go into calculating
GDP: consumption by households,
investment by businesses, government
spending on goods and services, and net
exports, which are equal to exports
minus imports of goods and services.
GDP = C + I + G + X – M
C – Consumption expenditure by
consumers or by firms (in exception
case) on consumption goods.
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ECONOMY 2021
I – Investment expenditure by firms on
capital goods.
G – Expenditure by government on final
goods and services produced by firms.
X - M – Net exports i.e. exports –
imports.
Main components under
Expenditure methodConsumer
spending
• Most dominant component in
calculation of GDP under expenditure
method.
• It accounts for the majority of India’s
GDP. It is about 59% and consumption
expenditureis the reason that our
economy is less affected by up and
downs in global world. Theeconomies,
which export a lot, are affected by global
winds.
• It includes purchasing of durable
goods, non-durable goods and services.
Government spending
• It is the spending by central, state
and local governments on basic services
(likeeducation, health care etc.) and
defense.
• Dominant after consumer spending
Business investment
• Most volatile component
• It includes capital expenditure by
firms on capital goods.
Net exports
• It represents the effect of foreign
trade of goods and services on the
economy.Consumption expenditure has
been the major driver of GDP growth,
accounting for nearly60% of the total

GDP growth between 2012-13 and 2015-
16. (Economic Survey 2017-18)
• This contribution increased to over
95% in 2016-17, which is attributed to
higher growthof both Private Final
Consumption Expenditure (PFCE) and
Government FinalConsumption
Expenditure (GFCE), particularly the
latter.
• Growth of GFCE was due to the
payment of higher wages and salaries to
thegovernment staff that followed the
implementation of the
recommendations of theSeventh Pay
Commission.
Why GDP includes expenditure on
investment but not the expenditure on
intermediate
goods? Reason – Investment goods
remain with the firm, whereas
intermediate goods are consumed in the
process of production.
Measures of National Income
GDP GNP NNP NNPFC PI DP
So, now GDP of India will be 100+10 =
110 crores only (why not 130 crores?
Because we have to include only those
earnings or income that is earn in
Indian Territory)
Important points about GDP
• Central Statistics Office (CSO),
Ministry of Statistics and Programme
Implementationreleases the estimates of
Gross Domestic Product (GDP) at
constant (2011-12) andcurrent prices.
• The components of expenditure on
Gross Domestic Product, namely,
consumptionexpenditure and capital
formation, are normally measured at
market prices. Indiaofficially used to
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ECONOMY 2021
calculate it's national income at factor
Cost. Since January 2015 , theCSO has
switched over to calculating it at market
price.
GDPMP → GDP at Market Price
Market value of all final goods and
services taking place within the
domestic economy during a year or GDP
at market price =Gross Value Added
(GVA) at basic price + Indirect tax-
Subsidies
The GDP of a country is derived from
the different sectors of the economy,
namely theagricultural sector, the
industrial sector and the service sector.
GNP (Gross National Product)
The word “national” here refers to all the
citizens of a country.
Definition – It is the total value of the
total output or production of final goods
and services produced by the nationals
of a country during a given period,
generally one year. It considers income
of both resident and non-resident
citizens of a country while the income of
foreigners who reside within the
geographical boundary of the country is
excluded.
Net National Product (NNPMP)
Definition – It is arrived after deducting
depreciation from GNP. Why deduction
indepreciation? Because the part, which
replaces the depreciated parts of the
product, already, produced, does not
add value to current year’s total
produce. It is just keeping the already
produced product intact.
Formula → NNP = GNP – Depreciation
The NNP with market prices includes
indirect taxes and excludes subsidies,

which are given to produce goods and
services.
Example - The cost of production of LPG
gas is 600 rupees for 15 kg but after
government provides subsidy of 200
rupees then the price of product came to
400 rupees. This is called as NNPMP i.e.
NNP at market price.
NNP at factor cost (NNPFC) or National
income
Definition - Adding of subsidies and
deduction of indirect taxes from
NNPMC is called as NNPFC.
This is done to find payments made to
factors of production (land, labor,
capital,entrepreneurship)
Formula → NNPFC = NNPMC – Net
Indirect Taxes
Net Indirect Taxes = Indirect taxes –
Subsidies
National Income is term used for
NNPFC.Personal Income (PI)
Definition – sum of income of all the
people of a country in one
year.Sometime part of national income
is not available to individuals and
sometimes payments made to some
individuals are not included in national
income.
So, while calculating national income
parts of national income that are not
available toindividuals of the country is
deducted from the national income. The
monetary payments made to individuals
but not included in national income are
added to the national income.
Formula → Personal income (PI) ≡
National Income – Undistributed profits
– Net interest payments made by
households – Corporate tax + Transfer
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ECONOMY 2021
payments to the households from the
government and firms. Undistributed
profits - A portion of corporates profit
which is for future expenditure and
expansion and it is not share with
shareholders and factors of production.
Corporate Tax - It is imposed on
the earnings made by the firms
Net interests paid by the households -
The households do receive interest
payments from private firms or the
government on past loans advanced by
them. Households may have to pay
interests to the firms and the
government as well, in case they had
borrowed money from either.
Transfer payments - The households
receive transfer payments from
government and firms (pensions,
scholarship, prizes, for example).
Personal Disposable Income
Definition – Income available to
individuals that can be spent at their
will.
Example – suppose your father’s income
is 50000 rupees per month. After paying
direct tax payments and fines, the
remaining income is there disposable
personal income.
Formula → Personal Disposable Income
(PDI) = PI – Personal tax payments –
Non-tax
Payments Personal tax payments –
example – income tax.
Non-tax payments – like fines.
Why do we need GDP at constant
prices?
• To compare the GDP figures of
different countries.

• To compare the GDP figures of the
same country at different points of time.
Base year The national income is
calculated with reference to a particular
year. That reference year is called as
base year.
Constant Prices
• The price of goods and services in
base year is called price of base year or
constantprice. Real GDP
• Real GDP is national income at
constant price.
• National income at constant price =
Q*P
• Where, Q is quantity of goods and
services in a particular year
• P is price of the base year (constant
price)
Nominal GDP
• Nominal GDP is national income at
current price.
• National income at current price =
Q*P
• Where, Q is quantity of goods and
services in a particular year
o P is price of the goods and services in
that particular year (current price)
Example –
• GDP at current price or nominal GDP
for year 2011 = 100 (quantity) * 100
(current year price) = 10,000
• GDP at current price or nominal GDP
for year 2015 = 120 (quantity) * 150
(current year price) = 18,000
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ECONOMY 2021
• GDP at constant price or Real GDP
for year 2018 =120 (quantity) * 100
(constant year price) = 12,000
Why do we calculate national income at
constant price?
• To check whether the National
Income has grown or not.
GDP and Welfare Though GDP reflects
the wealth of an economy, but it can’t be
taken as an index of greater well-being
of the people of that country.
Why GDP can’t be taken as an index of
greater well-being of the people of a
country?
Because many factors that contribute to
people's happiness are not bought and
sold, GDP is a limited tool for measuring
standard of living.
GDP does not account for leisure time.
The US GDP per capita is larger than the
GDP per capita of Germany, but does
this prove that the standard of living in
the United States is higher? Not
necessarily since it is also true that the
average US worker works several
hundred hours more per year more than
the average German worker. The
calculation of GDP does not take
German workers extra weeks of vacation
into account.
GDP includes what is spent on
environmental protection, healthcare,
and education, but it does not include
actual levels of environmental
cleanliness, health, and learning.
GDPincludes the cost of buying
pollution-control equipment, but it does
not address whether the air and water
are actually cleaner or dirtier. GDP
includes spending on medical care, but
it does not address whether life
expectancy or infant mortality have

risen or fallen. Similarly, GDP counts
spending on education, but it does not
address directly how much of the
population can read, write, or do basic
mathematics.
GDP includes production that is
exchanged in the market, but it does not
cover production that is not exchanged
in the market. For example, hiring
someone to mow your lawn or clean
your house is part of GDP, but doing
these tasks yourself is not part of GDP.
GDP has nothing to say about the level
of inequality in society. GDP per capita
is only an average. When GDP per capita
rises by 5%, it could mean that GDP for
everyone in the society has risen by 5%
or that the GDP of some groups has
risen by more while the GDP of others
has risen by less—or even declined.
Relate it with income inequality. Rich
getting richer and poor getting poorer.
GDP also has nothing in particular to
say about the amount of variety
available. If family buys 100 loaves of
bread in a year, GDP does not care
whether they are all white bread or
whether the family can choose from
wheat, rye, pumpernickel, and many
others—GDP just looks at whether the
total amount spent on bread is the same.
Likewise, GDP has nothing much to say
about which technology and products
are available.
The standard of living in, for example,
1950 or 1900 was not affected only by
how much money people had—it was
also affected by what they could buy. No
matter how much money you had in
1950, you could not buy an iPhone or a
personal computer.
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In certain cases, it is not clear that a rise
in GDP is even a good thing. If a city is
wrecked by a hurricane and then
experiences a surge of rebuilding
construction activity, it would be
peculiar to claim that the hurricane was
therefore economically beneficial. If
people are led by a rising fear of crime to
pay for installation of bars and burglar
alarms on all their windows, it is hard to
believe that this increase in GDP has
made them better off. In that same vein,
some people would argue that sales of
certain goods, like pornography or
extremely violent movies, do not
represent a gain to society’s standard of
living.
• In India, GDP is estimated by Central
Statistical Office (CSO).
• In the revision of National Accounts
statistics done by Central Statistical
Organization(CSO) in January 2015, it
was decided that sector-wise wise
estimates of Gross ValueAdded (GVA)
will now be given at basic prices instead
of factor cost. The Reserve Bankof India
recently switched back to the gross
domestic product (GDP)-based measure
tooffer its growth estimates from the
gross value added (GVA) methodology,
citingglobal best practices. The
government had started analysing
growth estimates usingGVA
methodology from January 2015 and
had also changed the base year to
2018From January.
The relationship between GVA at Factor
Cost and GVA at Basic Prices and GDP
at market prices and GVA at basic prices
is shown below:
GVA at basic prices = GVA at factor cost
+ (Production taxes less Production
subsidies)

GDP at market prices = GVA at basic
prices + Product taxes - Product
subsidies
ELASTICITY, ENGEL CURVE AND
ENGEL LAW/ENGEL’S
ELASTICITY
What is Elasticity?
A measure of the responsiveness of one
variable to changes in another.
Economists have identified four main
types.
1. PRICE ELASTICITY measures how
much the quantity of SUPPLY of a good,
orDEMAND for it, changes if its PRICE
changes. If the percentage change
inquantity is more than the percentage
change in price, the good is priceelastic;
if it is less, the good is INELASTIC.
2. INCOME elasticity of demand
measures how the quantity
demandedchanges when income
increases.
3. Cross-elasticity shows how the
demand for one good (say, coffee)
changeswhen the price of another good
(say, tea) changes. If they are
SUBSTITUTEGOODS (tea and coffee)
the cross-elasticity will be positive: an
increase in theprice of tea will increase
demand for coffee. If they are
COMPLEMENTARYGOODS (tea and
teapots) the cross-elasticity will be
negative. If they areunrelated (tea and
oil) the cross-elasticity will be zero.
4. Elasticity of substitution describes
how easily one input in the
productionprocess, such as LABOUR,
can be substituted for another, such as
machinery.
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What is Engel Curve?
An Engel curve is the relationship
between the amount of a product
thatpeople are willing to buy and their
income. An Engel curve is shown below.
Engel's law is an observation in
economics stating that, stating that
thepercentage of income allocated for
food purchases decreases as income
rises.
As a household's income increases, the
percentage of income spent on
fooddecreases while the proportion
spent on other goods (such as luxury
goods)increases.
In other words, the income elasticity of
demand of food is less than 1.The law
was named after the statistician Ernst
Engel.
Trend of GDP and Growth rate of GDP
TAX-TO-GDP RATIO
The tax-to-GDP ratio is a ratio of a
nation's tax revenue relative to its gross
domestic product (GDP). Some
countries aim to increase the tax-to-
GDP ratio to address deficiencies in
their budgets.
The tax-to-GDP ratio is used in
conjunction with other metrics to
measure how much a nation's
government controls its economic
resources. Tax revenue is the income
collected by governments through
taxation. It includes revenues from taxes
on income, social security contributions,
product sales tax, payroll taxes, and
other items. However, analysts exclude
Social Security payments, fines, and
penalties when calculating the tax-to-
GDP ratio.

What Does the Tax-to-GDP Ratio
Mean?
Policymakers and analysts use the tax-
to-GDP ratio to compare tax receipts
from year to year.
In most cases, because taxes are related
to economic activity, the ratio should
stay relatively consistent. Consequently,
as the gross domestic product (GDP)
grows, tax revenue should increase as
well.
Economic downturns will result in lower
rates of growth. During these times,
unemployment usually rises, and
consumer spending decreases. As a
result, there are fewer property and
consumption taxes collected. During
downturns, reduced consumption
significantly and quickly affects tax
receipts, pushing the tax-to-GDP ratio
downward.
Gross National Disposable Income
Gross national disposable income
measures the income available to the
nation for finalconsumption and saving.
Gross national disposable income may
be derived from gross national income
by adding all current transfers in cash
(e.g. Remittances) or in-kind receivable
by resident from non-resident and
subtracting all current transfers in cash
or in kind payable by resident to non-
resident.
Gross National Income (GNI) is often
used as an indicator for a country’s
living standards. Yet, it does not record
unilateral transfers and notably
remittances, which in the last decades
have gained growing importance as a
source of income for developing
countries.
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ECONOMY 2021
Gross National Disposable Income
(GNDI), includes both income and
transfers and provides a much better
account of people’s actually available
income.
INFLATION
“Inflation can be defined as a sustained
increase in the general level of prices for
goods and services”
MAJOR TYPES OF INFLATION
Demand Pull Inflation:
This type of inflation occurs when
demand exceeds supply primarily due to
increased money supply in the economy.
As we have seen in case 2, Apples cost
was increased just because the
customers started demanding more as
the money in their pockets have
increased. This is Demand pull inflation.
Let’s look at few causes for this type of
inflation
• Increase in money supply
• Increased Government spending.
• Increase in Black Money
• Foreign prices and growth
• Expectation of Inflation
Cost Push Inflation:
Simply it is the price rise due to increase
in the production costs.
Some of the major causes of it are:
• Increase in wages
• Business monopoly
• Government regulation and taxes
• Exchange rates

• Rising production costs
BASICS TERMINOLOGIES:
Inflation Types
Creeping Inflation: When prices rise
at very slow rate, i.e. creeper’s speed, it
is called‘creeping inflation. Generally 3%
annual rise in prices is considered as
‘creeping inflation’.
Walking or Trotting Inflation:
When inflation is in between 3% to 7%,
it’s regarded as ‘walking ortrotting
inflation’. Some economists have
extended the boundary of thistype of
inflation up to 10% per annum. This
type of inflation is consideredas a
warning signal for the government to
take some measures to controlthe
situation.
Running Inflation: This type of
inflation comes into action when there’s
a rapid rise in prices and the range of
this type lies in between 10% to 20% per
annum. Thistype of inflation is
controllable only by strong monetary
and fiscal measures, lest it will be turned
into ‘hyperinflation’.
Hyperinflation:
The rise of prices from 20% to 100 % per
annum is regarded as
‘gallopinginflation’. OR when price rises
to double ortriple digit rate.
Hyperinflation is extremely fast or out-
of-control inflation.
Hyperinflationoccurs when price
increases are so wild that the concept of
inflation ismeaningless. Recent example
“Inflation in Venezuela”.It’s hard to
imagine daily life with an annual
inflation rate of 1,000,000%.
25
ECONOMY 2021
At that rate, the price of a cup of coffee
doubles between your weeklypay checks.
That is what the citizens of Venezuela
are facing, according toa recent report
from the IMF.
Demand Pull Inflation:
This type of inflation is results as an
excess demand. In this case
supplyremains constant (couldn’t be
upgraded as per demand).
Soconsequently, the prices go up.
Cost Push Inflation: When there’s
increase in money-wages at speedier
rate than that of the rise in the
productivity of labor, it results as
increased cost of productionwhich
furthers the increase in prices. This type
of inflation is regarded ascost push
inflation.
Mixed Inflation: Majority of the
economists hold that, inflation is neither
completely‘demand pull’ nor completely
‘cost push’, the actual inflationary
processcontains the elements of both.
Excess demand and increase in
moneywages operate at the same time,
but it’s not necessary that they start
atthe same time.
Markup inflation: Garner Akley put
forward the theory of ‘markup inflation’.
In simplewords it is an advanced
explanation of ‘Mixed inflation’.
According toAkley First comes demand
pull inflation, and it is led by cost
pushinflation. Markup inflation comes
to happen when excess
demandincreases the prices, which
stimulates the production. The
increasingproduction creates excessive
demand for the factors of production,
andthe excessive demand for the factors
of production further raises theprices.

Stagflation: Stagflation is a situation,
whereby economy faces stagnation of
outputand unemployment along with a
high rate of inflation. This situation
isalso known as ‘inflationary recession’.
DisinflationDisinflation is a decrease
in the rate of inflation. Being how much
pricesare increasing per unit of time, it
can be expressed using the
worddisinflation: The slowing of the rate
of inflation per unit of time.
Forexample in one month the rate of
inflation could be was 4.4% and in
Maythe rate of inflation was 4.0%. In
this instance the price of goods
andservices is still increasing; however,
it is increasing at a slower rate,
0.4%less, than a month before. It should
not be confused with deflation,which is
an overall decrease in prices.
Disinflation is generally consideredto be
a very positive state for the economy.
Over the last twenty years
North America has seen steady
disinflation, and many credit this with
thestrong growth during this period.
While disinflation is generally
perceivedas positive, it is not good for
the effect to go so far as deflation, which
isgenerally perceived to be a very
negative state for an economy.
DEFLATION
Deflation is a decrease in the general
price level over a period of
time.Deflation is the opposite of
inflation. For economists especially, the
termhas been and is sometimes used to
refer to a decrease in the size of
themoney supply (as a proximate cause
of the decrease in the general pricelevel).
The latter is now more often referred to
as a 'contraction' of themoney supply.
During deflation the demand for
26
ECONOMY 2021
liquidity goes up, inpreference to goods
or interest. During deflation the
purchasing powerof money increases.
Deflation is considered a problem in a
moderneconomy because of the
potential of a deflationary spiral and
itsassociation with the Great
Depression, although not all episodes
ofdeflation correspond to periods of
poor economic growth historically.
Headline Inflation: Consumer Price
Index based inflation is called headline
inflation
Core Inflation: Core inflation=
headline inflation minus food and
energy items which arefrequently
subject to volatile prices.
Reflation: This term is used to refer
the situation where measures are taken
to curb deflation.
Steps can be like fiscal policy (reducing
taxes) or monetary policy (increasing
money supply or reducing interest rates)
Slowdown – Recession & Depression:
These three terms are inter-linked.
Generally, first slowdown occurs, then
recession comes and finally depression
occurs
a) Slowdown: A decline in economy of a
country – Link it with GDP, not inflation
b) Recession: If slowdown occurs for 2
successive quarters i.e. GDP falls for 2
successive quarters, it is known as
recession. Common indicators are fall in
GDP and investments
c) Depression: Generally, if recession
lasts long, it is said that the economy is
indepression. Main indicators are huge
fall in demand of goods and services
with a sharpdecline in GDP and

investments. Ex: Great Depression of
1930.
Now that you have seen inflation and its
forms, you can now see that inflation is
not just about raising prices, there is a
need to study the causes of inflation
which generally have some other root
causes and sometimes concerns. These
vary a lot depending on situation and
can be critical at many circumstances.
Base Effect
The base effect is the distortion in a
monthly inflation figure that results
from abnormally high or low levels of
inflation in the year-ago month. A base
effect can make it difficult to accurately
assess inflation levels over time. It
diminishes over time if inflation levels
are relatively constant.
INFLATION – BAD OR GOOD?
Now the question occurs whether
inflation is really bad? Let’s try to
answer it:
Deflation and very low inflation – Is it
harmful?
Deflation as we have seen is simply fall
in prices of goods and services. Or in
other words value of money just gets
increased during deflation.
Is that necessarily bad? Not always!
If the prices suddenly decrease, there
will be more consumption as prices have
decreased and hence the demand will
again increase, increasing the prices of
goods.
What happens if the deflation persists
for few periods?
Will the consumption increase?
27
ECONOMY 2021
• If you know that you can buy the
same product for a lower price
tomorrow, it will
discourage you from spending right
now.
• Also if you are in debt, it increases
your debt burden, because the same
amount which you have borrowed
earlier now has far more value, which
makes it difficult to repay.
Hence, deflation can reduce the
spending power of firms and consumers,
more especially in case they are in debts.
But now, you have certain doubts:
When we can buy more things with the
same money?
What are we losing in deflation?
– Well, when you have deflation, the
following generally take place:
• lowering of prices
• lowering of wages and
• High unemployment.
So, although you could get cheaper
products, your disposable income got
reduced because of lower wages and
unemployment effect. There might be
some people who are better-off with
deflation, but the problem is wider on a
macroscopic view.
Decrease in Price
More Consumption
High Demand:
Increase in Price
So, prolonged deflation is always bad?
– No, there are few cases where it can be
good but it can rarely be observed in this

21ST century. Suppose if there occur
continuous technological
improvements: Most of the goods could
be produced at a lower cost every year
and hence prices can fall.
This is definitely a good sign even
though there would be a deflation. Also
like how it happened with Japan, if most
of the neighboring countries are having
inflation, then the country with deflation
has better competitive advantage as
their goods obviously seem cheaper than
other countries with inflation.
• money in the economy remains
almost constant
• Productions will be at constant and
• Demand will also be at constant.
So, it’s not good for growing economy.
Growth be doomed!
Now we understood that having some
inflation is good. So, can’t we keep it
high so that it will never come near ‘0’?
– Okay, here we are talking about high
Inflation. As you know, inflation makes
your money less valuable.
Let’s just look at few of the major
consequences of having high inflation:
It erodes the purchasing power of
money: As we have seen many times
before, inflation makes your monetary
assets fall in value. Ex: The same 1000
rupees with which could serve you 10
meals before can now serve you only 9
because of inflation.
Redistribution of Income among groups:
People who know how to save their
assets from inflation gets protected but
all others will lose the value of their
monetary assets creating inequality.
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ECONOMY 2021
Ex: Borrowers are benefitted with
inflation as they now need to pay a lower
value of money but lenders suffer. How?
Suppose I have Rs.20. You wanted to
buy an apple now which costs Rs.20 but
don’t have money. So, you lend it from
me with 10 % interest. So, you will have
to give me Rs.22 next year. So, I am
happy to give it to you as I can buy an
apple and save 2 rupees next year. But
unfortunately this year saw a high
inflation of 20 % and hence apple cost is
now Rs.24.
So, as a lender I lose 2 rupees in buying
an apple instead of gaining 2 rupees but
you as a borrower gained because the
apple is worth more than 22 Which you
paid to me.
Loss of Business Confidence and fall in
Investments: When the inflation is high,
the aggregate demand reduces
(remember that demand increases
inflation but not the vice versa). Also
companies anticipate an increase in
interest rates to combat with inflation
and hence will discourage them from
investments. Also higher fluctuation
leads to low confidence in investments.
This is particularly important to India’s
“Make in India” initiative.
Bad for Balance of Payments: Higher
inflation will cause our exports to price
more and imports to cost less. Hence,
there will be lesser exports and more
imports worsening the Balance of
Payment.
By looking at all the above, it is evident
that both a high inflation and low
inflation are harmful to economy.
So how much should it be?
Many countries have different desirable
limits of inflation but all countries hope

for a low and predictable rate of
inflation. Even in India there are varied
opinions on how much it should be,
High /unpredictable inflation
Low /unpredicatable 'real' return for
companies leading to unpredictable
profits/losses
No confidence in investing in India -
Companies do not Invest
Dream of 'Make in India" lives forever
likes a dream!!
but some currently say that 2 to 6 % of
inflation is good to have. All these make
inflation the single most important
macro-economic objective for most of
the countries.
MEASURING INFLATION
Inflation target is set by the Govt. in
consultation with RBI, once in every five
years.
• Inflation target is measured by the
consumer price index-combined (CPI-C)
• Inflation target is 4% (+/-) 2% for the
period from August 5, 2016 to March 31,
2021.
• If the average inflation is more than
the upper tolerance level of 4% + 2%,
that is, 6%, or less than the lower
tolerance level of 4%- 2%, that is 2%, for
any 3 consecutive quarters, it would
mean a failure to achieve the inflation
target.
• Where RBI fails to meet the inflation
target, it shall set out a report to the
CentralGovernment stating the reasons
for failure to achieve the inflation target;
remedialactions proposed to be taken by
RBI; and an estimate of the time-period
within whichthe inflation target shall be
29
ECONOMY 2021
achieved pursuant to timely
implementation of proposedremedial
actions
In India, we generally use two indices to
measure Inflation – Consumer Price
Index (CPI) and Wholesale Price Index
(WPI)
Wholesale Price Index (WPI):
• It measures the change in price of
goods in wholesale market – Currently
697 items(Producer-centric mainly)
Commodities & Weight in WPI
o Primary Articles (Weight 22.62%)
(Items 117) (in Primary articles, Food
articlesweight is highest)
o Fuel and Power (Weight 13.15%)
(Items 16)
o Manufactured Products (Weight
64.23%) (Items 564)
• It is released by Office of Economic
Advisor, Department of Industrial Policy
andPromotion on a monthly basis.
• Base year of WPI currently is 2011-12.
• Pan India approach- Does not
fluctuate often; better at targeting
supply side constraints
• But gets affected by international
prices (Manufacturing- higher
weightage)
• It doesn’t take services sector and
unorganized manufacturing sector into
account.
• Prices used for compilation do not
include indirect taxes in order to remove
impact offiscal policy. Consumer Price
Index (CPI):
• It measures the change in price of
goods and services of consumers

• Its released by Central Statistics
Office, Ministry of Statistics and
Program
Implementation on a monthly basis
• Base year of CPI- 2012
• As the consumption diversity is high,
India currently has 7 CPI indicators
• Imported Goods-included
• Issues: Lack of
• Competitive Integrated Market
• Proper Infrastructure
MEASURES TO CONTROL
INFLATION
Inflation is generally controlled by using
monetary measures, fiscal measures or
few other measures.
Let’s look at each of them in detail:
Credit Control: Central bank (RBI in
India) can control the money flow into
economy through various methods. Ex:
Changing CRR, SLR, etc.
Demonetization of currency: It means to
withdraw currency notes (generally
higherdenomination) from the economy.
This brings out black money and helps
control Inflation.
Issue of new currency: This is helpful to
curb hyperinflation by exchanging old
notes with a new
note. But this burdens the
depositors.
Increase in taxes: Increasing tax leads to
less disposable income, which cuts
consumption andhence controls
inflation. But increasing it to a very
high-level leads to low savings
andinvestment which slowdowns
ECONOMY 2021
economy. Instead, tax benefits for
investments and savingsshould be
encouraged while using this measure.
Reduction of unnecessary Government
expenditure and surplus budgets:
Cutting down
unnecessary spending and also giving up
deficit financing helps in reduction of
money and controls inflation. Also
public debt repayment should be
stopped temporarily and more debt
should be taken.
Increasing production: The main factor
for inflation is not having enough supply
for theincreasing demand. There are
various methods to increase production
from expansion to increasing
productivity.
Rational Wage Policy: To prevent
inflation spiral from happening, the
wages can be freeze-d or can be linked
with productivity helps control inflation.
Price Control and Rationing: By either
controlling prices of essential goods or
distributing essential commodities,
demand can be reduced and prices can
be in check.
GDP DEFLATOR
GDP deflator, also called implicit price
deflator, is a measure of inflation. It is
the ratio of the value of goods and
services an economy produces in a
particular year at current prices to that
small of prices that prevailed during the base
year.
• GDP deflator in % terms = *100
• Similar to GDP deflator there is also
GNP deflator.
This ratio helps show the extent to
which the increase in gross domestic
30

product has happened on account of
higher prices rather than increase in
output.
Since the deflator covers the entire
range of goods and services produced in
the economy as against the limited
commodity baskets for the wholesale or
consumer price indices it is seen as a
more comprehensive measure of
inflation.
• Inflation provides benefits to debtors
and loss to creditors/bond-holders.
• Limited inflation is good for growth
in developing country.
• Containing budgetary deficits and
unproductive expenditure has proved
relativelyeffective in controlling the
double digit rate of inflation in the
Indian economy duringrecent years.
• During inflation the central bank sells
government securities. As a result
money supply in the economy falls
causing prices to fall and during
deflation, the central bank will buy back
the securities thus causing money
supply to rise which cures deficiency in
demand.
• If budget deficit is financed by raising
money, inflation may rise.
• General (Headline) inflation is more
volatile than Core inflation- it fluctuates
more dueto large changes in the relative
prices of certain food items vulnerable
to supply shocks.
The Phillips Curve shows the inverse
relationship between inflation and
unemployment: as unemployment
decreases, inflation increases.
In economics, the Lorenz curve is a
graphical representation of the
31
ECONOMY 2021
distribution of income or of wealth. It
was developed by Max O. Lorenz in 1905
for representing inequality of the wealth
distribution.
The J-curve effect/Curve is seen in
economics when a country's trade
balance initially worsens following a
devaluation or depreciation of its
currency.
In economics, the Laffer curve is a
representation of the relationship
between rates oftaxation and the
resulting levels of government revenue.
IMPORTANT ECONOMIC
CONCEPTS
GOLDILOCKS ECONOMY
A Goldilocks Economy is an economy
that is not too hot or cold, in other
words sustainsmoderate economic
growth, and that has low inflation,
which allows a market-friendlymonetary
policy.
A Goldilocks Economy describes an
economy that is not so hot that it causes
inflation, and not so cold that it causes a
recession. The term describes an
economy that is operating in an optimal
state by providing full employment and
economic stability.
An anti-goldilocks economy, however, is
one that’s neither cold enough to
support stimulus measures, nor hot
enough to sustain growth.
• Such a state of economy may occur
during the recovery phases. For
example, the USeconomy of the later
part of 90s was considered a Goldilocks
economy because it was"not too hot, not
too cold, but just right". Because we
have business cycles, a

Goldilockseconomy should be
considered a temporary state.
INFLATIONARY GAP
• An Inflationary Gap is a
macroeconomic concept that describes
the difference between the current level
of real gross domestic product (GDP)
and the anticipated GDP that would be
experienced if an economy is at full
employment, also referred to as the
potential GDP. For the gap to be
considered inflationary, the current real
GDP must be the higher of the two
metrics.
• The inflationary gap exists when the
demand for goods and services exceeds
production due to factors such as higher
levels of overall employment, increased
trade activities or increased government
expenditure. This can lead to the real
GDP exceeding the potential GDP,
resulting in an inflationary gap. The
inflationary gap is so named because the
relative increase in real GDP causes an
economy to increase itsconsumption,
which causes prices to rise in the long
run.
GREEN GDP
• The green gross domestic product
(green GDP or GGDP) is an index of
economic growth with the
environmental consequences of that
growth factored into a SOFT CURRENCY
country'sconventional GDP. Green GDP
monetizes the loss of biodiversity, and
accounts for costs caused by climate
change. Some environmental experts
prefer physical indicators (such as
"waste per capita" or "carbon dioxide
emissions per year"), which may be
aggregated to indices such as the
"Sustainable Development Index".
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ECONOMY 2021
• Calculating green GDP requires that
net natural capital consumption,
including resource depletion,
environmental degradation, and
protective and restorative
environmental initiatives, be subtracted
from traditional GDP. Some early
calculations of green GDP take into
account one or two but not all
environmental adjustments. These
calculations can also be applied to net
domestic product (NDP), which deducts
the depreciation of produced capital
from GDP. In each case, it is necessary
to convert the resource activity into a
monetary value, since it is in this
manner that indicators are generally
expressed in national accounts.
HARD CURRENCY
• It is the international currency in
which the highest faith is shown and is
needed byevery economy. The strongest
currency of the world is one which has a
high level ofliquidity. Basically, the
economy with the highest as well as
highly diversified exportsthat are
compulsive imports for other countries
(as of high-level technology,
defenseproducts, lifesaving medicines
and petroleum products) will also create
high demand forits currency in the and
become the hard currency. It is always
scarce.
• A term used in the foreign exchange
market which denotes the currency that
is easilyavailable in any economy in its
forex market. For example, rupee is a
soft currency in the Indian forex market.
It is basically the opposite term for the
hard currency.

HOT CURRENCY
• It is a term of the forex market and is
a temporary name for any hard
currency. Due tocertain reasons, if a
hard currency is exiting an economy at a
fast pace for the time, thehard currency
is known to be hot. As in the case of the
SE Asian crisis, the US dollar had
become hot.
HEATED CURRENCY
• A term used in the forex market to
denote the domestic currency which is
under enough pressure (heat) of
depreciation dueto a hard currency’s
high tendency of exiting the economy
(since it has become hot). It is also
known as currency under heat or under
hammering.
DEVALUATION
• Devaluation is a deliberate downward
adjustment to the value of a country's
currencyrelative to another currency,
group of currencies or standard. It is a
monetary policy toolused by countries
that have a fixed exchange rate or semi-
fixed exchange rate.
In order to improve efficiency,
infuse professionalism and enable them
to compete more effectively in the
liberalised global environment, the
government identifies PSEs and declares
them as maharatnas, navratnas and
miniratnas.
They were given greater managerial and
operational autonomy, in taking various
decisions to run the company efficiently
and thus increase their profits. Greater
operational, financial and managerial
autonomy has also been granted to
profit-making enterprises referred to as
Miniratnas.
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ECONOMY 2021
TAX BUOYANCY
Tax buoyancy is an important indicator
of the efficiency and responsiveness of
tax revenue mobilisation to GDP growth.
It is calculated as a ratio of percentage
growth in tax revenues to growth in
nominal GDP for a given year. Tax is
said to be buoyant if the gross tax
revenues increase more than
proportionately in response to a rise in
GDP figures.
FINANCIAL MOTIVATORS
Financial motivators are used during
recession time. E.g. reduce the tax rates,
increase the govt. expenditures. Due to
financial motivators, purchasing power
of people increases and therefore
demand for the goods and services also
increases.
TAX EXPENDITURES
Tax Expenditures, as the word might
indicate, does not relate to the
expenditures incurred by the
Government in the collection of taxes.
Rather it refers to the opportunity cost
of taxing at concessional rates, or the
opportunity cost of giving exemptions,
deductions, rebates, deferrals credits
etc. to the tax payers.
Tax expenditures indicate how much
more revenue could have been collected
by theGovernment if not for such
measures. In other words, it shows the
extent of indirect subsidy enjoyed by the
tax payers in the country.
CURRENT ACCOUNT DEFICIT
The current account measures the flow
of goods, services and investments into
and out of the country. We run into a
deficit if the value of the goods and
services we import exceeds the value of

those we export. The current account
includes net income, including interest
and dividends, and transfers, like
foreign aid.
• India’s current account deficit (CAD)
widened to $57.2 billion, or 2.1% of
GDP, in FY19 from 1.8% a year ago, as
per the Reserve Bank of India (RBI).
SINKING FUND
A sinking fund is a means of repaying
funds borrowed through a bond issue
through periodic payments to a trustee
who retires part of the issue by
purchasing the bonds in the open
market. Rather than the issuer repaying
the entire principal of a bond issue on
the maturity date, another company
buys back a portion of the issue annually
and usually at a fixed par value or at the
current market value of the bonds,
whichever is less.
It is a method of repayment of public
debt. It is created by the government out
of budgetary revenues every year. The
Reserve Bank also maintains a
consolidated sinking fund (CSF), on
behalf of the state governments, to
provide a cushion for amortization of
market
BORROWING/LIABILITIES.
IMPORTANT REPORTS AND
INDICES
• Financial Development Index - IMF
• Global Competitiveness Index - WEF
• Global GDP (Gross Domestic
Product) Rankings - World Bank
• Global Financial Development Report
– World Bank
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ECONOMY 2021
INDIA INVESTMENT GRID
• India Investment Grid (IIG) is an
interactive and dynamic national web
portal showcasing information on
investible projects across India.
• With the help of IIG, investors can
view, follow and register interest in
projects across states, sectors and
government schemes in India.
• Additionally, project owners get a
platform to showcase their projects as
viable investment opportunities to
investors.
• IIG seeks to facilitate collaboration by
enabling investors to search investible
projects pan- India, connect with
respective promoters and track project
status.
• Further, it provides tools and
dashboards to all users to gain an
understanding of investible projects on
the portal.
• IIG aims to match the needs of
investors with those of the promoters by
creating an interface that provides the
requisite information for taking that
first step towards making an
investment.
• It is an initiative of The Department
for Promotion of Industry and Internal
Trade (DPIIT), Ministry of Commerce
Government of India (now renamed as
The Department for Promotion of
Industry and Internal Trade (DPIIT))
and Invest India, the National
Investment Promotion and Facilitation
Agency.

NATIONAL INVESTMENT AND
MANUFACTURING ZONE (NIMZ)
• Government has granted final
approval to National Investment and
Manufacturing Zone (NIMZ) in
Kalinganagar,Jajpur district, Odisha.
• The Government of India had notified
the National Manufacturing Policy
(NMP) in 2011 With the objective of
enhancing the share of manufacturing in
GDP to 25% and creating 100 million
jobs by 2022.
• At least 30% of the total land area
proposed for the NIMZ will be utilized
for location of manufacturing units.
• On receipt of final approval, the
NIMZ will be declared by the State
Government as anindustrial township
under Article 243Q(1)(c) of the
Constitution.
• Special Economic Zone (SEZ) is a
specifically delineated duty free enclave
and shall be deemed to be foreign
territory for the purposes of trade
operations and duties and tariffs in
India.
• India was one of the first in Asia to
recognize the effectiveness of the Export
Processing Zone (EPZ) model in
promoting exports, with Asia's first EPZ
set up in Kandla in 1965.
• With a view to overcome the
shortcomings experienced on account of
the multiplicity of controls and
clearances; absence of world-class
infrastructure, and an unstable fiscal
regime and with a view to attract larger
foreign investments in India, the Special
Economic Zones (SEZs) Policy was
announced in April 2000.
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ECONOMY 2021
• The Special Economic Zone Act, 2005
came into force with effect from 2006.
• NIMZ originated under National
Manufacturing Policy, 2011 and SEZ
under SEZ Act, 2005.
• Minimum area for NIMZ is 5000
hectare and for SEZ 10-1000 depending
on sector.
REPURPOSE USED COOKING OIL
(RUCO)
• The Food Safety and Standards
Authority of India (FSSAI) launched
RUCO (Repurpose Used Cooking Oil)
initiative to enable collection and
conversion of used cooking oil to
biodiesel.
• the Food Safety and Standards
Authority of India’s (FSSAI) has directed
Food SafetyCommissioners to ensure
that Food Business Operators (FBOs),
whose consumption of edible oils for
frying is more than 50 litres per day,
stop reusing the oil more than three
times.
• Petroleum and Natural Gas Minister
announced that the state-run oil
marketing companies would procure the
entire supply of biodiesel produced from
used cooking oil for a three-year period.
• Under the scheme, the OMCs —
Indian Oil, Bharat Petroleum and
Hindustan Petroleum — will pay
biodiesel producers ₹51 per litre in the
first year, ₹52.7 per litre in the second,
and ₹54.5 per litre in the third year. The
oil companies will also bear the cost of
transportation and GST for the first
year.

PUBLIC CREDIT REGISTRY
A Public Credit Registry (PCR) is an
extensive database of credit information
for India that is accessible to all
stakeholders.
• A PCR is set up by the central bank
and reporting of loan details to the
Registry by lenders and/or borrowers is
mandated by law.
• The Reserve Bank of India made a
strong case for setting up a public credit
registry in India to address the twin
balance sheet problem of the banking
sector and the corporate sector.
• Public credit registry coverage reports
the number of individuals and firms
listed in a public credit registry with
current information on repayment
history, unpaid debts, or credit
outstanding.
• The repository can capture and
certify details of collaterals, enable
writing of contracts and prevent over-
pledging of collateral by a borrower.
A PCR will help in
• Credit assessment and pricing by
banks;
• Risk-based, dynamic and
countercyclical provisioning at banks;
• Supervision and early intervention by
regulators;
• Understanding if transmission of
monetary policy is working, and if not,
where are thebottlenecks and,
• How to restructure stressed bank
credits effectively.
• PCR is expected to enhance efficiency
of the credit market, increase financial
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ECONOMY 2021
inclusion, improve ease of doing
business and help control delinquencies.
GRADED SURVEILLANCE
MEASURE
• SEBI introduced the measure to keep
a tab on securities that witness an
abnormal price rise that is not
commensurate with financial health and
fundamentals of the company such as
earnings, book value, price to earnings
ratio among others.
• The underlying principle behind the
graded surveillance framework is to
alert and protect investors trading in a
security, which is seeing abnormal price
movements.
• SEBI may put shares of companies
under the measure for suspected price
rigging or under the ambit of ‘shell
companies’.
• The measure would provide a heads
up to market participants that they need
to be extra cautious and diligent while
dealing in such securities put under
surveillance.
NATIONAL DIGITAL
COMMUNICATIONS POLICY-2018
The new telecom policy has been
formulated, in place of the existing
National Telecom Policy-2012 and aims
to facilitate India's effective
participation in the global digital
economy. The policy aims to ensure
digital sovereignty and the objectives are
to be achieved by 2022.
The key objectives of the policy
are:
• The government aims to provide
universal broadband connectivity at 50
Mbps to every citizen.

• It has kept a target of providing 1
Gbps connectivity to all Gram
Panchayats by 2020 and 10 Gbps by
2022.
• Ensure connectivity to all uncovered
areas.
• It will cater to the modern
technological advancements such as 5G,
IoT, M2M etc. in the Telecom Sector for
effective participation in global digital
economy.
• Attract investments of USD 100
billion in the Digital Communications
Sector.
• Train one million manpower for
building New Age Skill.
• Expand IoT ecosystem to 5 billion
connected devices.
• Establish a comprehensive data
protection regime for digital
communications that safeguards the
privacy, autonomy and choice of
individuals.
National Financial Reporting
Authority
The Companies Act 2013 provides for
setting up a National Financial
Reporting Authority (NFRA).
• The decision aims at establishment of
NFRA as an independent regulator for
the auditing profession which is one of
the key changes brought in by the
Companies Act, 2013.
• The inclusion of the provision in the
Act was on the specific
recommendations of the Standing
Committee on Finance.
• NFRA has a larger remit than NACAS
(National Advisory Committee on
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ECONOMY 2021
Accounting Standards), which it is
meant to replace. NACAS only
recommends accounting standards.
• NFRA will set accounting and
auditing standards, monitor and enforce
compliance with the standards, and
oversee the accounting profession’s
record of ensuring compliance.
• It will take away significant
regulatory powers from the Institute of
Chartered Accountants of India (ICAI).
SEBI regulated NBFCs includes
• Venture Capital Fund
• Merchant Banking companies
• Stock Broking companies
Shares are equity instruments, while
bonds and debentures are debt
instruments.
• Debt instruments are assets that
require a fixed payment to the holder,
usually with interest.
• Examples of debt instruments include
bonds (government or corporate),
debentures and mortgages.
• Equity financing allows a company to
acquire funds (often for investment)
without incurring debt, e.g. shares.
Merchandise Exports from India
Scheme
• The Government of India has
introduced Merchandise Exports from
India Scheme (MEIS) through the
Foreign Trade Policy (FTP) 2015-20
w.e.f. April 1, 2015.
• It seeks to promote export of notified
goods manufactured/ produced in India.

• MEIS is a major export promotion
scheme of GOI implemented by the
Ministry of Commerce and Industry.
• The MEIS is the most popular
incentive for exporters, under which
identified sectors are given duty
exemption scrips that are fixed at a
certain percentage of the total value of
their exports.
The scrips can be used to pay duties on
inputs, including Customs duties.
The Qualified Foreign Investor
(QFI)
It is sub-category of Foreign Portfolio
Investor and refers to any foreign
individuals, groups or associations, or
resident, however, restricted to those
from a country that is a member of
Financial Action Task Force (FATF) or a
country that is a member of a group
which is a member of FATF and a
country that is a signatory to
International Organization of Securities
Commission’s (IOSCO)
Multilateral Memorandum of
Understanding (MMOU).
• QFI scheme was introduced by
Government of India in consultation
with RBI and SEBI in the year 2011,
through a Union Budget announcement.
• The objective of enabling QFIs is to
deepen and infuse more foreign funds in
the Indian capital market and to reduce
market volatility as individuals are
considered to be long term investors, as
compared to institutional investors.
Foreign Capital inflows to India have
significantly grown in importance over
the years. These flows have been
influenced by strong domestic
fundamentals and buoyant yields
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ECONOMY 2021
reflecting robust corporate sector
performance.
• In the presence of increased QFIs
there is increased capital available and
reduced voltality compared to the FIIs
which immediately rush out.
• In the present arrangement relating
to foreign portfolio investments, only
FIIs/sub-accounts and NRIs are allowed
to directly invest in Indian equity
market.
• In this arrangement, a large number
of Qualified Foreign Investors (QFIs), in
particular, a large set of diversified
individual foreign nationals who are
desirous of investing in Indian equity
market do not have direct access to
Indian equity market.
• In the absence of availability of direct
route, many QFIs find difficulties in
investing in Indian equity market.
Sustainable Alternative Towards
Affordable Transportation
(SATAT)
• Government is planning to launch
SATAT initiative to promote
Compressed Bio-Gas (CBG) as an
alternative, green transport fuel.
• Sustainable Alternative Towards
Affordable Transportation (SATAT) is
an effort that would benefit both
vehicle-users as well as farmers and
entrepreneurs.
• The programme will be funded under
Solid and Liquid Waste Management
(SLWM)component of Swachh Bharat
Mission-Gramin (SBM-G) to benefit
households in identified villages through
Gram Panchayats.

• The initiative will help in efficient
municipal solid waste management and
in tackling the problem of polluted
urban air due to farm stubble-burning
and carbon emissions.
• CBG is exactly similar to the
commercially available natural gas in its
composition and energy potential. It can
be used as an alternative, renewable
automotive fuel.
• Compressed Bio-Gas has the
potential to replace CNG in automotive,
industrial andcommercial uses in the
coming years.
• The National Policy on Biofuels 2018
also emphasises active promotion of
advanced biofuels, including CBG.
• The government had also launched
the GOBAR-DHAN (Galvanising
Organic Bio-Agro Resources) scheme to
convert cattle dung and solid waste in
farms to CBG and compost.
National Policy on Biofuels – 2018
• It aims for an indicative target of 20%
blending of ethanol in petrol and 5%
blending of biodiesel in diesel by 2030.
• The Policy categorises biofuels as
"Basic Biofuels" viz. First Generation
(1G) bioethanol & biodiesel and
"Advanced Biofuels" - Second
Generation (2G) ethanol, Municipal
Solid Waste(MSW) to drop-in fuels,
Third Generation (3G) biofuels, bio-
CNG etc. to enable extension of
appropriate financial and fiscal
incentives under each category.
• The Policy expands the scope of raw
material for ethanol production by
allowing use of Sugarcane Juice, Sugar
containing materials like Sugar Beet,
Sweet Sorghum, Starch containing
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ECONOMY 2021
materials like Corn, Cassava, Damaged
food grains like wheat, broken rice,
Rotten Potatoes, unfit for human
consumption for ethanol production.
• The Policy allows use of surplus food
grains for production of ethanol for
blending with petrol with the approval
of National Biofuel Coordination
Committee.
• With a thrust on Advanced Biofuels,
the Policy indicates a viability gap
funding scheme for 2G ethanol Bio
refineries of Rs.5000 crores in 6 years in
addition to additional tax incentives,
higher purchase price as compared to 1G
biofuels.
• The Policy encourages setting up of
supply chain mechanisms for biodiesel
production from non-edible oilseeds,
Used Cooking Oil, short gestation crops.
Expected Benefits of National Policy on
Biofuels 2018:
• Reduce Import Dependency: One
crore lit of E10 saves Rs.28 crore of
forex at current rates.
• Cleaner Environment: One crore lit of
E-10 saves around 20,000 ton of CO2
emissions.
• MSW Management: One ton of such
waste has the potential to provide
around 20% of drop in fuels.
• Employment Generation: One
100klpd 2G bio refinery can contribute
1200 jobs in Plant Operations, Village
Level Entrepreneurs and Supply Chain
Management.
• Additional Income to Farmers: By
adopting 2G technologies, agricultural
residues/waste which otherwise are
burnt by the farmers can be converted to

ethanol and can fetch a price for these
waste if a market is developed for the
same.
National Investment and
Infrastructure Fund
• NIIF was proposed to be set up as a
Trust, to raise debt to invest in the
equity ofinfrastructure finance
companies such as Indian Rail Finance
Corporation (IRFC) and National
Housing Bank (NHB). The idea is that
these infrastructure finance companies
can then leverage this extra equity,
manifold. In that sense, NIIF is a banker
of the banker of the banker.
• NIIF is envisaged as a fund of funds
with the ability to make direct
investments as required. As a fund of
fund it may invest in other SEBI
registered funds.
• Its creation was announced in the
Union Budget 2015-16
Objective
• The objective of NIIF would be to
maximize economic impact mainly
through infrastructure development in
commercially viable projects, both
Greenfield and brownfield, including
stalled projects. It could also consider
other nationally important projects, for
example, in manufacturing, if
commercially viable.
Functions of NIIF
• Fund raising through suitable
instruments including off-shore credit
enhanced bonds, and attracting anchor
investors to participate as partners in
NIIF;
• Servicing of the investors of NIIF.
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ECONOMY 2021
• Considering and approving candidate
companies/institutions/ projects
(including stateentities) for investments
and periodic monitoring of investments.
• Investing in the corpus created by
Asset Management Companies (AMCs)
for investing in private equity.
• Preparing a shelf of infrastructure
projects and providing advisory services.
NIIF
• Provides equity/quasi-equity support
to those Non-Banking Financial
Companies(NBFCs)/Financial
Institutions (FIs) that are engaged
mainly in infrastructure financing.
These institutions will be able to
leverage this equity support and provide
debt to the projects selected.
• Invest in funds engaged mainly in
infrastructure sectors and managed by
Asset ManagementCompanies (AMCs)
for equity / quasi-equity funding of
listed / unlisted companies.
• Provides Equity/ quasi-equity
support / debt to projects, to
commercially viable projects, both
Greenfield and Brownfield, including
stalled projects.
The Asian Tea Alliance
• The Asian Tea Alliance (ATA), a
union of five tea-growing and
consuming countries, was launched on
Friday in Guizhou in China.
• The members of the alliance are the
Indian Tea Association, China Tea
Marketing Association, Indonesian Tea
Marketing Association, Sri Lanka Tea
Board and Japan Tea Association.
• ATA plans to work towards
enhancing tea trade, cultural exchanges,

technology exchanges as well as globally
promoting tea. It will also work towards
enhancing global consumption of tea,
while creating a sustainability agenda
for the future of Asian tea.
• The forging of this alliance comes
close on the heels of the signing of a
memorandum of understanding in
December 2018 between the Indian Tea
Association and China TeaMarketing
Association.
• The two associations signed the pact
to promote green and black tea
consumption in major tea markets of
Europe, the U.S., Russia and West Asia,
besides India and China.
• The Indian Tea Association is a
member of The Asian Tea Alliance
(ATA).
• The Indian black tea production has
risen to 188.03 mkg from 180.18 mkg,
Kenya is second major producer with
production of 106.29 mkg in 2018.
Insurance Regulatory and
Development Authority of India
Insurance Regulatory and Development
Authority of India (IRDAI) is an
autonomous apex statutory body which
regulates and develops the insurance
industry in India. It was constituted by a
Parliament of India act called Insurance
Regulatory and Development Authority
Act, 1999 and duly passed by the
Government of India.
Financial Action Task Force
(FATF)
The Financial Action Task Force (FATF)
is an inter-governmental body
established in 1989 by the Ministers of
its Member jurisdictions. The objectives
of the FATF are to set standards and
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ECONOMY 2021
promote effective implementation of
legal, regulatory and operational
measures for combating money
laundering, terrorist financing and other
related threats to the integrity of the
international financial system.
The FATF is therefore a “policy-making
body” which works to generate the
necessary political will to bring about
national legislative and regulatory
reforms in these areas.
• The Financial Action Task Force
(FATF) is such global standard setting
body for anti-money laundering and
combating the financing of terrorism
(AML/CFT).
• The FATF was formed at the efforts of
the OECD, which is a group of the
developed countries.
• At present, the FATF has 37 member
countries and 2 regional organizations
(GCC and EU), representing most major
financial centres in all parts of the globe.
• India joined FATF as 34th member in
2010.
SEBI Act, 1992
The Securities and Exchange Board of
India (SEBI) is the regulator for the
securities market in India. It was
established in the year 1988 and given
statutory powers on 30 January 1992
through the SEBIAct, 1992.
• The SEBI Act, 1992 Was enacted to
empower SEBI with statutory powers for
(a) protecting the interests of investors
in securities, (b) promoting the
development of the securities market,
and (c) regulating the securities market.
Its regulatory jurisdiction extends over
corporates in the issuance of capital and
transfer of securities, in addition to all

intermediaries and persons associated
with securities market.
• It can conduct enquiries, audits and
inspection of all concerned and
adjudicate offences under the Act. It has
powers to register and regulate all
market intermediaries and to penalise
them in case of violations of the
provisions of the Act, Rules and
Regulations made there under.
SEBI has full autonomy and authority to
regulate and develop an orderly
securities market.
The Preamble of the Securities and
Exchange Board of India describes the
basic functions of the Securities and
Exchange Board of India as "...to protect
the interests of investors in securities
and to promote the development of, and
to regulate the securities market and for
matters connected there with or
incidental there to".
SEBI has to be responsive to the needs
of three groups, which constitute the
market:
• the issuers of securities
• the investors
• the market intermediaries.
SEBI has three functions rolled into one
body: quasi-legislative, quasi-judicial
and quasi-executive.
Current Account of Government of
India
• Current transactions of an economy
in foreign currency all over the world
are—export,import, interest payments,
private remittances and transfers.
• Every transaction in foreign currency
(inflow or outflow) considered as capital
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ECONOMY 2021
is shown in this account—external
lending and borrowing, foreign currency
deposits of banks, external bonds issued
by the Government of India, FDI, PIS
and security market investment of the
QFIs (Rupee is fully convertible in this
case).
• Unlike Current Account, there is no
deficit or surplus in Capital account.
The GAAR (General Anti-Avoidance
Rules), originally proposed in the Direct
Taxes Code 2010, are targeted at
arrangements or transactions made
specifically to avoid taxes.
The objective of the GAAR provisions is
to codify the doctrine of ‘substance over
form’ where the real intention of the
parties and purpose of an arrangement
is taken into account for determining the
tax
consequences, irrespective of the legal
structure of the concerned transaction
or arrangement. It essentially comes
into effect where an arrangement is
entered into with the main purpose or
one of the main purposes of obtaining a
tax benefit and which also satisfies at
least one of the following four tests:
• The arrangement creates rights and
obligations that are not at arm’s length
• It results in misuse or abuse of
provisions of tax laws
• Lacks commercial substance or is
deemed to lack commercial substance
• It is not carried out in a bona fide
manner.
GAAR provisions will check treaty
shopping by the taxpayer for avoidance
of payment of tax in India.

• GAAR is not applicable to
transactions where tax benefit to parties
does not exceed Rs.3 crore in a financial
year.
• Foreign Institutional Investors are
exempted from GAAR.Currency
Convertibility is the ease with which a
country's currency can be converted into
gold or another currency. The issue of
currency convertibility is concerned with
foreign currency outflow only. India still
has only partial convertibility (40:60) in
the capital account. However, the
current account is fully convertible.
• Currency convertibility is extremely
important for international commerce.
When a currency is inconvertible, it
poses a risk and barrier to trade with
foreigners who have no need for the
domestic currency.
• Convertible currencies are defined as
currencies that are readily bought, sold,
and convertedwithout the need for
permission from a central bank or
government entity.
• Most major currencies are fully
convertible; that is, they can be traded
freely without
restriction and with no permission
required.
• The easy convertibility of currency is
a relatively recent development and is in
partattributable to the growth of the
international trading markets and the
FOREX markets inparticular.
• Indian Rupee is fully convertible in
respect to current account of Balance of
payment.
External Commercial Borrowing (ECBs)
are loans in India made by non-resident
lenders in foreign currency to Indian
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ECONOMY 2021
borrowers. They are used widely in India
to facilitate access to foreign money by
Indian corporations and PSUs
(public sector undertakings).
• External Commercial Borrowings
(ECB) are governed by the Foreign
Exchange Management Act, 1999
(FEMA).
• ECB is different from FDI. If the
foreign money is used to finance the
Equity Capital, it would be termed as
Foreign Direct Investment. ECB means
any kind of funding other than Equity.
Managed-Exchange-Rate System is a
hybrid or mixture of the fixed and
flexible exchange rate systems in which
the government of the economy
attempts to affect the exchange rate
directly by buying or selling foreign
currencies or indirectly, through
monetary policy6 (i.e., by lowering or
raising interest rates on foreign currency
bank accounts, affecting foreign
investment, etc.).
Fixed Currency Regime is a method of
regulating exchange rates of world
currencies brought by the IMF. In this
system exchange rate of a particular
currency was fixed by the IMF keeping
the currency in front of a basket of
important world currencies (they were
UK£, US $, Japanese ¥, German Mark
DM and the French Franc FFr).
• Different economies were supposed
to maintain that particular exchange
rate in future. Exchange rates of
currencies were modified by the IMF
from time to time.
• There are 2 types of exchange rate
regime – fixed and floating exchange-
rate regime.

• A method of regulating exchange
rates of world currencies based on the
market mechanism(i.e., demand and
supply).
• Under a pure fixed-exchange-rate
regime, authorities intervene so that the
value of the domestic currency vis-a-vis
the currency of another country, say the
US Dollar, is maintained at a constant
rate.
• Under a freely floating exchange-rate
regime, authorities do not intervene in
the market for foreign exchange and
there is minimal need for international
reserves.
‘FDI Regulatory Restrictiveness Index’ is
published by The Organization for
Economic Co-operation and
Development (OECD)
• The FDI Regulatory Restrictiveness
Index (FDI Index) measures statutory
restrictions on foreign direct investment
in 62 countries, including all OECD and
G20 countries, and covers 22 sectors.
The FDI Index is currently available for
the following years: 1997, 2003, 2006,
2010- 2016.
A Current Account Deficit occurs when
the value of imports (of goods, services
and investment incomes) is greater than
the value of exports, i.e. a country is
buying more than what it is selling to the
rest of the world.
• So, reduce the CAD a country has to
sell more which can be done by
increasing the exports, sending more
nationals to work overseas thereby
increasing the inbound remittances, and
buy less, which can be done by reducing
the imports. Increasing the Imports will
increase the CAD.
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FDI is more stable and less volatile in
nature; in contrast the Foreign Portfolio
Investments are highly volatile in
nature.
• They are also called the Hot Money,
as they can leave India overnight to
invest in other markets.
• FDI being more stable in nature
involves investments with long term
profits in mind. They generate profits by
locally producing the goods and services,
as such are more preferable over the
Debt financing as it creates interest
obligations even when the business is
not running well.
Countervailing Duty is levied on the
imported goods to counterbalance
(Countervail) the subsidies provided by
the exporting country’s Government.
Many of the governments provide
subsides either during production or
during exports to create price advantage
for their products, this can be harmful to
the products of the importing country,
so Countervailing duties are levied to
equalize the advantage.
Anti-dumping Duties are levied on the
goods that are either sold either, below
the cost of production or below the
prices in the home country. This is
considered predatory as it tries to
driveout the products of importing
country and create a monopoly. To
prevent this from happening,
antidumping duty is levied.
Crowding Out Effect
• Crowding out is an economic concept
that describes a situation where
government spending and borrowing
reduces overall private sector
consumption and investment. Crowding
out can be caused by an expansionary

fiscal policy financed by increased taxes,
borrowing or both. (Or)
• Crowding out effect is an economic
term referring to government spending
driving down private sector spending or
even eliminates private sector spending.
• Crowding out can refer to when
government borrowing absorbs all the
available lending capacity in the
economy. This causes interest rates to
rise.
• As a result, private businesses and
individuals find it cost prohibitive to
borrow money to fund growth and
expansion. This, in turn, can create a
downturn in the economy, which lowers
tax revenue and thus increases the need
for the government to borrow even more
money.
• Crowding out can also refer to the
government conducting activities that
were traditionally performed by the
private sector. For instance, an increase
in government investment and grants to
private businesses crowds out the
financial entities, such as venture capital
firms, that traditionally do this,
themselves.
India’s GST Act contains an ‘Anti –
Profiteering’ clause.
• Australia incorporated this clause in
July 2000 with the aim of educating
businesses and avoiding litigation, once
implemented.
• Clause 171 has been inserted in the
GST bill which provides that it is
mandatory to pass on the benefit due to
reduction in rate of tax or from input tax
credit to the consumer by way of
commensurate reduction in prices.
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• This clause further provides for the
establishment of an authority against
anti-profiteering in order to ensure its
compliance. While the end consumer
may have some reason to cheer, the
industry is still doubtful of its
implementation.
Infrastructure Investment Trusts
(InvITs) are mutual fund like
institutions that enable investments into
the infrastructure sector by pooling
small sums of money from multitude of
individual investors for directly
investing in infrastructure so as to
return a portion of the income (after
deducting expenditures) to unit holders
of InvITs, who pooled in the money.
• InvITs can invest in infrastructure
projects, either directly or through a
special purpose vehicle (SPV). In case of
Public Private Partnership (PPP)
projects, such investments can only be
through SPV.
• InvITs are regulated by the securities
market regulator in India- Securities
and Exchange Board of India (SEBI).
• The objective of InvIT is to facilitate
investment into the infrastructure sector
in India.
• InvITs are very much similar to the
Real Estate investment Trusts (REITs)
in structure and operations. InvITs are
modified REITs designed to suit the
specific circumstances in India.
CriSidEx
• It is India’s first sentiment index for
micro and small enterprises (MSEs)
developed jointly by

CRISIL & SIDBI
• It is a composite index based on a
diffusion index of 8 parameters and
measures MSE business sentiment on a
scale of 0 (extremely negative) to 200
(extremely positive).
• It will have 2 indices, one for the
‘survey quarter’ and another for the
‘next quarter’ once a trend emerges after
few rounds of the survey, providing
independent time series data.
• CriSidEx readings will flag potential
headwinds and changes in production
cycles and thus help improve market
efficiencies.
• It will also offer actionable indicators
on foreign trade, by capturing the
sentiment ofexporters and importers
The Securities Transaction Tax
(STT) was introduced in India a few
years ago, to stop tax avoidance of
capital gains tax. Earlier, many people
usually didn’t declare their profits on the
sale of stocks and avoided paying capital
gains tax. The government could tax
only those profits, which have
beendeclared by people.
• To stop this situation, the then
Finance Minister P Chidambaram in the
Union Budget 2004-05—introduced
STT. Transactions in stock, index
options and futures would also be
subject to transaction tax. This tax is
payable whether you buy or sell a share
and gets added to the price of the stock
at the time the transaction is made.
Since brokers have to automatically add
this tax to the transaction price, there is
no way to avoid it.
• STT is levied on every purchase or
sale of securities that are listed on the
Indian stock exchanges. This would
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ECONOMY 2021
include shares, derivatives or equity-
oriented mutual funds units. The rate of
tax that is deducted is determined by the
central government, and it varies with
different types of transactions and
securities. STT is deducted at source by
the broker or AMC, at the time of the
transaction itself, the net result is that it
pushes up the cost of the transaction
done.
• As on date, STT is not applicable in
case of preference shares, Government
securities, bonds, debentures, currency
derivatives, units of mutual fund other
than equity oriented mutual fund, and
gold exchange traded funds and in such
cases, tax treatment of short-term and
long-term gains shall be as per normal
provisions of law.
The Williamson trade-off model is a
theoretical model in the economics of
industrial organization which
emphasizes the trade-off associated with
horizontal mergers between gains
resulting from lower costs of production
and the losses associated with higher
prices due to greater degree of monopoly
power.
It is a model for evaluating the possible
benefits (lower costs) and detriments
(higher prices) of a proposed MERGER
that can be used in the application of a
DISCRETIONARY COMPETITION
POLICY.
World Bank Reports
Some of the prominent reports released
by World Bank
1. Ease of Doing Business Report
2. World Development Report
3. Ease of Living Index

4. Universal Health Coverage Index
5. Remittance Report
India’s Foreign Trade Policy
The Government of India, Ministry of
Commerce and Industry announced
New Foreign Trade Policy on 01ST April
2015 for the period 2015-2020, earlier
this policy known as Export Import
(Exim) Policy.
After five years foreign trade policy
needs amendments in general, aims at
developing export potential, improving
export performance, encouraging
foreign trade and creating favorable
balance of payments position.
The Export Import Policy (EXIM Policy)
or Foreign Trade Policy is updated every
year on the 31St of March and the
modifications, improvements and new
schemes becomes effective from April
month of each year.
• All export and import-related
activities are governed by the Foreign
Trade Policy (FTP), which is aimed at
enhancing the country's exports and use
trade expansion as an effective
instrument of economic growth and
employment generation.
• The Department of Commerce has
announced increased support for export
of variousproducts and included some
additional items under the Merchandise
Exports from IndiaScheme (MEIS) in
order to help exporters to overcome the
challenges faced by them.
• The Central Board of Excise and
Customs (CBEC) has developed an
'integrated declaration' process leading
to the creation of a single window which
will provide the importers and exporters
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ECONOMY 2021
a single point interface for customs
clearance of import and export goods.
• As part of the FTP strategy of market
expansion, India has signed a
Comprehensive Economic Partnership
Agreement with South Korea which will
provide enhanced market access to
Indian exports. These trade agreements
are in line with India’s Look East Policy.
To upgrade export sector infrastructure,
‘Towns of Export Excellence’ and units
located therein will be granted
additional focused support and
incentives.
• RBI has simplified the rules for credit
to exporters, through which they can
now get long-term advance from banks
for up to 10 years to service their
contracts. This measure will help
exporters get into long-term contracts
while aiding the overall export
performance.
Committee on Capital Account
Convertibility (CAC)
• The Committee on Capital Account
Convertibility (CAC) or Tarapore
Committee wasconstituted by the
Reserve Bank of India for suggesting a
roadmap on full convertibility of Rupee
on Capital Account.
• The committee submitted its report
in May 1997. The committee observed
that there is no clear definition of CAC.
The CAC as per the standards refers to
the freedom to convert the local
financial assets into foreign financial
assets or vice versa at the market
determined rates of exchange.
• The Tarapore committee observed
that the Capital controls can be useful in
insulating the economy of the country
from the volatile capital flows during the

transitional periods and also in
providing time to the authorities, so that
they can pursue discretionary domestic
policies to strengthen the initial
conditions.
• The report noted that India had
adopted current account convertibility
in August 1994, in accordance to Article
VIII of the Articles of Agreement of the
International Monetary Fund (IMF).
• It also noted that capital account
convertibility already existed for foreign
investors, both direct and portfolio, non-
resident depositors and Indian
corporates which take external
commercial borrowings (ECB). But,
there were restrictions on the ability of
Indians citizens and corporates to send
capital abroad. There were also
restrictions on transfers of capital
associated with banks and non-banking
financial companies.
• The report said that implementing
capital account convertibility would
increase capitalinflows. But, it would
make it difficult to implement an
effective domestic monetary policy.
• The report suggested that capital
account convertibility should not be
fully implemented until weaknesses in
the financial systems are completely
eliminated. However, the report said
that the time was appropriate for India
to take some steps towards it
• The FEMA act contains the list of
permissible capital account transactions
as well as list of prohibited capital
account transactions.
World Investment report-UNCTAD
World Economic Outlook-IMF
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ECONOMY 2021
Some important reports given by
WEF
• Global Information technology report
• Global competitiveness report
• Travel and Tourism competitiveness
report
• Global gender gap report
• Global risk report
• Global human capital report
Global Findex Report
• It is released by World Bank Group.
The Global Findex database, the world's
mostcomprehensive database on
financial inclusion, provides in-depth
data on how individuals save, borrow,
make payments, and manage risks.
• Collected in partnership with the
Gallup World Poll and funded by the Bill
& Melinda Gates Foundation, the Global
Findex is based on interviews with about
150,000 adults in over 140countries.
CESS
A cess is a levy for a specific purpose
which may bear the characteristics of a
tax or a fee. The quintessential feature of
a cess is that it is levied for a ‘specific
purpose’ and the proceeds are
earmarked as such.
• Under Article 270 of the Constitution,
a cess tax has special privilege as the
proceeds can be retained exclusively by
the Union and need not be shared with
States. The object of granting this
special status is to ensure expenditure
for a specific purpose, as is evident from
the

Fourth Finance Commission
Report.
• This is a tax on tax, levied by the
government for a specific purpose. All
the taxes collected by the government
usually go into the Consolidated Fund of
India (CFI) which can be spent on any
legitimate activity. But the collections
from a cess are required to be kept
outside of the CFI to be spent only on
the specific purpose for which it was
levied.
• Few examples are- Education cess,
Krishi Kalyan cess and infrastructure
cess, Swachh Bharat cess (SBC) ext.
Presumptive Taxation involves the use
of indirect means to ascertain tax
liability, which differ from the usual
rules based on the taxpayer's accounts.
In India for calculating presumptive tax
deemed income is calculated. 8% of the
total turnover or gross receipts of the
assessee or any higher amount
voluntarily declared by him shall be
deemed to be his income chargeable to
tax. Now on this deemed income tax is
charged at a fixed rate.
Presumptive tax has following
benefits:
• It reduces burden of compliance.
• Combats tax avoidance and tax
evasion.
• More equitable distribution of tax
burden.
• No accounting records are required to
be maintained.
Tax Expenditure
• The divergence between the statutory
tax rate and effective tax rate (defined as
the ratio of total tax revenue collected to
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ECONOMY 2021
the aggregate tax base) is mainly on
account of tax exemptions.
• Tax expenditure is also termed as
‘revenue forgone’, but it does not
necessarily imply that this quantum of
revenue has been waived by the
government.
RBI does Sterilization of foreign inflows
with a view to control money supply and
to control inflow of financial services in
India.
• Sterilization is a form of monetary
action in which a central bank seeks to
limit the effect of inflows and outflows of
capital on the money supply.
Sterilization most frequently involves
the purchase or sale of financial assets
by a central bank, and is designed to
offset the effect of foreign exchange
intervention.
Eastern Economic Forum
• The fifth edition of Eastern Economic
Forum (EEF) was held in Vladivostok,
Russia from September 4 to 6, 2019.
• It was aimed at providing a platform
for discussing issues aimed at expanding
international cooperation in Asia-Pacific
region and developing the economy of
Russian Far East.
• Among the participants in the
Summit are India, Malaysia, Japan,
Australia, and South Korea.
• India announced a $1 billion line of
credit for the development of the
resource-rich region.
• India is the first country to open a
Consulate in Vladivostok.
• The EEF was established by a decree
of the President of the Russian
Federation, Vladimir Putin, in 2015

Masala bonds are bonds issued outside
India but denominated in Indian
Rupees, rather than the local currency.
Unlike dollar bonds, where the borrower
takes the currency risk, masala bond
makes the investors bear the risk. As per
RBI, corporates, Indian banks, Real
Estate Investment Trusts (REITs) and
Infrastructure Investment Trusts
(InvITs) are eligible to issue these
bonds.
• The first Masala bond was issued by
the World Bank backed International
FinanceCorporation (IFC) in November
2014 when it raised 1,000 crore bond to
fund infrastructure projects in India
Automatic Exchange of
Information (AEOI) Regime
• Automatic Exchange of Information
(AEOI) Regime between Switzerland
and India kicked off from September 1,
2019.
• Under this mechanism, India will
start receiving information on all
financial accounts held by Indian
residents in Switzerland, for the year
2018.
• Automatic Exchange of Information
(AEOI) is systematic and periodic
transmission of “bulk” taxpayer
information by the source country to the
residence country, which is possible
under most of the Double Taxation
Avoidance Agreements (DTAAs) and
Multilateral Convention on Mutual
Administrative Assistance in Tax
Matters (MAC).
• Participating jurisdictions that
implement AEOI send and receive pre-
agreed information each year, without
having to send a specific request.
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ECONOMY 2021
• AEOI will enable the discovery of
formerly undetected tax evasion.
• It will enable governments to recover
tax revenue lost to non-compliant
taxpayers, and will further strengthen
international efforts to increase
transparency, cooperation, and
accountability among financial
institutions and tax administrations.
• Additionally, AEOI will generate
secondary benefits by increasing
voluntary disclosures of concealed assets
and by encouraging taxpayers to report
all relevant information.
BALANCE OF PAYMENTS
According to the RBI, balance of
payment is a statistical statement that
shows –
• The transaction in goods, services
and income between an economy and
the rest of the world
• Changes of ownership and other
changes in that economy's monetary
gold, specialdrawing rights (SDRs), and
financial claims on and liabilities to the
rest of the world
• Unrequited transfers
The transactions in BOP are categorised
in –
• Current account showing export
and import of visibles (also called
merchandise) and invisibles (also called
non-merchandise). Invisibles take into
account services, transfers and income.
• Capital account showing a capital
expenditure and income for a country. It
gives asummary of the net flow of both
private and public investment into an
economy.External commercial
borrowing (ECB), foreign direct

investment, foreign portfolioinvestment,
etc. form a part of capital account
• Errors and omissions Sometimes
the balance of payment does not
balance. Thisimbalance is shown in the
BOP as errors and omissions. BOP is
compiled using thedouble entry book
keeping system consisting assets and
liabilities
CASH RESERVE RATIO (CRR)
CRR is a specified minimum fraction of
the total deposits of customers, which
commercial banks have to hold as
reserves either in cash or as deposits
with the central bank. CRR is set
according to the guidelines of the central
bank of a country.
The amount specified as the CRR is held
in cash and cash equivalents, is stored in
bank vaults or parked with the Reserve
Bank of India.
The aim here is to ensure that banks do
not run out of cash to meet the payment
demands of their depositors. CRR is a
crucial monetary policy tool and is used
for controlling money supply in an
economy.
CRR specifications give greater control
to the central bank over money supply.
Commercial banks have to hold only
some specified part of the total deposits
as reserves. This is called fractional
reserve banking.
STATUTORY LIQUIDITY RATIO
(SLR)
The ratio of liquid assets to net demand
and time liabilities (NDTL) is called
statutory liquidity ratio (SLR)
Apart from Cash Reserve Ratio (CRR),
banks have to maintain a stipulated
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ECONOMY 2021
proportion of their net demand and time
liabilities in the form of liquid assets like
cash, gold and unencumbered securities.
Treasury bills, dated securities issued
under market borrowing programme
and marketstabilisation schemes (MSS),
etc also form part of the SLR. Banks
have to report to the RBI every alternate
Friday their SLR maintenance, and pay
penalties for failing to maintain SLR as
mandated.
FISCAL DEFICIT
The difference between total revenue
and total expenditure of the government
is termed as fiscal deficit. It is an
indication of the total borrowings
needed by the government. While
calculating the total revenue,
borrowings are not included.
The gross fiscal deficit (GFD) is the
excess of total expenditure including
loans net of recovery over revenue
receipts (including external grants) and
non-debt capital receipts. The net fiscal
deficit is the gross fiscal deficit less net
lending of the Central government.
Generally fiscal deficit takes place either
due to revenue deficit or a major hike in
capitalexpenditure. Capital expenditure
is incurred to create long-term assets
such as factories, buildings and other
development.
A deficit is usually financed through
borrowing from either the central bank
of the country or raising money from
capital markets by issuing different
instruments like treasury bills and
bonds.
 ECONOMY 2021

MONETARY POLICY PHILIPS CURVE

What a CENTRAL BANK does to control An economic concept developed by A.
the MONEY SUPPLY, and thereby W. Phillips stating that inflation and
manage DEMAND. unemployment have a stable and inverse
relationship. The theory states that with
Monetary policy involves OPEN- economic growth comes inflation, which
MARKET OPERATIONS, RESERVE in turn should lead to more jobs and less
REQUIREMENTS and changing the unemployment. The concept has been
short-term rate of interest. It is one of proven empirically and some
the two main tools of government policies are directly
MACROECONOMIC POLICY, the side- influenced by it. Some level of inflation
kick of FISCAL POLICY, and is easier could be considered desirable in order to
said than done well. minimize unemployment.
The RBI uses the interest rate, Open LAFFER CURVE
Market Operations (OMO), changes in
banks' CRR and primary placements of Invented by Arthur Laffer, this curve
government debt to control the money shows the relationship between tax rates
supply. OMO, primary placements and and tax revenue collected by
changes in the CRR are the most governments. The chart below shows the
popular instruments used. Laffer Curve:
• Under the OMO, the RBI buys or sells The curve suggests that, as taxes
government bonds in the secondary increase from low levels, tax revenue
market. By absorbing bonds, it drives up collected by thegovernment also
bond yields and injects money into the increases. It also shows that tax rates
market. When itsells bonds, it does so to increasing after a certain point (T*)
suck money out of the system. would cause people not to work as hard
or not at all, thereby reducing tax
• The changes in CRR affect the revenue.
amount of free cash that banks can use
to lend – reducing the amount of money Eventually, if tax rates reached 100%
for lending cuts into overall liquidity, (the far right of the curve), then all
driving interest rates up, lowering people would choose not to work
inflation and sucking money out of because everything they earned would
markets. go to the government.
• Primary deals in government bonds Governments would like to be at point
are a method to intervene directly in T*, because it is the point at which the
markets,followed by the RBI. By directly government collects maximum amount
buying new bonds from the government of tax revenue while people continue to
at lower thanmarket rates, the RBI tries work hard.
to limit the rise in interest rates that
higher governmentborrowings would ENGEL’S CURVE
lead to Engel's law is an observation in
economics stating that, with a given set
of tastes andpreferences, as income

52

rises, the proportion of income spent on
food falls, even if actualexpenditure on
food rises. In other words, the income
elasticity of demand of food is less than
1. The law was named after the
statistician Ernst Engel.An Engel curve
is the relationship between the amount
of a product that people are willing
tobuy and their income. An Engel curve
is shown below.
LORENZ CURVE AND GINI
COEFFICIENT
A Lorenz curve shows the degree of
inequality that exists in the distributions
of two variables, and is often used to
illustrate the extent that income or
wealth are distributed unequally in a
particular society.
The Gini coefficient is the area between
the line of perfect equality and the
observed Lorenz curve, as a percentage
of the area between the line of perfect
equality and the line of perfect
inequality. A Gini coefficient is a
summary numerical measure of how
unequally one variable is related to
another. The Gini coefficient is a
number between 0 and 1, where perfect
equality has a Gini coefficient of zero,
and absolute inequality yields a Gini
coefficient of 1.
MISERY INDEX
It is the sum of a country’s INFLATION
and UNEMPLOYMENT rates. The
higher the score, the greater is the
economic misery.
TRADE BARRIERS
A trade barrier is a general term that
describes any government policy or
regulation thatrestricts international
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ECONOMY 2021
trade. The barriers can take many forms,
including:
• Import duties
• Import licenses
• Export licenses
• Import quotas
• Tariffs
• Subsidies
• Non-tariff barriers to trade
• Voluntary Export Restraints
• Local Content Requirements
NON-TARIFF TRADE BARRIERS
Non-tariff barriers to trade are trade
barriers that restrict imports but are not
in the usual form of a tariff. Some of the
common examples are anti-dumping
measures and countervailing duties,
which, although they are called "non-
tariff" barriers, have the effect of tariffs
but are only imposed under certain
conditions. Their use has risen sharply
after the WTO rules led to a very
significant reduction in tariff use.
Now what is countervailing duty
Countervailing duties (CVDs) are a
means to restrict international trade.
They are imposed when a foreign
country subsidizes its exports, hurting
domestic producers.
DEFLATION
When the overall price level decreases so
that inflation rate becomes negative, it is
called deflation. It is the opposite of the
often-encountered inflation.
A reduction in money supply or credit
availability is the reason for deflation in
most cases. Reduced investment

spending by government or individuals
may also lead to this situation.
Deflation leads to a problem of
increased unemployment due to slack in
demand.
Central banks aim to keep the overall
price level stable by avoiding situations
of severedeflation/inflation. They may
infuse a higher money supply into the
economy to counterbalance the
deflationary impact. In most cases, a
depression occurs when the supply of
goods is more than that of money.
Deflation is different from disinflation
as the latter implies decrease in the level
of inflation whereas on the other hand
deflation implies negative inflation.
FOREIGN EXCHANGE RESERVES
Forex reserves are foreign currency
assets held by the central banks of
countries.
These assets include foreign marketable
securities, monetary gold, special
drawing rights (SDRs) and reserve
position in the IMF. The main purpose
of holding foreign exchange reserves is
to make international payments and
hedge against exchange rate risks.
SPECIAL DRAWING RIGHTS
This is a kind of reserve of foreign
exchange assets comprising leading
currencies globally and created by the
International Monetary Fund in the year
1969.
Before its creation, the international
community had to face several
restrictions in increasing world trade
and the level of financial development as
gold and US dollars, which were the only
means of trade, were in limited
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ECONOMY 2021
quantities. In order to address the issue,
SDR was created by the IMF.
SDR is often regarded as a 'basket of
national currencies' comprising five
major currencies of the world - US
dollar, Euro, British Pound, Yen (Japan)
and Chinese renminbi (RMB). The
basket has been expanded to include the
Chinese renminbi (RMB) as the fifth
currency. The composition of this basket
of currencies is reviewed every five years
wherein the weightage of currencies
sometimes get altered.
POVERTY AND DEVELOPMENT
ISSUES
Definition of Poverty
• Poverty can be defined as a social
phenomenon in which a section of
society is unable to fulfill even the basic
necessities of life. When a substantial
section is deprived of minimum level of
living and continues with a bare
subsistence level, that society is said to
be plagued with mass poverty.
• Poverty implies a condition in which
a person is unable to maintain living
standardadequate for his/her physical
and mental efficiency. Poverty erodes
self-esteem andopportunities to live life
to the fullest. The cumulative effect is
the wide gap betweenhaves and have
not’s.
• According to World Bank, Poverty is
deprivation in well-being and is
multidimensional.It includes low
incomes and inability to acquire the
basic goods andservices necessary for
survival with dignity.

The dynamic nature of Poverty
• The concept of poverty today, is
different from what it was thirty years
ago.
• The left and right of politics is not
necessarily always in conformity with
the livedexperiences of ordinary Indians
• Left: They want to expand social
welfare programmes for the poor by
highlighting thegrowing inequalities
between rich and poor.
• Right: they want to alleviate the
growing burden of welfare policies and
introduceeconomic growth to improve
the lives of poor.
• Thus, it is needed that poverty be
understood and tackled with tailor made
approaches to align with the transition
happening in society.
Dimensions of Poverty:
Poverty may be defined as either
absolute or relative. Absolute poverty or
destitution refers to the lack of means
necessary to meet basic needs such as
food, clothing and shelter.
• Absolute poverty is a condition
characterized by severe deprivation of
basic humanneeds, including food, safe
drinking water, sanitation facilities,
health, shelter,education and
information. It depends not only on
income, but also on access toservices.
• Relative poverty views poverty as
dependent on social context, hence
relative povertyis a measure of income
inequality. Usually, relative poverty is
measured as thepercentage of
population with income less than some
fixed proportion of medianincome.
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ECONOMY 2021
Types of Poverty:
• Absolute poverty: The state in which
people do not have the minimum level of
incomedeemed necessary for living in a
civilized way.
• Relative poverty: Relative poverty is
when some people‟s way of life and
income is somuch worse than the
general standard of living in the country
or region in which theylive that they
struggle to live a normal life and to
participate in ordinary economic,
socialand cultural activities.
• Always poor: These people are never
having income above poverty line in
their lifetime.
• Usually poor: Those people who are
generally poor but who may sometimes
have a little more money. E.g. casual
workers
• Chronic poor: Always poor and
usually poor together are categorized
under chronicpoor.
• Churning poor: Those people who
regularly move in and out of poverty.
E.g.: small farmers and seasonal
workers
• Occasionally poor: Those who are
rich most of the time but may
sometimes have apatch of bad luck.
• Transient poor: Churning poor and
occasionally poor are categorised under
this.
• Non – Poor: Those who are never
poor in their lifetime.
CAUSES OF POVERTY
Pre-independence:
Colonial Exploitation: Colonial rule in
India is the main reason of poverty and

backwardness in India. The Indian
economy was purposely and severely de-
industrialized through colonial
privatizations. British rule replaced the
wasteful warlord aristocracy by a
bureaucratic-military establishment.
However, colonial exploitation caused
backwardness in India.
• Zamindari system
• Sharp increase on rural taxes
• Export of food grains
• Famine
• De-industrialization in India –
closing of Indian handloom and cottage
industries
• India turning into raw material
exporter and importer of finished goods
Post – independence:
• Poor planning
• Failure of trickledown theory
• Emphasis on economic growth and
not on development
• Slow economic growth
• Unequal distribution of wealth
• Poor land reforms – fragmentation of
land
• Green revolution - helping large land
owners and not small farmers.
Causes of Rural Poverty:
Rural poverty is a multi-dimensional
social problem. Its causes are varied.
They are as follows:
Climatic factors:
• Climatic conditions constitute an
important cause of poverty. The hot
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ECONOMY 2021
climate of Indiareduces the capacity of
people especially the ruralites to work
for which productionseverely suffers.
Frequent flood, famine, earthquake and
cyclone cause heavy damage to
agriculture. Moreover, absence of timely
rain, excessive or deficient rain affect
severely country’s agricultural
production.
Demographic factors:
The following demographic factors are
accountable for poverty in India.
Rapid growth of population:
• Rapid growth of population
aggravates the poverty of the people.
The growth ofpopulation exceeds the
rate of growth in national income.
Population growth not onlycreates
difficulties in the removal of poverty but
also lowers the per capita incomewhich
tends to increase poverty. The burden of
this reduction in per capita income
isborne heavily by the poor people.
Population growth at a faster rate
increases labour supply which tends to
lower the wage rate.
Size of family:
• Size of the family has significant
bearing on rural poverty. The larger the
size of family, the lower is the per capita
income, and the lower is the standard of
living. Thepersistence of the joint family
system has contributed to the health and
earning capacityof the ruralites.
Personal Causes:
Lack of motivation:
• Lack of motivation is an important
cause of rural poverty. Some ruralites do
not have a motive to work hard or even

to earn something. This accounts for the
poverty of the ruralites.
Economic Causes:
Low agricultural productivity:
• Poverty and real income are very
much interrelated. Increase in real
income leads toreduction of the
magnitude of poverty. So far as
agricultural sector is concerned,
thefarmers even today are following the
traditional method of cultivation. Hence
there islow agricultural productivity
resulting in rural poverty.
Over-reliance on Agriculture:
• In India there is high level of
dependence on primitive methods of
agriculture. There is a surplus of
labourin agriculture. Farmers are a large
vote bank and use their votes toresist
reallocation of land for higher-income
industrial projects. While services
andindustry have grown at double digit
figures, the agriculture growth rate has
droppedfrom 4.8 per cent to below 2 per
cent. About 60 per cent of the
population depends onagriculture,
whereas the contribution of agriculture
to the GDP is below 18 per cent.
Theagricultural sector has remained
very unproductive. There is no
modernization ofagriculture despite
some mechanization in some regions of
India.
Unequal distribution of land and other
assets:
• Land and other forms of assets
constitute sources of income for the
ruralites. But,unfortunately, there has
been unequal distribution of land and
other assets in oureconomy. The size-
wise distribution of operational holdings
indicates a very high degree
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ECONOMY 2021
of concentration in the hands of a few
farmers leading to poverty of many in
the ruralsector
Decline of village industries:
• At present consequent upon
industrialization new factories and
industries are being set up in rural
areas. Village industries fail to compete
with them in terms of quality andprice.
As a result they are closed down. The
workers are thrown out of employment
andlead a life of poverty. Immobility of
labour:
• Immobility of labour also accounts,
for rural poverty. Even if higher wages
are offered,labourers are not willing to
leave their homes. The joint family
system makes peoplelethargic and stay-
at-home.
• The ruralites are mostly illiterate,
ignorant, conservative, superstitious and
fatalistic.Poverty is considered as God-
given, something preordained. All these
factors lead toabysmal poverty in rural
India.
Lack of employment opportunities:
• Unemployment is the reflection of
poverty. Because of lack of
employmentopportunities, people
remain either unemployed or
underemployed. Most of
theseunemployed and underemployed
workers are the small and marginal
farmers and thelandless agricultural
labourers.
Social Causes:
Education:
• Education is an agent of social change
and egalitarianism. Poverty is also said
to beclosely related to the levels of

schooling and these two have a circular
relationship. Theearning power is
endowed in the individual by investment
in education and training. Butthis
investment in people takes away money
and lack of human investment
contributesto the low earning capacity of
individuals.
• In this way people are poor because
they have little investment in themselves
and poorpeople do not have the funds
for human capital investment.
Caste System:
• Caste system in India has always been
responsible for rural poverty. The
subordination of the low caste people by
the high caste people caused the poverty
of the former. Dueto rigid caste system,
the low caste people could not
participate in the game ofeconomic
progress.
• A Shudra was not allowed to become
a trader and a Vaisya could earn his
bread only by trade.
• Birth would decide their occupation
and their economic fate. K. V. Verghese
rightlyobserves, “Caste system acted as a
springboard for class exploitation with
the result that the counterpart of the
poverty of the many is the opulence of
the few. The second is the cause of the
first.”
Joint family system:
• The joint family system provides
social security to its members. Some
people takeundue advantage of it. They
live upon the income of others. They
become idlers. Theirnormal routine of
life consists in eating, sleeping and
begetting children.
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ECONOMY 2021
• In this way poverty gets aggravated
through joint family system.
Social customs:
• The ruralites spend a large
percentage of annual earnings on social
ceremonies likemarriage, death feast
etc. As a result, they remain in debt and
poverty.
Growing indebtedness:
• In the rural sector most of the
ruralites depend on borrowings from the
money-lendersand land-lords to meet
even their consumption expenses.
Moneylenders, however,exploit the poor
by charging exorbitant rates of interest
and by acquiring the mortgagedland in
the event of non-payment of loans.
• Indebted poor farmers cannot make
themselves free from the clutches
ofmoneylenders. Their poverty is further
accentuated because of indebtedness.
Geographical Reason:
• Regional imbalances
• Heterogeneous availability of
resources
• Poor exploitation of minerals
• Poor fertility of land
• Lack of irrigation facilities
• Poor agricultural growth
• Poor technological intervention in
agriculture
• Natural calamities like cyclone,
hailstorm, flood and drought.
• Poor credit and insurance facilities
for agriculture
• Monoculture
 ECONOMY 2021

• Poor area specific planning of • Indebtedness/ debt trap

agriculture
• Caste, religious and other
• Lack of allied agricultural activities discrimination
• Environmental degradation • Poor social mobility
• Climate change • Social, economic and political
inequality
Socio-economic reasons:
Lack of Investment for the Poor: There
• Unemployment and under – is lack of investment for the
employment development of poorer section of the
• High inflation society. Over the past 70 years, India
decided to focus on creating world class
• Poor capital formation educational institutions for the elite,
• Lack of infrastructure whilst neglecting basic literacy for the
majority. This has denied the illiterate
• Lack of demand population – 33 per cent of India – of
even the possibility of escaping poverty.
• High population growth
Thus, there is no focus on creating
• Lack of social/ welfare nets – poor permanent income generating assets for
implementation of existing welfare the poor people.
schemes
Social System in India: The social
• Poorly targeted poverty alleviation system is another cause of poverty in
programs and high leakages India. The social subsystems are so
strongly interlocked that the poor are
• High corruption incapable of overcoming the obstacles.
• White elephant approach High Unemployment: There is high
• Politicisation of policies degree of underutilization of resources.
The whole country suffers from a high
• Poor PDS system degree of unemployment. India is
marching with jobless economic growth.
• Malnutrition and hunger
Employment is growing, neither in the
• Poor public health care facilities – private sector, nor in the public sector.
increasing out of pocket expenditure The IT sector has become elitist, which
does not improve the poverty situation
• Poor education in the country. Disguised unemployment
• Lack of skills and vocational and seasonal unemployment is very high
education in the agricultural sector of India. It
isthe main cause of rural poverty in
• Lack of basic services to poor India.
• Lack of community participation of Lack of Entrepreneurship: The
poor industrial base of India has remained
• Poor bargaining power very slender. The industrial sickness is
very widespread. The whole industrial

59

sector suffers from capital deficiency
and lack of entrepreneurial spirit.
Causes for Urban Poverty
The causes of urban poverty in India
are:
• Migration of Rural Youth towards
Cities
• Lack of Vocational Education /
Training
• Limited Job Opportunities of
Employment in the Cities
• Rapid increase in Population
• Lack of Housing Facilities
• No proper Implementation of Public
Distribution System
Consequences of Poverty:
• Poverty has far reaching
consequences on the society. People
suffering from povertywill generally
have a low standard of living. They are
not able to afford education andlack
access to health care and education. This
will lead to a low quality of human
capitaland thus compromise economic
growth.
• Poverty takes a toll on poor children’s
development. For example, poverty
causesmalnutrition which would affect
the development of a child’s mental
thinking andhealthy body.
• Poverty may also lead to political
instability and lead to increased risk of
war, massemigration of population and
terrorism
VICIOUS CYCLE OF POVERTY
The vicious circle of poverty refers to the
interconnectedness of different factors
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ECONOMY 2021
that reinforce each other for generating
poverty.
• Supply side factors
• Demand side factors
• Market imperfection
Supply Side Factors
The supply side of the vicious circle
indicates that in underdeveloped
countries, productivity is so low that it is
not enough for capital formation.
• According to Samuelson, "The
backward nations cannot get their heads
above waterbecause their production is
so low that they can spare nothing for
capital formation bywhich their
standard of living could be raised."
• According to Nurkse on the supply
side there is small capacity to save,
resulting fromlow level of national
income. The low real income is the
result of low productivity, whichin turn,
is largely due to the lack of capital.
• The lack of capital is a result of the
small capacity to save, and so, the circle
is vicious.
Thus, it becomes clear from the above
diagram that the main reason of poverty
is the low level of saving. Consequently,
investment is not possible in production
channels. A huge chunk of GDP is used
for consumption purposes.
People cannot save. So, there is lack of
investment and capital formation.
Although rich people can save, they
spend their surplus on luxurious goods
instead of saving. They gave preference
to high priced items and foreign
products. Thus, their demand does not
enlarge the size of the market. The

developing countries, therefore, lack
investment facilities.
Demand Side Factors
According to Nurkse, poverty is caused
by several factors in the demand side.
Inunderdeveloped countries the
inducement to invest is low because of
the low purchasing power of the people,
which is due to their small real income.
The main reason for poverty inthese
countries is the low level of demand.
Consequently, the sizes of markets
remain low. The small size of the market
becomes a hurdle in the path of
inducement to invest.
Market Imperfections
According to Meier and Baldwin, the
existence of market imperfections
prevents optimum allocation and
utilization of natural resources, and the
result is underdevelopment, and this, in
turn, leads to poverty. The development
of natural resources depends upon the
character of human resources. But due
to lack of skill and low level of
knowledge, natural resources remain
unutilized, underutilized and misused.
Poverty and Hunger eradication
programs in India
Development is about removing the
obstacles to the things that a person can
do in life, such as illiteracy, ill health,
lack of access to resources, or lack of
civil and political freedoms. Therefore,
the aim of poverty alleviation schemes
should be to improve human lives by
expanding the range of things that a
person could be and could do, such as to
be healthy and well-nourished, to be
knowledgeable and participate in the life
of a community.
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ECONOMY 2021
Governments approach towards poverty
reduction has three dimensions.
1. Growth oriented approach
2. Specific poverty alleviation programs
3. Providing minimum basic amenities
Growth oriented approach refers to
rapid industrialization, thrust to
manufacturing sector, transformation of
agriculture like Green revolution etc.
The basic principle here is trickle down.
However this approach has not been
very successful in India in upbringing
the poor though they resulted in high
economic growth.
Providing minimum basic amenities
refers to providing food grains at
subsidized rates,education, health, water
supply, sanitation which would enhance
the living standard of poor people. The
programs under this approach are
expected to supplement the
consumption of the poor, create
employment opportunities and bring
about improvement in health and
education.
The second strategy, which is, specific
poverty alleviation programs include
several programs for employment
generation and self-employment as well
as wage employment.
Some of the major policy interventions
by Government of India towards poverty
alleviation are given below:
Rural Poverty-Alleviation
Programmes
• Integrated Rural Development
Programme (IRDP)
• Swarnajayanti Gram Swarozgar
Yojana (SGSY)

• MAHATMA GANDHI NATIONAL
RURAL EMPLOYMENT GUARANTEE
ACT (MGNREGA)
• MGNREGA 2.0 (AFTER MIHIR
SHAH COMMITTEE)
• National Rural Livelihood Mission
(NRLM) or Aajeevika
• Indira Awas Yojana (IAY)
• Integrated Watershed Management
Programme (IWMP)
Urban poverty alleviation
programmes
• Jawaharlal Nehru National Urban
Renewal Mission (JNNURM)
• SWARNA JAYANTI SHAHARI
ROZGAR YOJANA (SJSRY)
• National Urban Livelihood Mission
(NULM)
• Rajiv Awas Yojana (RAY)
• Credit Risk Guarantee Fund Trust
(CRGFT)
Key Requirements for Sustainable
Poverty Reduction
1. Accelerating rural poverty reduction:
• With four out of every five of India’s
poor people living in rural areas,
progress will need to focus on the rural
poor.
• It’s not just about agricultural
growth, which has long been considered
the key driver of poverty reduction. In
fact, rural India is not predominantly
agricultural and shares many of the
economic conditions of smaller urban
areas.
• Capitalizing on growing connectivity
between rural and urban areas, and
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ECONOMY 2021
between theagriculture, industry and
services sectors, has been effective in the
past two decadesand holds promise for
the future.
2. Creating more and better jobs:
• The road out of poverty in India has
been built on the performance of the
labor market, but also benefited from
rising transfers and remittances, and
favorable demographics among other
factors.
• Future efforts will need to address job
creation in more productive sectors,
which hasuntil now been lukewarm and
has yielded few salaried jobs that offer
stability andsecurity.
3. Focusing on women and Scheduled
Tribes:
• The most worrying trends are the low
participation of women in the labor
market andthe slow progress among
scheduled tribes.
• India’s women have been
withdrawing from the labor force since
2005 and less thanone-third of working
age women are now in the labor force.
As a result, India todayranks last among
BRICS countries, and close to the
bottom in South Asia in female labor
force participation.
• Scheduled Tribes started with the
highest poverty rates of all of India’s
social groups,and have progressed more
slowly than the rest.
• Women and Scheduled Tribes are at
risk of being locked out of India’s growth
andprosperity.
4. Creating more “good” locations:
• Where people live largely shapes their
prospects in life. India’s states continue

to seelarge and growing differences in
poverty levels and basic opportunities.
• More and more of India’s poor are
concentrated in the poorest states, and
even withinrelatively prosperous states,
certain pockets of deprivation persist
where people areunable to share in the
state’s successes.
5. Improving human development
outcomes for the poor:
• This is central to improving their
quality of life and income earning
opportunities.
• The recent past shows that some
problems, such as undernutrition and
open
defecation, are endemic and not only
confined to the poor but others too, and
have not
improved with economic growth.
• Better health, sanitation and
education will not only help raise the
productivity of
millions, they will also empower the
people to meet their aspirations, and
provide the
country with new drivers of economic
growth.
The Indian economy is changing and so
is the relationship between economic
growth and poverty reduction. The
process of structural transformation of
the economy has intensified. As this
process continues, the country can be
expected to increasingly turn to growth
in its urban and non-agricultural
economy to drive future poverty
reduction. What needs to be
remembered is that, elimination of
poverty is not merely a question of
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ECONOMY 2021
economic upliftment but is a social and
a political issue. It related to the level of
the politico-social awareness of people
which will help the country to sustain
progress and bring about deeper
changes.
FINANCIAL MARKET
MONEY
• Money is a commonly accepted
medium of exchange.
• Money is not useful if there are no
individuals to participate in market
transactions.
What is Barter Exchange?
• Exchange of goods without the
mediation of money.
• Example – Suppose X has 2 kg rice
and he wants 1 kg tomato so, he has to
search for the person who has tomato
and needed rice in place of tomato.
Demand for money
Money is the most liquid of all assets.
What does that mean?
As water takes shape of any container in
which it is poured similarly money has
universal acceptability and so, can be
exchanged for other commodities very
easily.
Opportunity Cost
• Let’s try to understand it with an
example. Suppose you have 10000
rupees. If you put this money into bank,
then you can earn interest on it but you
would not be able topurchase anything.
In addition, if you purchase a tab or any
other thing then you lost theopportunity
of earning interest.

Liquidity Preference
• This means preference of asset in
liquid i.e. cash.Liquidity Order
• Currency
• Demand deposits in Banks
• Savings deposits in Banks
• Term deposits in Banks
People hold money for three reasons -
• The Transaction motive
• The Speculation motive
• The Precautionary motive
Liquidity Trap
A liquidity trap means consumers'
preference for liquid assets (cash) is
greater than the rate at which the
quantity of money is growing. So any
attempt by policymakers to get
individuals to spend more (and
policymaker do this by increasing the
money supply) to create demand will not
work.
Why do Liquidity Traps Occur?
• Expectations of deflation - If there is
deflation or people expect deflation (fall
in prices)then real interest rates can be
quite high even if nominal interest rates
are zero. - If prices are falling 2% a year,
then keeping cash under your mattress
means your money will increase in
value. The difficulty is in having negative
nominal interest rates (banks would be
paying you to borrow money). There
have been attempts to create negative
interest rates (e.g. destroy money in
circulation but in practice, it is rarely
implemented.
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ECONOMY 2021
• Preference for saving - Liquidity traps
occur during periods of recessions and a
gloomy economic outlook. Consumers,
firms and banks are pessimistic about
the future, so they look to increase their
precautionary savings and it is difficult
to get them to spend which is necessary
to create demand so that economy can
revive once again. This rise in the
savings ratio means spending falls.
• Credit Crunch - Banks lost significant
sums of money in buying sub-prime
debt, whichdefaulted. Therefore, they
are seeking to improve their balance
sheets. They are reluctant to lend so
even if firms and consumers want to
take advantage of low interest rates,
banks will not lend them the money.
• Unwillingness to hold bonds. If
interest rates are zero, investors will
expect interest rates to rise sometime. If
interest rates rise, the price of bonds
falls. Therefore, investors would rather
keep cash savings than hold bonds.
• Banks Don't pass Base Rate cuts onto
consumers
THE SUPPLY OF MONEY
• In our Indian economy RBI,
monetary authority of India, issues the
currency notes while Government of
India (GoI) issues the coins.
• Up to Re. 1 note and coins are issued
by Govt of India (Ministry of Finance).
Rest areissued by RBI. The balance in
savings or current account deposits is
also considered money. Why?
As cheques, which are drawn on these
accounts, are used to settle transaction.
All of us have used this note. Have you
ever wondered that it is just a piece of
paper but still everyone accepts it? Why?

Because the note is guaranteed by RBI.
In the image you can see the promise
(highlighted in box) from the Governor
of RBI. The promise guarantees that if
someone produces the note to
RBI, or any other commercial bank, RBI
will be responsible for giving the person
purchasing power equal to the value
printed on the note. It is same for coins
as well.
Fiat Money
• Currency notes and coins do not have
any intrinsic value. They have value
because of above explained reasons.
Therefore, they are called as Fiat money.
They are legaltenders (they cannot be
refused by any citizen of the country for
settlement of any kindof transaction)
Can cheques be refused to settle any
kind of transaction? If yes, Why?
• Cheques are drawn on savings or
current accounts, however, can be
refused by anyone as a mode of payment
as they are not legal tenders. (Demand
Deposits are not legal tender)
• Cheques or instruments like
commercial bills can’t be used as legal
tender money.Similarly, a virtual
currency like Bitcoin is different from
bank notes mainly because the
Bitcoin is not legal tender money.
Legal definitions: Narrow and Broad
Money or Monetary aggregates
• Monetary aggregates is related only
to monetary liabilities of the RBI and
depositorycorporations i.e. the banking
system.
The new monetary aggregates are
of four types. They are:
• Reserve money or Base money (M0)
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ECONOMY 2021
• Narrow money (M1)
• Intermediate money (M2) and
• Broad money (M3)
Reserve Money or Base Money (M0) :
The total liability of the RBI is called the
monetary base or high powered money.
It consists of Currency in Circulation +
Bankers' Deposits with RBI + Other
Deposits with RBI.
The financial assets in M0 category is
called as Reserve money because these
are held by public and banks (Currency
in circulation) or by the RBI (Bankers
deposits with RBI + Other deposits with
RBI). These are not available for lending
purposes.
M0 = Currency in Circulation + Bankers
Deposits with the RBI + Other Deposits
with the RBI Currency in circulation -
Total amount of the Rupee notes issued
by RBI and the Rupee coins and small
(paisa) coins issued by GoI. It is held by
both public and banks.
Bankers deposit with RBI - Cash
Reserve Ratio (CRR) and excess reserve.
The banks keep CRR with RBI as
stipulated by the RBI. Some banks keep
more cash reserve with RBI than
stipulated amount. It is called Excess
Reserve.
Other deposits with RBI – It includes –
o Deposits of quasi-government and
other financial institutions including
primarydealers (financial intermediaries
operating in Government securities (G-
Secs) andother financial instruments)
o Balances in the accounts of foreign
central banks and governments
o Accounts of international agencies
such as the IMF etc., and

o Provident, gratuity and guarantee
funds of RBI staff
Narrow Money (M1)
The financial assets it includes are fewer
than the M2. This means it defines
money in narrower sense and hence
called as Narrow money.
M1 = Currency with public + Demand
deposits with the banking system +
other deposits with RBI OR
In short – CU + DD + Deposits with RBI
Currency with the public - currency in
circulation –(minus) cash on hand with
the banking system
Demand deposits are those deposits that
can be withdrawn by depositor at any
point of time.
There are two major types of demand
deposits viz., current deposits and
saving deposits. The saving deposits
have two components namely demand
liability and time liability. Most part of
the saving deposits is demand liabilities
only. However, few saving deposits can
be withdrawn only on some
performance or on some happenings,
For example, a saving deposit made in
the name of a child may be deposited
with a condition that it can be
withdrawn only after the child became a
major. In M1 only demand liability
portion is included.
Intermediate Money (M2)
• It is called intermediate money for
the reason financial assets included in
this category are more than those
included in M1 but less than those
included in M3.
• In short – M1 < M2 < M3
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ECONOMY 2021
• M2 = M1 + Time Liabilities portion of
savings Deposits with the Banking
system +
Certificates of Deposit issued by Banks +
Term Deposits (excluding Foreign
Currency
Non-Resident (Bank) (FCNR (B))
Deposits) up to one-year maturity with
the Bankingsystem.
Broad money (M3)
The financial assets it includes are more
than the M2. This means it defines
money in a wider sense and so called as
Broad money.
M3 = M2 + Term Deposits (excluding
FCNR (B) Deposits) over one-year
maturity with the Banking system + Call
borrowings from ‘Non – Depository’
Financial corporations by the banking
system.
RBI followed the following method since
1979 until implementation of above
(current)method.
M1 (Narrow Money)
M1 = Currency with the Public +
Demand Deposits of banks + Other
demand deposits with RBI
M2 (Intermediate money)
M2 = M1 + Post office Savings Deposits
M3 (Broad Money)
M1 = M1 + Time Deposits of the Public
with Banks.
M4
M4 = M3 + Total Post office deposits.
NOTE- Up to Re. 1 note and coins are
issued by Govt of India (Ministry of
Finance). Rest are issued by RBI

MONEY MULTIPLIER
The Money Multiplier refers to how an
initial deposit can lead to a bigger final
increase in the total money supply. For
example, if the commercial banks gain
deposits of 1 million and this leads to a
final money supply of 10 million. The
money multiplier is 10.
The money multiplier is a key element of
the fractional banking system.
• There is an initial increase in bank
deposits (monetary base)
• The bank holds a fraction of this
deposit in reserves and then lends out
the rest.
• This bank loan will, in turn, be re-
deposited in banks allowing a further
increase in bank lending and a further
increase in the money supply.
The money multiplier in an economy
increases with which one of the
following? UPSC
High Powered Money
• Total liability of RBI is known as
monetary base or high-powered money.
• It consists of currency and deposits
held by GoI and commercial banks.
• The currency notes and demand
deposits are liabilities on RBI.
• Liabilities are claims by public,
government and banks on RBI.
• Example – suppose RBI purchases
100 rupees gold from market. To
purchase gold RBI paid in 100 rupees
note. So now 100 rupees note is liability
on RBI and Gold is asset for
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ECONOMY 2021
MONEY MARKET
Definition - Market of an economy
where funds are transacted between the
fund-surplus and fund-scarce
individuals and groups.
Money Market
• Controlled by RBI.
• Sources which meet short term
requirements of money are the
constituents of themoney market
Capital/Security Market
• Controlled by SEBI.
• Sources which meet medium and
long term requirements of money are
the constituents of the capital market.
• It has two type Primary market and
secondary market
Primary Market- It is a market of new
issue. Since securities are new hence
they create capital formation.
Secondary Market- It provides market
ability for the securities coming for sale
in stock market.
There is no profit for company. When
price of securities is increased,
capitalization of company increased.
Bull Market
• Where prices are rising.
• A bull investor has a very optimistic
view of the market. He aggressively buys
and sells stocks quickly.
Bear Market
• Where prices are falling
• A bear investor is pessimistic about
the market and may make more
conservative stock choices.
 ECONOMY 2021

RESERVE BANK OF INDIA FUNCTIONS OF RBI

• Apex regulatory body of Indian
banking system.
• Keeps the cash reserves of all
scheduled banks and hence is known as
the “ReserveBank".
• It is the central bank of India.
• Established – 1ST April, I935 under
RBI Act 1934.
• It was owned by private with
government share.
• It was nationalized in 1St January,
1949.
• General Superintendence and
direction are carried by Central Board of
directors.
• Financial Year- July to June
Liabilities:
• Notes in Circulation
Bank of Issue
• Issuing money is exclusive right of
RBI.
• All notes except ONE RUPEE note
and coins are issued by RBI.
• 1 RUPEE notes and coins are issued
by Ministry of Finance but circulated by
RBI.
• It also exchanges or destroys old
damaged currencies.
Minimum Reserve System
• To issue money, RBI keeps `115 crore
in gold and `85 crore in foreign
securities as abackup. This is called
Minimum Reserve System.
• This system is followed from 1957.
The amount of new money is based on
the prevailing economic condition, the
need of the economy etc.

• Notes held in Banking Department
Assets:
• Gold Coin and Bullion
• Foreign Securities
• Rupee Coin
• Government of India
SecuritiesSubsidiaries of RBI
• Deposit Insurance and Credit
Guarantee Corporation (DICGC),
• Bharatiya Reserve Bank Note Mudran
Private Limited (BRBNMPL)
• Reserve Bank Information
Technology Private Limited (ReBIT)
• Indian Financial Technology and
Allied Services (IFTAS)
• RBI ensures that issue of new money
does not lead to inflation.
Banker and Debt Manager to
Government
• It acts as a banker to both central and
state governments (except Jammu and
Kashmir and Sikkim).
Rupee
• It keeps deposits of governments and
lends to governments.
• RBI carries out lending and
borrowing operations by issuing
government securities onbehalf of the
government.
• Though RBI is not a banker to Sikkim
and Jammu and Kashmir it manages
their public debt to some extent.

68

Banker’s Bank
• It is the banker of all the banks.
• It keeps the reserve of the banks like
cash reserve ratio (CRR) with it.
• It provides financial assistance to
banks against mortgaged securities.
• It rediscounts bills of exchange.
• Usually banks borrow and lend
money among themselves via call money
market,regulated by RBI.
• But if there is liquidity crunch in call
money market then RBI is the only
avenue toborrow money. RBI provides
enough money to banks and so called as
lender of lastresort. Custodian and
Manager of Foreign exchange
• RBI keeps the foreign exchange (i.e.
foreign currency) which flows into the
country.
• It also keeps the foreign exchange
rate stable to certain extent.Controller of
Credit or Credit and Monetary Policy
• Acts as controller of credit by control
of lending and deposit creating capacity
of thebanks.
• The policy by which the desired level
of money flow and its demand regulated
is called as credit and monetary policy.
• This policy is essential to control
inflation and thereby promote economic
growth.
• All over world it is announced by
central bank of country (in case of India
it is RBI)
• RBI announces its twice in a financial
year -
o Busy season
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ECONOMY 2021
o Slack season
RBI Publications
• Report on Trend and Progress of
Banking in India-Annually
• Financial stability report- Half yearly
• Monetary policy report- Half yearly
• Report on foreign exchange reserves-
Half yearly
• Bi-monthly Policy Statement
• Industrial Outlook Survey of the
Manufacturing Sector (Quarterly)
• Consumer Confidence Survey
(Quarterly)
Bank Notes Printing Presses
RBI’s Prompt Corrective Action
Framework for Banks
• RBI came across some misinformed
communication circulating in social
media, aboutclosure of some Public-
Sector Banks in the wake of their being
placed under the Prompt
Corrective Action (PCA)
framework.
• The Reserve Bank has clarified that
the PCA framework is not intended to
constrainnormal operations of the banks
for the general public.
• It is further clarified that the Reserve
Bank, under its supervisory framework,
usesvarious measures/tools to maintain
sound financial health of banks.
• PCA framework is one of such
supervisory tools, which involves
monitoring of certainperformance
indicators of the banks as an early
warning exercise and is initiated

oncesuch thresholds as relating to
capital, asset quality etc. are breached.
• Its objective is to facilitate the banks
to take corrective measures including
thoseprescribed by the Reserve Bank, in
a timely manner, in order to restore
their financialhealth.
Prompt Corrective Action or PCA is a
framework under which banks with
weak financial metrics are put under
watch by the RBI. The PCA framework
deems banks as risky if they slip below
certain norms on three parameters:
capital ratios, asset quality and
profitability.
• It has three risk threshold levels (1
being the lowest and 3 the highest)
based on where a bank stands on these
ratios. Banks with a capital to risk-
weighted assets ratio (CRAR) of less
than 10.25 per cent but more than 7.75
per cent fall under threshold 1.
• Those with CRAR of more than 6.25
per cent but less than 7.75 per cent fall
in thesecond threshold. In case a bank’s
common equity Tier 1 (the bare
minimum capitalunder CRAR) falls
below 3.625 per cent, it gets categorized
under the third thresholdlevel.
• Banks that have a net NPA of 6 per
cent or more but less than 9 per cent fall
underthreshold 1, and those with 12 per
cent or more fall under the third
threshold level.
• On profitability, banks with negative
return on assets for two, three and
fourconsecutive years fall under
threshold 1, threshold 2 and threshold 3,
respectively.National Payments
Corporation of India (NPCI) Products &
Services of NPCI
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ECONOMY 2021
RuPay debit card RuPay is India's own
domestic card with own payment
gateway system. It’s objective is to offer
a domestic, open-loop, multilateral
system which will allow all Indian banks
and financial institutions in India to
participate in electronic payments.
Since the transaction processing will
happen domestically, it would lead to
lower cost ofclearing and settlement for
each transaction as compared to Master
and Visa card which are based outside
India.
MONETARY POLICY
AGREEMENT
• It was signed between Government
and RBI.
• Government intends to deepen such
reforms including amendments of the
RBI act forproviding a statutory
monetary policy framework and
monetary policy
committee,strengthening and upgrading
the securities appellate tribunal to the
financial sectorappellate tribunal and
creation of a resolution corporation to
enable faster dispersal ofdeposit
insurance as well as orderly resolution of
financial service providing companies.
Monetary Policy Committee of
India (MPC)
• The Monetary Policy Committee of
India is a committee of the Reserve
Bank of Indiathat is responsible for
fixing the benchmark interest rate in
India. The meetings of theMonetary
Policy Committee are held at least 4
times a year and it publishes its
decisions after each such meeting.
• The committee comprises six
members - three officials of the Reserve
Bank of India and three external

members nominated by the Government
of India.
• They need to observe a "silent period"
seven days before and after the rate
decision for "utmost confidentiality".
The Governor of Reserve Bank of India
is the chairperson exofficio of the
committee.
• Decisions are taken by majority with
the Governor having the casting vote in
case of atie. The current mandate of the
committee is to maintain 4% annual
inflation untilMarch 31, 2021 WIth an
upper tolerance of 6% and a lower
tolerance of 2%.
The committee was created in 2016 to
bring transparency and accountability in
fixing India's Monetary Policy. Minutes
are published after every meeting with
each member explaining his opinions.
The committee is answerable to the
Government of India if the inflation
exceeds the range prescribed for three
consecutive months.
• MPC is constituted by the Central
Government
• RBI Governor- Chairperson,
• Deputy Governor of RBI, in charge of
Monetary Policy (Dr. Viral V. Acharya)
• One officer of the Reserve Bank of
India to be nominated by the Central
Board
• Other three members appointed by
the CG
METHODS OF CREDIT CONTROL
Instruments of Monetary Policy
• There are two types- Direct and
Indirect
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ECONOMY 2021
Direct Instruments are
• Cash Reserve Ratio and Statutory
Liquidity Ratio (SLR)
Cash Reserve Ratio (CRR)
• Scheduled banks are required to keep
certain % of their Net Time and Demand
Deposits with RBI in cash form.
• Aim - to have control over banks
credit.
• The ratio was 3 -15% (floor and
ceiling of 3 – 15% removed via RBI
(Amendment) Bill2006). Within this
range, RBI fixed the CRR. If this ratio is
increased, the banks have todeposit
more money with RBI. So, the resource
available to banks for lending will
comedown. The money supply will come
down.
• The reverse is the case when the ratio
is decreased.
Statutory Liquidity Ratio (SLR)
• The schedule banks need s to also
keep certain % of their Net time and
demand deposits in their vault itself (i.e.
not with RBI).
• Need of SLR - It prevents bank from
lending all its deposits which is too risky
and it ismandatory under Banking
Regulation Act 1949.
• Aim – similar to CRR, to have control
over banks credit.Higher the CRR and
SLR, lower will be the liquidity in the
system as Banks will have lesser money
for providing loans. Suppose CRR and
SLR rate is 4% and 18.75% respectively.

Indirect Instruments are
• Bank Rate
• Repo Rate as known as Policy Rate
and Reverse Repo <Liquidity
Adjustment Facility
• Open Market Operation
• Marginal Standing Facility (MSF)
• Market Stabilization Scheme (MSS)
Bank Rate or Discount Rate Policy
• Discount means the process of
converting a bill into money at an earlier
date than that
is mentioned in the bill of exchange
(maturity date).
• In this process, the receiver can
approach a bank. The bank accepts the
bill of exchange and pays. For this
purpose, it can deduct some percentage
of money as interest.
• Example – for a bill of exchange of
2000 the bank may pay `1840 after
deducting 8%interest.
• On the maturity date, the bank will
receive full amount from the purchaser.
But if thebank needs money urgently the
bank will convert these into monies at a
lesser discountrate from RBI.
• Example – at 6% the bank will receive
1880. The profit for bank is 40. This is
called asrediscount. This rate is called as
bank rate or discount rate. Apart from
bills ofexchange, the commercial banks
get their government securities
discounted from RBI.
• To be precise, the bank rate or the
discount rate is the rate fixed by the
central bank at
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ECONOMY 2021
which it rediscounts first class bills of
exchange and government securities
held bycommercial banks.
• By varying bank rate, the RBI controls
the credit. If RBI offers discount at a
higher rate(increases the bank rate
(BR)) the bank’s profit may be affected.
So, it will not approachRBI for
discounting or will charge higher
discount rate from customer. So the
customermay not discount his bill.
Hence, the money supply will be low.
The reverse is the casewhen RBI reduces
the bank rate. So, depending on the
economic condition, RBI altersthe bank
rate. If there is high inflation, the bank
rate will be high and vice versa.
• In short – If BR↑(high) → profit of
bank↓(low) → money supply↓
• If BR↓→ profit of bank ↑→ money
supply↑
• The rate has direct impact on long—
term lending activities of the concerned
lendingbodies operating in the Indian
financial system. The rate was realigned
with the MSF(Marginal Standing
Facility) by the RBI in February 2012.
• Increase in the bank rate is the symbol
of tightening of RBI monetary policy.
(i.e.Dearer Monetary Policy)
• When RBI wants to increase liquidity
in the market, it reduces bank rate.
When RBIwants to decrease liquidity in
the market, it increases bank rate.
OMO (Open Market Operations)
• It is sale and purchase of securities,
bills and bonds of government as well as
privatefinancial institutions by the
Central bank (in our case RBI).

• Securities, bills and bonds are issued to
banks and public against money given
by them.
• If the central bank sells these
instruments, banks and public will buy it
and pay moneyto the RBI.
• If the RBI buys these instruments from
instrument holders, it will pay money to
thelatter. The public who sold will
deposit the money with the banks. So
the resource ofbanks increase that helps
to increase their lending capacity. When
there is more moneysupply, the interest
will come down. Therefore, more people
will borrow from banks.
The reverse is the case when RBI sells
financial instruments.
• During inflation the central bank sells
government securities. As a result
money supplyin the economy falls
causing prices to fall.
• During deflation, the central bank will
buy back the securities thus causing
moneysupply to rise which cures
deficiency in demand.
Repo Rate or Policy Rate
• It is the rate at which commercial
banks borrow from RBI by mortgaging
their datedGovernment securities and
Treasury bills.
• If repo rate is increased, the banks
have 2 options –
o Either to reduce the borrowing from
RBI or
o Borrow at higher rate from RBI and
charge higher interest rate from
customer.
• If banks borrow fewer amounts – the
credit creating capacity of banks will
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ECONOMY 2021
come downand money supply will come
down.
• If bank borrows and charges higher
interest rate – the customer will borrow
less. Themoney supply will come down.
• If the repo rate is decreased the
reverse will be the case. (in short –
banks borrowingincreases →credit
creating capacity increase → lower
interest rate → more moneysupply)
• Reduction in Repo rate helps the
banks to get money at a cheaper rate
and increase in Repo rate discourages
the banks
Reverse Repo Rate
• It is the rate at which RBI borrows
from commercial Banks by mortgaging
its datedGovernment securities and
Treasury bills.
• If the reverse repo rate is increased,
the banks have 2 options –
o Either to lend to RBI or
o Lend to customer at higher interest
rate.
• If banks lend to RBI – the money
available with the bank to lend to its
customer willcome down. The credit
creating capacity of banks and money
supply will come down.
• If the banks give loans at higher
interest rate to customers – the
customer will borrowlesser amount. So
the money supply will come down.
• If the Reverse repo rate is decreased
the reverse will be the case.
• When RBI increases the reverse repo
rate then Banks are attracted to deposit
with RBI for higher return.

Marginal Standing Facility
• It is a loan facility given by RBI to
banks which have current and SGL
(Subsidiary General Ledger) account
with RBI.
• It is a loan for overnight (one day).
• It is more similar to Liquidity
Adjustment Facility (Repo and Reverse
Repo), but there are many differences.
o The loan is given against the mortgage
of eligible securities (Government
datedsecurities, Treasury bills and State
Development Loans) while in case of
Reporate it is only government
securities and treasury bills.
o The interest rate for MSF is Repo rate
plus 1%. Usually, the Reverse Repo rate
isRepo rate minus 1%. Therefore, the
Repo rate act as an anchor rate. The
Reporate stands in the middle. The MSF
rate stands above and Reverse Repo
ratesands below the Repo Rate. (in short
- MSF (RR+1%) ←RR (anchor rate)
→RRR(RR-1%))
Market Stabilization Scheme
(MSS)
• It is not a pure monetary instrument.
o It is a fiscal cum monetary instrument.
• It is facility to control liquidity due to
excess foreign exchange flow into the
country.
• To tackle this problem - RBI issues
government securities to absorb excess
liquidity. The interest is paid by Ministry
of Finance, GoI. The amount of issue
and date of issue is decided by RBI in
consultation with Ministry of Finance,
GoI.
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ECONOMY 2021
If CRR/SLR/Repo/Reverse
Repo/Bank Rate
Decreases- Inflation Increases
Liquidity in the market\
Increases
Easy Monetary Policy
Increases - Inflation Decreases
Liquidity in the market
Decreases
Tight Monetary Policy
Base Rate
• Base Rate is the interest rate below
which Scheduled Commercial Banks
(SCBs) will lend no loans to its
customers—its means it is like prime
lending rate (PLR) and thebenchmark
prime lending Rate (BPLR) of the past
and is basically a floor rate of interest.
• Base Rate is the minimum rate of
interest for all loans.
• BPLR system was introduced with
objective of bringing transparency to
lending rates.But it failed because banks
could lend to below BPLR.
• This made a bargaining by the
borrower with bank- ultimately one
borrower gettingcheaper loan than the
other, and blurred the attempts of
bringing in transparency in thelending
business.
• Aim of base rate - enhancing
transparency in lending rates of banks
and enabling better assessment of
transmission of monetary policy.

MCLR
• Marginal Cost of Funds Based
Lending Rate (MCLR)
• It is new methodology for banks to
compute their lending rate.
• Articulated by RBI.
• Banks have adopted
methodology from 1ST April, 2016.
What method or methods was used by
banks before MCLR?
• Average cost of funds
• Marginal cost of funds
• Blended cost of funds (liabilities)
Main features of MCLR
• Tenor linked internal benchmark
(tenor means time duration) to be reset
on annualbasis.
• Actual lending rate will be fixed by
adding spread to the MCLR.
o Net interest spread refers to the
difference in borrowing and lending
rates offinancial institutions (such as
banks) in nominal terms.
o Suppose spread for house loan is 0.20
and MCLR is 9.20 so the lending rate
willbe 9.40.
• Will be reviewed every month on a
pre-announced date.
• Existing borrowers will have option
to move to it.
What benefits MCLR will bring?
• It will improve the transmission of
policy rate into the lending rates.
• There will be transparency in
computation of interest rates by banks.
ECONOMY 2021
• Fairer loan cost to borrowers as well
as banks.
• Banks will have more competition
and their long-run value will increase.
Revised LMF (Liquid Management
Framework)
Why RBI had introduced revised LMF?
this
• To check volatility in the inter-bank
call money markets. (in this market
banks lend toeach other.)
• For better management of lenders
liquidity.
• Better interest signaling and
medium-term stability in the loan
market
Major features of the LMF –
• RBI started conducting 14-day term
repurchase auctions 4 times a fortnight,
up to anaggregate amount equal to 0.75
per cent of the system’s deposit base or
net demandand time liabilities (NDTL).
• Unlike before, now there would be a
time table for 14-day term repo
operations.
• No change in the amount that banks
can access from the liquidity adjustment
facility(LAF) window at fixed repo rate
of the time.
• Additionally, RBI conducts overnight
variable rate repo auctions based on an
assessment of liquidity in the system
and government cash balances available
for auction for the day.
A Government security is a tradable
instrument issued by the Central
Government or the State Governments.
It acknowledges the Government’s debt
obligation.
75

• Maturity period of less than one year
(e.g. treasury bills)
• Maturity period of one year or more
(e.g. Government bonds or dated
securities withoriginal).
• Central Government issues both,
treasury bills and bonds or dated
securities
• State Governments issue only bonds
or dated securities, which are called the
StateDevelopment Loans (SDLs).
• Government securities carry
practically no risk of default and, hence,
are called riskfree gilt-edged securities
Treasury Bills
• Treasury bills are securities issued by
Government treasury.
• They are of short term nature and in
this regard they differ from market
loans.
• They are non-interest bearing (zero
interest / zero coupons). These kinds of
bonds are called Zero coupon bonds.
They are issued at a discount rate. It
means security worth of 1,000 is issued
against receipt of amount lower than `
1000. The purchaser of security can
redeem the full ` 1,000 at a particular
date. This is called redeem at par
(original value).
Commercial Paper
• Commercial Paper (CP) is an
unsecured money market instrument
issued in the form of a promissory note.
• It was introduced in India in 1990
with a view to enabling highly rated
corporateborrowers to diversify their
sources of short-term borrowings and to
provide anadditional instrument to
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ECONOMY 2021
investors. Subsequently, primary dealers
and all-India financialinstitutions were
also permitted to issue CP to enable
them to meet their short-termfunding
requirements for their operations.
• Commercial Papers (CPs) are issued
by Corporate, Primary Dealers (PDs)
and the All- India Financial institutions
(Fls) to raise fund.
• These are issued in denominations of
`5lakh or multiples of it, subject to a
minimum amount of `1Crore. The
maturity period is 3 to 6 months.
• To use them, corporate house most
be a listed company with working capital
not < 5crore.
• The CP issuing companies need to be
obtain a specified credit rating from an
agency(like CRISIL, ICRA etc.)
approved by the RBI.
Commercial Bill
• A bill of exchange issued by a
commercial organization to raise money
for short – term needs.
• They can be issued by –
o All India Financial institutions
o Non-Banking finance companies
o Scheduled commercial banks
o Merchant Banks
o Cooperative Banks
o Mutual funds
Call Money Market
• Inter Bank money market
• Here funds are lent and borrowed for
one day

• Also known as ‘overnight borrowing
money at call’.
• Funds raising/borrowing maximum
period – 14 days ("Short notice")
• Borrowing can take place against
securities or without securities.
• Rate of Interest – ‘glides’ with ‘repo
rate’. Longer the interest rate – higher
the interestrate.
• Real call rate revolves nearby current
repo rate, according to the availability
anddemand of fund in market.
• Schedule commercial banks,
cooperative banks – operates as
borrowers as well aslenders.
• LIC, GIC, mutual funds, IDBI and
NABARAD – operates as lender only.
Money Market Mutual Fund
• Popular as mutual funds.
Why this market was introduced?
• To provide short term investment
opportunities to individuals.
• Regulated by - SEBI and RBI
Who can setup Mutual funds (MFs)?
• Financial institutions and firms
• Such as commercial banks, public
and private sector companies
Cash Management Bill
• Term instrument
• By – Government of India.
Why government introduced CMBs?
• To meet temporary cash
mismatch of government.
ECONOMY 2021
• They are non-standard and
discounted instruments issued for
maturities less than 91 days.
• The CMBs have generic character of
treasury lines (How? - issued at discount
to theface value)
• Tradable and qualify for ready
forward facility.
• Investment in CMBs are considered
as an eligible investment in government
securities by banks for SLR.
Foreign Exchange Reserves
The foreign exchange reserves include
(as per decreasing order)
• Foreign currency assets (FCA),
• Gold
• Reserve Tranche Position (RTP) in
the IMF and
• Special Drawing Rights (SDRs)
Special Drawing Rights (SDRs)
• The SDR is an international reserve
asset, created by the IMF in 1969 to
supplement its member countries’
official reserves.
• The value of the SDR is based on a
basket of five major freely usable
currencies—U.S. dollar, Euro, Chinese
renminbi (RMB), Japanese yen, and
Pound sterling. Effective from October 1,
2016, the Chinese renminbi (also called
Yuan) was included in the SDRbasket.
• The SDR is neither a currency, nor a
claim on the IMF. Rather, it is a
potential claim on the freely usable
currencies of IMF members.
flow
• SDRs can be exchanged for freely
usable currencies. Holders of SDRs can
77

obtain these currencies in exchange for
their SDRs
BANKING IN INDIA
INTRODUCTION
• Banking term originated in western
world.
• Today, Indian banks are best in
developing world and attempt to emerge
best in worldis going on.
• Calcutta presidency bank was the
First bank in India established by East
India Company in 1806.
Function of Commercial Banks
Primary
• Accepting deposit and Providing
loans
Secondary
• Collection and payment of various
items e.g. Cheques, Bills
• Purchase and sell of securities &
Remittance of money
• Purchase and sell of foreign exchange
• Acting as executors and trustees of
wills & Underwriting of shares
• Lockers facility &Travellerscheque
and letter of credit
NATIONALIZATION AND
DEVELOPMENT OF BANKING IN
INDIA
Why Government nationalized certain
private banks?
• During that time banks were owned
and managed by private sector and the
services of banking were not able to
reach majority of population.
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ECONOMY 2021
• Resources (savings of people) need to
be directed in a direction which benefit
greaterpublic.
• For development of planned
economy, a certain degree of
government control wasrequired on
capital generated by the economy.
Emergence of SBI
• State bank group means State bank of
India and its associates.
• SBI previous name – “Imperial Bank
of India”.
o Created in – 1921 by amalgamating 3
banks – Presidency of Bengal, Bombay
andMadras.
• By enacting SBI Act, 1955 the
government partially nationalized
imperial bank of Indiaand renamed it as
SBI.
• In 1959 – by enacting SBI
(Associates) Act, 1959 the government
brought 8 banks offormer princely states
under SBI as its associates. They were -
o State bank of Bikaner
o State bank of Jaipur
o State bank of Hyderabad
o State bank of Indore
o State bank of Mysore
o State bank of Saurasthra
o State bank of Patiala
o State bank of Travancore
• State bank of Bikaner and Jaipur
were merged and known as SBBJ (State
Bank of Bikaner and Jaipur)
• 2008 - State bank of Saurasthra was
merged with state bank of India.

• Now number of associate banks is 5.
SBI associates and BharatiyaMahila
Bank wasmerged with SBI w.e.f. April 1,
2017.
• SBI – largest public sector bank in
country.
• Previously RBI was having 92% share
in SBI.
o To unload RBI from its administrative
work and to endow it with
onlyregulatory functions, RBI’s
shareholding was transferred to
government of India.
Merging of Banks Is it good or
bad?
Recently GoI merged 10 public sector
banks into four large banks. After the
mergers, there are 12 public sector
banks in India, including State Bank of
India and Bank of Baroda.
The mega merger has left untouched six
other banks out of which two are
national banks and the four have
regional focus. The untouched banks are
Bank of India, Central Bank of India,
Indian Overseas Bank, UCO Bank, Bank
of Maharashtra and Punjab & Sind Bank
which will continue as separate entities
as before.
Advantages of Bank Mergers
• More competent to face global
competition. In the global market, the
Indian banks willgain greater
recognition and higher rating
• Reduction in the cost of banking
operation
• Better NPA and Risk management
• Decisions on High Lending
requirements can be taken promptly
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ECONOMY 2021
• After the merger, benefits of merger
are enormous and the biggest is
generation of abrand new customer
base, empowering of business, increased
hold in the market share, opportunity of
technology upgrade. Thus overall it
proves to be beneficial to the overall
Economy
• Provides better efficiency ratio for
business operations as well as banking
operationswhich is beneficial for the
economy
• Minimization of overall risk is there
due to mergers and acquisitions which is
alwaysgood from the business point of
view
• Chances of survival of
underperforming banks increases hence
customer trust remains intact which is
vital for the Economy. The weaker bank
gets merged into stronger one and gets
the benefit of large scale operations.
• The objectives of financial inclusion
and broadening the geographical reach
of banking can be achieved better with
the merger of large public sector banks
and leveraging on their expertise.
• A larger bank can manage its short
and long term liquidity better. There will
not be any need for overnight
borrowings in call money market and
from RBI under Liquidity
Adjustment Facility (LAF) and
Marginal Standing Facility (MSF).
• With a larger capital base and higher
liquidity, the burden on the central
government to recapitalize the public
sector banks again and again will come
down.

• Multiple posts of CMD, ED, GM and
Zonal Managers will be abolished,
resulting insubstantial financial savings.
Problems Arising due to Mergers &
Acquisitions in Indian Banking
• Compliance needed in every decision
which might not be favorable as
thinking
perspectives and risk taking abilities of
different organizations are different. It
leads tofriction and rift which, if not
managed well may lead to the downfall
of the organizationas a whole.
• Risk of failure increases if the
executives are not committed enough in
bringing themerger platforms together
for the merging and taking over bank.
Such failure may provebrutal for the
Economy.
• Impact of customers on banking
merger or acquisition is often quite
emotional. Ifcustomer perception is not
managed with frequent and careful
communication it maylead to loss of
business which is never good for the
Economy.
• Many banks focus on regional
banking requirements. With the merger
the very purpose of establishing the
bank to cater to regional needs is lost.
• Large bank size may create more
problems also. Large global banks had
collapsed during the global financial
crisis while smaller ones had survived
the crisis due to theirstrengths and focus
on micro aspects.
• With the merger, the weaknesses of
the small banks are also transferred to
the biggerbank. So far small scale losses
and recapitalization could revive the
capital base of small banks. Now if the
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ECONOMY 2021
giant shaped bank books huge loss or
incurs high NPAs as it had been
incurring, it will be difficult for the
entire banking system to sustain.
Emergence of Nationalized Banks
• By enacting Banking Nationalization
Act, 1969, the government nationalized
a total no. of 20 private banks –
o In 1969 - 14 banks – having deposits of
more than 50 Crore rupees –
werenationalized.
o In 1980 – 6 banks – having deposits of
more than 200 crore rupees –
werenationalized.
• In 1993 – loss making new bank of
India was merged with Punjab national
bank andtotal no. of nationalized banks
come to 19.
• Presently – total 27 PSB (Public
Sector Banks) (out of which 19 are
nationalized)
• After Nationalization of banks,
opening of private banks were stopped
in private sector but foreign private
banks were allowed to operate to
provide external currency loan.
• In 1992-93, after era of economic
reforms, banking reforms took place.
• 3 developments allowed further
expansion of banking industry in
country
o In 1993 - SBI was allowed to access to
capital market. Presently govt. has
over60% shares in SBI.
o In 1994 - government allowed
nationalized banks to have access to
capitalmarket with a ceiling of 33% sale
of shares. It helped banks to enhance
theircapital

o In 1994 - government allowed opening
of private banks. UTI - It was first
privatebank of reform era.
• But from 1993-94 we see reversing of
policies which governs the banks (As a
generalprinciple the PSB and
nationalized banks are to be converted
into private sectorentities).
Emergence of Regional Rural
Banks (RRBs)
• First setup - 2 October 1975
• Aim - to take banking services to
where no access to banking services with
twin duties.
o Providing credit to poor people with
concessional interest rates (so, they
don'tdepend on private money lenders)
o To mobilize rural savings and
channelize them for supporting
productiveactivities in rural areas.
In other words –
• Purpose - increase credit flow to rural
areas to lend weaker section called
target groups like landless laborer,
artisan, and craftsmen at concessional
rate
Contribution of Capital in RRBs
• Government of India - 50%
• Concerned state government - 15%
• Sponsoring nationalized bank - 35%
(sponsor banks are those public sector
banks which setup a particular RRB. for
e.g. Pandian gram bank was setup by
Indian Overseas Bank(so, it is a sponsor
bank of Pandian bank)
Area of operation of RRB - limited to
notified few districts in a state
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ECONOMY 2021
• Since 1987, no new RRBs have been
opened due to Kelkar
committeerecommendations.
For restructuring and strengthening of
the banks govt. setup 2 committees -
o Bhandari committee (1994-95)
o Basu committee (1995-96)
• Many RRBs became unviable or less
profitable.
• Solution - merged weaker banks with
efficient one
• Merging is still going on.
In 1998-99 government took some
decisions
o Obligation of concessional loans
abolished and RRB started charging
loans atcommercial interest rates.
o RRBs were free to land outside the
target group
• After these decisions RRBs started to
come out from heavy losses.
• Committee on Financial System
(CFS) recommended – merge loss
making with efficientone and make
them part of 3 tier banking structure of
India.
NATIONAL BANK FOR
AGRICULTURE AND RURAL
DEVELOPMENT (NABARD)
• NABARD was established on 12 July
1982 under The National Bank for
Agriculture and Rural Development Act,
1981
• It is a Apex institution for financing
the Agriculture and Rural development

• It also provides re-financing facility
to regional rural banks, cooperative
banks,
commercial banks etc. for the promotion
of activities in the rural areas
• 100% equity- Government of India
SMALL INDUSTRIES
DEVELOPMENT BANK OF INDIA
(SIDBI)
• Established in April 1990 as a wholly
owned subsidiary of Industrial
Development Bank of India (IDBI)
under The SIDBI Act, 1989
• Currently shares of SIDBI are held by
29 institutions/public sector
banks/insurancecompanies owned or
controlled by the Central Government
and Govt. of India.
• It acts as the Principal Financial
Institution for the Promotion, Financing
andDevelopment of the Micro, Small
and Medium Enterprise (MSME) sector
and for Coordination of the functions of
the institutions engaged in similar
activities.
India Aspiration Fund (IAF)
• To boost the starts-up Fund-of-funds
ecosystem in the country, SIDBI
launched IndiaAspiration Fund with an
initial corpus of Rs.2,000 crore.
Micro Units Development &
Refinance Agency Ltd- Mudra
Bank
In our country, BIG industries provide
employment to 1.25 crore people while,
small industries provide it to 12 crore
people.
• So, we need to focus more on their
micro units.
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ECONOMY 2021
• Capital is key to small entrepreneurs.
They heavily depend on local money
lenders fortheir fund requirements.
• Government launched Prime
Minister Mudra Yojana. Under this
MUDRA Bank (MicroUnits
Development and Refinance Agency
Bank) was setup with aim of
fundingunfunded micro units.
• The Union Budget presented for FY
2015-16, announced the formation of
MUDRA Bank. It was registered under
Companies act, 2013 and as a NBFC
with the RBI.
• MUDRA has been initially formed as
a wholly owned subsidiary of Small
IndustriesDevelopment bank of India
(SIDBI)
Pradhan Mantri Mudra Yojana
• MUDRA was given the responsibility
of monitoring the Pradhan Mantri
Mudra Yojana(PMMY) by collecting the
information on regular basis.
• All loans sanctioned on or after April
08, 2015 upto a loan size of 10 lakh for
non-farmincome generating activities
will be branded as PMMY loans.
• Generally, loans upto 10 lakh issued
by banks under Micro Small Enterprises
is givenwithout collaterals.
Features
• Micro units can avail up to ` 10 lakh
through refinance route (through the
public andprivate sector banks, NBFCs,
MFIs, RRBs, District banks etc.)
• Three products –
o Shishu – loan up to ` 50,000
o Kishor – loan up to ` 50,000 to ` 5
lakh

o Tarun - loan up to ` 5 lakh to 10 lakh
• Scheme covers traders of fruits and
vegetables but not refinance the
agriculture sector
• No fixed interest rate (Supposed to
vary according to the risk involved in
enterprisesseeking loans)
• No general subsidy offered on
interest rates.
Fund of Funds for Start-ups (FFS)
• Established by Government of India
and managed and operated by SIDBI.
• Fund size is Rs. I0,000 crore and
would be built over the 14th and 15th
FinanceCommission cycles till 2025.
• FFS would not invest directly in
Startups, but would participate in the
capital ofAlternate Investment Funds
(AIF) registered with Securities and
Exchange Board of India (SEBI) for
investing in equity and equity linked
instruments of various Startups at early
stage, seed stage and growth stages
NON-BANKING FINANCIAL
COMPANIES NBFCS
• Banks are financial institutions which
play central role in financial system (by
mobilizing public savings and flow of
credit to most productive industrial and
infrastructure sectors)
• Example - Kotak Mahindra Finance,
SBI Factors, Sundaram Finance, ICICI
Ventures
• Banks are regulated by central bank
of country. In case of our country i.e. it’s
RBI.
• NBFCs functions are similar to the
bank but main difference is that it
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ECONOMY 2021
doesn't allow itsdepositors to withdraw
money from their accounts.
RBI’s NBFC definition
“A Nonbanking Financial Company
(NBFC) is a company registered under
the Companies Act, 1956 and is engaged
in the business of loans and advances,
acquisition of shares/ stock/ bonds/
debentures/ securities issued by
Government or local authority or other
securities of like marketable nature,
leasing, hire-purchase, insurance
business, chit business but does not
include any institution whose principal
business is that of agriculture activity,
industrial activity,
sale/purchase/construction of
immovable Property.
A non-banking institution which is a
company and which has its principal
business of receiving deposits under any
scheme or arrangement or any other
manner, or lending in any manner is
also a non—banking financial company
(Residuary non-banking company)”
• The institutions in the capital market
are called NBFC. This is evident from
RBI'sobservation –
“Housing finance companies, merchant
banking companies, stock exchanges,
companies engaging in stock broking,
sub broking, venture capital fund
companies, Nidhi companies, Insurance
companies and chit fund companies are
NBFCs.”
• All the institutions listed in this
observation are capital market
institutions. But it is notnecessary that
are N BE are capital market institutions.
• By giving loans to various wholesale
and retail traders, small scale industries
and selfemployed persons, they have

broadened and diversified products and
services offered by financial sector.
Why NBFCs are considered as
complementary to the banking sector?
Because of –
• Customer oriented services
• Simplified procedures
• Attractive rate of returns on deposits
• Flexibility and timeliness in meeting
credit needs of specified sectors.
NBFC Regulatory Authority
• Regulated by – RBI.
To avoid regulatory overlap, certain
NBFCs which are regulated by other
financial regulators are exempted from
regulatory control of RBI -
• Venture Capital fund, merchant bank,
stock broking firms (SEBI registers
them and also regulates them)
• Insurance company (IRDA registers
and regulate)
• Housing finance company (regulated
by NHB)
• Nidhi company (regulated by
Ministry of corporate affairs under
Companies Act, 1956)
• Chit fund company (by respective
State governments under Chit Funds
Act, 1982)
NBFC classification
• Classified into 2 categories according
to their liability structure –
o Deposit-taking NBFCs (NBFC -D)
o Non-deposit taking NBFCs (NBFC -
ND)
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ECONOMY 2021
• It is mandatory for a NBFC to get
itself registered with RBl as a deposit
taking company. (Under Companies act,
1956) and should have minimum net
owned fund of 2 crore. NBFCs are
categorized a) in terms of the type of
liabilities into Deposit and Non-Deposit
accepting NBFCs, b) non deposit taking
NBFCs by their size into systemically
important and other non-deposit
holding companies (NBFC-NDSI and
NBFC-ND) and c) by the kind of activity
they conduct.
Within this broad categorization the
different types of NBFCs are as follows:
I. Asset Finance Company (AFC) : An
AFC is a company which is a financial
institution carryingon as its principal
business the financing of physical assets
supporting productive/economic
activity, such as automobiles, tractors,
lathe machines, generator sets, earth
moving and material handling
equipment, moving on own power and
general purpose industrial machines.
Principal business for this purpose is
defined as aggregate of financing
real/physical assets supporting
economic activity and income arising
therefrom is not less than 60% of its
total assets and total income
respectively.
II. Investment Company (IC): IC means
any company which is a financial
institution carrying on as its principal
business the acquisition of securities,
III. Loan Company (LC): LC means any
company which is a financial institution
carrying on as its principal business the
providing of finance whether by making
loans or advances or otherwise for any
activity other than its own but does not
include an Asset Finance Company.

IV. Infrastructure Finance Company
(IFC): IFC is a non-banking finance
company a) which deploys at least 75
per cent of its total assets in
infrastructure loans, b) has a minimum
Net Owned Funds of ₹ 300 crore, c) has
a minimum credit rating of ‘A ‘or
equivalent d) and a CRAR of 15%.
V. Systemically Important Core
Investment Company (CIC-ND-SI): CIC-
ND-SI is an NBFC carrying on the
business of acquisition of shares and
securities which satisfies the
followingconditions:-
• it holds not less than 90% of its Total
Assets in the form of investment in
equity shares, preference shares, debt or
loans in group companies;
• its investments in the equity shares
(including instruments compulsorily
convertible into equity shares within a
period not exceeding 10 years from the
date of issue) in group companies
constitutes not less than 60% of its Total
Assets;
• it does not trade in its investments in
shares, debt or loans in group
companies except through block sale for
the purpose of dilution or
disinvestment;
• it does not carry on any other
financial activity referred to in Section
45I(c) and 45I(f) of the RBI act, 1934
except investment in bank deposits,
money market instruments,government
securities, loans to and investments in
debt issuances of group companiesor
guarantees issued on behalf of group
companies.
• Its asset size is ₹ 100 crore or above
and
• It accepts public funds
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ECONOMY 2021
VI. Infrastructure Debt Fund: Non-
Banking Financial Company (IDF-
NBFC) : IDF-NBFC is a company
registered as NBFC to facilitate the flow
of long term debt into infrastructure
projects.
DF-NBFC raise resources through issue
of Rupee or Dollar denominated bonds
of minimum 5 year maturity. Only
Infrastructure Finance Companies (IFC)
can sponsor IDF-NBFCs.
VII. Non-Banking Financial Company:
Micro Finance Institution (NBFC-MFI):
NBFC-MFI is a non-deposit taking
NBFC having not less than 85% of its
assets in the nature of qualifying assets
which satisfy the following criteria:
• loan disbursed by an NBFC-MFI to a
borrower with a rural household annual
income not exceeding ₹ 1,00,000 or
urban and semi-urban household
income not exceeding ₹1,60,000;
• loan amount does not exceed ₹
50,000 in the first cycle and ₹ 1,00,000
in subsequentcycles;
• total indebtedness of the borrower
does not exceed ₹ 1,00,000;
• tenure of the loan not to be less than
24 months for loan amount in excess of
₹ 15,000 with prepayment without
penalty;
• loan to be extended without
collateral;
• aggregate amount of loans, given for
income generation, is not less than 50
per cent of the total loans given by the
MFIs;
• loan is repayable on weekly,
fortnightly or monthly instalments at
the choice of theborrower

VIII. Non-Banking Financial Company –
Factors (NBFC-Factors): NBFC-Factor
is a non-deposit taking NBFC engaged in
the principal business of factoring. The
financial assets in the factoring business
should constitute at least 50 percent of
its total assets and its income derived
from factoring business should not be
less than 50 percent of its gross income.
IX. Mortgage Guarantee Companies
(MGC) - MGC are financial institutions
for which at least 90% of the business
turnover is mortgage guarantee business
or at least 90% of the gross income is
from mortgage guarantee business and
net owned fund is ₹ 100 crore.
X. NBFC- Non-Operative Financial
Holding Company (NOFHC) is financial
institution through which promoter /
promoter groups will be permitted to set
up a new bank .It’s a wholly-owned Non-
Operative Financial Holding Company
(NOFHC) which will hold the bank as
well as all other financial services
companies regulated by RBI or other
financial sector regulators, to the extent
permissible under the applicable
regulatory prescriptions.
Regulations related to acceptance
of deposits by NBFCs
• Can accept and/or renew public
deposits for a period minimum (12
months) and maximum (60 months)
• Cannot accept demand deposits
(demand deposits are funds deposited at
a depository institution that are payable
on demand -- immediately or within a
very short period like your current or
savings accounts)
• Cannot offer interest rates higher
than the ceiling rate prescribed by RBI.
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ECONOMY 2021
• Cannot offer gifts, incentives or any
other additional benefit to depositors.
• Should have minimum investment
grade credit rating.
• Their deposits are not insured.
• Repayments of deposits by NBFCs is
not guaranteed by RBl.
• Need to maintain CAR (capital
adequacy ratio) as prescribed by RBI.
The Banking Ombudsman Scheme
Purpose
The BO is a quasi-judicial authority for
resolving disputes between a bank and
itscustomers. The Banking Ombudsman
Scheme enables an expeditious and
inexpensive forum to bank customers
for resolution of banking complaints
Appointment of BO
The Banking Ombudsman is a senior
official appointed by the Reserve Bank
ofIndia Coverage
All Scheduled Commercial Banks,
Regional Rural Banks and Scheduled
PrimaryCooperative Banks are covered
under the Scheme.
Fee
The Banking Ombudsman does not
charge any fee for filing and
resolvingcustomers’ complaints. One
can file a complaint with the Banking
Ombudsman simply by writing on a
plain paper.
One can also file it online or by sending
an email to the Banking
OmbudsmanAppeal against order of BO
If one is not satisfied with the decision
passed by the Banking Ombudsman,

onecan approach the appellate authority
against the Banking Ombudsmen’s
decision.
Appellate Authority is vested with a
Deputy Governor of the RBI.One can
also explore any other recourse and/or
remedies available to him/her asper the
law.
The Reserve Bank introduces
Ombudsman Scheme for Non-Banking
Financial Companies for redressal of
complaints against NBFCs registered
with RBI
• The Scheme will provide a cost-free
and expeditious complaint redressal
mechanismrelating to deficiency in the
services by NBFCs.
• Scheme will cover all deposit-taking
NBFCs.
• Based on the experience gained, the
RBI would extend the scheme to cover
NBFCshaving asset size of Rs. One
Billion and above with customer
interface.
• The offices of the NBFC Ombudsmen
will function at four metro centres viz.
Chennai,
Kolkata, Mumbai and New Delhi and
will handle complaints of customers in
therespective zones.
FINANCIAL SECTOR REFORMS
• The process of economic reforms had
changed the control of government on
economy. Now private sector will play
important role in economy.
• This required overhauling of
investment structure in economy.
• Private sector will utilize the high
investible capital from the financial
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ECONOMY 2021
system and so, aneed to restructure the
whole financial system of India was felt.
• Till now banking had expanded its
presence and reach. But some
weaknesses werefound in banking
system and it was necessary to rectify
these problems to enable thefinancial
system to play its role in efficient and
competitive economy.
Committee on Financial System
(CFS)
• High level committee setup by govt.
• This committee had to examine the
structure, organization, function and
procedure offinancial system.
• Committee had made assumptions
which were basic to banking industry.
Like “theresources of the bank come
from the general public and held by the
banks in trust thatthey are to be
deployed for maximum benefits of the
depositors”
• On the basis of such assumptions
committee gave some
recommendations, whichbecame basis
for reforms introduced in the banking
system in 1992-93.Aim of CFS
(Narsimhan Committee) was –
1. Ensuring operational flexibility
2. Internal autonomy for PSB in their
decision making process
3. More professionalism in banking
operation
Recommendations
(1) On directed investment
• RBI was advised to use OMO as
principal instrument of monetary and
credit controlinstead of CRR.

• Two proposals for this purpose was
advised -
o CRR should be progressively reduced.
o RBI should pay interest late on the
CRR of the banks above the basic
minimum.
• For SLR - cut it to minimum level in
next 5 years.
• Govt. was also advised to meet their
borrowing requirements from market so
that banks can get economic benefit
from SLR.
Why these suggestions were given?
• So that more funds can be availed to
banks
• Converting idle cash for use
• Cutting down interest rates charged
by banks on loans.
(2) On directed credit program
• These suggestions were related to
priority sector lending (PSL) by banks.
• Directed credit programme should be
phased out gradually.
• Directed credit (loan at concessional
rates) were to help certain weaker
section so, itshould be temporary in
nature and not permanent.
• Concept of PSL should be redefined -
to include only weakest sections like
marginalfarmers, rural artisans, village
and cottage industries etc.
• “Redefined PSL” should have 10%
fixed of aggregate bank credit.
• Composition of PSL should be
reviewed after every 3 years.
(3) On the structure of Interest rates
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ECONOMY 2021
• Let market forces determine the
interest rates
• Withdraw all kinds of control on
interest rates of deposits and loans.
• Concessional interest rates for PSL
should be phased out.
o Subsidies on IRDP loans to be
withdrawn.
• Bank rate to anchor rate and all other
interest rates to linked with it (just like
RR andRRR and MSF)
• RBI will be sole authority to simplify
interest rate structure.
(4) On structural reorganization of bank
• Reduce PSB (through merger and
acquisitions) so, greater efficiency in
bankingoperations.
• RBI to be made primary agency for
regulation of banking system and do
away dualcontrol (RBI & Ministry of
finance’s banking division)
• Made PSBs - free and autonomous
• RBI to examine all the guidelines and
directions issued to banking system in
context of independence and autonomy.
• Every PSB must adopt technology
and culture change so can become
competitiveinternally.
• Appointment of chief executive of
bank (CMD) must be on professionalism
and integrity and not on political
considerations.
o Appointment of CMD to be decided by
panel experts.
(5) Asset Reconstruction Companies
Fund (ARC)
• This concept was taken from US.

• Setup ARC to tackle 'NPA’ (Non-
performing assets) problem of banks
and financialinstitutions.
• According to committee the sad state
of affairs of PSBs was due to use and
abuse ofbanks by government, officials,
bank employees and trade unions.
(6) Other major suggestions accepted by
govt.
• Opening of new private sector banks
permitted in 1993
• Introduction of capital adequacy
norms (i.e. CAR provisions) with
international standard.
• Simplification of banking
regulation.Government had taken a
number of reform measures during
2015-2016.
1. FMC merger with SEBI
2. Monetary Policy Agreement between
RBI and Government
3. Insolvency and Bankruptcy Code 2015
4. Financial Stability and Development
Council (FSDC)
FMC merger with SEBI
Why FMC was merged with SEBI?
• To achieve convergence of regulation
of securities and commodity derivatives
markets.
• Increase the economies of scope and
scale for exchanges, financial firms and
otherstakeholders.
Twin Balance Sheet (TBS) Problem
• Long-festering Twin Balance Sheet
(TBS) problem was decisively addressed
by sending the major stressed
companies for resolution under the new
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ECONOMY 2021
Indian Bankruptcy Code and
implementing a major recapitalization
package to strengthen the public
sectorbanks.
• Survey highlights that the TBS
actions need complementary reforms to
shrink unviable banks and allow greater
private sector participation.
• Government should focus on 4 R’s of
the TBS—recognition, resolution,
recapitalization, and reforms.
TWIN REFORMS - Indian
Bankruptcy Code and
Recapitalization package
New Indian Bankruptcy Code
The new Indian Bankruptcy Code (IBC)
has provided a resolution framework
that will help corporates clean up their
balance sheets and reduce their debts.
Government revised the bankruptcy
laws so that the “exit” problem that
pervades the Indian economy can be
addressed effectively and expeditiously.
• Last year Survey had likened the
Indian economy in the 21St century to
the‘Chakravyuh’ legend of Mahabharata
– the ability to enter but not exit –
cautioning thecountry is facing adverse
consequences due to the lack of a way
out for failed ventures.
• Just as a market economy requires
unrestricted entry of new firms, new
ideas and new technologies, it also
requires an exit route so that resources
are forced or enticed away from
inefficient and unsustainable uses.
• Stressed corporate and bank balance
sheets were partly because it was
difficult forcapital to exit enterprises or
 ECONOMY 2021

investments that had turned relating toreorganization and insolvency

unprofitable. resolution of corporate persons,
partnershipfirms and individuals in a
• As a consequence, India was littered time bound manner and for
with firms that were too small and maximization of valueof the assets of
unproductive,taking up scarce resources such persons and matters connected
more efficiently allocated elsewhere. therewith.
Government passed the Insolvency and Framework It proposes a
Bankruptcy Code 2016 – this new framework to ensure:
bankruptcy law will ensure time-bound
settlement of insolvency, enable faster • early detection of stress in a business;
turnaround of businesses and createa
database of serial defaulters. The move • initiation of the insolvency resolution
is also expected to help India move up process by debtor, financialcreditor or
from its current rank in the World operational creditor;
Bank’s ease of doing business index. • timely revival of viable businesses;
Overall this legislation is a huge step • liquidation of unviable businesses;
towards the ease of doing business in
India and has the potential to bring • minimization of losses to all
business practices in India closer to stakeholders; and
more developed markets over the long • Avoiding destruction of value of failed
term. business.Insolvency Law
The Insolvency and Bankruptcy CommitteeConstituted by The
Code, 2016 Government of India had constituted
the 14 member Insolvency
About IBC is the bankruptcy law of India LawCommittee vide order
which seeks to consolidate the
existingframework by creating a single Purpose to take stock of the functioning
law for insolvency and bankruptcy. and implementation of the Insolvency
andBankruptcy Code, identify the issues
It offers a market determined, time that may impact the efficiency of
bound mechanism (within 180 days thecorporate Insolvency Resolution and
plus90 days extension) for orderly the Liquidation Framework
resolution of insolvency, wherever prescribedunder the Code, and make
possible,and orderly exit, wherever suitable recommendations to address
required. such issues, enhance efficiency of the
This is considered as the biggest processes prescribed and the effective
economic reform next only to GST implementation of the Code.

It will facilitate ease of doing business. Chairman Secretary, Ministry of

Aim to promote entrepreneurship,
availability of credit, and balance the
interestsof all the stakeholders by
consolidating and amending the laws
Corporate Affairs (MCA)
Note: The IBC mechanism is being used
actively to resolve the NPA problem of
the banking sector. A major factor
behind the effectiveness of the new Code

90

has been the adjudication by the
Judiciary. The Code prescribes strict
time limits for various procedures under
it. In this process, a rich case-law has
evolved, reducing future legal
uncertainty.
Recapitalization Package
Government announced a large
recapitalization package (about 1.2
percent of GDP) tostrengthen the
balance sheets of the public sector banks
(PSBs).
• The move on the part of the
government to inject capital into public
sector banks (PSBs) is commendable
and a decisive step.
• This could give the banking system a
good breathing time to enhance its
credit portfolio and restore value out of
the NPA accounts.
• The capital infusion plan for 2017-18
included Rs. 80,000 crore through
recapitalization bonds and Rs. 8,139
crore as budgetary support.
• Recently Finance Minister announced
that the government will release Rs
70,000 crore upfront and additional
lending and liquidity to the tune of Rs 5
lakh crore to PSBs,thereby benefitting
corporates, retail borrowers, MSMEs,
small traders and others.
Expected outcome because of above twin
reforms –
• Firms should finally be able to
resume spending
• Banks should be able to lend
especially to the critical, but-currently-
stressed sectors of infrastructure and
manufacturing.
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ECONOMY 2021
PSL (PRIORITY SECTOR
LENDING)
• Priority sector refers to those sectors
of the economy which may not get
timely andadequate credit in the
absence of this special dispensation. All
banks have to follow thecompulsory
target of PSL.
• Sectors in PSL - Agriculture, SMEs
(small and medium enterprises, road
and watertransport, retail trade, small
business, small housing loans (<10
lakh), softwareindustries, SHGs (Self-
help groups), Education, Housing,
Renewable Energy, SocialInfrastructure,
Ago-processing, Small and marginal
farmers, Artisans, Distressed urbanpoor,
Intended non-institutional debtors
besides SCs, STs & other weaker
sections ofsociety.
• 2007 - RBI included 5 minorities -
Buddhists, Christians, Muslims, Parsis
and Sikhs under PSL.
• 2015 - RBI added “medium enterprise,
sanitation and renewable energy”
PSL target must be met by banks in
following way –
Indian Banks
• They need to lend 40% of their total
lending’s to PSL every year (Public +
Pvt.)
• Sub targets - 18% of total lending –
agriculture
o 10% of total lending or 25% of PSL -
weaker sections (whichever is higher)
o 12% of total lending - other areas of
PSL Foreign Banks

• Those which have less than 20
branches.
• 32% of total lending – PSL
• Sub targets –
o 12% - exports
o 10% - medium enterprises
o 10% - other areas of PSL
• Narsimhan I committee had
recommended to cut down PSL targets
to 10% for all banks and phase out PSL
for betterment of banking.
• Shuffle PSL sectors in every 3 years
Revision in PSL
RBI panel on PSL proposed (2012) –
• Target for PSL in foreign banks should
be increased to 40% from present 32%.
• Sub target – 15% - export
15% - MSE sector (7%
microenterprises)
• Retain 40% PSL target for scheduled
commercial bank
Nair Committee
• Chairman of Union leanly (M V Nair)
• Suggested revised guidelines for PSL
• It suggested continuing MSE, housing,
weaker sections (women and education)
underPSL.
• The sector "agriculture and allied
activities" can be composite sector under
PSL (smalland marginal farmer as sub
target for agriculture and allied
activities)
NON-PERFORMING ASSETS
(NPA)
What is NPA?
ECONOMY 2021
• A loan or advance is asset of the bank.
If its interest or principle or both remain
overdue(unpaid) for a reasonable
period, then it is called Non-Performing
Asset.
• Criteria for identifying NPA - keep on
changing.
• An asset becomes non-performing
when it ceases to generate income for
the bank i.e.when a loan where interest
and/ or installment of principal remain
overdue for a periodof 90 days or more.
• NPA has been growing in public sector
banks over the years.
• For agriculture loans - period is tied
with crop seasons- i.e. ranging from two
cropseasons to one-year overdue norm.
• NPAs growth is inversely related to the
GDP growth. Decline in GDP growth
leads torise in NPAs growth
- NPA classification
• Sub-standard NPAs - remaining
NPAs for ≤18 months
• Doubtful NPAs – remaining NPAs for
≥18 months
• Loss assets - where the loss has been
identified by the bank or
internal/external auditors or the RBl
inspection, but the amount has not been
written off. (Reducing a debt to zero
which cannot lee collected).
According to Financial Stability Report
of RBI, NPA situation in country were as
follows –
• Restructured loans as a proportion of
gross loans were 6.2% while the stressed
loans to total loans total loans were at
11.3%.
• Stressed assets in Banks -
92

a) PSB – 14% of total loans (highest)
b) Pvt. banks - 4.6%
c) Foreign banks – 3-4%
• 5 subsections (mining, iron and steel,
textiles, infrastructure and aviation)
share in total stressed advances was
53.0%.
Reasons for increase in NPAs
• Switchover to system-based
identification of NPAs
• Current macro-economic situation
• Increased interest rates in the recent
past
• Lower economic growth
• Aggressive lending by banks in past
in good times new guidelines by RBI to
resolve NPA issue
• As soon as early sign of stress is
visible, take action
a) Don't wait to become loan as NPA.
b) Banks will carve out special category
of assets called special mention
accounts(SMAs) in which early signs of
stress are visible.
• Flexibility in project loans to
infrastructure and core industry projects
• For non - cooperative borrowers –
a) For future borrowings they need to
pay higher interest rates
b) Banks will make higher provisions for
future loans to such borrowers.
c) Norms for ARC have been tightened
to strengthen recovery from
noncooperativeborrowers.
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• For large value restructuring (above
500 crores) independent evaluation was
mademandatory.
• A joint lenders forum to be formed by
bankers for early resolution of stress,
ifborrower's interest or principle
payments are overdue by more than 60
days.
• Central repository of information -
setup by RBI
o Purpose - Store and disseminate credit
data to lenders. Banks have to
furnishcredit information on all their
borrowers (with an exposure of `5 crore
andabove) The Reserve Bank of India’s
Financial Stability Report (FSR) has
warned that gross nonperforming assets
of troubled banks are likely to rise
further under the current
macroeconomic scenario.
• The stress in the banking sector
continues as gross NPA ratio rises
further. Profitability of SCBs declined,
partly reflecting increased provisioning.
• Macro-stress tests indicate that under
the baseline scenario of current
macroeconomic outlook, gross NPA
ratio of banks may rise.
SARFAESI ACT, 2002
• Securitization and Reconstruction of
Financial Assets and Enforcement of
SecurityInterest Act, 2002 (SARFAESI)
• Govt. Passed it so that it can crack
down on willful defaulters
• Legal framework for recovery of
NPAs.The act gives following powers to
FIs/Banks regarding NPA. Banks/FIs
having 75% of the dues owed by the
borrower can collectively proceed on
following if account is becoming NPA -

o Issue of notice to default to borrowers
asking to clear dues within 60 days.
o If borrower fails to repay - take
possession of security, take over
management ofborrowing concern or
appoint a person to manage the concern.
o If the case is already before the BIFR,
the proceedings can be stalled if
banks/FIs
• Having 75% share in the dues have
taken any steps to recover the dues
under theprovisions of the ordinance.
The banks can sell the security to a
securitization or Asset Reconstruction
Company (ARC) Government has
amended the SARFAESI Act in August
2016 to empower the ARCs (Asset
Reconstruction Companies), to
rejuvenate Debt Recovery Tribunals
(DRTs) and to enhance the effectiveness
of asset reconstruction under the new
bankruptcy law.
• The amendment has given more
regulatory powers to the RBI on the
working of ARCs. It was also aimed to
empower asset reconstruction and the
functioning of DRTs in the context of the
newly enacted bankruptcy law.
• As per the amendment, the scope of
the registry that contains the central
database ofall loans against properties
given by all lenders has been widened to
include moreinformation.
• RBI will get more powers to audit and
inspect ARCs and will get the freedom to
remove the chairman or any director. It
can also appoint central bank officials
into the boards of ARCs.
• RBI will get the power to impose
penalties on ARCs when the latter
doesn’t follow thecentral bank’s
directives. Similarly, it can regulate the
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ECONOMY 2021
fees charged by ARCs from banks while
dealing with NPAs. The penalty amount
has been increased from Rs 5 lakh to Rs
1 crore.
• The amendment has brought hire
purchase and financial lease under the
coverage ofthe SARFAESI Act.
• Regarding DRTs, the amendment
aims to speed up the DRT procedures.
Onlineprocedures including electronic
filing of recovery applications,
documents and writtenstatements will
be initiated.
• The amendments are important for
DRTs as they can play an important role
under the new Bankruptcy law. DRTs
will be the backbone of the bankruptcy
code and deal with all insolvency
proceedings involving individuals. The
defaulter has to deposit 50 per cent of
the debt due before filing an appeal at a
DRT.
WILLFUL DEFAULTER
As the name itself suggests willful
defaulter is one who does not repay a
loan or liability.
According to RBI, a willful defaulter is
one who –
• Financially capable to repay loan but
still not repay.
• or one who diverts the funds for
purposes other than what was the funds
availed for.
• or with whom funds are not available
in form of assets as funds have been
siphoned off
• or who has sold of disposed the
property that was used as a security to
obtain the loan (i.e. sold the collateral
against which it had taken the loan)

Diversion of fund includes –
• Using short - term working capital for
long - term purposes.
• Acquiring assets for which loan was
not meant E.g. Suppose Vijay Malya had
taken loan for son's education purpose
and it has used it in buying a chartered
plane
• Transferring funds to other
entitiesSiphoning of funds mean
• Funds were used for purposes that
were not related to the borrower and
which couldaffect the financial health of
the entity
Lending institution needs to –
• Take into account the repayment
track record
• Prove that default was intentional
• Inform the defaulter
• Should be given a chance to clarify his
stand on issue
• The default amount needs to be ≥ `25
lakh.
Following restrictions get in action if an
entity or individuals name figures in list
of willfuldefaulters.
• Barred from participating in capital
market.
• No further banking facilities
• Access to financial inst. for 5 years for
starting a new venture is barred.
• Lender can initiate process of
recovery with full vigor and can even
initiate criminalproceedings, if required.
• Lending institutions may not allow
any person related to defaulting
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ECONOMY 2021
company to become a board member of
any other company as well.
FUGITIVE ECONOMIC
OFFENDER
The “fugitive economic offender” means
any individual, against whom a warrant
for arrest in relation to a scheduled
offence has been issued by any court in
India, who:
• Leaves or has left India so as to avoid
criminal prosecution; or
• Refuses to return to India to face
criminal prosecution.
The Fugitive Economic Offenders
Act
The Fugitive Economic Offenders Act,
2018 is an Act of the Parliament of India
that seeks to confiscate properties and
assets of economic offenders that evade
prosecution by remaining outside the
jurisdiction of Indian courts.
• Economic offences with a value of
more than Rs 100 crores, which are
listed in theschedule of the Fugitive
Economic Offenders Act, come under
the purview of this law.
• As per the Act, a court (‘Special Court’
under the Prevention of Money
Laundering Act, 2002) has to declare a
person as a Fugitive Economic Offender.
• Recently, Special Prevention of
Money Laundering Act (PMLA) court
has declared Vijay Mallya a fugitive
economic offender.
Fugitive Economic Offender:
• A fugitive economic offender has
been defined as a person against whom
an arrestwarrant has been issued for

committing any offence (listed in the
schedule).
Further the person has:
• Left the country to avoid facing
prosecution, or
• Refuses to return to face
prosecution.Some of the offences listed
in the schedule are:
• Counterfeiting government stamps or
currency,
• Cheque dishonour for insufficiency of
funds,
• Money laundering, and
• Transactions defrauding creditors.
The Act allows the central government
to amend the schedule through a
notification.
Attachment of property:
• The director or deputy director may
attach any property mentioned in the
applicationwith the permission of a
special court.
• Further, these authorities may
provisionally attach any property
without the priorpermission of the
special court, provided that they file an
application before the courtwithin 30
days.
• The attachment will continue for 180
days, unless extended by the special
court. If atthe conclusion of
proceedings, the person is not found to
be a fugitive economicoffender, his
properties will be released.
What comes under Economic
offences?
Offences under the following Acts:
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ECONOMY 2021
• Negotiable Instruments Act, 1881;
• Reserve Bank of India Act, 1934;
• Central Excise Act, 1944;
• Customs Act, 1962;
• Prohibition of Benami Property
Transactions Act, 1988;
• Prevention of Money Laundering Act,
2002; and
• Indian Penal Code
Provisions:
• Making an application before the
special court for a declaration that an
individual is afugitive economic
offender;
• Attachment of the property of a
fugitive economic offender and proceeds
of crime
• Issue of a notice by the special court
to the individual alleged to be a fugitive
economic offender;
• Confiscation of the property of an
individual declared as a fugitive
economic offender or even the proceeds
of crime;
• Disentitlement of the fugitive
economic offender from defending any
civil claim; and
• Appointment of an administrator to
manage and dispose of the confiscated
propertyunder the act. The Bill allows
any civil court or tribunal to disallow a
person, who has been declared a fugitive
economic offender, from filing or
defending any civil claim. Appeals
against the orders of the special court
will lie before the High Court.

CAPITAL ADEQUACY RATIO
It is said that banks are backbone of
economy. Any damage to banking can
pass the same to other sectors of
economy. Why banks are called as
backbones of economy and should we
care if they face any risk?
• Banking is a segment of service sector
in any economy.
• It is called as back home of economy
because today economies are more
dependent on banks than in past
• Banks credit creation (loan
disbursals) is highly risky business. The
depositors' money depends on the
banks, quality of lending.
• In banking system risks are always
there and they cannot be made zero-
because loan forwarded to any entity or
individual can become a bad debt -
probability of this being 50%.
• So, if a bank goes failure it has the
potential of creating chaos in an
economy. Some risks like credit growth
and cyber security had already entered
in our banking system.
• This is why govt. pays special
attention to regulatory aspect of banks.
• Every regulatory provision tries to
achieve following simple equation -
"how the banksshould maximize their
credit creation by minimizing the risk
and continue functioningpermanently."
• And so, Central banks of world have
devised many tools which minimize
risks of banks at one hand and providing
cushions to banks at another hand so,
that banks do not shut down after going
bankrupt.
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• Central bank provides cushions to
banks by following -
(a) CRR - reserve a part of total deposits
in cash
(b) SLR - keep part of total deposits with
banks themselves
(c) CAR norm
• In 1988 the central banks of
developed economies agreed upon
provision, the CAR – also known as
Basel Accord.
• This accord was agreed at Basel,
Switzerland in a meeting of (BIS) Bank
for International settlements (It is
central bank for central banker’s setup
in 1930. Today it functions as a meeting
place for the bank regulators of many
countries, as a multilateral regulatory
authority and as clearing house for
many nations’ reserves
• In Basel-I norms, it was decided that
a requirement was imposed upon the
banks tomaintain a certain amount of
free capital (i.e. ratio) to their assets (i.e.
loans &investments by banks) as a
cushion against losses (ratio was
decided – 8%), e.g. If SBIhad done total
investments and loans of 1000, then SBI
needs to maintain a free capitalof 80 at
that particular time.
• CAR is the percentage of total capital
to total risk-weighted assets
• In other words, CAR =
• It is also known as 'Capital to Risk
weighted Assets Ratio' (CRAR)
• This ratio is used to -
(a) Protect depositors
(b) Promote the stability and efficiency
of financial systems around the world.

CAR in India
• RBI introduced CAR in 1992.
• Why?
o In accordance with BIS standards (as
part of financial sector reforms)
• In coming year Basel norms were
extended to term-lending institutions,
primary dealers and NBFCs.
Why to maintain CAR?
• It prevents bank failure (If banks are
not able to pay depositors and other
creditors)
• Amount of capital affects returns for
the owners (equity holders) of the bank.
• In simple terms Capital Adequacy
Ratio is Capital/risk. Lower the CAR,
higher is the risk.
• The Basel III norms stipulated a
capital to risk weighted assets of 8%.
However, as per RBI norms, Indian
scheduled commercial banks are
required to maintain a CAR of 9% while
Indian public sector banks are
emphasized to maintain a CAR of 12%.
BASEL ACCORDS
• It is a set of agreement set by the
Basel committee on bank supervision
(BCBS)
• BCBS provides recommendations on
banking regulations in regards to capital
risk,market risk and operational risk
• Purpose of accords - to ensure
financial institutions have enough
capital to meetobligations and absorb
unexpected losses
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Objectives of accords -
• To strengthen international banking
system.
• To promote convergence of national
capital standards
• To iron out competitive inequalities
among banks across countries of the
world
Basel-I accord
• It focuses on capital adequacy of
financial institutions.
• It was not a legal document
• It was designed to apply to
internationally active banks of member
countries of theBasel Committee on
Banking Supervision (BCBS) of Basel,
Switzerland.
• It is said that Basel-I looked G10
centric because details of its
implementation were left to national
discretion
• Banks that operate internationally are
required to have a risk weight of 8% or
less.
Basset -II accord
• It was to be fully implemented by
2015.
• Focus on 3 main areas - minimum
capital requirements, supervisory review
and market discipline. (also known as "
3 pillars")
• Focus of accord - to strengthen
international banking requirements as
well as tosupervise and enforce these
requirements.

Basel – III accord
Basel III: A Global Regulatory
Framework for more Resilient Banks
and Banking systems
Objectives:
• To strengthen global capital and
liquidity regulations with the goal of
promoting a more resilient banking
sector
• To improve the banking sector's
ability to absorb shocks arising from
financial and economic stress.
Enhancements:
• Augmentation in the level and quality
of capital
• Introduction of liquidity standards
• Modifications in provisioning norms
• Introduction of leverage ratio
Issues with Indian Banks:
• Profitability
• Capital acquisition
• Liquidity Needs
• Limits on lending: ‘Urgent need to
take control of bad loans (NPAs) +
selection ofborrowers based on proper
due diligence and not on relationships’
• Bank consolidation: ‘Consolidate
weaker banks with stronger ones and
this wouldattract more funding from
both international and local capital
markets’
• Pressure on Yield on Assets
• Pressure on Return on Equity: ‘Will
face decline in the short run’
• Stability in the Banking system
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As per the Reserve Bank of India’s
direction, the Basel III capital regulation
is beingimplemented from April 1, 2013,
in India in phases, and was to be fully
adopted by March 31, 2019.
Classification of Bank's Capital
Tier -I capital
• Tier 1 capital is a term used to
describe the capital adequacy of a bank.
• It is a core measure of bank's
financial strength.
• It consists financial capital which are
in are most reliable and liquid (share
capital anddisclosed reserves)
• It is most reliable and liquid form of
capital because equity capital can’t be
redeemed at the option of the holder
and disclosed reserves are the liquid
assets available with thebank itself.
• Share capital - share investment
made by public and others.
• Disclosed reserves or retained
earnings means undistributed profit.
Tier 2 Capital
• A term used to describe the capital
adequacy of a bank - it can absorb losses
in case of a winding-up and so provides
a lesser degree of protection to
depositors.
• It is secondary bank capital (second
most reliable form of capital)
• It consists of -
o Accumulated after-tan surplus of
retained earnings
o Revaluation reserves of fined assets
and long term holding of equity
securities

o General loan-loss reserves.
o Hybrid (debt/ equity) capital
instruments
o Subordinated debt
o Undisclosed reserves
Tier 3 capital
• Tertiary capital of the banks
• It is used to meet support market
risk, commodities risk and foreign
currency risk
• It includes variety of debt other than
Tier 1 and Tier 2 capitals.
• It includes greater number of
subordinated issues, undisclosed
reserves and general loss reserves
compared to tier 2 capital.
• To qualify as tier 3 capital, assets
must be limited to 50% of a bank's tier 1
capital, beunsecured, sub-ordinate and
have a minimum maturity of 2 years.
Disclosed Reserves - total liquid cash
and SLR assets of the banks that may be
used any time. So, they are part of tier 1
Capital.
Undisclosed Reserves - unpublished or
hidden reserves of a financial institution
that may not appear on publicly
available documents such as balance
sheet, but are real assets, which are
accepted by most banking institutions,
but cannot be used at will by the bank.
So, they are part of Tier-2 capital.
Basel-3 compliance of the PSBs and
RRBs
• The CRAR of scheduled commercial
banks of India was satisfactory while the
capitalpositions of PSBs declined.
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ECONOMY 2021
• The PSBs require substantial capital
to meet regulatory requirement with
respect toadditional capital buffers.
• In order to make the PSBs and RRBs
compliant to the Basel norms, the govt.
has been following a recapitalization
program for them since 2011-12.
• In year 2016-17, the govt. announced
25000 crore for purpose of
recapitalizing the PSBs.
• Given the deterioration in asset
quality and gradual implementation of
Basel III norms,PSBs will have to
improve their capital positions to meet
unforeseen losses in future
• Estimated Capital requirement for
next 4 years – ` 1,80,000 crore (Govt.
had proposed to make 70,000 crore
available from budgetary allocations
during 2016-17 and 2017-18)
• A massive recapitalisation plan for
PSBs is already underway with the
governmentannouncing a Rs 2.11 trillion
capital infusion programme in 2017.
• Of the Rs 1.35 billion to be infused
through recapitalization bonds, the
government has already infused about
Rs 710 billion in the banks, Rs 113
billion in five PSBs.
LEVERAGE RATIO
The Basel Committee on Banking
Supervision (BCBS) introduced a
leverage ratio in the 2010 Basel III
package of reforms.
• The leverage ratio is defined as the
capital measure divided by the exposure
measure, expressed as a percentage.
• The capital measure is tier 1 capital
and the exposure measure includes both

on-balance sheet exposure and off-
balance sheet items.
The leverage ratio measures a bank's
core capital to its total assets. The ratio
uses tier 1 capital to judge how leveraged
a bank is in relation to its consolidated
assets. Tier 1 assets are ones that can be
easily liquidated if a bank needs capital
in the event of a financial crisis. So, it is
basically a ratio to measure a bank's
financial health.
PROJECT SASHAKT
• It was proposed by a panel led by
PNB chairman Sunil Mehta to address
the bad loans problem in India’s
banking sector
• Public sector banks (PSBs) will need
an additional capital of Rs 1.1-1.3 trillion
over the next two years to implement a
five-point strategy to tackle bad loans, a
committeereport on project ‘Sashakt’
has recommended.
• Project Sashakt was proposed by a
panel led by PNB chairman Sunil Mehta.
Bad loans of up to ₹50 crore will be
managed at the bank level, with a
deadline of 90 days.
• For bad loans of ₹50-500 crore,
banks will enter an inter-creditor
agreement,
authorizing the lead bank to implement
a resolution plan in 180 days, or refer
the assetto NCLT.
• For loans above ₹500 crore, the panel
recommended
an independent AMC, supported by
institutional funding through the AIF.
The idea is to help consolidate stressed
assets.
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CREDIT COUNSELLING
• As name suggests it is advising
borrowers to overcome their debt
burden and improve money
management skills is credit counseling.
• India's sovereign debt is usually rated
by 6 major sovereign credit rating
agencies(SCRAs) of world which are
o Fitch ratings
o Moody's Investors service.
o Standard and Poor's (S& P)
o Dominion Bond Rating service (DBRS)
o Japanese credit rating agency (JCRA)
o Rating and Investment Information
Inc., Tokyo (R & I)
Before demonetization many credit
ratings have put India under 'stable'
category but this stand changed after
demonetization.
Credit Rating
• To assess the credit worthiness
(credit record, integrity, capability) of a
prospectiveborrower to meet debt
obligations is credit rating.
• It is done in case of – individuals,
companies and even countries
• World renowned agency – Moody’s, S
&P
• In India ICICI and UTI jointly
introduced credit rating in 1988CREdit
rating agencies are regulated by SEBI.
Credit rating agencies registered with
SEBI are: CRISIL (Credit Rating
Information of India Ltd.)
• Jointly by ICICI and UTI (SBI, LIC
and United India Insurance company-
shared capital)

• To rate debt instrument –
debenturesICRA (Investment
Information and Credit Rating Agency
India Ltd.)
• By IFCI, LIC and SBI
• To rate debt instrumentsCARE
(Credit Analyses and Research Ltd.)
• By IDBl, other Fls, nationalized banks
and pvt. sector finance companies.
• To rate all type of debt instruments
ONICRA (Onida Individual Credit
Rating Agency of India Ltd.)
• To rate credit worthiness of non-
corporate and their debt instruments i.e.
credit cards,hire-purchase, housing
finance, rental agreements and bank
finance.
SMERA (Small and Medium Enterprises
Rating Agency)
• Not a credit rating agency precisely.
• To rate the overall strength of small
and medium enterprises (SMEs).
Credit assessment - a general credit
rating service not linked to any debt
issue is also availed by companies -
already offered in India by CRISIL – this
kind of ratings are called as credit
assessment.
CIBIL
• To maintain a database on the credit
records of individuals the CIBIL was
setup in India in 2004.
• It makes information's available to
banks and FIs about prospective
individualborrowers.
LABELS OF ATM
Entry of ATMs in India - in 1980s.
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ECONOMY 2021
Types of ATMs –
Bank's own ATM
• Owned by - Concerned bank
• Operated by - Concerned bank
• Carry “logo” - Concerned bank
• Costliest to provide service to bank's
customer
Brown label ATMs (BLAs)
• Owned by - 3rd party (non-banking
firm)
• Operated by - concerned banks (‘cash
handling ‘and ‘back end server
connectivity’)
• Carry 'logo" - concerned bank
White label ATMs (WLAs)
• Owned by – Third party (non –
banking firm)
• Operated by – third party
• Carry 'logo' - not bear logo of the
banks they serve and so name is white
label
• They carry logo of the firm which own
them
• Serve customers of all the banks
• Interconnected with entire ATM
network in the country
• Role of concerned bank - limited to
provide account information and back -
end money transfers to the third parties.
The 3rd parties have a mandate to
deploy -
• 67% ATMs - Rural
• 33% ATMs - Urban location

• E.g. - Tata communications payment
solutions - first firm to get permission
from RBI(Brand name – ‘Indicash’)
• Main objective of BLAs and WLAs -
cutting operation cost of running ATM
and financial inclusion.
NIDHIS
• Nidhi means ‘treasure’.
• In the Indian financial sector it means
– “Any mutual benefit society notified
by theCentral / Union Government as a
Nidhi Company.”
• Purpose of creating nidhi - cultivating
the habit of thrift and savings amongst
itsmembers.
What is done in this business?
• Borrowing from members and lending
to members only.
• Known by different names - Nidhi,
Permanent Fund, Benefit Funds, Mutual
BenefitFunds and Mutual Benefit
Company.
• More popular in – South India.
• Highly localized single office
institutions.
• They are mutual benefit societies.
How? Because dealings are restricted
only to themembers and membership is
limited to individuals.
• Principal source of funds - members.
• Loans are given to the members at
relatively reasonable rates for purposes
such ashouse construction or repairs.
• Deposits mobilized by Nidhis are not
much when compared to the organized
bankingsector.
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• Registered under - Companies Act,
1956.
• Regulated by - Ministry of Corporate
Affairs (MCA).
• They are exempted from certain
provisions of the Act because of
operations limited tomembers only.
• They are also included in the definition
of NBFCs, which operate mainly in
theunorganized money market.
• Non—banking financial entities
include
o NBFCS comprising equipment leasing,
hire purchase finance (HP), loan (LC),
investment (IC) (including primary
dealers and residuary non-banking
companies(RNBCs)
o Mutual benefit financial Companies
(MBFC), i.e., Nidhi company
o Mutual benefit company (MBC), i.e.,
potential nidhi company (a company
whichis working on the lines of a Nidhi
company, but has not yet been so
declared bythe Central Government)
o Miscellaneous non-banking company
(MNBC), i.e., Chit Fund Company.
• As they come under the one class of
NBFCs, the RBI can issue notifications
to themregarding deposit acceptance
activities.
• RBI has also exempted the nidhis from
RBI act because of they deal with
theirshareholder members only.
• So, by 2013 RB has not provided any
regulatory framework for nidhis.
• To prevent misuse of word “nidhi” the
P. Sabanayagam committee
 ECONOMY 2021

recommended thefollowing definition period not exceeding the next 24

for ‘Nidhis’. months.
• “Nidhi is a company formed with the • Administered prices and interest
exclusive object of cultivating the habit rates – They are impediments to
of thrift,savings and functioning for the monetary policytransmission and
mutual benefit of members by receiving achievement of price stability and so
deposits onlyfrom individuals enrolled they should be eliminated.
as members and by lending only to
individuals, also enrolled as members, • Monetary policy committee –
and which functions as per Notification Monetary policy decision-making should
and Guidelines prescribed by the be vested withmonetary policy
committee (MPC) (chairman – RBI
DCA. The word Nidhi shall not form governor, Vice chairman –
part of the name of any company, firm deputygovernor, Executive Director in
or individualengaged in borrowing and charge could be its member and two
lending money without incorporation by external members).
DCA and suchcontravention will attract
penal action.” • All fixed income financial products
should be treated in a par with bank
URJIT PATEL COMMITTEE deposits for the purposes of taxation and
TDS.
Main objective of committee – to
recommend what needs to be done to • With a sharp rise in ratio of
revise and strengthen the current agricultural credit to agricultural GDP,
monetary policy framework with a view the need ofsubventions on the interest
to making it transparent and rate for lending to certain sectors would
predictable. have to berevisited.
Recommendations of the • Regarding the global spillover driving
committee episodes of large and volatile capital
inflows aswell as outflows, it
• CPI (combined) should be used as the recommended that a flexible setting of
nominal anchor for a flexible inflation monetary policy by the RBI inthe short-
targeting(FIT) framework because CPI run was warranted.
closely reflects cost of living and has
larger influences oninflationary NACHIKET MOR COMMITTEE
expectations than other anchors.
• Setup by - RBI
• Target rate of inflation – 4% with a
tolerance band of 2% to be achieved in a • Name of committee – Committee on
two-yeartime frame. Comprehensive Financial Services for
SmallBusiness and Low Income
• Transition path to the target zone Households (CCFS)
should be graduated to bring down
inflation from the current level of • Chairman – Dr. NachiketMor
around 10% to 8% over a period not • Recommendations core - To achieve
exceeding 12 months and to 6% over a financial inclusion which enhances both
financial and stability, we need to more

104

away from approach which focus
exclusively on one model to an approach
where multiple models and partnerships
are allowed to thrive.
• Common theme of recommendations
- instead of focusing only on large
generalistinstitutions, specialization and
partnership between specialists must be
encouraged.
• Recommendations of CCFS
1) Universal Electronic Bank Account
• At the time of issuing the Aadhaar
number, every resident to made
availableuniversal electronic bank
account.
2) Before creating new regional banks,
strengthen the existing one and develop
riskbased supervision process for
regional banks.
3) Reorient focus of NABARD, SIDBI
and NHB to become market-makers and
providersof risk-based credit
entrancements
4) Consolidating NBFC definitions into
2 categories –
a. Core investment companies
b. Other NBFCs
• Restore permission of NBFCs-ND to
act as business correspondents.
5) Priority sector lending -
• Incentive each provider to specialist
in one or more sectors of the economy
andregions of the country.
• Government subsidies to be
channeled as DBTs rather than
subvention orwaivers.
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ECONOMY 2021
6) All financial firms regulated by RBI -
must have an internal process to
assesssuitability of products before
advising clients regards to them.
SMALL AND PAYMENT BANKS
According to RBI guidelines, small and
payment banks are ‘niche’ or
‘differentiated’ banks with common
objective of increasing financial
inclusion.
Guidelines to setup both banks -
a) Minimum capital requirement - ` 100
crore.
b) Promoter contribution - at least 40%
for first 5 years
• Excess shareholding-brought down to
90% by end of 5th year, 30% by end of
10thyear and to 26% in 12 years from
commencement of business.
c) Foreign shareholding as per current
FDI policy.
• Voting rights - same as according to
existing guidelines for private banks.
d) Entities other than promoters would
not hold share in excess of 10%.
e) They must comply with the corporate
governance guidelines, including ‘fit
andproper’ criteria for directors as
issued by RBI.
Small Banks
Purpose - to provide whole suite of basic
leanings product (like deposits, supply
of credit but in limited of operation)
Objective - To increase financial
inclusion by -

a) Provision of savings vehicles to under
- served and unserved sections of
thepopulation
b) Supply of credit to small farmers,
micro and small industries and other
unorganized
sector entities through high technology
low-cost operations
Other features of Small Banks
• Resident individuals with 10 years of
experience in banking and finance,
companies and societies will be eligible
as promoters to setup small banks.
o NBFCs, microfinance institutions and
local area banks can convert their
operations into small bank.
o Local focus and ability to serve smaller
customers – key criteria to license
suchbanks.
• For branch expansion prior approval
required (for initial 3 years)
• Area of operation - contiguous
districts in a homogenous cluster of
states or UTs (union territories) so,
small bank has ‘local feel and culture’. If
needed their area would be expanded.
• Primarily under take basic banking
activities.
o Cannot setup subsidiaries for non-
banking financial services activities.
o Initial stabilization period of 5 years
and after a review, RBI may liberalize
thescope of activities for small banks.
• Promoters’ other financial and non-
financial services activities, if any,
should bedistinctly ring forced and not
co-mingled with banking business.
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ECONOMY 2021
• Robust risk management framework
required. Banks would be subjected to
allprudential norms and RBI regulations
which apply to existing commercial
banksincluding CRR and SLR
maintenance.
• Regarding concentration of area of
operations - diversified portfolio of
loans spreadover bank's area of
operation would be needed.
• Maximum loan size and investment
limit to single group borrowers/ issuers
- 15% ofcapital funds.
• Loan and advances of upon `25 lakh
primarily to micro enterprise, should
constitute atleast 50% of loan portfolio.
• For first 3 years - 25% of branches –
in unbanked rural areas.
Payment Banks
• Objective - increase financial
inclusion by providing small saving
accounts, paymentremittance services to
migrant laborer, low income
households, small businesses,
otherunorganized sector entities and
other users by enabling high volume -
low valuetransactions in deposits and
payments/remittance services in a
secured technology –driven
environment.
• Example – Vodafone m-pesa, Airtel
money
Who can promote the payment banks?
• Non-bank PPIs, NBFCs, corporate’s,
mobile telephone companies, super
market chains, real sector cooperatives
companies and public sector entities.
Even banks can take equity in Payments
Banks.

• They can accept demand deposits
(current account and savings account)
• Initially can hold maximum balance
of 100, 000 per customer RBI, can
enhance this limit leased on
performance.
• They can offer payments and
remittance services, issuance of prepaid
paymentinstruments, internet learning,
functioning as correspondent for other
banks.
• They cannot setup subsidiaries to
undertake NBFC business.
• Just like small banks they cannot
comingle there financial and non-
financial serviceswith the banking
business.
• To differentiate them from other
banks, they would be required to use the
word‘payments’ in their name.
• No credit lending is allowed for
Payment banks.
• The float funds can be parked only in
less than one-year G-secs
BUSINESS CORRESPONDENT
• The RBI has allowed banks to appoint
entities and individuals as agents for
providingbasic banking services in
remote areas where they can’t practically
start a branch. These agents are called
business correspondents.
• BCs are considered as practical
solutions to extend basic banking
services to the nearly 600000 village
habitations in the country. Business
Correspondents are henceinstrumental
in facilitating financial inclusion in the
country.
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ECONOMY 2021
What are BCs?
• Business Correspondents are retail
agents engaged by banks for providing
bankingservices at locations other than a
bank branch/ATM. BCs enable a bank to
provide itslimited range of banking
services at low cost. They hence are
instrumental in promotingfinancial
inclusion.
What are the functions of BCs?
• BCs have to do a variety of functions
viz, identification of borrowers,
collection of small value deposit,
disbursal of small value credit, recovery
of principal / collection ofinterest, sale
of micro insurance/ mutual fund
products/ pension products/ other
thirdparty products and receipt and
delivery of small value remittances/
other paymentinstruments, creating
awareness about savings and other
products, education andadvice on
managing money and debt counseling,
etc.
What types of products can be
provided by BCs?
• As per the RBI guidelines the
products provided by BCs are: Small
Savings Accounts,Fixed Deposit and
Recurring Deposit with low minimum
deposits, Remittance to any
BCcustomer, Micro Credit and General
Insurance.
• The BC model allows banks to
provide door-step delivery of services
especially ‘cash in – cash out’
transactions at a location much closer to
the rural population, thus addressing
the last-mile problem.
 ECONOMY 2021

Who can act as BCs?
• The RBI has provided a long list of
entities and persons who can act as BCs.
Initially the entities permitted to act as
BCs included registered entities like
NGOs/ MFIs.
• Later, the list expanded to include
individuals like retired bank employees,
retiredteachers, retired government
employees and ex-servicemen,
individual owners of kirana/ medical
/Fair Price shops, individual Public Call
Office (PCO) operators, agents of Small
Savings schemes of Government of
India/Insurance Companies, individuals
who own Petrol Pumps, authorized
functionaries of well-run Self-Help
Groups (SHGs) which are linked to
banks.
• Any other individual including those
operating Common Service Centers
(CSCs) are also allowed to act as BCs of
banks.
UNIVERSAL PAYMENT
INTERFACE (UPI)
• Now raising new funds for new
projects in these sectors becomes
difficult.
• These sectors - responsible for major
portion of Bank's NPAs
• Eased norms of RBI for banks to take
care of ALM -
a) Banks can raise fund through long-
term bonds. (maturity period - not < 7
years)
b) Such bonds exempted from regulating
norms (CRR, SLR and PSL)
c) They were to use to finance long term
projects in Infrastructure, core sector
andaffordable housing. (loans eligible
under PSL)
d) 5/25 structure - Banks can extend
long term loans with flexible structuring
to absorb
potential adverse contingencies. Under
5/25 structure, bank may fix
longeramortization period (25 years)
with periodic refinancing (every 5 years)

UPI is a payment system that allows NON-RESIDENT INDIAN

money transfer between any two bank DEPOSITS (NRI DEPOSITS)
accounts by using a smartphone. UPI Foreign Exchange Management
allows a customer to pay directly from a (Deposit) Regulations, 2000 permits
bank account to different merchants, Non-Resident Indians (NRIs) to have
both online and offline, without the deposit accounts with authorized dealers
hassle of typing credit card details, IFSC and with banks authorized by the
code, or net banking/wallet passwords. Reserve Bank of India (RBI) which
ALM (ASSET-LIABILITY include:
MANAGEMENT) OF BANKS 1) Foreign Currency Non-Resident
• In recent times banks are facing (Bank) Account [FCNR(B) Account]
asset-liability management problem 2) Non-Resident External Account (NRE
because of longterm loans forwarded to Account)
certain sectors like infrastructure, core
sector and real estate sector. 3) Non-Resident Ordinary Rupee
Account (NRO Account)

108

• FCNR (B) accounts can be opened by
NRIs and Overseas Corporate Bodies
(OCBs) with an authorized dealer. The
accounts can be opened in the form of
term deposits.
• Deposits of funds are allowed in
Pound Sterling, US Dollar, Japanese Yen
and Euro. Rate of interest applicable to
these accounts are in accordance with
the directives issued by RBI from time to
time.
• NRE accounts can be opened by NRIs
and OCBs with authorized dealers and
with banks authorized by RBI. These can
be in the form of savings, current,
recurring or fixed deposit accounts.
Deposits are allowed in any permitted
currency.
• NRO accounts can be opened by any
person resident outside India with an
authorized dealer or an authorized bank
for collecting their funds from local
bonafide transactions in Indian Rupees.
• When a resident becomes an NRI, his
existing Rupee accounts are designated
as NRO.
These accounts can be in the form of
current, savings, recurring or fixed
depositaccounts. There were two more
NRI deposit accounts in operation, viz
Non-Resident (Non-Repatriable)
Rupee Deposit Account and Non-
Resident (Special) Rupee Account—
an amendment to Foreign Exchange
Management (Deposit) Regulations, in
2002, discontinued the acceptance of
deposits in these two accounts from
April 2002 onwards.
Repatriation of funds in FCNR (B) and
NRE accounts is permitted. Hence,
deposits in these accounts are included
in India’s external debt outstanding.
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ECONOMY 2021
While the principal of NRO deposits is
non-repatriable, current income and
interest earning is repatriable.
Account-holders of NRO accounts are
permitted to annually remit an amount
up to US$ 1 million out of the balances
held in their accounts. Therefore,
deposits in NRO accounts too are
included in India’s external debt.
GOVERNMENT BUDGETING
INTRODUCTION
• This is one of the very important
topics for Prelims.
• You have to focus on various
terminologies and concepts mostly from
Indian Budget
Document.
• They are more or less present in news
throughout the year hence to
understand theeconomy related news;
one should be very well versed with such
concepts.
• Our focus through this document is to
create dimensions and clear concepts.
WHAT IS A GOVERNMENT
BUDGET?
A government budget is a statement of
expected expenditure of the government
and thesources of financing the
expenditure during a financial year.
Such an exercise is undertaken much
before the financial year starts. The
statement details all expenditures to be
incurred during the coming financial
year and the sources of meeting this
expenditure.
In India, government budget is normally
presented in the Parliament in the
month of February every year. The

budget of a government is a summary of
the item-wise intended/expected
revenues and anticipated expenditures
of the government during a fiscal
year/financial year.
Budget is prepared, keeping in view the
general policy of government towards
the welfare of people.
• Budget is presented before both the
house of the Parliament on a date fixed
byPresident of India
• The General Budget is presented in
Lok Sabha by the Minister of Finance.
The ‘Annual Financial Statement’ is laid
on the Table of Rajya Sabha at the
conclusion of the speech of the Finance
Minister in Lok Sabha.
• Responsibility of budget presentation
is with President of India.
• The receipts and disbursements are
shown under three parts in which
Government accounts are kept viz.,
Consolidated Fund, Contingency Fund
and Public Account.
• The Annual Financial Statement
distinguishes the expenditure on
revenue account from the expenditure
on other accounts, as is mandated in the
Constitution of India. TheRevenue and
the Capital sections together, therefore
make the Union Budget.
MAIN ELEMENTS OF THE
BUDGET
• It is a statement of estimates of
government receipts and expenditure.
• Budget estimates pertain to a fixed
period, generally a year.
• Expenditure and sources of finance
are planned in accordance with the
objectives of the government.
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ECONOMY 2021
• It requires to be approved (passed) by
Parliament or Assembly or some other
authority before its implementation.
Ministry of Finance consist of
• Department of Economic Affairs
• Department of Expenditure
• Department of Revenue
• Department of Investment and Public
Asset Management (DIPAM)
• Department of Financial
ServicesBudget is prepared by Budget
Division of Department of Economic
Affairs.
The Budget documents presented to
Parliament comprise, besides the
Finance Minister's Budge Speech, the
following:
• Annual Financial Statement (AFS)
• Demands for Grants (DG)
• Finance Bill
• Statements mandated under Fiscal
Responsibility and Budget Management
Act, 2003
o Macro-economic framework
Statement
o Fiscal Policy Strategy Statement
o Medium Term Fiscal Policy Statement
• Expenditure Budget
• Receipts Budget
• Expenditure Profile
• Memorandum Explaining the
Provisions in the Finance Bill
• Budget at a glance
• Outcome Budget

Financial Bill
• At the time of presentation of the
Annual Financial Statement before
Parliament, aFinance Bill is also
presented detailing the imposition,
abolition, remission, alteration
orregulation of taxes proposed in the
Budget. A Finance Bill is a Money Bill as
defined inArticle 110 of the Constitution.
Consolidated Fund of India
(Article 266)
• Consolidated Fund of India is the
most important of all government
accounts. Revenues received by the
government and expenses made by it,
excluding the exceptional items, are part
of the Consolidated Fund.
• This fund was constituted under
Article 266 (1) of the Constitution of
India. All revenues received by the
government by way of direct taxes and
indirect taxes, money borrowed and
receipts from loans given by the
government flow into the Consolidated
Fund of India.
• All government expenditure is made
from this fund, except exceptional items
which are met from the Contingency
Fund or the Public Account. No money
can be withdrawnfrom this fund without
the Parliament’s approval.
Contingency Fund of India (Article
267)
• Contingency Fund is created as an
imprest account to meet some urgent or
unforeseen expenditure of the
government.
• This fund was constituted by the
government under Article 267 of the
Constitution ofIndia. This fund is at the
disposal of the President.
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ECONOMY 2021
• Any expenditure incurred from this
fund requires a subsequent approval
from the parliament and the amount
withdrawn is returned to the fund from
the ConsolidatedFund.
Public Account
• Public Account of India accounts for
flows for those transactions where the
government is merely acting as a
banker.
• This fund was constituted under
Article 266 (2) of the Constitution. It
accounts for flows for those transactions
where the government is merely acting
as a banker.
• Examples of those are provident
funds, small savings and so on. These
funds do notbelong to the government.
• They have to be paid back at some
time to their rightful owners. Because of
this nature of the fund, expenditures
from it are not required to be approved
by the Parliament.
Demands for Grants (Article 113)
• Estimated expenditure from the
Consolidated Fund of India included in
the AnnualFinancial Statement are
submitted in the form of Demands for
Grants.
• Demands for Grants are presented to
the Lok Sabha along with the Annual
FinancialStatement and required to be
voted by the Lok-Sabha
• Generally, one Demand for Grant is
presented in respect of each Ministry
orDepartment. However, more than one
Demand may be presented for a
Ministry orDepartment depending on
the nature of expenditure

• In regard to Union Territories
without Legislature, a separate Demand
is presented foreach of the Union
Territories.
OBJECTIVES OF A GOVERNMENT
BUDGET
In a mixed economy like ours, the
government plays a significant role
along with the private sector. The three
major functions served by this
presentation of estimates.
• Allocation function: Public goods
(national defense, roads, government
administration, measures of lower air
pollution, etc.) can’t be provided by
Market Mechanism (transaction
between individuals).
• Distribution function: Government
can alter income distribution by making
transferpayments and collecting taxes,
therefore affecting personal disposable
income ofhouseholds. Thus, through its
tax and expenditure policy government
tries to achieve afair income distribution
in society.
• Stabilization function: Fluctuations in
economy may lead to inflation
andunemployment. Government policy
measures to stabilize domestic economy.
COMPONENTS OF THE
GOVERNMENT BUDGET
There is a constitutional requirement in
India (Article 112) to present before the
Parliament a statement of estimated
receipts and expenditures of the
government in respect of every financial
year which runs from 1 April to 31
March. This ‘Annual Financial
Statement’ constitutes the main budget
document. Further, the budget must
distinguish expenditure on the revenue
account from other expenditures.
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ECONOMY 2021
Therefore, the budget comprises of the
(a) Revenue Budget and the (b) Capital
Budget.
The Revenue Budget
The Revenue Budget shows the current
receipts of the government and the
expenditure that can be met from these
receipts.
Revenue Receipts: Revenue receipts are
divided into tax and non-tax revenues.
Tax Revenue:
• Tax revenues consist of the proceeds
of taxes and other duties levied by the
centralgovernment. Tax revenues, an
important component of revenue
receipts, comprise of
direct taxes – which fall directly on
individuals (personal income tax) and
firms(corporation tax), and indirect
taxes like excise taxes (duties levied on
goods producedwithin the country),
customs duties (taxes imposed on goods
imported into andexported out of India)
and service tax.
• Excise taxes are the single largest
revenue earner. Other direct taxes like
wealth tax, gift tax and estate duty (now
abolished) have never been of much
significance in terms of revenue yield
and have thus been referred to as ‘paper
taxes’.
Non Tax Revenue:
• Non Tax Revenue includes interest
receipts on loans given by central
government,dividends or profits in
investment of government, fees & other
receipts for servicesrendered by
government. Also, cash grants-in-aid
received from foreign countries
andinternational organizations.
 ECONOMY 2021

Revenue Expenditure: • Effective Revenue Deficit= Difference

Expense other than creation of physical
or financial assets of central
government, which means expenditure
for normal functioning of government
departments (day to day working)
• Interest payments on debt taken by
government
• Grants to state government and
others (even for creation of assets).
Revenue Deficit:
• If the balance of total revenue
receipts and total revenue expenditures
turns out to benegative it is known as
revenue deficit, a new fiscal terminology
used since the fiscaL1997–98 in India.
• Revenue deficit= Revenue
expenditure – Revenue receipts
Effective Revenue Deficit
• Revenue expenditures include all the
grants which the Union Government
gives to the state governments and the
UTs—some of which create assets
(though these assets are not owned by
the Government of India but the
concerned state governments and the
UTs).
• According to the Finance Ministry
(Union Budget 2011–12), such revenue
expenditures contribute to the growth in
the economy and therefore, should not
be treated as unproductive in nature like
other items in the revenue expenditures.
• And on this logic, a new methodology
was introduced to capture the ‘effective
revenue deficit’, which is the Revenue
Deficit ‘excluding’ those revenue
expenditures of the Government of India
which were done in the form of GoCA
(grants for creation ofcapital assets).
between Revenue deficit and Grants for
creation of capital assets
Capital Budget of Government of
India:
Assets and liabilities of central
government. Changes occurring capital
is considered, shows capital
requirements of government and
pattern of their financing.
Capital Receipts:
Receipts creating liabilities and reducing
financial assets. These are:
• Market Borrowings: Loans raised
from public.
• Treasury Bills: Borrowings from RBI
and other commercial banks and FIs
throughtreasury bills.
• Loans received from foreign
government and international
organization.
• Recoveries of loans granted by central
government.
• Small savings in PO savings account,
National Saving Certificate, etc.
• Provident Fund
• PSU disinvestment (receipts from
salepf share in Public Sector
Undertakings).Capital
Expenditure:Expense which result in
creation of physical or financial asset.
Reduction in financial liabilities.
They are:
• Expenditure on Land acquisition,
building machinery, equipment.
• Investment in shares

113

• Loans & advances by Central
government to states and UTs, PSUs or
others.
Fiscal Deficit
• When balance of the government’s
total receipts (i.e., revenue + capital
receipts) andtotal expenditures (i.e.,
revenue + capital expenditures) turns
out to be negative, itshows the situation
of fiscal deficit, a concept being used
since the fiscal 1997–98 inIndia.
• The situation of fiscal deficit indicates
that the government is spending beyond
itsmeans. To be simpler, we may say
that the government is spending more
than itsincome.
• Fiscal Deficit = Total expenditure –
(Revenue receipts+ Non-debt creating
capitalreceipts)
Primary Deficit
• The fiscal deficit excluding the
interest liabilities for a year is the
primary deficit, a term India started
using since the fiscal 1997–98. It shows
the fiscal deficit for the year in which the
economy had not to fulfill any interest
payments on the different loans
andliabilities which it is obliged to,
shown both in quantitative and
percentage of GDPforms.
• Primary Deficit= Fiscal deficit –
Interest payment
Monetized Deficit
• The part of the fiscal deficit which
was provided by the RBI to the
government in aparticular year is
Monetized Deficit, this is a new term
adopted since 1997–98 in India.
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ECONOMY 2021
BUDGET DEFICIT
• When a government spends more
than it receives by the way of revenue, it
is known as the budget deficit.
• The difference between revenue
expenditure and revenue receipts is
known as the
revenue deficit.
• The difference between the
government’s total expenditure and its
total receiptsexcluding borrowing is
known as the fiscal deficit.
• The growth of revenue deficit as a
percentage of fiscal deficit points to a
deterioration in the quality of
government expenditure involving lower
capital formation.
• Government deficit can be reduced by
an increase in taxes or/and reduction
inexpenditure.
• Public debt is burdensome if it
reduces the future growth in terms of
output.
• Budget deficit Total Expenditure -
Total Receipts
DEFICIT FINANCING
Deficit financing is the budgetary
situation where expenditure is higher
than the revenue. It is a practice adopted
for financing the excess expenditure
with outside resources. The expenditure
revenue gap is financed by either
printing of currency or through
borrowing.
Need of Deficit Financing
The idea and need of deficit financing
was felt in the late 1920s. Government
needs to spend more money than it was
expected to earn or generate in a

particular period, to go for a desired
level of growth and development. To
realize the socio-political goals as per
the aspirations of the public policy. Once
the growth had taken place, the extra
money spent above the income would
have been reimbursed or repaid.
Means of Deficit Financing
1. External Aids are the best money as a
means to fulfill a government’s deficit
requirements even if it is coming with
soft interest. If they are coming without
interest nothing could be better.
2. External Borrowings are the next best
way to manage fiscal deficit with the
condition that the external loans are
comparatively cheaper and long-term.
External Borrowings are better than the
internal borrowings due to two reasons.
• External borrowing brings in foreign
currency/hard currency which gives
extra edge tothe government spending
as by this the government may fulfill its
developmentalrequirements inside the
country as well as from outside the
country.
• It is preferred over the internal
borrowings due to ‘crowding out effect’.
If thegovernment itself goes on
borrowing from the banks of the
country, from where willothers borrow
for investment purposes?
3. Internal Borrowings come as the third
preferred route of fiscal deficit
management. But going for it in a huge
way hampers the investment prospects
of the public and the corporate sector.
4. Printing Currency is the last resort for
the government in managing its deficit.
But it has the biggest handicap that with
it the government cannot go for the
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ECONOMY 2021
expenditures which are to be made in
the foreign currency. Even if the
government is satisfied on this front,
printing fresh currencies does have
other damaging effects on the economy:
• It increases inflation proportionally.
(India regularly went for it since the
early 1970s and usually had to bear
double digit inflations.)
• It brings in regular pressure and
obligation on the government for
upward revision inwages and salaries of
government employees- ultimately
increasing the governmentexpenditures
necessitating further printing of
currency and further inflation—a
viciouscycle into which economies
entangle themselves.
Government deficit can be reduced by
an increase in taxes or reduction in
expenditure.
• In India, the government has been
trying to increase tax revenue with
greater reliance
on direct taxes (indirect taxes are
regressive in nature, they impact all
income groupsequally).
• Govt. is trying to raise money through
the sale of shares in PSUs. However, the
majorthrust has been towards reduction
in government expenditure.
• In case of a budget deficit, i.e., when
Govt. cannot meet its expenses from the
taxrevenue. So it borrows money by
selling treasury bills or government
securities to RBI,which issues currency
to the government in return. The
government then pays for itsexpenses
with this money. The money thus
ultimately comes into the hands of
thegeneral public. If budget deficit is

financed by raising money then,
inflation may rise.
TYPES OF BUDGETING
1. Performance Budgeting
• A performance budget reflects the
goal/objectives of the organization and
spells out its performance targets.
• These targets are sought to be
achieved through a strategy. Unit costs
are associatedwith the strategy and
allocations are accordingly made for
achievement of theobjectives.
• A Performance Budget gives an
indication of how the funds spent are
expected to give outputs and ultimately
the outcomes.
• However, performance budgeting has
a limitation – it is not easy to arrive at
standardunit costs especially in social
programmes, which require a multi-
pronged approach.
2. Zero-based Budgeting
• The basic purpose of ZBB is phasing
out of programmes/activities, which do
not haverelevance anymore. ZBB is done
to overhaul the functioning of the
governmentdepartments and PSUs so
that productivity can be increased and
wastage can beminimized. Scarce
government resources can be deployed
efficiently. Therefore, ZeroBased
Budgeting is followed for rationalization
of expenditure.
• The concept of zero-based budgeting
was introduced in the 1970s. As the
namesuggests, in the process every
budgeting cycle starts from scratch.
• Unlike the earlier systems, where
only incremental changes were made in
theallocation, under zero-based
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budgeting every activity is evaluated
each time a budget ismade and only if it
is established that the activity is
necessary, funds are allocated to it.
• Under the ZBB, a close and critical
examination is made of the existing
governmentprogrammes, projects and
other activities to ensure that funds are
made available tohigh priority items by
eliminating outdated programmes and
reducing funds to the lowpriority items.
• Governmental programmes and
projects are appraised every year as if
they are new and funding for the
existing items is not continued merely
because a part of the project cost has
already been incurred.
3. Programme Budgeting
• Programme budgeting aimed at a
system in which expenditure would be
planned andcontrolled by the objective.
The basic building block of the system
was classification ofexpenditure into
programmes, which meant objective-
oriented classification so
thatprogrammes with common
objectives are considered together.
4. Programme and Performance
Budgeting System (PPBS)
• PPBS went much beyond the core
elements of programme budgeting and
was muchmore than the budgeting
system. It aimed at an integrated
expenditure managementsystem, in
which systematic policy and expenditure
planning would be developed andclosely
integrated with the budget. Thus, it was
too ambitious in scope.
• Neither was adequate preparation
time given nor was a stage-by-stage
approachadopted. Therefore, this
attempt to introduce PPBS in the federal

government in USAdid not succeed,
although the concept of performance
budgeting and programmebudgeting
endured.
• Many governments today use the
“programme budgeting” label for their
performancebudgeting system. As
pointed out by Marc Robertson, the
contemporary influence ofthe basic
programme budgeting idea is much
wider than the continuing use of the
label.
It is defined in terms of its core elements
as mentioned above.
Programmebudgeting isan element of
many contemporary budgeting systems
which aim at linking funding andresults.
5. Outcome Budget
With effect from Financial Year 2007-
08, the Performance Budget and the
Outcome Budget hitherto which were
presented to Parliament separately by
Ministries/Departments, were merged
and presented as a single document
titled "Outcome Budget" in respect of
each Ministry/ Department.
From Financial Year 2017-18 onwards,
Department of Expenditure in the
Ministry of Finance in collaboration
with NITI Aayog is preparing the
consolidated Outcome Budget for all
Ministries and Departments. The
Outcome Budget broadly indicates the
outcomes of the financial budget of a
Ministry/Department, indicating actual
deliverables linked with outlays
targetted during the year and in the
medium term.
• The Outcome Budget is a progress
card on what various ministries and
departmentshave done with the outlay
announced in the annual budget.
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• It is a performance measurement tool
that helps in better service delivery;
decisionmaking; evaluating programme
performance and results;
communicating programme goals; and
improving programme effectiveness.
• The Outcome Budget is likely to
comprise scheme- or project-wise
outlays for all central ministries,
departments and organizations during
2005-06 listed against corresponding
outcomes (measurable physical targets)
to be achieved during the year.
• It measures the development
outcomes of all government
programmes. The OutcomeBudget,
however, will not necessarily include
information of targets already achieved.
• This method of monitoring flow of
funds, implementation of schemes and
the actualresults of the usage of the
money is followed by many countries.
6. Gender Budgeting
• The 2005-06 Budget introduced a
statement highlighting the gender
sensitivities of the budgetary allocations.
• Gender budgeting is an exercise to
translate the stated gender
commitments of thegovernment into
budgetary commitments, involving
special initiatives for
empoweringwomen and examination of
the utilization of resources allocated for
women and theimpact of public
expenditure and policies of the
government on women.

BALANCED AND UNBLANCED
BUDGETS
A. Balanced Budgeting
• A Balanced Budget is that budget in
which Government receipts are equal
toGovernment expenditure.
Merits of the Balanced Budget
• The Government does not indulge in
wasteful expenditure.
• Interference in economic functioning
of the system is totally avoided by the
government generally.
• Financial stability is ensured with
balanced budget.
• However, balanced budget is not an
achievement of the government when
economy is in a state of depression for at
that time, government is expected to
increase itsexpenditure with a view to
increasing aggregate demand.
Demerits of a Balanced Budget
• Balanced budget does not offer any
solution to the problem of
unemployment duringdepression.
• Balanced budget is not helpful to the
growth and development programmes of
the less developed countries.
B. Unbalanced Budgeting
• An unbalanced budget is that budget
in which receipts and expenditure of
thegovernment are not equal.
• In this, two cases concerning surplus
Budget and Deficit Budget arise.
• In Surplus Budget, Government
receipts are greater than Government
expenditures.
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While in the case of Deficit Budget,
Government expenditures are greater
thanGovernment receipts.
Merits of a Deficit Budget
• It helps in addressing the problem of
unemployment during depressions.
• It is conducive for growth and
development in less developed countries
• It works towards social welfare of the
people.
Demerits of Deficit Budget
• It shows wasteful expenditure by the
government.
• It shows less revenue realization in
comparison with the expenditure.
• It increases debt burden of the
government.
FISCAL POLICY
Fiscal policy has been defined as ‘the
policy of the government with regard to
the level of government purchases, the
level of transfers, and the tax structure’.
Fiscal policy is also defined as ‘changes
in government expenditures and taxes
that are designed to achieve
macroeconomic policy goals’ (such as
growth, employment, investment, etc.).
Therefore, we say that ‘fiscal policy
denotes the use of taxes and government
expenditures’.
Let us first discuss the taxes and their
impact on the economy:
• Taxes have a direct bearing on
people’s income affecting their levels of
disposableincomes, purchase of goods
and services, consumption and
ultimately their standard ofliving

• Taxes directly affect the savings of
individuals, families and firms which
affectinvestment in the economy—as
investment affects the output (GDP)
thereby influencingthe per capita
income
• Taxes affect the prices of goods and
services as factor cost (production cost)
is affected thereby affecting incentives
and behavior of economic activities,
etc.Government expenditures
affect/influence the economy in two
ways:
• There is some expenditure on
government purchases of goods and
services, for example construction of
roads, railways, ports, food grains, etc.,
in the goods category and salary
payments to government employees in
the services category; and
• There is some expenditure due to
government’s income support, to the
poor, unemployed and old-age people
FISCAL CONSOLIDATION
Fiscal consolidation is a process where
government’s fiscal health is getting
improved and is indicated by reduced
fiscal deficit. Improved tax revenue
realization and better aligned
expenditure are the components of fiscal
consolidation as the fiscal deficit reaches
at a manageable level.
According to Financial time’s lexicon,
“Fiscal consolidation is a reduction in
the underlying fiscal deficit. It is not
aimed at eliminating fiscal debt.”
In India, fiscal deficit is the king
indicator to show the fiscal health of the
government.
Effectively, fiscal deficit indicates the
amount of government borrowing for
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that particular year. Excess fiscal deficit
produces some adverse effects. For the
government it causes interest payment
burden and for the economy it produces
inflationary effect, and rising interest
rate in the economy.
INDIAN TAX STRUCTURE
Taxes are classified under two categories
namely direct and indirect taxes.
The largest difference between these
taxes is their implementation. Direct
taxes are paid by the assessee while
indirect taxes are levied on goods and
services.
DIRECT TAX
• If the impact and incidence lies on
same point it is called as direct tax.
• Direct taxes are progressive in nature
Income Tax
• It is the tax that is levied on your
earning in a financial year. There are
many facets toincome tax, such as the
tax slabs, taxable income, tax deducted
at source (TDS), reduction of taxable
income, etc. The tax is applicable to both
individuals and companies.
• For individuals, the tax that they have
to pay depends on which tax bracket
they fall in.
• Amounts invested in certain
investments like Employee Provident
Fund, Public Provident Fund, Tax saving
Fixed Deposits, are also eligible for
deduction under section 80C upto
Rs.1,50,000 per year.
• One of the bodies that overlook these
direct taxes is the Central Board of
Direct Taxes (CBDT) which is a part of
the Department of Revenue. It has, to
help it with its duties, the support of

various acts that govern various aspects
of direct taxes.
Capital Gains Tax
• It is a direct tax.
• It applies on the sales of all ‘assets’ if
a profit (gain) has been made by the
owner of the asset a tax on the ‘gains’
one gets by selling assets.
The tax has been classified into
two:
Short Term Capital Gain
• It applies ‘if the asset has been sold
within 36 months of owning it’.
• ‘Rate’ of this tax is similar to the
normal income tax slab.
• Period is ‘12 months’ in cases of
shares, mutual funds, units of the UTI
and ‘zerocoupon bond’—in this case the
‘rate’ of this tax is 15 per cent.
Long Term Capital Gain
• It applies ‘if the asset has been sold
after 36 months of owning it’.
• ‘Rate’ of this tax is 20 per cent.
• In cases of shares, mutual funds,
units of the UTI and ‘zero coupon bond’
there is‘exemption’ (zero tax) from this
tax.
Securities Transaction Tax
• It’s no secret that if you know how to
trade properly on the stock market, and
trade insecurities, you stand to make a
substantial amount of money. This too is
a source of income but it has its own tax
which is known as the Securities
Transaction Tax.
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Perquisite Tax
• Perquisites are all the perks or
privileges that employers may extend to
employees. These privileges may include
a house provided by the company or a
car for your use, given to you by the
company. These perks are not just
limited to big compensation like cars
and houses;they can even include things
like compensation for fuel or phone
bills. How this tax is levied is by figuring
out how that perk has been acquired by
the company or used by theemployee.
• In the case of cars, it may be so that a
car provided by the company and used
for both personal and official purposes is
eligible for tax whereas a car used only
for officialpurposes is not.
Corporate Tax
• This tax is paid by the companies
registered under company law in India
on the net profit that it makes from
businesses. It is taxed at a specific rate
as prescribed by the income tax act
subject to the changes in the rates every
year by the IT department.
• India’s statutory rate for corporate
tax is 22 per cent now, down from 30
per cent. Theglobal average corporate
tax rate is 23.79 now, and the Asian
average is 21.09 per cent.
Minimum Alternate Tax
• It is a tax imposed on companies,
which escaped corporate tax net or pay
very low tax by using the provisions of
exemptions, deductions, and incentives
etc., which are called Zero Tax
Companies. It was introduced in 1996 -
97.
• In case, total income of the company
after availing all eligible deductions is
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less than 30% of the book profits, the • GST is one indirect tax for the entire
company shall be charged to a minimum country.
tax as a percentage of total income. This
is to ensure that companies pay at least • It is a uniform value-added tax on
a minimum amount of tax. goods and services throughout the
country.
• It is applicable on all companies
except those engaged in infrastructure • There are GSTs namely State GST
and powersectors, free trade zones, and Central GST and Integrated GST for
charitable activities, and venture and inter-state trade
angel funds. • GST is applicable to whole of India.
• Foreign companies with income The following is the list of indirect taxes
sources in India also come under it. in the pre-GST regime:
Dividend Distribution Tax • Central Excise Duty
• Dividend Distribution Tax was • Duties of Excise
introduced after the end of 2007’s Union
Budget. It isbasically a tax levied on • Additional Duties of Excise
companies based on the dividend they • Additional Duties of Customs
pay to their investors. This tax is
applicable on the gross or net income an • Special Additional Duty of Customs
investor receives from their investment.
• Cess
Currently, the DDT rate stands at 15%.
• State VAT
INDIRECT TAX
• Central Sales Tax
Goods and Services Tax (GST)
• Purchase Tax
GST stands for Goods and Service Tax.
It is a kind of tax imposed on sale, • Luxury Tax
manufacturing and usage of goods and
services. Goods and Service Tax is • Entertainment Tax
applied on services and goods at a • Entry Tax
national level with a purpose of
achieving overall economic growth. • Taxes on advertisements
• Goods & Services Tax Law in India is • Taxes on lotteries, betting, and
a comprehensive, multi-stage, gambling
destination-based tax that is levied on
All these taxes have been replaced with
every value addition.
Central GST, State GST, and Integrated
• In simple words, Goods and Service GST.
Tax is an indirect tax levied on the
Advantages of GST
supply of goods and services. GST Law
has replaced many indirect tax laws that • It simplifies the indirect-tax structure
previously existed in India. in India. It will decrease cost of tax
administration

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• Different GST slabs ranging from 0%
to 28% make indirect taxes progressive
• Creating a single market will help the
business and industry by bringing down
the cost of business
• Cascading effect of tax-on-tax is
removed
• There will be no competition between
states to reduce tax and attract
investment.
• In the long-term, prices of
commodities will come down, thus
benefitting the endcustomer.
GST COUNCIL
The GST council consists of the
following members:
• Union finance minister (Chairman)
• Union minister of state in-charge of
revenue or finance
• Minister of finance or any other
minister nominated by each state
government to GSTcouncil
The GST Council makes
recommendations on the following:
• Taxes, cesses, and surcharges to be
included under the GST
• Goods and services which will be
subject to, or exempt from GST
• Rates of GST (5%, 12%, 18%, 28%)
• GST laws, principles of levy,
apportionment of IGST and principles
associated with place of supply
• Special provisions with respect to the
eight north eastern states, Himachal
Pradesh, Jammu and Kashmir, and
Uttarakhand and other associated
matters.
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• Other matters pertaining to the
implementation and regulation of GST
in India.
• Every decision of the GST Council
shall be taken at a meeting by a majority
of not less than 3/4th of the weighted
votes of the Members present and
voting.
• The vote of the Central Government
shall have a weightage of 1/3rd of the
votes cast and the votes of all the State
Governments taken together shall have a
weightage of 2/3rd of the total votes cast
in that meeting.
• One half of the total number of
members of the GST Council shall
constitute the quorum at its meetings.
Composition Scheme
• Small taxpayers can get rid of tedious
GST formalities and pay GST at a fixed
rate ofturnover. This scheme can be
opted by any taxpayer whose turnover is
less than Rs. 1.0 crore.
• For special category States (except
J&K and UK) limit is Rs. 75 lakh
• They are required to file quarterly
returns.
• Uniform Tax rate is 1%
Goods and Services Tax Network
(GSTN)
• It is a Section 8 (under new
companies Act, not for profit companies
are governed under section 8), non-
Government, private limited company.
It was incorporated on March 28, 2013.
• The Government of India holds
24.5% equity in GSTN and all States of
the Indian Union, including NCT of
Delhi and Puducherry, and the

Empowered Committee of State Finance
Ministers (EC), together hold another
24.5%.
• Balance 51% equity is with non-
Government financial institutions. The
Company has been set up primarily to
provide IT infrastructure and services to
the Central and State Governments, tax
payers and other stakeholders for
implementation of the Goods and
Services Tax (GST).
• The Authorised Capital of the
company is Rs. 10,00,00,000 (Rupees
ten crore only).
TAX EXPENDITURE
• There is significant divergence in
India between the official rates of taxes
and the actual or effective rate of
taxation because of tax exemptions.
• Tax expenditure is also known as
revenue foregone.
• But such forgone taxes do not
necessarily mean that they have been
waived off by the government. It should
be interpreted as incentives given by the
govt. to promote certain sectors, in
absence of which they may not have
come up.
• High tax expenditure simply means
complex tax system. The tax expenditure
can bebrought down by simplification in
tax system and improvements in the tax
administration.
• The level of tax expenditure is slated
to fall steeply once the GST is ‘fully’
operationalized in the country.
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METHODS OF TAXATION
Progressive Taxation
• If tax rate increase with the increase
in size of tax base, it is called progressive
tax.
• Progressive taxation helps to ensure
economic equality in the society.
• Indian income tax is a typical
example of it. The idea here is less tax on
the people who earn less and higher tax
on the people who earn more—
classifying income earners into different
slabs.
• This tax is pro-poor.
Regressive Taxation
• If tax rate decreases with the increase
in the tax base it is called regressive tax.
• As for example, to promote the
growth and development of small scale
industries, India at one time had
regressive excise duty on their
productions—with increasing slabs of
volume they produced, the burden of tax
used to go on decreasing.
• It rewards higher producer or
income-earners and punishes poor and
low-producers.
• Used rarely and only for specific
intended outcomes.
Proportional Taxation
• Tax levied as a % of tax base
irrespective of size of tax base, at a
uniform rate is called as proportional
tax.
• Here the % of tax rate remains the
same but the absolute amount of tax
increases with increase in size of tax
base.
 ECONOMY 2021

• Such taxes have fixed rates for every • any other instruments so declared by
level of income or production, they are the central government.
neutral from the poor or rich point view
or from the point of view of the levels of • Capital Issues (Control) Act, 1947
production • Securities Contracts (Regulation) Act,
• Indirect taxes usually follow 1956
proportional taxation. • Companies Act, 1956
SECURITY MARKET • Repeal of Capital Issues (Control)
The present capital market Act, 1992
scenario features SEBI Act, 1992 to:
• an advanced regulatory environment • protect interest of investors
• steadily increasing market • promote development of securities
capitalisation market
• better allocation and mobilisation of • regulate the securities market
resources
SEBI has powers
• a rapidly developing derivatives
market • to investigate and examine
companies
• a robust mutual fund industry
• to visit their premises
• increased issuer transparency.
• to inspect records and personnel and
As per the Securities Contracts
(Regulation) Act, 1956, securities • to impose penalties that are
include commensurate with any misconduct.

• shares PRIMARY AND SECONDARY

MARKETS
• bonds
The primary market is concerned with
• scrips the floatation of new issues of shares or
• stocks bonds. The firms floating new issues to
raise funds may be new companies or
• other marketable securities of like existing companies planning
nature in or of any incorporate company expansions.
or body corporate
The primary market is where securities
• government securities are created. It's in this market that firms
sell (float) new stocks and bonds to the
• derivatives of securities public for the first time.
• units of collective investment scheme • For our purposes, you can think of
• interest and rights in securities the primary market as the market where
an initial public offering (IPO) takes
• security receipt place. Simply put, an IPO occurs when a

124

private company sells stocks to the
public for the first time. The primary
market is also the market where
governments or public sector
institutions raise money through bond
offerings.
• The important thing to understand
about the primary market is that
securities are purchased directly from an
issuing company.
• The secondary market commonly
referred to as the "stock market." This
includes the New York Stock Exchange
(NYSE), Nasdaq and all major
exchanges around the world. The
defining characteristic of the secondary
market is that investors trade among
themselves.
• That is, in the secondary market,
investors trade previously issued
securities without the issuing
companies' involvement. For example, if
you go to buy Microsoft stock, you are
dealing only with another investor who
owns shares in Microsoft. Microsoft is
not directly involved with the
transaction.
STOCK EXCHANGE
National Stock Exchange of India
Ltd (NSE)
• The National Stock Exchange (NSE)
is the leading stock exchange in India
and the fourth largest in the world by
equity trading volume in 2015,
according to World Federation of
Exchanges (WFE).
• It began operations in 1994 and is
ranked as the largest stock exchange in
India in terms of total and average daily
turnover for equity shares every year
since 1995, based on annual reports of
SEBI.
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Bombay Stock Exchange (BSE)
• The first and largest securities market
in India, the Bombay Stock Exchange
(BSE) was established in 1875 as the
Native Share and Stock Brokers'
Association.
• Based in Mumbai, India, the BSE lists
close to 6,000 companies and is one of
the largest exchanges in the world. The
BSE has helped develop the country's
capital markets, including the retail debt
market, and helped grow the Indian
corporate sector.
LEGISLATION TO CONTROL
SECURITY MARKET IN INDIA
The four main legislations
governing “the securities markets
are:
• the SEBI Act, 1992 WHich establishes
SEBI to protect investors and develop
and regulate securities market;
• the Companies Act, 1956, which sets
out the code of conduct for the corporate
sector in relation to issue, allotment and
transfer of securities, and disclosures to
be made in public issues;
• the Securities Contracts (Regulation)
Act, 1956, which provides for regulation
of transactions in securities through
control over stock exchanges; and
• the Depositories Act, 1996 which
provides for electronic maintenance and
transfer ofownership of demat
securities.
SECURITIES CONTRACTS
(REGULATION) ACT, 1956
• It provides for direct and indirect
control of virtually all aspects of
securities trading and the running of
stock exchanges and aims to prevent

undesirable transactions in securities. It
gives Central Government regulatory
jurisdiction over (a) stock exchanges,
through a process of recognition and
continued supervision, (b) contracts in
securities, and (c) listing of securities on
stock exchanges.
• As a condition of recognition, a stock
exchange complies with conditions
prescribed by Central Government.
Organised trading activity in securities
takes place on a specified recognised
stock exchange. The stock exchanges
determine their own listing regulations,
which have to conform to the minimum
listing criteria set out in the Rules.
COMPANIES ACT, 1956
• It deals with issue, allotment and
transfer of securities and various aspects
relating tocompany management. It
provides for standards of disclosure in
public issues of capital,particularly in
the fields of company management and
projects, information about otherlisted
companies under the same
management, and management
perception of risk factors. It also
regulates underwriting, the use of
premium and discounts on issues, rights
and bonus issues, payment of interest
and dividends, supply of annual report
and other information.
COMPANIES ACT, 2013
• The Companies Act 2013 is an Act of
the Parliament of India which regulates
incorporation of a company,
responsibilities of a company, directors,
dissolution of a company.
• The Act has replaced The Companies
Act, 1956 (in a partial manner) after
receiving the assent of the President of
India on 29 August 2013.
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• The Act came into force on 12
September 2013 with few changes like
earlier privatecompanies maximum
number of member was 50 and now it
will be 200. A new term of "one person
company" is included in this act that will
be a private company and with only 98
provisions of the Act notified.
New concepts
• One Person Companies (OPC)
• Women Directors (second proviso to
sec 149(1) or 149 subsection read with
rule 3 ofcompanies (appointment and
qualifications of directors rules, 2014)
• Corporate Social Responsibility
• Registered Valuers
• Rotation of Auditors
• Class Action
• Dormant Company sec 455(1)
• Fast Track Mergers
• Serious Fraud Investigation Office
• One Person Company is a company
with only one person as a member. That
one person will be the shareholder of the
company. It avails all the benefits of a
private limited company such as
separate legal entity, protecting personal
assets from business liability, and
perpetual succession. One Person
Company (OPC) is a Company
registered with ONLY ONE PERSON as
its shareholder. An OPC is classified as a
private company under Companies Act.
• Woman Director: Every Listed
Company and Public Company with paid
up capital of Rs 100 Crores or more /
Public Company with turnover of Rs
300 Crores or more shall have at least
one Woman Director.

• Corporate Social Responsibility
Clause (135): Every company having net
worth of rupees five hundred crore or
more, or turnover of rupees one
thousand crore or more or a net profit of
rupees five crore or more during any
financial year shall constitute a
Corporate Social Responsibility
Committee of the Board consisting of
three or more directors, out of which at
least one director shall be an
independent director
SECURITIES AND EXCHANGE
BOARD OF INDIA (SEBI)
The Securities and Exchange Board of
India (SEBI) is the regulator for the
securities market in India.
DEPOSITORIES ACT, 1996
• The Depositories Act, 1996 provides
for the establishment of depositories in
securities with the objective of ensuring
free transferability of securities with
speed, accuracy and security by
(a) making securities of public limited
companies freely transferable subject to
certainexceptions; (b) dematerialising
the securities in the depository mode;
and (c) providing for maintenance of
ownership records in a book entry form.
In order to streamline thesettlement
process, the Act envisages transfer of
ownership of securities electronically by
book entry without making the
securities move from person to person.
• The Act has made the securities of all
public limited companies freely
transferable, restricting the company’s
right to use discretion in effecting the
transfer of securities, and the transfer
deed and other procedural requirements
under the Companies Act have been
dispensed with.
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PREVENTION OF MONEY
LAUNDERING ACT, 2002
• The primary objective of the Act is to
prevent money-laundering and to
provide forconfiscation of property
derived from or involved in money-
laundering. The term moneylaundering
is defined as whoever acquires, owns,
possess or transfers any proceeds of
crime; or knowingly enters into any
transaction which is related to proceeds
of crime either directly or indirectly or
conceals or aids in the concealment of
the proceeds or gains of crime within
India or outside India commits the
offence of money-laundering.
• Besides providing punishment for the
offence of money-laundering, the Act
also provides other measures for
prevention of Money Laundering. The
Act also casts an obligation on the
intermediaries, banking companies etc.
to furnish information, of such
prescribed transactions to the Financial
Intelligence Unit-India, to appoint a
principal officer, to maintain certain
records etc.
FORWARD MARKET
COMMISSION
Note- FMC has been merged with SEBI
in 2015. Merger of Forward Market
Commission and SEBI
• In the first ever merger of two
regulators, commodities regulatory body
Forward Markets Commission (FMC)
merged with the capital markets
watchdog SEBI.
• This merger between the SEBI and
the FMC was planned by the Congress
Government and has its roots in the
Union Budget 2014-15
 ECONOMY 2021

• The merger was precipitated with the the market or those being policed. From
National Spot Exchange Ltd. scam, that perspective, this will be a challenge
which involved a payment crisis of more for SEBI too.
than Rs. 5000 crore. This was
considered a regulatory failure by the • This merger is not just a reversal of a
trend but also a pointer to the way in
FMC. which regulatory structures in India’s
financial markets are set to change.
• The merger was done to improve the
market regulation in the country, in turn
improving business environment.
• The FMC has been regulating
commodities markets since 1953, but
lack of powers has led to wild
fluctuations and alleged irregularities
remaining untamed in this market
segment. This is the first major case of
two regulators being merged.
Revamped Role of SEBI:
• The commodity futures market in
India is now supervised by SEBI,
making for an integrated regulation of
both the securities and commodities
markets in India.
• SEBI was set up in 1988 as a non-
statutory body for regulating the
securities markets, while it became an
autonomous body in 1992 With fully
independent powers.
• FMC, on the other hand, has been
regulating commodities markets since
1953, but lack of powers has led to wild
fluctuations and alleged irregularities
remaining untamed in this market
segment.
• This merger is a key test as the
proposed merger of the insurance and
pension regulators will hinge on the
success of this.
• What counts ultimately is the quality
of regulation and the credibility and
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FOREIGN INVESTMENT
FOREIGN DIRECT INVESTMENT
(FDI)
A foreign direct investment (FDI) is an
investment in the form of a controlling
ownership in a business in one country
by an entity based in another country. It
is thus distinguished from a foreign
portfolio investment by a notion of
direct control.
These are intended to liberalise and
simplify the FDI policy so as to provide
ease of doing business in the country. In
turn, it will lead to larger FDI inflows
contributing to growth of investment,
income and employment. Foreign Direct
Investment (FDI) is a major driver of
economic growth and a source of non-
debt finance for the economic
development of the country.
As per current Foreign Direct
Investment (FDI) policy in defence
sector notified by The Department for
Promotion of Industry and Internal
Trade (DPIIT), Ministry of Commerce &
Industry, FDI upto 49% is allowed
under automatic route and beyond 49%
through Government route wherever it
is likely to result in access to modern
technology or for other reasons to be
recorded.
Investment climate in India has
improved considerably since the
opening up of the economy in 1991.
This is largely attributed to ease in FDI
norms across sectors of the economy.
India, today is a part of top 100 club on
Ease of Doing Business (EoDB) and
globally ranks 1St in the greenfield FDI
ranking. India received the record FDI
of $ 60.1 bn in 2016-17.
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ECONOMY 2021
India received the highest-ever FDI
inflow of $64.37 billion during the fiscal
ended March 2019.
According to the Annual Report 2018-19
of the Department for Promotion of
Industry and Internal Trade (DPIIT),
foreign direct investments (FDI) worth
$286 billion were received in the
country in past five years.
Foreign Investment Facilitation
Portal
• The Foreign Investment Promotion
Board (FIPB) was replaced by the
Foreign Investment Facilitation Portal
(FIFP) to speed up the FDI inflow and to
increase the transparency in the FDI
approvals in the country. FIFP replaced
FIPB in May, 2017.
• The Foreign Investment Facilitation
Portal (FIFP) is the new online single
point interface of the Government of
India for investors to facilitate Foreign
Direct Investment. This portal is being
administered by the Department for
Promotion of Industry and Internal
Trade (DPIIT),
Ministry of Commerce & Industry.
• This portal will continue to facilitate
the single window clearance of
applications which are through approval
route. Upon receipt of the FDI
application, the concerned
Administrative Ministry/Department
shall process the application as per the
Standard Operation Procedure (SOP).
National Investment and
Infrastructure Fund
• The proposed corpus of NIIF is Rs.
40,000 Crores (around USD 6 Billion).
GOI’s contribution to the NIIF shall be

49% of the total commitment at any
given point of time.
• NIIF has been mandated to solicit
equity participation from strategic
anchor partners, like overseas
sovereign/quasi-
sovereign/multilateral/bilateral
investors.
• Two companies viz. NIIFTL, the
trustee of the fund and NIIFL, the
investment management company were
incorporated in 2015.
• A Governing Council has been set up
under the chairmanship of the union
Finance Minister to act as an advisory
council to NIIF.
• The NIIF is India’s first sovereign
wealth fund
FOREIGN PORTFOLIO INVESTOR
(FPI)
Foreign Institutional Investor (FII)
means an institution established or
incorporated outside India which
proposes to make investment in
securities in India. They are registered
as FIIs in accordance with Section 2 (f)
of the SEBI (FII) Regulations 1995. FIIs
are allowed to subscribe to new
securities or trade in already issued
securities.
However, FII as a category does not
exist now. It was decided to create a new
investor class called "Foreign Portfolio
Investor" (FPI) by merging the existing
three investor classes viz. FIIs, Sub
Accounts and Qualified Foreign
Investors. Accordingly, SEBI (Foreign
Portfolio Investors) Regulations, 2014
were notified on January 07, 2014
followed by certain other enabling
notifications by Ministry of Finance and
RBI.
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ECONOMY 2021
In order to ensure the seamless
transition from FII regime to FPI
regime, it was decided to commence the
FPI regime with effect from June 1, 2014
so that the requisites systems and
procedures are in place before migration
to the new FPI regime.
In India, the term “Foreign Portfolio
Investor” refers to FIIs or their sub-
accounts, or qualified foreign investors
(QFIs).
• Portfolio Investment by any single
investor or investor group cannot exceed
10% of the equity of an Indian company,
beyond which it will now be treated as
FDI.
• FIIs, Sub-Accounts and QFIs are
merged together to form the new
investor class, namely Foreign Portfolio
Investors, with an aggregate investment
limit of 24% which can be raised by the
Company up to the applicable sectoral
cap.
• All existing FIIs and Sub Accounts
can continue to buy, sell or otherwise
deal in securities under the FPI regime.
• All existing Qualified Foreign
Investors (QFIs) may continue to buy,
sell or otherwise deal in securities only
till the period of one year from the date
of notification of the FPI Regulation. In
the meantime, they have to obtain FPI
registration.
• Non-Resident Indians (NRIs) and
Foreign Venture Capital Investors
(FVCI) are excluded from the purview of
this definition.
• FPIs are permitted to invest in
Government Securities with a minimum
residual maturity of one year. However,
FPIs have been prohibited from
investing in T-Bills.

• FPI can invest in privately placed
bonds if it is listed within 15 days.
QUALIFIED FOREIGN
INVESTORS (QFIS)
The Qualified Foreign Investor (QFI) is
sub-category of Foreign Portfolio
Investor and refers to any foreign
individuals, groups or associations, or
resident, however, restricted to those
from a country that is a member of
Financial Action Task Force (FATF) or a
country that is a member of a group
which is a member of FATF and a
country that is a signatory to
International Organization of Securities
Commission’s (IOSCO) Multilateral
Memorandum of Understanding
(MMOU).
QFI scheme was introduced by
Government of India in consultation
with RBI and SEBI in the year 2011,
through a Union Budget announcement.
The objective of enabling QFIs is to
deepen and infuse more foreign funds in
the Indian capital market and to reduce
market volatility as individuals are
considered to be long term investors, as
compared to institutional investors.
QFIs are allowed to make investments in
the following instruments by opening a
demat account in any of the SEBI
approved Qualified Depository
Participant (QDP):
• Equity and Debt schemes of Indian
mutual funds,
• Equity shares listed on recognized
stock exchanges,
• Equity shares offered through public
offers
• Corporate bonds listed/to be listed on
recognized stock exchanges
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ECONOMY 2021
• G-Securities, T-Bills and Commercial
Papers
QFIs do not include FIIs/Sub-accounts/
Foreign Venture Capital Investor
(FVCI).
PARTICIPATORY NOTES (P-
NOTES)
P-Notes or Participatory Notes are
Overseas Derivative Instruments that
have Indian stocks as their underlying
assets. They allow foreign investors to
buy stocks listed on Indian exchanges
without being registered. The
instrument gained popularity as FIIs, to
avoid the formalities of registering and
to remain anonymous, started betting
on stocks through this route.
Participatory notes are the financial
instruments through which individual
foreign investors or hedge funds who do
not want to disclose their identity can
invest in Indian markets, otherwise
registration with SEBI is a must to get
an exposure into Indian equities.
• Registered foreign institutional
investors (FIIs), foreign banks and
brokerages based in India issue P-notes
to foreign investors and invest in Indian
stocks on their behalf. Any dividends or
capital gains collected from the
underlying securities go back to the
investors.
• While a common investor has to fill
up several KYC (know your customer)
forms, provide PAN number and proof
of address, etc, a P-Note investor can
invest anonymously. This makes it a
'legal' way to route unaccounted wealth
in Indian equities, thus feeding the black
money monster.
• Other than politicians, bureaucrats or
business-persons, even terror financiers

are feared to misuse the P-Note route to
fulfill illegal objectives.
• A flurry of suggestions SIT made to
tackle the black buck menace, including
cancelling the participation in the
Indian markets by way of P-notes
altogether.
• Taking cues from the suggestions,
SEBI has now made it mandatory for the
P-Notes holders to adhere to Indian
Know your customer (KYC) or anti-
money laundering (AML) norms.
• SEBI has also put curbs on the
transfer-ability of P-notes between two
foreign investors.
Further, it has also increased the
frequency of reporting by P-notes
issuers.
• Brokerage Angel Broking said the
new set of rules is likely to tighten the
round tripping of money by Indian
investors, but might see some slowdown
in the incremental funds flow in to
Indian markets.
• The brokerage, however, believed
foreign investors with a long term
horizon in India should have no issues
adhering to the new set of norms.
Concerns
• The primary reason why P-Notes are
worrying is because of the anonymous
nature of the instrument as these
investors could be beyond the reach of
Indian regulators. Further, there is a
view that it is being used in money
laundering with wealthy Indians, like
the promoters of companies, using it to
bring back unaccounted funds and to
manipulate their stock prices.
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ECONOMY 2021
Measures
• SEBI has taken a number of steps to
tighten rules on P-Notes.
• From January 2011, FIIs have had to
follow KYC norms and submit details of
transactions.
• In 2014, new rules on foreign
portfolio investors (FPIs) made it
mandatory for those issuing PNotes to
submit a monthly report disclosing their
portfolios. This led to a decline in the
number of entities issuing P-Notes.
• More recently, SEBI mandated that in
addition to KYC, the anti-money
laundering rules (AML) will also be
applicable to P-Note holders. Earlier, a
P-Note holder had to adhere to KYC or
AML norms of just their home
jurisdiction.
• SEBI also issued norms on
transferability of P-Notes between two
foreign investors and increased the
frequency of reporting by P-Note
issuers.
• In a recent development, SEBI issued
circular banning FPIs from issuing
Participatory Notes for investing in
equity derivatives.
• At the same time, FPIs can issue PNs
to overseas investors if the equity
derivativesinvestments are used for
hedging the equity shares held by them.
This means that a foreign investor can
make investment in equity derivatives
only if he purchases an equal value of
shares in the cash segment.
• Effectively, this step will help to avoid
speculative investment by foreign
investors using PN in derivatives.

• SEBI also instructed ODI-issuing
FPIs to liquidate such ODI instruments
prior to the timeline of 2020.
Participatory Notes (PNs) are associated
with which one of the following?
a) Consolidated Fund of India
b) Foreign Institutional Investors
c) United Nations Development
Programme
d) Kyoto Protocol
INSURANCE IN INDIA
Insurance industry in India has seen a
major growth in the last decade along
with an introduction of a huge number
of advanced products. Insurance sector
in India plays a dynamic role in the
wellbeing of its economy. It substantially
increases the opportunities for savings
amongst the individuals, safeguards
their future and helps the insurance
sector form a massive pool of funds.
With the help of these funds, the
insurance sector highly contributes to
the capital markets, thereby increasing
large infrastructure developments in
India. The Indian Insurance Sector is
basically divided into two categories –
Life Insurance and Non-life Insurance.
The Non-life Insurance sector is also
termed as General Insurance. Both the
Life Insurance and the Non-life
Insurance is governed by the IRDAI
(Insurance Regulatory and Development
Authority of India). This government
organization thoroughly monitors the
entire insurance sector in India and also
acts like a custodian of all the insurance
consumer rights. This is the reason all
the insurers have to abide by the rules
and regulations of the IRDAI.
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ECONOMY 2021
INSURANCE REGULATORY AND
DEVELOPMENT AUTHORITY
(IRDA)
The Insurance Regulatory and
Development Authority of India (IRDAI)
is an autonomous, statutory agency
tasked with regulating and promoting
the insurance and re-insurance
industries in India.
• It was constituted by the Insurance
Regulatory and Development Authority
Act, 1999, an Act of Parliament passed
by the Government of India.
• The agency's headquarters are in
Hyderabad, Telangana, where it moved
from Delhi in 2001.
• IRDAI is a 10-member body
including the chairman, five full-time
and four part-time members appointed
by the government of India.
SIGNIFICANCE OF SOCIAL
SECURITY AND INSURANCE
Article 41 of Directive Principles in
Indian constitution asks the state to
“within the limits of its economic
capacity and development,” make
effective provision for securing the right
to work, to education and to public
assistance in cases of unemployment,
old age, sickness and disablement, and
in other cases of undeserved want.”
Article 42 says the state shall make
provisions for securing just and humane
conditions of work and for maternity
benefits.
Significance of social security and
insurance cover:
• High cost of out of pocket
expenditure on health in India means
families lying above the BPL falling into

the BPL category in wake of illness
because of lack of any social security.
• Presence of large unorganized sector.
Many surveys suggest that only that in
the formal sector, 8 per cent of India’s
workforce, enjoys social security. Over
91 percent of workers, over 39.5 crore
workers, are in the informal sector.
Recently launched schemes and
plans:
• Atal Pension Yojana- which caters
mainly to the people who are part of
unorganized sector.
• Jeevan Jyoti Yojana
• National Pension Scheme and
Pradhan Mantri Suraksha Bima Yojana
• Pradhan Mantri Jan Dhan Yojana-
Leading to financial inclusion making
insurance policies and social security
schemes to reach to the poor.
• Maternity Benefit Act providing
social security to women.
Are they effective?
• Schemes like PMJDY have proved to
be a successful one as millions of
Indians have created bank accounts
under it. Similarly, Pradhan Mantri
Fasal Bima Yojana is a scheme which
has been one of the most comprehensive
insurance schemes.
However, the implementation and
structure of above schemes are not very
effective because of following issues:
• Bureaucratic delays and
administrative apathy.
• Multiplicity of schemes.
• Lack of awareness among the needy
ones.
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ECONOMY 2021
• Banking professional not sensitive to
needs of poor when it comes to
insurance schemes and generating
awareness. India spends 1.4 percent of
its GDP on social protection, among the
lowest in Asia, far lower than China, Sri
Lanka, Thailand, and even Nepal. Also
only 17% of Indians have insurance.
Given the significance and importance
of these schemes India needs to bring in
national insurance policy.
HEDGE FUND
Hedge funds are alternative investments
using pooled funds that employ
numerous different strategies to earn
active return for their investors.
A hedge fund is a pool of money that
takes both short and long positions,
buys and sells equities, initiates
arbitrage, and trades bonds, currencies,
convertible securities, commodities and
derivative products to generate returns
at reduced risk. As the name suggests,
the fund tries to hedge risks to investor's
capital against market volatility by
employing alternative investment
approaches.
One aspect that has set the hedge fund
industry apart is the fact that hedge
funds face less regulation than mutual
funds and other investment vehicles.
INITIAL PUBLIC OFFER (IPO)
• Initial public offering is the process
by which a private company can go
public by sale of its stocks to general
public. It could be a new, young
company or an old company which
decides to be listed on an exchange and
hence goes public.
• Companies can raise equity capital
with the help of an IPO by issuing new
shares to the public or the existing

shareholders can sell their shares to the
public without raising any fresh capital.
Going public raises a great deal of
money for the company in order for it to
grow and expand. Private companies
have many options to raise capital –
such as borrowing, finding additional
private investors, or by being acquired
by another company. But, by far, the
IPO option raises the largest sums of
money for the company and its early
investors. Some of the largest IPO’s to
date are:
ANGEL INVESTORS AND
VENTURE CAPITALISTS
• Angel investors invest mostly as
individuals, while venture capitalists are
structuredcompanies comprising of
several individual investors.
• Angel investors invest their own
money into businesses, but venture
capitalists invest money contributed by
several investors.
• Because they are individuals, angel
investors are usually unable or unwilling
to fundbusinesses that require huge
funds. Venture capitalists, on the other
hand can fundbusinesses that require
millions of dollars, since they are
holding funds from severalindividuals.
• Angel investors may be willing to
“hands-off” your business if they have
nothing relevant, aside the capital to
contribute. But venture capitalists will
always require board seats and complex
deal terms including the ability to
control subsequent financings.
• Angel investors tend to believe in the
entrepreneur and invest in them as a
person. Venture capitalists, being less
emotional and more process involved,
mainly evaluate deals and make offers.
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ECONOMY 2021
• An angel investor fund businesses for
motives beyond financial gains (such as
socialresponsibility and community
involvement). A venture capitalist is
obligated to maximize investors’ returns
and outperform other venture
capitalists; in order to attract even
moreinvestors.
• Angels tend to avoid follow-up
investments out of fear of losing more
money if the business fails. Venture
capitalists, on the other hand, usually
invest additional funds at later stages to
assist with growth.
• Angel investors are found in virtually
all industries, and they have diversified
portfolios. Venture capitalists are
involved in limited industries (mostly
technology and infrastructure), and they
have limited portfolios.
GSTIN
• It is a 15-digit number.
• First Two Digits represent State Code
and next 10 digit is PAN number.
Goods are classified under the HSN
Code and Services are classified under
the SAC (Services Accounting Code)
Code.
• Based on the HSN or SAC code, GST
rates have been fixed harmonized
System ofNomenclature or HSN, is a 6-
digit uniform code allotted to over 5000
goods and is universally accepted.
• It was Conceived and developed by
World Customs Organization (WCO) in
order to classify goods from all over the
world in a systematic way and facilitates
international trade.
• WCO 182 Members, three-quarters of
which are developing countries, are
 ECONOMY 2021

responsible for managing more than • This notional / virtual currency

98% of world trade. would be used by the exporters to make
the payment of GST /IGST on the goods
• India is a member of World Customs imported / procured by them so their
Organization (WCO). funds are not blocked.
• In India, there are 2 more digits • Before GST regime, exporters used to
added to these 6 for further get ab-initio exemptions from duties.
classification. But now they have to pay first and then
• HSN/SAC codes must be declared in seek refund.
every tax invoice issued by the taxpayer • GST Council deferred the
under GST. implementation of the e-Wallet scheme
E-WAY BILL by 6 months i.e., upto 01.10.2018 but
this deadline has not been met.
E-way bill is an electronic way bill for
movement of goods which can be STANDARD FOR AUTOMATIC
generated on the GSTN portal. EXCHANGE OF FINANCIAL
ACCOUNT
• A ‘movement’ of goods of more than
Rs 50,000 in value cannot be made by a INFORMATION IN TAX MATTERS
registered person without an e-way bill. The Standard requires financial
• In the 26th meeting, the GST Council institutions to report information on
has recommended the introduction of e- accounts held by nonresident
way bill for inter-State movement of individuals and entities (including trusts
goods across the country from 1St April and foundations) to their tax
2018 to track inter-State movement of administration.
goods above the value of Rs. 50,000. • The tax administration then securely
• For intra-State movement of goods, transmits the information to the account
e-way bill system will be introduced holders’countries of residence on an
w.e.f. a date to be announced in a annual basis.
phased manner but not later than 01St • It is developed by G-20 and OECD.
June, 2018.
• Government of India has joined the
• E-way bill is being touted as anti- Multilateral Competent Authority
evasion measure that would help boost Agreement (MCAA) for Automatic
tax collection by clamping down on the Exchange of Information as per
trade that currently happens on cash Common Reporting Standard (CRS).
basis.
• The Multilateral Competent
E-WALLET SCHEME UNDER GST Authority Agreement (MCAA) is a
• The e-Wallet scheme is basically the multilateral frameworkagreement that
creation of electronic e-Wallets. Under provides a standardized and efficient
the e-wallet mechanism, a notional mechanism to facilitate the automatic
credit would be transferred to exporters’ exchange of information in accordance
accounts based on their past record. with the Standard for Automatic

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Exchange of Financial Information in
Tax Matters (the Standard).
• It avoids the need for several bilateral
agreements to be concluded
ANGEL TAX
As per Income Tax Act, Any
consideration received by a company
(startup) from a resident, against issue
of shares, exceeds the fair market value
of such shares; such excess
consideration will be taxable in the
hands of the startup, as an income.
BENAMI TRANSACTIONS
(PROHIBITION) AMENDED ACT,
2016
The amended law empowers the
specified authorities to provisionally
attach benami properties which can
eventually be confiscated.
• If a person is found guilty of offence
of benami transaction by the competent
court, he shall be punishable with
rigorous imprisonment for a term not
less than one year which may extend to 7
years and shall also be liable to fine
which may extend to 25% of the fair
market value of the property
• The benami properties attached
include deposits in bank accounts and
immovable properties
ADVANCE PRICING
AGREEMENTS (APA)
An APA is a contract, usually for
multiple years, between a taxpayer and
at least one tax authority specifying the
pricing method that the taxpayer will
apply to its related-company
transactions.
These programmes are designed to help
taxpayers voluntarily resolve actual or
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ECONOMY 2021
potential transfer pricing disputes in a
proactive, cooperative manner, as an
alternative to the traditional
examination process.
• The Government has introduced the
Advance Pricing Agreement (APA)
Scheme through Finance Act, 2012
• An APA is an agreement between the
Central Board of Direct Taxes and tax
payers, which determines, in advance,
the arm's length price or specifies the
manner of the determination of arm's
length price (or both), in relation to an
international transaction between
associated enterprises for the period
specified in the APA.
• The APA Scheme endeavours to
provide tax certainty to taxpayers in the
field of transfer pricing through an
agreement in advance.
• Arm’s Length Price of an
international transaction between
associated enterprises means price
charged independently as if they are not
associated or related.
• An APA can be unilateral, bilateral, or
multilateral.
• Central Board of Direct Taxes (CBDT)
achieves important milestone of 200
Advance Pricing Agreements.
TAX BUOYANCY
Tax buoyancy is an important indicator
of the efficiency and responsiveness of
tax revenue mobilisation to GDP growth.
It is calculated as a ratio of percentage
growth in tax revenues to growth in
nominal GDP for a given year. Tax is
said to be buoyant if the gross tax
revenues increase more than
proportionately in response to a rise in
GDP figures.
 ECONOMY 2021

• The average buoyancy in personal

income tax of seven years preceding the
financial years 2016-17 and 2017-18
comes to 1.1.
• In simple terms tax buoyancy of 1.1
means that if nominal GDP growth rate
of the country is 10%, the growth rate of
personal income tax is 11%. However,
the buoyancy in personal income tax for
-financial years 2016-17 and 2017-18
(RE) is 1.95 and 2.11 respectively.
• This indicates that the excess revenue
collected in the last two financial years
from personal income tax compared to
the average buoyancy pre 2016-17 and
the same can be attributed to the strong
anti-evasion measures taken by the
Government.
REVENUE NEUTRAL RATE (RNR)
• The term revenue neutral rate (RNR)
refers to that single rate, which
preserves revenue at desired (current)
levels.
• The RNR Committee had estimated a
base of Rs.68.8 lakh crore and the GST
Council had estimated a base of Rs.65.8
lakh crore.
• Current data suggest that the GST tax
base (excluding exports) is Rs.65-70
lakh crore, broadly similar to these two
previous estimates.
• Based on the average collections in
the first few months, the implied
weighted average collection rate
(incidence) is about 15.6%. So, as
estimated by the RNR committee, the
single tax rate that would preserve
revenue neutrality is between 15 to 16%.

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