1.

National income - preparation - concepts- comparisons

What is National Income?

The total value of final goods and services produced by the normal residents during an
accounting year, after adjusting depreciation.

 It is Net National Product (NNP) at Factor Cost (FC)

 It does not include taxes, depreciation and non-factor inputs (raw materials)
Domestic Income – Total value of final goods and services produced within a domestic
territory during an accounting year, after adjusting depreciation.

 It is NDP at FC
 Both NNP and NDP can be measured at constant prices (real income) or market prices
(nominal income)
 Domestic Income + NFIA = National Income
 Factor Cost
 Factor cost refers to the cost of factors of production viz, rent of land, interest of
capital, interest of capital wages for compensation of employees for labour and
profit for entrepreneurship.
FC = MP – Indirect taxes + Subsidies
Market Price
 Market Price is the price that customers actually pay. It includes the component of
indirect taxes and of subsidies. Accordingly, when indirect taxes are deducted and
subsides added to the market price, we get the value of national income at factor
cost.
MP = FC + Indirect taxes – Subsidies
GDP (Gross Domestic Product)
 It is the monetary value of all final goods and services produced in a country in a
year.
GDP = C + I + G + NX
Where
C = Consumption
I = Investment
G = Government Expenditure
NX = Net Export
 GDPMP = GNPMP – (X – M)
 GDPFC = GNPFC – (X – M)
Where X is the export and M is
import of a country,
Nominal GDP
 It is the market value of all final goods and services produced within the country.
Real GDP
 It is a measurement of the value of the output economy adjusted for price
changes.
GNP (Gross National Product)
 It is the market value of all products and services produced in one year of a
country (i.e., by labour and property).
GNP = GDP + X – M.
Net National Product (NNP)
 It is the value of GNP after deducting depreciation of plant and machinery.
NNP = GNP – Depreciation
National Income (NI) = NNP – Indirect Taxes + Subsidies
Per-Capita Income (PCI)
 It is the average income (per person) of a country.
Per−Capita Income=National Income
Personal Income (PI)
 It is the income of the residents (individuals) of a country. To calculate personal
income, transfer payments to individuals are added to national income, while
social security contributions, corporate tax and undistributed profits are
subtracted.
Personal = National Income +Income Transfer payments –(Social security contributions
+Undistributed profits of Corporate)
Difference between GDP and GNP
 In GDP, goods and services produced in a country are added, whether it is
produced by residents of the country or foreigners.
 In GNP, the production of foreigners in the country is not included, while the
production of nationals outside the country is included.
Disposable Income (DI)
 It is the income of individuals at their disposal after paying direct tax liabilities.
Disposable = Personal Income –income Direct taxes (e.g., Income Tax)
Green Economy
This is the economy which deals with the environmental risks and ecological scarcity and
also an economy that aims for sustainable development without degrading the environment.
Green GDP
It is the calculation of net natural consumption (i.e., resource depletion, environmental
degradation, protective and restorative environmental initiatives).

Measurement of National Income

There are three methods to measure national income:

Measurement of National Income – Income Method

Estimated by adding all the factors of production (rent, wages, interest, profit) and the mixed-
income of self-employed.

1. In India, one-third of people are self-employed.

2. This is the ‘domestic’ income, related to the production within the borders of the
country

Measurement of National Income – Production Method

Estimated by adding the value added by all the firms.
Value-added = Value of Output – Value of (non-factor) inputs

1. This gives GDP at Market Price (MP) – because it includes depreciation (therefore
‘gross’) and taxes (therefore ‘market price’)
2. To reach National Income (that is, NNP at FC)
o Add Net Factor Income from Abroad: GNP at MP = GDP at MP + NFIA
o Subtract Depreciation: NNP at MP = GNP at MP – Dep
o Subtract Net Indirect Taxes: NNP at FC = NNP at MP – NIT

Measurement of National Income – Expenditure Method

The expenditure method to measure national income can be understood by the equation given
below:
Y = C + I + G + (X-M),
where Y = GDP at MP, C = Private Sector’s Expenditure on final consumer goods, G =
Govt’s expenditure on final consumer goods, I = Investment or Capital Formation, X =
Exports, I = Imports, X-M = Net Exports
Any of these methods can be used in any of the sectors – the choice of the method depends
on the convenience of using that method in a particular sector
National Income

Items Included in National Items not included in National Income

Income

Goods produced for self- Intermediate goods

consumption

Estimated rent of the self- Transfer payments (unilateral payments made without expectations of
occupied property return; like gifts, unemployment allowance, donations, etc)

– Sale and purchase of old goods and existing services (shares are not
included unless they are through an IPO)

– Windfall gains (lottery income)

– Black money (cannot be estimated)

– Work done by housewives

1. A first rough estimate of National Income was done by Dadabhai Naoroji for 1867-
68; published in his book Poverty and Unbritish rule in India (famous for its Drain of
Wealth theory)
2. The first scientific estimate made by Prof V K R V Rao (1931-32)
3. The Indian government estimated the National Income for the first time in 1948-49
through the Ministry of Commerce
4. National Income Committee was set up in 1949 (Chairman – Dr. P C Mahalanobis)
o P C Mahalanobis was also the chairman of Indian Statistical Institute

5. According to the National Income Committee Report (1954), National Income

of India was ₹ 8710 crore and Per Capita Income was ₹ 225 in 1948 – 49.
6. In India, Central Statistical Organisation (1949) now renamed as Central
Statistical Office (CSO) has been formulating National Income.
7. Currently, the National Statistical Office (NSO) estimates National Income
o It publishes National Accounts Statistics annually
o Under the Ministry of Statistics and Programme Implementation
o Now, CSO has been merged with the National Sample Survey Organization to
form the National Statistical Organization
Comparison between India and Other Developing Countries!

We chose China because it had roughly the same per capita income in 1960 as India did. Our
analysis showed that even though China and India are constantly compared, until now, China
has outperformed India across most wealth and health indicators.

We looked at South Korea to get a sense of how India performed compared to a country that
has gone from being a developing to a developed country after 1947.

We used Pakistan to compare progress in a country that shares the same history and culture,
and was formed at the same time as India.

Brazil, one of the BRICS (Brazil, Russia, India, China and South Africa) countries, serves as
a comparison with another emerging economy that is estimated to become one of the largest
in the world over the next 30 years.

We picked Malaysia because it is, like India, multicultural and, although it was more
prosperous than India when independence came, it has weathered significant ethnic tension
and conflict. It represents the unique dynamism of a region, southeast Asia, in close
proximity to India.

In 56 years, Indian income up 21 times, but progress slower than China, Malaysia

India’s Gross Domestic Product (GDP) per capita (current US$)--which is the average
income of each citizen and reflects the well being of the population--increased 21 times from
$81.3 (Rs 1,705) in 1960 to $1709.4 (Rs 1,14,530) in 2016, according to World Bank
estimates. But India made slower progress as compared to China, Malaysia, Brazil and South
Korea.
2. Unemployment - Indian scenario and comparisons.
The unemployment rate in India shot up from 6.5 per cent in March 2021 to 8 per cent in
April 2021, while the employment rate fell from 37.6 per cent in March to 36.8 per cent in
April, says the report of CMIE – Centre for Monitoring Indian Economy.
In 2020, the unemployment rate in India fell to 7% in September 2020 from the record high
of 29% since the country went into lockdown from March 2020, however, it later increased to
9.1% in December 2020.
The unemployment rate again declined to 6.5 per cent in January 2021 from 9.1 per cent in
December 2020, while the employment rate surged to 37.9 per cent as compared to 36.9 per
cent.
The lockdown to contain the coronavirus outbreak has forced many industries to shut down
thus increasing unemployment across the country.
Unemployment is a situation when a person actively searches for a job and is unable to find
work. Unemployment indicates the health of the economy.
The unemployment rate is the most frequent measure of unemployment. The unemployment
rate is the number of people unemployed divided by the working population or people
working under labour force.
Unemployment rate = (Unemployed Workers / Total labour force) × 100
National Sample Survey Organization (NSSO) defines employment and unemployment on
the following activity statuses of an individual. NSSO, an organization under MoSPI –
Ministry of Statistics and Programme Implementation measures India’s unemployment on
three approaches:

1. Daily Status Approach: unemployment status of a person under this approach is

measured for each day in a reference week. A person having no gainful work even for
one hour in a day is described as unemployed for that day.
2. Weekly Status Approach: This approach highlights the record of those persons who
did not have gainful work or were unemployed even for an hour on any day of the
week preceding the date of the survey.
3. Usual Status Approach: This gives the estimates of those persons who were
unemployed or had no gainful work for a major time during the 365 days.

Types of Unemployment in India

In India, there are seven types of unemployment. The types of unemployment are discussed
below:

1. Disguised Unemployment: This is a type of unemployment where people employed

are more than actually needed. Disguised unemployment is generally traced in
unorganised sectors or the agricultural sectors.
2. Structural Unemployment: This unemployment arises when there is a mismatch
between the worker’s skills and availability of jobs in the market. Many people in
India do not get job matching to their skills or due to lack of required skills they do
not get jobs and because of poor education level, it becomes important to provide
them related training.
 3. Seasonal Unemployment: That situation of unemployment when people do not have
work during certain seasons of the year such as labourers in India rarely have
occupation throughout the year.
4. Vulnerable Unemployment: People are deemed unemployed under this
unemployment. People are employed but informally i.e. without proper job contracts
and thus records of their work are never maintained. It is one of the main types of
unemployment in India.
5. Technological Unemployment: the situation when people lose their jobs due to
advancement in technologies. In 2016, the data of the World Bank predicted that the
proportion of jobs threatened by automation in India is 69% year-on-year.
6. Cyclical Unemployment: unemployment caused due to the business cycle, where the
number of unemployed heads rises during recessions and declines with the growth of
the economy. Cyclical unemployment figures in India are negligible.
7. Frictional Unemployment: this is a situation when people are unemployed for a
short span of time while searching for a new job or switching between jobs. Frictional
Unemployment also called Search Unemployment, is the time lag between the jobs.
Frictional unemployment is considered as voluntary unemployment because the
reason for unemployment is not a shortage of jobs, but in fact, the workers themselves
quit their jobs in search of better opportunities.

Causes of Unemployment
The major causes of unemployment in India are as mentioned below:

 Large population.
 Lack of vocational skills or low educational levels of the working population.
 Labour-intensive sectors suffering from the slowdown in private investment
particularly after demonetisation
 The low productivity in the agriculture sector plus the lack of alternative opportunities
for agricultural workers that makes transition among the three sectors difficult.
 Legal complexities, Inadequate state support, low infrastructural, financial and market
linkages to small businesses making such enterprises unviable with cost and
compliance overruns.
 Inadequate growth of infrastructure and low investments in the manufacturing sector,
hence restricting the employment potential of the secondary sector.
 The huge workforce of the country is associated with the informal sector because of a
lack of required education or skills, and this data is not captured in employment
statistics.
 The main cause of structural unemployment is the education provided in schools and
colleges are not as per the current requirements of the industries.
 Regressive social norms that deter women from taking/continuing employment.

Impact Of Unemployment
The unemployment in any nation have the following effects on the economy:

 The problem of unemployment gives rise to the problem of poverty.

  The government suffers extra borrowing burden because unemployment causes a
decrease in the production and less consumption of goods and services by the people.
 Unemployed persons can easily be enticed by antisocial elements. This makes them
lose faith in the democratic values of the country.
 People unemployed for a long time may indulge in illegal and wrong activities for
earning money which increases crime in the country.
 Unemployment affects the economy of the country as the workforce that could have
been gainfully employed to generate resources actually gets dependent on the
remaining working population, thus escalating socio-economic costs for the state. For
instance, a 1 % increase in unemployment reduces the GDP by 2 %.
 It is often seen that unemployed people end up getting addicted to drugs and alcohol
or attempts suicide, leading to losses to the human resources of the country.

Government Initiative To Control Unemployment

Several policies have been initiated by the government to reduce the unemployment problem
in the economy. The policies to reduce unemployment are highlighted below:

 In 1979 the government launched TRYSEM – Training of Rural Youth for Self-
Employment The objective of this scheme was to help unemployed youth of rural
areas aged between 18 and 35 years to acquire skills for self-employment. The
priority under this scheme was given to women and youth belonging to SC/ST
category.
 The Government launched the IRDP – Integrated Rural Development Programme
(IRDP) in the year 1980 to create full employment opportunities in rural areas.
 A new initiative was tried namely RSETI/RUDSETI in 1982 jointly by Sri
Dharmasthala Manjunatheshwara Educational Trust, Canara Bank and Syndicate
Bank. The aim of RUDSETI, the acronym of Rural Development And Self
Employment Training Institute was to mitigate the unemployment problem among the
youth. Rural Self Employment Training Institutes/ RSETIs are now managed by
Banks with active cooperation from the state and central Government.
 The Jawahar Rozgar Yojana (JRY) was started in April 1989 by merging the two
existing wage employment programme i.e. RLEGP – Rural Landless Employment
Guarantee Programme and NREP – National Rural Employment Programme on an
80:20 cost-sharing basis between the state and centre.
 MNREGA – Mahatma Gandhi National Rural Employment Guarantee Act launched
in 2005 providing the right to work to people. An employment scheme of
MGNREGA aimed to provide social security by guaranteeing a minimum of 100 days
paid work per year to all the families whose adult members opt for unskilled labour-
intensive work
 PMKVY – Pradhan Mantri Kaushal Vikas Yojana was launched in 2015. The
objective of PMKVY was to enable the youth of the country to take up industry-
relevant skill training in order to acquire a secured better livelihood.
 The government launched the Start-Up India Scheme in 2016. The aim of Startup
India programmes was to develop an ecosystem that nurtures and promotes
entrepreneurship across the nation.
  Stand Up India Scheme also launched in 2016 aimed to facilitate bank loans to
women and SC/ST borrowers between Rs 10 lakh and Rs. 1 crore for setting up a
greenfield enterprise.
 National Skill Development Mission was set up in November 2014 to drive the ‘Skill
India’ agenda in a ‘Mission Mode’ in order to converge the existing skill training
initiatives and combine scale and quality of skilling efforts, with speed.
 India unemployment rate for 2019 was 5.36%, a 0.03% increase from 2018.
 India unemployment rate for 2018 was 5.33%, a 0.09% decline from 2017.
 India unemployment rate for 2017 was 5.42%, a 0.09% decline from 2016.
 India unemployment rate for 2016 was 5.51%, a 0.05% decline from 2015.

Comparison

India Pakistan China Korea .S Brazil Malaysia

Position 86 118 164 160 54 170
% 8.5% 6% 3.64% 3.76% 11.94% 3.3%
3. Migration - why migration - problem of migration - European crisis

Migration is a way to move from one place to another in order to live and work.
Movement of people from their home to another city, state or country for a job, shelter or
some other reasons is called migration. Migration from rural areas to urban areas has
increased in past few years in India.

Pull Factor:
Peoples are attracted by the pull factor to migrate voluntarily, such as:

 Better economic opportunities

 Better job opportunities
 Better living condition
 Peace and stability
 Security of Life and property
 Pleasant climate
 Better life
 Better services such as better opportunities education, communication &
health services

Push Factors:
The push factors are those factor which compels people to migrate, such as:
 Drought & flood
 Calamities
 Threat of life
  Poverty
 No job or high unemployment
 War, civil war, conflict among people
 Terrorism
 Poor living standard
 Political instability
 Harsh climate
 Natural disaster
 Epidemic
 Social and economic backwardness

Consequences of Migration?
Migration happens in response to the unequal distribution of opportunities( economic,
resources, political, environment, social). This could be both benefits and problems for
the area. For example, City & village both are benefited from migration because the city gets
cheap labor from the village & the village gets capital from labor wages.At the same time,
excess migration in the city creates many problems such as an increase in crime rate, slum
area, scarcity of basic necessities such as drinkable water and house, etc.
Consequences of migration can be seen in the following areas:
 Economic Consequences
 Demographic Consequences
 Social Consequences
 Environmental consequences

Economic Consequences:
 Source region get remittance. India is the largest receiver of remittance in the
world, Kerala, Punjab, Tamil Nadu receive a very large amount of remittance from
abroad.
 Destination region get benefited by cheap labor supply
 Unregulated migration to the metro cities of India created an overcrowding
situation.
 The negative consequence of migration can be seen in the slum area that is
developed in metro cities like Mumbai & Delhi.
Demographic Consequence:
 Redistribution of the population happens through migration.
 Rural demographic structure adversely effected by selective age & skill
migrations
Social Consequence:
 Social change happens through migration, for example, Aryan culture came in
India through Aryan migration.
 New Ideas, New technologies, family values, women's status, all are get
diffused through migration.
  Migration leads to intermixing of ethnicity, race, caste, religion, culture,
language, etc
 Negative consequences: Migration may create intolerance & growth of anti-
social activities.
Environment Consequences:
Overcrowing put pressure on the existing resources
 Pollutions problems
 Groundwater depletion

Impacts of Migration

Migration is becoming a very important subject for the life of cities. Many opportunities and
attraction of big cities pull large numbers of people to big cities. Migration can have positive as
well as negative effects on the life of the migrants.

Positive Impact

 Unemployment is reduced and people get better job opportunities.

 Migration helps in improving the quality of life of people.

 It helps to improve social life of people as they learn about new culture, customs,
and languages which helps to improve brotherhood among people.

 Migration of skilled workers leads to a greater economic growth of the region.

 Children get better opportunities for higher education.

 The population density is reduced and the birth rate decreases.

Negative Impact

 The loss of a person from rural areas, impact on the level of output and
development of rural areas.

 The influx of workers in urban areas increases competition for the job, houses,
school facilities etc.

 Having large population puts too much pressure on natural resources, amenities
and services.

 It is difficult for a villager to survive in urban areas because in urban areas there is
no natural environment and pure air. They have to pay for each and everything.

 Migration changes the population of a place, therefore, the distribution of the

population is uneven in India.

 Many migrants are completely illiterate and uneducated, therefore, they are not
only unfit for most jobs, but also lack basic knowledge and life skills.
  Poverty makes them unable to live a normal and healthy life.

 Children growing up in poverty have no access to proper nutrition, education or

health.

 Migration increased the slum areas in cities which increase many problems such
as unhygienic conditions, crime, pollution etc.

 Sometimes migrants are exploited.

 Migration is one of the main causes of increasing nuclear family where children
grow up without a wider family circle.

Overview of the European Refugee Crisis

The European migrant crisis, also known as the refugee crisis, was a period marked by a large
number of people arriving in mainland Europe. The refugees were primarily from the Middle-
East and North Africa, fleeing the conflicts that were engulfing these regions.
The migrant crisis was part of a pattern of increased forced migration to European
Union from other continents which is thought to have begun in 2014. At its height in
2015, nationalities that made up the majority of the migrants were Syrian, Afghan and Iraqi.
This was confirmed in a United Nations High Commissioner for Refugees (UNHCR) report.
Many refugees that arrived in Italy and Greece came from countries where armed conflict
was ongoing most notable the Syrian Civil War and the Iraqi Conflict
Of the migrants arriving in Europe by sea in 2015, 58% were males over 18 years of
age while 17% were females over 18 and the remaining 25% were under 18.
By 2019 the European Union declared the Refugee Crisis over but large scale efforts to
resettle them are still underway.

Factors that led to the Refugee Crisis

The main causes behind European Refugee crisis are listed below.

1. Wars – Syrian War, Afghanistan war, Iraq war, Libyan war

2. Human Rights Violations
3. Economic hardships.

Currently the main driver behind European refugee crisis is the Syrian war. They are
augmented by millions of refugees from Iraq, Libya, Somalia, Afghanistan, Yemen. Large
number of people arrive in the European Union by crossing Mediterranean Sea or overland
through South East Europe.
4. PPP and population growth

One popular macroeconomic analysis metric to compare economic productivity and standards
of living between countries is purchasing power parity (PPP). PPP is an economic theory that
compares different countries' currencies through a "basket of goods" approach.
Calculating Purchasing Power Parity

S=P1/ P2where:

S= Exchange rate of currency 1 to currency 2

P1= Cost of good X in currency 1

P2= Cost of good X in currency 2

Drawbacks of Purchasing Power Parity

Transport Costs
Goods that are unavailable locally must be imported, resulting in transport costs. These costs
include not only fuel but import duties as well. Imported goods will consequently sell at a
relatively higher price than do identical locally sourced goods.

Tax Differences
Government sales taxes such as the value-added tax (VAT) can spike prices in one country,
relative to another

Government Intervention
Tariffs can dramatically augment the price of imported goods, where the same products in
other countries will be comparatively cheaper.6

Non-Traded Services
The Big Mac's price factors input costs that are not traded. These factors include such items
as insurance, utility costs, and labor costs. Therefore, those expenses are unlikely to be at
parity internationally

Market Competition
Goods might be deliberately priced higher in a country. In some cases, higher prices are
because a company may have a competitive advantage over other sellers. The company may
have a monopoly or be part of a cartel of companies that manipulate prices, keeping them

The population growth of India can be categorized into the following four phases.
Phase 1( 1901-1921):
 Stagnant or stationary phase.
 The population even declined between 1911-1921.
Phase-II:( 1921-1951)
 Period of steady population growth due to improvement in health.
Phase-III( 1951-1981):
 Very high population growth or period of population explosion.
  The average annual rate of 2.2 %
Phase-IV( 1981-present):
 High absolute increment with slowing decadal growth rate
Phase -III( 1951-1981) Population explosion phase:
 The average population growth was 2.2 % yearly growth.
 The following are causes of population explosion in India:
 Rapid fall in mortality rate due to improving living and health standards.
 High fertility rate
 Increase in international migration from Tibet, Bangladesh, Nepal, and
Pakistan.

Population growth effect on PPP.

Relative population growth affects price levels through its effect on money demand and that
in turn impacts Purchasing Power Parity (PPP).

This population growth as one of the factors that affect money demand. The most obvious
channel through which population growth affects demand for money is transaction motive of
holding money. Increase in the number of economic agents in the economy because of high
population growth leads to increase in the transaction demand for money

According to Baumol (1952) and Tobin (1956), there is a positive relationship between the
transaction costs associated with obtaining money and the optimal amount of money held by
individuals. Fair and Dominguez (1991) hypothesized that if the opportunity cost of bank
visits is higher for prime age people, which seem likely, then people in their prime working
years will demand more money relative to their transactions because the opportunity cost of
their time is higher. Fair and Dominguez found statistically significant result in favour of this
hypothesis on US data. Recently, Sterken (2004) found a significant positive association
between population growth and money demand in Ethiopian economy.

Higher population growth results in higher share of working age people which will give rise
to higher demand for money and appreciation of PPP exchange rate. Thus, a negative
relationship is hypothesized between PPP exchange rate and Relative Population
Growth Rate (RPOPGR).
5. Basel-why - reaction of other countries

The Committee, headquartered at the Bank for International Settlements in Basel,

was established to enhance financial stability by improving the quality of banking
supervision worldwide, and to serve as a forum for regular cooperation between its member
countries on banking supervisory matters.
WHY?
The Basel Accords were formed with the goal of creating an
international regulatory framework for managing credit risk Credit. Risk Credit risk is the
risk of loss that may occur from the failure of any party to abide by the terms and conditions
of any financial contract, principally, and market risk.
Basel guidelines refer to broad supervisory standards formulated by group of central
banks- called the Basel Committee on Banking Supervision (BCBS). The set of
agreement by the BCBS, which mainly focuses on risks to banks and the financial
system are called Basel accord.
Basel is a city in Switzerland which is also the headquarters of Bureau of International
Settlement (BIS).
The purpose of the accords is to ensure that financial institutions have enough
capital on account to meet obligations and absorb unexpected losses.
BASEL-I:
Introduced in 1988.
Focused almost entirely on credit risk, it defined capital and structure of risk weights
for banks.
The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
India adopted Basel 1 guidelines in 1999.
BASEL-II:
Published in 2004.
The guidelines were based on three parameters:

1. Banks should maintain a minimum capital adequacy requirement of 8% of risk

assets.
2. Banks were needed to develop and use better risk management techniques in
monitoring and managing all the three types of risks that is credit and increased
disclosure requirements. The three types of risk are- operational risk, market
risk, capital risk.
3. Banks need to mandatory disclose their risk exposure to the central bank.

Basel III:
In 2010, Basel III guidelines were released. These guidelines were introduced in
response to the financial crisis of 2008.
Basel III norms aim at making most banking activities such as their trading book
activities more capital-intensive.
The guidelines aim to promote a more resilient banking system by focusing on four
vital banking parameters viz. capital, leverage, funding and liquidity.
Presently Indian banking system follows Basel II norms.

REACTION

Basel I:-

However they were criticized by some countries for allowing banks to take on additional
types of risk, which was considered part of the cause of the US subprime financial crisis that
started in 2008. In fact, bank regulators in the United States took the position of requiring a
bank to follow the set of rules giving the more conservative approach for the bank.

Basel II:-

The role of Basel II, both before and after the global financial crisis, has been discussed
widely. While some contries argue that the crisis demonstrated weaknesses in the
framework, others have criticized it for actually increasing the effect of the crisis. In response
to the financial crisis, the Basel Committee on Banking Supervision published revised global
standards, popularly known as Basel III. The Committee claimed that the new standards
would lead to a better quality of capital, increased coverage of risk for capital market
activities and better liquidity standards among other benefits.

Basel III:-
Think tanks such as the World Pensions Council have argued that Basel III merely builds on
and further expands the existing Basel II regulatory base without fundamentally questioning
its core tenets, notably the ever-growing reliance on standardized assessments of "credit risk"
marketed by two private sector agencies- Moody's and S&P, thus using public policy to
strengthen anti-competitive duopolistic practices. The conflicted and unreliable credit ratings
of these agencies is generally seen as a major contributor to the US housing bubble.
Academics have criticized Basel III for continuing to allow large banks to calculate credit
risk using internal models and for setting overall minimum capital requirements too low.
Since derivatives present major unknowns in a crisis these are seen as major failings by some
countries causing several to claim that the "too big to fail" status remains with respect to
major derivatives dealers who aggressively took on risk of an event they did not believe
would happen—but did. As Basel III does not absolutely require extreme scenarios that
management flatly rejects to be included in stress testing this remains a
vulnerability. Standardized external auditing and modelling is an issue proposed to be
addressed in Basel 4 however.
A few countries argue that capitalization regulation is inherently fruitless due to these and
similar problems and—despite an opposite ideological view of regulation—agree that "too
big to fail" persists.
Basel III has been criticized by many countries similarly for its paper burden and risk
inhibition by banks, organized in the Institute of International Finance, an international
association of global banks based in Washington, D.C.
6. The growth of MSME in India
Micro, Small and Medium Enterprises (MSME)
Micro, Small, Medium Enterprises (MSME’s) are entities that are involved in production,
manufacturing and processing of goods and commodities.
The concept of MSME was first introduced by the government of India through the Micro,
Small & Medium Enterprises Development (MSMED) Act, 2006.

Classification of MSME’s
MSME’s are classified as per their turnover and investment. The new classifications as per
the Aatma Nirbhar Bharat Abhiyan Scheme in 2020 is given in the table below:
Micro, Small and Medium Enterprises Classification 2020

Size of the Enterprise Investment and Annual Turnover

Micro Investment less than Rs. 1 crore

Turnover less than Rs. 5 crore

Small Investment less than Rs. 10 crore

Turnover up to Rs. 50 crore

Medium Investment less than Rs. 50 crore

Turnover up to Rs. 250 crore

Ministry of Micro, Small and Medium Enterprises

The Ministry of Micro, Small and Medium Enterprises, a branch of the Government of India,
is the apex executive body for the formulation and administration of rules, regulations and
laws relating to micro, small and medium enterprises in India. The Minister of Micro, Small
and Medium Enterprises is Nitin Gadkari and the Minister of State is Pratap Chandra Sarangi
since 31 May 2019.
Under the Micro, Small and Medium Enterprises Development Act, 2006, Government of
India established The National Board for Micro, Small and Medium Enterprises (NBMSME)
to examine the factors affecting promotion and development of MSME. This board also
reviews the existing policies and suggests recommendations to the Government for the
growth of the MSME sector
The services provided by the Ministry of MSME are as follows:

 Facilities for testing, toolmenting, training for entrepreneurship development

 Preparation of project and product profiles
 Technical and managerial consultancy
 Assistance for exports
 Pollution and energy audits.
Importance and Features of MSME’s
The MSME sector is considered as the backbone of Indian economy that has contributed
substantially in the economic development of the nation. It generates employment
opportunities and works in the development of backward and rural areas. As per the
Government’s annual report 2018-19, there are presently 6,08,41,245 MSMEs in India.
In addition, due to the following features, they are considered a viable sources of income for
those looking to venture into manufacturing industry
Export Promotion and potential for Indian products

 Funding – Finance & Subsidies

 Government’s Promotion and Support
 Growth in demand in the domestic market
 Less Capital required
 Manpower Training
 Project Profiles
 Raw Material and Machinery Procurement
MSMEs contribute to approximately 8% of India’s GDP, employs over 60 million people,
has an enormous share of 40% in the exports market and 45% in the manufacturing sector.
Hence they are of paramount importance for overall economic development of India.
7. NPA-Universal regulations for banking - financial crisis
When a person delays the payment of the loan or an amount which was due on him
through the delay in payment in either interests or instalments or principal amount,
that particular loan or amount is termed as Non-Performing Asset.

Bank fraud is a criminal offense, Non-Performing Assets is a loan or advance wherein

interest or instalments of principal remain overdue for a period of 90 days.

NPA (Non-Performing Assets) – 3 Classifications

Based on different parameters the Non-Performing Assets are classified into different types.
The below table gives the different classification of Non-Performing Assets:

Classification of Non- Criteria

Performing Assets (NPA)

Substandard Assets These are the assets which have remained NPA for a period of less
than or equal to 12 months

Doubtful Assets If the asset is in the substandard category for a period of 12 months

Loss Assets These assets are of little value, it can no longer continue as a
bankable asset, there could be some recovery value.

What are the impacts of Non-Performing Assets (NPA)

1. Banks won’t have sufficient funds for other development projects which will impact
the economy
2. To maintain a profit margin, banks will be forced to increase interest rates.
3. Due to the curb in further investments, it may lead to the rise of unemployment.

What were the reasons behind the rise of Non-Performing Assets in India?

1. In the period from 2004 to 2009, there was a huge growth in the economy, which led
to firms taking bank loans very aggressively.
2. Most of the investment was in infrastructure sectors like roads, power, aviation, steel
3. Laxity in lending norms by the banks, without analysing the financial health of the
companies and their credit ratings
4. The banning of mining projects, delay in environment permit, led to a rise in prices of
raw materials and a big gap in demand and supply thereby affecting the power, steel,
and iron industries. This affected the capacity of the companies to repay the loans to
banks which resulted in Non-Performing Assets (NPA).
 FINANCIAL CRISIS DUE TO NPA OR NPA CRISIS.

 More than Rs.7 lakh crore worth loans are classified as Non-Performing Loans in
India. This is a huge amount.
 The figure roughly translates to near 10% of all loans given.
 This means that about 10% of loans are never paid back, resulting in substantial loss of
money to the banks.
 When restructured and unrecognised assets are added the total stress would be 15-20%
of total loans.
 NPA crisis in India is set to worsen.
 Restructuring norms are being misused.
 This bad performance is not a good sign and can result in crashing of banks as
happened in the sub-prime crisis of 2008 in the United States of America.
 Also, the NPA problem in India is worst when comparing other emerging economies in
BRICS.
What are the various steps taken to tackle NPAs?

The Debt Recovery Tribunals (DRTs) – 1993

To decrease the time required for settling cases. They are governed by the provisions of the
Recovery of Debt Due to Banks and Financial Institutions Act, 1993. However, their number
is not sufficient therefore they also suffer from time lag and cases are pending for more than
2-3 years in many areas.

Credit Information Bureau – 2000

A good information system is required to prevent loan falling into bad hands and therefore
prevention of NPAs. It helps banks by maintaining and sharing data of individual defaulters
and willful defaulters.

Lok Adalats – 2001

They are helpful in tackling and recovery of small loans however they are limited up to 5
lakh rupees loans only by the RBI guidelines issued in 2001. They are positive in the sense
that they avoid more cases into the legal system.

Compromise Settlement – 2001

It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It
covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however willful default and
fraud cases are excluded.

RECENTLY TO OVERCOME THIS PROBLEM IBA (INDIAN BANKS ASSOCIATION)

CAME WITH A PROPOSAL “BAD BANK”

A Bad Bank houses Bad loans or Non-Performing Assets (NPA). The idea of Bad Bank was
implemented in countries like Sweden, Finland, France, Germany, Indonesia etc. Even with
Bad Bank structure, the Non-Performing Assets (NPA) losses do not go away. It needs to be
shared between investors, taxpayers of these banks in general and those of the bad bank.
The bad bank will manage Non-Performing Assets in suitable ways, some may be liquidated,
others may be restructured, etc. In the meantime, it would work towards suitably disposing of
the toxic assets. This concept has been successfully implemented in many western European
countries post the 2007 financial crisis like Ireland, Sweden, France etc.

How Does ‘Bad Bank’ Work?

1. Banks will be able to demarcate their assets into good assets and toxic or bad assets.
2. Good assets are ones in which loans are repaid as per schedule, and defaulted ones are
classified as toxic assets or bad assets.
3. Toxic assets can be removed from Banks books and transferred to Bad Bank which
has the sole purpose of aiding the recovery of risky assets.
4. Hence the banks will clean up and reduce their exposure to risky assets.
 5. Bad Bank will absorb all the toxic assets of banks at a price below the book value of
these loans.

What is the Need for a Bad Bank?

Investors would see large NPA’s as a sign of Banks ill-health or financial weakness. If the
NPA’s are high, then the Bank loses its ability to borrow, lend or conduct business.

Bad Bank Structure – IBA Proposal

The ‘Bad Bank’ will be a 2 tiered structure.
Tier 1:

1. There will be an Asset Reconstruction Company (ARC) backed by the Government

which would buy bad loans from banks and issue Security Receipts to the Banks.
2. As per RBI guidelines, ARC will hold Security Receipts of 15%.
3. Banks will get 15% of the cash and will hold 85% of Security Receipts. Hence it is
called 15:85 structure.

Tier 2:

1. There will be an Asset Management Company (AMC).

2. AMC would be run by public and private bodies which includes banks as well.
3. Turnaround professionals.
8. Capital markets in India

Capital Market is a place where different financial instruments are traded between
different entities. On one side, there are entities that have abundant capital, much more
than they require and on the other side, there are entities who need capital for various
purposes.

Capital Markets – Types

Capital markets are mainly divided into 2 different types.

1. Primary Markets: The primary market is the part of the capital market that deals with
the issuance and sale of securities to investors directly by the issuer. An investor buys
securities that were never traded before. Primary markets create long term instruments
through which corporate entities raise funds from the capital market.
2. Secondary Markets: The secondary market, also called the aftermarket and follow on
public offering is the financial market in which previously issued financial instruments
such as stock and bonds are bought and sold

Capital Market – Examples

Examples of capital markets are given below.

1. Stock Market: A stock market, equity market or share market is the aggregation of
buyers and sellers of stocks, which represent ownership claims on businesses
2. Bond Market: The bond market is a financial market where participants can issue new
debt, known as the primary market, or buy and sell debt securities
3. Currency and Foreign Exchange Markets: The foreign exchange market is a global
decentralized or over-the-counter market for the trading of currencies. This market
determines foreign exchange rates for every currency.

Which are the most common capital markets?

Stock market and Bond market are considered as the most common capital markets.

Why do we need the capital market?

Capital market is a cog in the wheel of the modern economy since capital markets move
money from the entities that have money to the entities that require money for productive use.

Capital Market – Features

In capital markets, there are 2 entities, one who supplies capital and the other entity is the one
who needs capital.
Usually, entities with surplus capital in the capital markets are retail and institutional
investors. Entities seeking capital are people, governments and businesses.
Some common examples of suppliers of capital are

1. Pension funds: A pension fund, also known as a superannuation fund in some

countries, is any plan, fund, or scheme which provides retirement income
 2. Life insurance companies: Life insurance companies offer contracts between an
insurance policyholder and an insurer or assurer, where the insurer promises to pay a
designated beneficiary a sum of money (the benefit) in exchange for a premium, upon
the death of an insured person (often the policyholder). The Insurance Development
and Regulatory Authority of India manage everything related to insurance in India.
3. Non-financial companies: Non-financial companies are those businesses which don’t
accept deposits or make loans. Examples of non-financial companies are Healthcare,
Technology, Industrial, sector related companies.
4. Charitable foundations: A charitable foundation is a category of a non-profit
organization that will typically provide funding and support for other charitable
organizations through grants.

Some common examples of users of capital

1. People looking to purchase vehicles, homes

2. Governments
3. Non-financial companies.

Capital Market – Structure

Capital markets structure is made of primary and secondary markets.
Primary markets consist of companies that issue securities and investors who purchase those
securities directly from the issuing company. These securities are called Initial Public
Offerings (IPO). Whenever a company goes public it sells its stocks and bonds to large scales
institutional investors like hedge funds and mutual funds.
Secondary markets are places where the trade of already issued certificates between investors
are overseen by regulatory bodies. Issuing companies play no part in the secondary market.
Examples of secondary markets are New York Stock Exchange (NYSE), London Stock
Exchange (LSE), Bombay Stock Exchange (BSE).

Capital Markets – Functions

1. Capital markets bring together those requiring capital and those having excess capital.
2. Capital markets aim to achieve better efficiency in transactions.
3. It helps in economic growth
4. It ensures there is the continuous availability of funds
5. By ensuring the movement and productive utilisation of capital, it helps in boosting
the national income.
6. Minimizes transaction costs and information costs.
7. Makes trading of securities easier for companies and investors.
8. It offers insurance against market risk.

Capital market – Advantages

1. Money moves between people who need capital and who have the capital.
2. There is more efficiency in the transactions.
3. Securities like shares help in earning dividend income.
4. With the passage of time, the growth in value of investments is high.
5. The interest rates provided by securities like Bonds are higher than interest rates given
by banks.
6. Can avail tax benefits by investing in stock markets.
7. Scope for a wide range of investments.
8. Securities of capital markets can be used as collateral for getting loans from banks.
9. Financial instruments and interest rates
Financial instruments provide an efficient flow of money and transfer of capital throughout
the world. These tools can be real or virtual documents representing agreement involving any
monetary value. It has a monetary value, and it constitutes a legally enforceable agreement
between two or more parties regarding a right to payment of money.
Types of Financial Instruments Financial Instruments are classified into two types namely. 1.
Cash Instruments - The value of the cash instruments are directly influenced and determined
by the markets. These are the kind of securities which are easily transferred. 2. Derivative
Instruments - The value and characteristics of derivative instruments are based on the
underlying components such as assets, interest rates or indices. These can be over-the-counter
derivatives or exchange-traded derivatives.

Types of Financial Instruments in India 1. Equities It is a type of security that represents the
ownership of a company. Equities are traded in stock markets. It can also be purchased
through Initial Public Offerings (IPO), whenever a company issues shares to the public for
the first time. In India, share trading actively happens in stock exchanges; prominent ones are
BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). It is one of the best
options to invest in equities over an extended period as it will fetch good returns. It is also
subject to market-related risk, and one needs to do thorough research before investing in
equities. Equity shares constitute permanent capital for the firm and it cannot be redeemed
during the lifetime of the company and as per the Companies Act of 1956, a company cannot
purchase its own shares during its existence. At the time of liquidation, the equity
shareholders can demand the refund of their capital amount and the same will be paid after
meeting all the other prior claim including preference shareholders.
2.Mutual Funds In India, Mutual Funds are top-rated because the initial investment
amount is very less and the risk is diversified. Mutual funds allow a group of individuals
to invest their money together. The investment avenue is famous because of cost-
efficiency, risk-diversification, professional management and sound regulation. The
minimum amount to be invested can be as small as INR 500, and the frequency of
investment is usually monthly or quarterly.
3. Bonds Bonds are fixed income instruments which are issued to raise working capital.
Both private entities, such as companies, financial institutions, and the central and state
government institutions issue this to raise funds. The bonds issued by the government
carries the lower rate of risk but guarantees returns. The bonds issued by private
institutions have high risks.
4. Deposits Investing the money in banks or post-office is one of the standard method of
savings followed in India. The risk factor involved is zero, and the return on investment is
guaranteed.
5. Cash and Cash Equivalents These are relatively safe and highly liquid investment
options. All the securities that can be immediately converted into cash within three
months are known as cash and cash equivalents. Treasury bills, gold, money market
funds are cash equivalents.
What Is an Interest Rate Derivative?
An interest rate derivative is a financial instrument with a value that is linked to the
movements of an interest rate or rates. These may include futures, options, or swaps
contracts. Interest rate derivatives are often used as hedges by institutional investors, banks,
companies, and individuals to protect themselves against changes in market interest rates, but
they can also be used to increase or refine the holder's risk profile or to speculate on rate
moves.

KEY TAKEAWAYS

 An interest rate derivative is a financial contract whose value is based on some

underlying interest rate or interest-bearing asset.
 These may include interest rate futures, options, swaps, swaptions, and FRA's.
 Entities with interest rate risk can use these derivatives to hedge or minimize potential
losses that may accompany a change in interest rates.
Understanding Interest Rate Derivatives
Interest rate derivatives are most often used to hedge against interest rate risk, or else to
speculate on the direction of future interest rate moves. Interest rate risk exists in an interest-
bearing asset, such as a loan or a bond, due to the possibility of a change in the asset's value
resulting from the variability of interest rates. Interest rate risk management has become very
important, and assorted instruments have been developed to deal with interest rate risk.

Interest rate derivatives can range from simple to highly complex; they can be used to reduce
or increase interest rate exposure. Among the most common types of interest rate derivatives
are interest rate swaps, caps, collars, and floors.

Also popular are interest rate futures. Here the futures contract exists between a buyer and
seller agreeing to the future delivery of any interest-bearing asset, such as a bond. The
interest rate future allows the buyer and seller to lock in the price of the interest-bearing asset
for a future date. Forwards on interest rate operate similarly to futures, but are not exchange-
traded and may be customized between counterparties.

Interest Rate Swaps

A plain vanilla interest rate swap is the most basic and common type of interest rate
derivative. There are two parties to a swap: party one receives a stream of interest payments
based on a floating interest rate and pays a stream of interest payments based on a fixed rate.
Party two receives a stream of fixed interest rate payments and pays a stream of floating rate
payments. Both payment streams are based on the same notional principal, and the interest
payments are netted. Through this exchange of cash flows, the two parties aim to reduce
uncertainty and the threat of loss from changes in market interest rates.

A swap can also be used to increase an individual or institution's risk profile, if they choose
to receive the fixed rate and pay floating. This strategy is most common with companies that
have a credit rating that allows them to issue bonds at a low fixed rate but prefer to swap to a
floating rate to take advantage of market movements.

Caps and Floors

A company with a floating rate loan that does not want to swap to a fixed rate but does want
some protection can buy an interest rate cap. The cap is set at the top rate that the borrower
wishes to pay; if the market moves above that level, the owner of the cap receives periodic
payments based on the difference between the cap and the market rate. The premium, which
is the cost of the cap, is based on how high the protection level is above the then-current
market; the interest rate futures curve; and the maturity of the cap; longer periods cost more,
as there is a higher chance that it will be in the money.

A company receiving a stream of floating rate payments can buy a floor to protect against
declining rates. Like a cap, the price depends on the protection level and maturity. Selling,
rather than buying, the cap or floor increases rate risk.

Other Interest Rates Instruments

Less common interest rate derivatives include eurostrips, which are a strip of futures on the
eurocurrency deposit market; swaptions, which give the holder the right but not the obligation
to enter into a swap if a given rate level is reached; and interest rate call options, which give
the holder the right to receive a stream of payments based on a floating rate and then make
payments based on a fixed rate. A forward rate agreement (FRA) is an over-the-counter
contract that fixes the rate of interest to be paid on an agreed upon date in the future to
exchange an interest rate commitment on a notional amount. The notional amount is not
exchanged, but rather a cash amount based on the rate differentials and the notional value of
the contract.
10. Tax havens and black money
A tax haven is generally an offshore country that offers foreign individuals and businesses
little or no tax liability in a politically and economically static environment.

 Tax havens provide the advantage of little or no tax liability.

 Offshore countries with little or no tax liabilities for foreign individuals and
businesses are generally some of the most popular tax havens.
 Investors and businesses may be able to lower their taxes by taking advantage of tax-
advantaged opportunities offered by tax havens, however, entities should ensure they
are compliant with all relevant tax laws.

Types of Tax Havens

Over the years, more and more countries have been presenting themselves as tax havens in
order to promote tourism and attract foreign investment. As a result, there are countries
that have no taxes or low taxes, and others that offer special exemptions or arrangements
for foreign investors.
 A ‘no-tax haven’ country is one that has no taxes of any sort on any sortof income.
Although there are no taxes, these countries do charge fees, as do most, for
incorporations, filing and other regulatory services. Some examples of no-tax
havens are Turks and Caicos Islands, Bahamas, Cayman Islands, and Bermuda.
 A ‘low-tax haven’ country usually encompasses some tax on the income of an
individual or corporation regardless of where the income is earned. Examples
include Barbados, British Virgin Islands and Cyprus.
 A ‘special tax haven’ country is one that has most of the usual taxes imposed by
other countries; however, they have legislation that allows for special treatment for
certain vehicles such as international business corporations and exempt companies.
Austria is a prime example as are the Netherlands and Liechtenstein
Companies and trusts established in tax haven are in huge numbers, despite the fact that most
tax havens are geographically remote both from the owner (of companies registered there)
and from the business activities conducted (by such companies).
Also, there are an unknown number of trusts, banks and funds in tax havens. The companies
registered in tax havens carry out virtually no, or very limited, genuine local business
activity.
The best example for such registrations is Cayman Island’s single small office building at
George Town that serves as the registered address for more than 18000 companies.
Exemption Rules
These tax havens are governed by ring-fenced legislation directing their activities towards
foreigners. Companies which operate within this regime have the below exemptions:
1. They can conceal their identities.
2. They are partly or wholly exempted from paying taxes.
3. No strict rule on accounting or auditing of books.
4. No need to preserve any important corporate documents.
5. They can move the company to a different jurisdiction with minimal formalities

BLACK MONEY
It is money that has been acquired through illegitimate means or money which is unaccounted for, that is,
for which tax is not paid to the government. Black money is hidden from government authorities and is not
reflected in the GDP of India, national income, etc.

 White money is money that is earned through legitimate means and is accounted for, for which
income or other tax is paid.
 In an ideal economy, all money that is transacted should be accounted for. This would help the
government to collect taxes.
 Cash transactions without proper accounting are known as black money.
Black money is generated by any of the following three ways:

Illegitimate The illegal activities that can lead to black money generation are:
activities
1.
1. Crime
2. Corruption
3. Non-compliance with tax requirements
4. Complex procedural regulations
5. Money laundering
6. Smuggling

Tax evasion This is where an entity wilfully does not pay taxes that are due to the government.

Tax avoidance This is where an entity takes advantage of the existing loopholes in the system and
avoids paying taxes. This is not illegal though

Sources of Black Money in India

Some of the chief sources of black money are described below.

 Sellers or traders who do not give bills or receipt creates black money.
 Many people invest in bullion or jewellery to hide their actual income from the authorities.
 In the real estate sector, many people undervalue their real assets to refrain from paying the
rightful tax. They cheat the government of the correct amount of property tax.
 Some Self-Help Groups (SHGs) and trusts do not provide proper sources for their funds and
donations received.
 Tax havens: Tax havens are generally small countries where foreigners don’t have to pay taxes.
These countries generally have very liberal regulatory frameworks, which big corporations take
advantage of. They set up shell companies there and redirect all their profits to this entity, by
which they can reduce their tax liabilities by a huge margin.
 Hawala: Hawala is an informal method by which money can change hands without the use of
banks. This works through codes, contacts and trust with no paperwork at all.
 Investments through innovative derivative instruments like participatory notes also is a means to
hide black money.
Money Laundering
Money laundering is the process by which black money is converted into white money.
People who possess black money cannot spend it publicly. They should either hide it or spend it on the
underground economy. Through money laundering, they convert it into white money. It is a method by
which criminals mask their accumulated wealth.
Through money laundering, people separate the money earned (illegally) from its source, mix it with white
money, and then funnel it back into the source.
Another commonly heard related term is round-tripping. Here, people send money to a tax haven like
Mauritius or Cayman Islands (to avoid paying tax) and then invest that money into India, thus becoming a
foreign investment.

Effects of Black Money in India

Black money has some serious consequences on the economy of a country. Some of them are discussed
below.

 It affects the financial system of the country. The central bank is not able to control money supply
in the economy causing higher inflation. This will lead to a fall in the value of the currency.
 Black money affects the credibility of a country negatively.
 Black money is most often used for illegal activities such as drugs and narcotics dealing,
terrorism, etc. which is detrimental to the heath of the country.
 The government suffers a big loss in the form of taxes because of black money.
 Black money creates a parallel economy in the country, which is completely underground. For
example, in Mexico, there is a thriving parallel economy because of the illegal trafficking of
drugs. This leads to governance problems.
 Black money can also cause real estate prices to go up, which may lead to an asset bubble.
Legislative Framework to deal with Black Money

1. Prevention of Corruption Act, 1988

2. Benami Transactions Prohibition Act, 1988
3. Prevention of Money Laundering Act, 2002
4. The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015
5. Lokpal and Lokayukta Act
11. Demonetization - why – impact
What is Demonetisation?
 Demonetization refers to the decision of the government to revoke the legal
tender status of a currency note. (Note- All the currencies issued by RBI are used
as a legal tender because the value they bear is assured by the RBI).
 Once the currency note is demonetised, it cannot be used anymore.
 Central banks all over the world follow a practice where older currency notes are
revoked and new currency notes with better features are issued.
Was this the first time the government is demonetising?
 India opted for demonetization two times before the 2016 monetisation.
 The first instance of demonetisation by the government was implemented
in 1946 when the RBI demonetised Rs 1,000 and Rs 10,000 notes.
 Later, higher denomination bank notes (Rs 1000, Rs 5000 and Rs 10000) were
re-introduced in 1954.
 However, the Morarji Desai government demonetised these notes in 1978.
 According to data provided by RBI Rs 10,000 note was printed in 1938 and 1954
and was subsequently demonetised in 1946 and 1978 respectively.
 Demonetisation has been implemented in India primarily because of economic
and political issues like hyperinflation, hostilities, political turmoil, or other
sensitive states of affairs like corruption, etc.
What were the main motives behind 2016 demonetisation?
Government and RBI had many intentions behind this. The major objectives of the
demonetisation drive are as follows:

 Curb Corruption: Cash and corruption are correlated. By reducing the cash
circulation one can control the corruption as well.
 Eliminate Counterfeiting/Fake currency: The Annual Report of RBI shows
that during the year 2016-’17, Rs 41.5 crores worth of fake currency notes in the
form of old Rs 500 and Rs 1,000 notes were detected in the banking system. The
estimate of the total fake currency in the system was Rs 400 crores.
 Tackle Terrorism: High denomination notes like Rs. 500 and Rs. 1000 are often
used in terrorist/naxalist activities, drug, and human trafficking. In addition,
these notes constitute a huge percentage of money spent during general elections
by political parties and candidates in India.
 Eradicate Black Money: The accumulation of black money generated by the
income that has not been declared to tax authorities (tax evasion).
Demonetisation would bring back those black money in the form of high-value
notes into the banks which otherwise would not have any value.
 Improve digital transactions.
 Lower Cash-to-GDP ratio.

What are the positive impacts of demonetisation?

Increase in tax collection:
 Due to the demonetisation drive, there is a considerable increase in the number
of Income Tax Returns (ITRs) filed.
 The number of Returns filed as on August 2017 registered an increase of 24.7%
compared to a growth rate of 9.9% in the previous year.
Tackling Black Money:
 Transactions of more than 3 lakh registered firms are under the radar of
suspicion while one lakh companies were struck off the list.
 The government has identified more than 37000 shell companies which were
engaged in hiding black money and hawala transactions.
 About 163 companies which were listed on the exchange platforms were
suspended from trading due to the pending submission of proof documents.
Impacts on terrorism, Naxalism, and trafficking:
 Due to demonetisation, terrorist and Naxalite financing has stopped almost
entirely. The surrender rate has reached its highest since the demonetisation is
announced.
 According to the Nobel laureate Kailash Satyarthi and several others working to
fight human trafficking, the note ban had led to a huge fall in sex trafficking.
 Since demonetisation, no high-quality fake currency notes were found/seized by
intelligence operations, including at the Indo-Bangladesh border.
 Furthermore, it also affected the hawala operators and dabba trading venues.
Increase in digital transactions:
 In 2015-16, the value of transactions for debit and credit cards was ₹1.6 lakh
crore and ₹2.4 lakh crore, respectively; in 2016-17, it was ₹3.3 lakh crore for
each.
 Thus digital transactions have increased by around 50-55% points since
demonetisation.
 Increase in digital transactions = RBI has to print fewer notes = save printing
costs of the government.
 In addition to demonetisation, digital transactions have also been boosted by the
launch of BHIM and UPI App.
 Increase in digital transactions could also improve the e-commerce business due
to a decline in Cash On Delivery (COD) demand which could cut down their
costs.
What are the concerns/negative impacts of demonetisation?
Poor Planning:
 At the time of demonetisation, the high-value notes constitute 87.5% of the
currency value which is certainly a huge percentage of currency in the economy.
 Therefore, the same amount of currency should have been printed and made
ready for the circulation in the economy once the demonetisation drive started.
 However, India went for demonetisation without having done this which led to
many repercussions.
Economic impacts:
 Jobs: As people ran out of money, they could not be able to pay = economic
activity slowed down & supply-chain affected particularly in the informal sector
= A lot of people have lost their jobs. In a recent report by Azim Premji
University, around 50 lakh people lost their jobs since demonetization was
launched in November 2016.
 Savings: Households are now holding far more of their savings in cash than in
the year prior to demonetisation = setback to the attempt at financialising
household savings.
 Govt expenditure: by RBI cost the government around Rs 8000 crore during the
period between July 2016-June 2017.
 GDP: During the Demonetisation, many industries were not able to continue
their production activities due to the decrease in consumption demand. This is
 the reason why the country’s growth rate, which was 7.5% in September 2016
declined to 5.7% in June 2017. It means the demonetisation caused a reduction
of 1.5% in the Indian GDP.
Tax Evasion/Black Money: One of the main motives behind demonetisation was to get
people to pay taxes and eradicate black money.
 But cash is only one component of black wealth (about 1% of it). Black money is
produced by different means which are not affected by the one-shot squeezing
out of cash as it can quickly regenerate.
 Also, People very quickly found ways around the system to evade taxes.
 Many converted the unaccounted money into legal tender. Thus demonetisation
itself became a tool for turning the black money into white.
 Moreover, there were logistical difficulties in penalising all of them = whole
purpose gets defeated.
Corruption: It was claimed that the drive would reduce corruption by bringing to light the
corrupt rich and by reducing the cash flow. But it is apparent that the corruption has not yet
suppressed since demonetisation.
Fake notes: The number of fake notes in the banking system jumped by 20.4 % during 2016-
17 compared to the previous year. Apart from this, we have heard the news of the fake notes
coming out of ATM across the country.
Cash-GDP ratio:
 The cash-GDP ratio has reached levels similar to the period before
demonetisation.
 Hence the government’s expectation of bringing behavioural changes among the
people in terms of holding cash was not realised.
Agriculture:
 Reports of stress in agriculture have begun to appear because of demonetization.
 It is because, cash is the dominant mode of transaction in the agriculture sector
from Sale, transport, marketing, and distribution of ready produce to wholesale
centres or mandis.
Other impacts:
 Real-estate – It was badly affected as it is highly cash-dependent and has long
been a favourite asset for holding black wealth.
 Banks –Banks are not in a position to considerably increase lending; their net
interest income has decreased, thus, worsening their capital situation and
their NPA situation got worse.
 Stock market – Demonetisation hasn’t really affected the overall stock market
much and investors believe the impact is temporary, with lower interest rates and
more government spending offsetting any adverse effects.
 Foreign investors –Foreign investors were major sellers of equities because they
feared an economic slump, resulting in the slump in the stock market.

Conclusion
To summarize, the main benefit that the demonetisation brought about was the considerable
increase in the number of income tax returns filed and the resultant tax collections. It also led
to a formalisation of the economy.
However, these could have been achieved by other policy initiatives as well and not
necessarily by demonetisation.

Tax reforms and effective monitoring of suspicious transactions could be a viable alternative
for resolving the issues that the policy-makers sought to fix through demonetisation.

Another benefit is that digital transactions have become more common. But financial savings
in the form of currency notes have also increased, which means that people still value cash.

To conclude in the words of the ex-RBI governor, Raghuram Rajan, “the demonetisation is
not a well-planned or well-thought-out, useful exercise”.
12. Tax rates and the classification of people based on caste and its impact
The taxation system is an important concept in the economy of a country. In order to run the
government and manage the affairs of a state, money is required. So the government imposes
taxes in many forms on the incomes of individuals and companies.
There are 2 types of taxes levied:

1. Direct taxes – A tax that is paid directly by an individual or organization to the

imposing entity (generally government) and it cannot be shifted to another individual
or entity. The Central Board of Direct Taxes (CBDT) is the authority that looks after
the administration of laws related to direct taxes through the Department of Income
Tax.
2. Indirect taxes – An indirect tax (such as sales tax, a specific tax, value-added tax
(VAT), or goods and services tax (GST)) is a tax collected by an intermediary (such
as a retail store) from the person who bears the ultimate economic burden of the tax
(such as the consumer).

Types of the taxation system in India

The types of taxation system can be stated below:

VAT (Value Added Tax)

Value-added tax or VAT is an indirect tax, which is imposed on goods and services at each
stage of production, starting from raw materials to the final product. It is levied on the value
additions at different stages of production.
Value Added Tax was introduced into the taxation system in India on 1st April 2005
replacing the Sales Tax. As of June 2014, all states and UTs in India except the Andaman and
Nicobar Islands and Lakshadweep were implementing VAT.
VAT is widely applied in European countries. However, now a number of countries across
the globe have adopted this tax system. GST (Goods and Service Tax) which is to be
implemented in India is nothing but a kind of VAT system.

GST (Goods and Services Tax)

The Goods and Services Tax (GST) is a value-added tax to be implemented in India, the
decision on which is pending. It will replace all indirect taxes levied on goods and services by
the Indian Central and State governments.
GST is aimed at being comprehensive for most goods and services with few tax exemptions.
India is a federal republic, and the GST will thus be implemented concurrently by the central
and state governments as the Central GST and the State GST respectively.
The implementation of GST will lead to the abolition of other taxes such as octroi, Central
Sales Tax, State-level sales tax, entry tax, stamp duty, telecom license fees, turnover tax, tax
on consumption or sale of electricity, taxes on transportation of goods and services, etc, thus
avoiding multiple layers of taxation that currently exist in India.
Advantages of Implication of GST in India

 GST will boost up economic unification of India which ultimately assists in better
conformity and revenue resilience.
 In the GST system, both Central and state taxes will be collected at the point of sale.
Both components (the Central and State GST) will be charged on the manufacturing
cost.
 It will reduce the burden of tax for consumers
 It will result in a simple, transparent, and easy tax structure as it involves the
provision of merging all levies on goods and services into one GST.
 It will set a uniformity level in tax rates with only one or two tax rates across the
supply chain
 It will result in a good administration of the tax structure
 There are chances of the tax base broadening
 This implementation will increase tax collections due to the wide coverage of goods
and services.
 The global market will witness a comparative cost in the value of goods and services.
 This taxation system will reduce transaction costs for taxpayers through simplified tax
compliance and will also result in increased tax collections due to a wider tax base
and better conformity.

Limitations in implementing GST in India

The limitations in GST implementation in India are stated below:

 Experience of various countries shows that it is very difficult to manage the GST
system. Even various developed countries find it difficult.
 India’s tax collecting authority is not equipped technically to handle it.
Computerization of data is needed.
 Amendment of Constitution is required for which consensus of at least half of the
states is needed, which is very difficult in today’s rise of regional politics.
 It is resource-intensive as large data collection is required.
To know about the direct tax code, refer to the linked article.

Laffer curve
Invented by Arthur Laffer, this curve shows the relationship between tax rates and tax
revenue collected by governments.
The curve suggests that, as taxes increase from low levels, tax revenue collected by the
government also increases. It also shows that tax rates increasing after a certain point (T*)
would cause people not to work as hard or not at all, thereby reducing tax revenue.
Eventually, if tax rates reached 100% (the far right of the curve), then all people would
choose not to work because everything they earned would go to the government.
Origin

 The Rig Vedic period Varna system (determination based on occupation) was changed
to a caste system (assessment based on birth) by the later Vedic period.
 It is believed that these groups came into existence according to Hinduism through Lord
Brahma, the creator of the universe. The caste system in India divides people into four
distinct categories - Brahmins, Kshatriyas, Vaishyas, and Shudras.
 According to the development theory, the caste system has arisen due to social
development. Due to the long and slow development of civilization, some faults in the
caste system also came. Its biggest flaw is the feeling of untouchability. But through
various efforts, this social evil is being eradicated.

Problems of the caste system

Against democratic values: -

 Of course, the caste system is a social practice. It is ironic that even after more than
seven decades of liberating the country, we have not been able to break free from the
clutches of the caste system. Even in democratic elections, caste exists as a major factor.

The problem for National Integration: -

 The caste system not only increases disharmony among us but it also works to create a
huge gap in our unity. The caste system sows the seeds of high, lowliness, inferiority
in every human mind since childhood. This eventually becomes a factor of regionalism.
The weakness of the society beset by the caste system does not establish political unity
in a wide area and it discourages a large section at the time of any external attack on
the country. Casteism has taken a more formidable form than before due to selfish
politicians, leading to increased social bitterness.

Disrupts the progress of development:

 The tension created by caste hatred or caste appeasement by political parties hinders
the progress of the nation.

 of castes.

Features of the Caste System

1. Birth determines caste.
2. A person born in a particular caste remains in it for life and dies in it.

3. Each caste governs the food habits of its members.

4. Some low castes have been considered to be untouchables.

5. The caste system has got a definite gradation based on which different castes are given
prestige and power in the society.

6. Members of a lower caste cannot aspire for occupations, which are often done by people of
higher caste.

Positive Impacts of Caste system on business

The positive impacts of caste system on business are summarized below:

1. Provide for Division of Labour: In caste system, each caste was required to do the work,
which is meant for it. In other words, under caste system, labour was divided. This division of
labour increased the productivity.
2. Excess Specialization and Efficiency: In caste system, each person followed the profession
of his ancestors. Over the period of time they became experts in their field. It increased the
efficiency in each field.
3. Advantage of Competition: In caste system, only Vaishyas did the business activities. So
there is no unhealthy competition.
4. Initiated the Spirit of Co-operation: Actually, the co-operative movement in India was
initiated by the caste system. Each caste organize their own association for the growth and
development of the people of their own caste. For e.g. Nattu Kottai Chettiar Community
organized “Nagarathar Sangam” for its development.
5. No Exploitation in Business: There was no exploitation in business under caste system
because it produced good business people,
Negative Impacts of Caste System on Business
The caste system exerts negative impact also on business.

1. Lack of Initiative: As the caste system was rigid, it killed the initiative of the people. So
stagnancy came in the business. There was no technological development in business.
2. Creation of Monopoly: A particular section was highly experienced in a particular field. It
created monopoly trend in business, which was not favorable for the consumers.
3. Creation of Idle Class: The caste system created a lot of idle people not involving
themselves in business because only Vaishyas were allowed to do business.
4. No Drive for industrialization etc.: It never led to industrialization and urbanization, which
are necessary for boom in business because of superstitious beliefs under caste system.
5. Creation of Imbalanced development in the Economy: It created imbalanced
development in the economy.