FULL ECONOMICS

MONEY AND CREDIT

HOW WERE TRANSACTIONS DONE IN OLDEN DAYS?

BARTER SYSTEM

● Barter is a medium in which goods/services are

exchanged directly without a common unit.

● Also known as double coincidence of wants.

● What a person desires to sell is exactly what the

other wishes to buy.

● In a barter system where goods are directly

exchanged without the use of money, double
coincidence of wants is an essential feature.

Money eliminates the need for double coincidence of

wants. Since, money enables the exchange process, it is
also called a Medium of Exchange.
 MODERN CURRENCY

● Use of paper notes and coins made of relatively

inexpensive metals.

● Has no value of its own. Has a value only because it

is authorised by the government of a country.

● In India- the Reserve Bank of India issues currency

notes on behalf of the government.

DEPOSIT WITH BANKS

● People deposit their extra money with the banks.

● Banks accept their deposit & also pay an amount as

interest on the deposits.

● People also have an option to withdraw the money

as and when they require.

● Demand deposit: Deposits in the bank that can be

withdrawn on demand.
 LOAN ACTIVITIES OF BANK

❏ Banks keep small proportion of their deposits as

cash with themselves

❏ E.g., Banks in India holds about 15% of their

deposits as cash.

❏ Why? To pay to the depositors who wants to

withdraw deposited money at any time.

Where does the rest of the deposited money go?

➔ The rest of deposit money is used by banks to

extend loans to the people.
➔ There is huge demand of loan for economic
activities.
➔ Benefit- Banks charge higher rate of interest on
loans than they provide at deposits.
In this way banks mediate between those who have
surplus funds & those who are in need.
What is a cheque? Describe the utility of
cheque?

- Cheque is a paper instructing the bank to pay

a specific amount from the person’s account to
the person in whose name the cheque has
been issues.

- Cheques have the same features of money.

- They settle payments without the use of cash.

- They are widely accepted as a means of

payment.

- There pose the least risk in transaction.

- In a fair dealing, it is the most appropriate

means of money transaction.
● Credit refers to an agreement in which the
lender supplies the borrower with money,
goods or services in return for the
promise of future payments with interest.

● Interest rate, collateral and

documentation requirement and mode of
repayment together comprise terms of
credit.
 TERMS OF CREDIT

- Interest rate, collateral and

documentation requirement, and the
mode of repayment together comprise
what is called the terms of credit.

- The terms of credit vary substantially

from one credit arrangement to another.

- They may vary depending on the nature

of the lender and the borrower.
Define Collateral. Why do lenders ask for
collateral while lending?

Collateral is an asset that the borrower owns (such

as land, building, vehicle, livestocks, deposits with
banks) & uses this as a guarantee to a lender until
the loan is repaid.

Lenders ask for collateral while lending because:

- In case a borrower fails to repay the debt, the

collateral can be used to generate the amount
that borrower owes.

- Hence, collateral is a legal guarantee that the

debtor will repay the money by all means.
Explain the term debt-trap. Why is it more
rampant in rural areas? Give two reasons.

A debt trap is a situation in which a borrower is led into a

cycle of re-borrowing because they are unable to repay
the loan.

It is more common in rural areas because:

● A borrower repays a loan by selling the agricultural

produce, which sometimes may not be enough to
repay the loan.

● Rural borrowers normally depend on informal

sources of credit who charge a high rate of interest.
This repayment of larger amounts may sometimes
be larger than their income.

Thus, it can be concluded that loans from banks always

help to raise people’s earning capacity.
 Formal Source Informal Source

Banks require collateral

and proper documentation No collateral is required.
for getting a loan.

A reasonable rate of Higher rate of interest is

interest is charged. charged.

There is no organisation to
RBI supervises them.
supervise them.

Terms of credit are fair and Terms of credit are very

reasonable. tough and unreasonable.

Includes moneylenders,
Includes banks and
traders, employers, friends
cooperatives.
and relatives.
 FUNCTIONS OF RBI

● Supervises the functioning of loans in

formal sector.

● Maintain checks & balances.

● Monitors banks in maintaining Cash

Balance.

● Sees that the banks give loans not just to

profit-making businesses and traders but
also to small cultivators, small scale
industries, etc.
 SELF-HELP GROUPS

A Self Help Group is a financial intermediary committee

made up of people who share a common local area as well
as a common type of work or financial situation. The idea
behind its functioning is to encourage people to pool their
savings & there by increase their opportunities for
earnings.

● A typical SHG has 15-20 members, usually belonging

to one neighbourhood, who meet & save regularly.

● Saving per member varies from Rs. 25 to Rs. 100 or

more, depending on the ability of the people to save.

● Members can take small loans from the group itself

to meet their needs WITHOUT A COLLATERAL.

● The group charges interest on these loans but this is

still less than what the moneylender charges.

● After a year or two, if the group is regular in savings,

it becomes eligible for availing loan from the bank.
 GRAMEEN BANK OF BANGLADESH

● One of the biggest success stories in

reaching the poor to meet their credit
needs at reasonable rates.

● Started- 1970 & meets the credit needs

of over 9 million people.

● Professor Muhammad Yunus- Founder

of Grameen Bank & recipient of 2006
Nobel Prize for Peace.
CASE-BASED
QUESTION
Read the given text and answer the following questions:

The Reserve Bank of India supervises the functioning of formal sources of loans. For
instance, we have seen that the banks maintain a minimum cash balance out of the
deposits they receive. The RBI monitors the banks in actually maintaining cash
balance. Similarly, the RBI sees that the banks give loans not just to profit-making
businesses and traders but also to small cultivators, small scale industries, to small
borrowers etc. Periodically, banks have to submit information to the RBI on how much
they are lending, to whom, at what interest rate, etc.

There is no organisation which supervises the credit activities of lenders in the

informal sector. They can lend at whatever interest rate they choose. There is no one to
stop them from using unfair means to get their money back.

Compared to the formal lenders, most of the informal lenders charge a much higher
interest on loans. Thus, the cost to the borrower of informal loans is much higher.
1. Why is the supervision of the functioning of formal
sources of loans necessary?

Supervision of the functioning of formal sources of

loans is necessary because banks have to submit
information to the RBI on how much they are lending,
to whom they are lending and at what interest rate etc.

2. Compare formal sector loans with informal sector of

loans regarding interest only.

The formal sector charge low rate of interest and

the mode of repayment is easy, whereas, the
informal sector charge higher rate of interest and
the mode of repayment is very harsh.
3. What are the two categories of sources of
credit? Mention any one features of each.

The two categories of sources of credit are:

● Formal sources of credit: Reserve Bank of India

supervises the functioning of formal sources of
credit.

● Informal sources of credit: There is no

organisation to supervise the functioning of
informal sources of credit.
GLOBALISATION AND
THE INDIAN ECONOMY
 WHAT ARE MNCs?

● Multinational Corporation or MNC is a company

that owns or controls production in more than
one nation.

● Set up offices & factories for production in

regions where they can get cheap labour &
other resources.

● Aim- Low cost of production & greater profits.

CONDITIONS REQUIRED TO SET UP MNCs

● Closeness to Market

● Cheap skilled & unskilled labour

● Favourable government policies

 Sometimes, MNCs set up production jointly
with some of the local companies of a country

Benefit to local companies of joint

production:

- MNCs provide money for additional

investments, like buying new machines for
faster production.

- MNCs might bring with them the latest

technology for production.

Foreign trade: The process of buying and selling goods and

services between two or more than two countries.

Foreign investment: It involves capital flows from one country to

another, granting extensive ownership stakes in domestic
companies and assets.
 MOST COMMON ROUTE FOR MNCs

Investment is to buy up local companies & expand

production

EXAMPLE:

● Parakh Foods- small company bought

over by a large American Company —
Cargill Foods.

● Parakh food built large marketing

network in India & owned 4 oil refineries,
whose control has now shifted to Cargill.

● Cargill is now the largest manufacturer of

edible oil in India making five million
pouches daily.
Another way in which MNCs control production

● Large MNCs place their orders for productions with

small producers & sell them under their brand name.

● These MNCs have tremendous power to determine

price, quality, delivery, & labour conditions for these
distant producers.

SUM-UP

● Variety of ways through which MNCs spread their

production & interact with local producers in various
countries.

● By setting up partnerships with local companies, by using

the local companies for supplies, by closely competing
with the local companies or buying them up.

● MNCs are exerting a strong influence on production at

these distant locations.

● Result- production in these widely dispersed locations is

getting interlinked.
 FOREIGN TRADE

It is the exchange of capital, goods, and services

across international borders or territories.

BASIC FUNCTIONS OF FOREIGN TRADE

● Provides vast market to Producers.

● For buyers, import of goods produced in

another country is one way of expanding the
choice of goods.

● With the opening of trade, goods travel from one

market to another.

● Choice of goods in the markets rises.

● Prices of similar goods in the two markets tend

to become equal.

● Increased competition between producers of

two different countries.
 GLOBALISATION

● Globalisation is this process of rapid

integration or interconnection between
countries.

● MNCs play major role in the globalisation

process.

● More & more goods & services, investments

& technology are moving between
countries.

● Large part of foreign trade controlled by

MNCs.

● Result- greater integration of production &

markets across countries
FACTORS THAT HAVE ENABLED GLOBALISATION

TECHNOLOGY:

● Rapid improvement in technology has

stimulated the globalisation process.

● Example- the past 50 years have seen several

improvements in transportation technology.

● This has made much faster delivery of goods

across long distances possible at lower costs.

● Remarkable developments in information &

communication technology have made
communication accessible even in remote areas
of world.

● Information and communication technology (or

IT in short) has played a major role in spreading
out production of services across countries.
 FACTORS THAT HAVE ENABLED GLOBALISATION

LIBERALISATION OF FOREIGN TRADE & FOREIGN

INVESTMENT POLICY:

● Trade barrier- government-induced restrictions on

international trade, eg. tax on imports.

● Governments can use trade barriers to regulate

foreign trade & to decide what kinds of goods & how
much of each, should come into the country.

● After independence, Indian government had to put

barriers on foreign trade & foreign investment.

● Considered necessary- to protect the producers within

the country from foreign competition.

● Industries were just coming up in the 1950s & 1960s, &

competition from imports at that stage would not have
allowed these industries to come up.

● Thus, India allowed imports of only essential items

such as machinery, petroleum, fertilizers, etc.
Far reaching changes in Trade Policy- India
around 1991

● Government decided the time had come for Indian

producers to compete with producers around the
globe.

● Competition would improve the performance of

producers within the country.

● Producers within the country would have to improve

the quality of the products.

● Decision supported by powerful international

organisations.

● Thus, trade barriers were removed to a large extend.

LIBERALISATION: Removing barriers or restrictions set

by the government is what.

Trade, businesses are allowed to make decisions freely

about what they wish to import or export.
 WORLD TRADE ORGANISATION

● WTO- is an organisation whose aim is to liberalise

international trade.

● Who started WTO?

Developed countries in 1 January 1995

● WTO establishes- rules regarding international trade,

& sees that these rules are obeyed.

● Total number of member countries- 164. India joined

WTO- 1 January 1995.

Shortcomings:

● It is dominated by the developed countries who

manipulate its policies to favour their interest, thus
ignoring the developing countries.

● It is supposed to allow free trade, but the developed

countries have unfairly retained trade barriers
whereas it forced the developing countries to remove
the trade barriers.
 IMPACT OF GLOBALISATION

CONSUMERS:

● Globalisation & competition among producers, local &

foreign has been advantageous for consumers.

● They have greater choice of products with improved

quality & lower prices.

● Resultantly, people enjoy high standard of living that was

not possible before.

MNCS:

● Increased their investment in India over the past 20 years.

Meaningly, investing in India is beneficial for them.

● Invested in industries such as automobiles, electronics,

soft drink, etc. or services such as banking in urban areas.

● New jobs have been created in these industries.

● Local companies supplying raw materials have also

prospered.
 GLOBALISATION & SMALL PRODUCERS

● For small producers globalisation pose serious

challenge of either to compete or perish.

● Industries like batteries, plastics, toys, dairy

products & vegetable oil are some examples
which have been hit hard due to competition.

● Many have shut down making workers jobless.

● Notably, small industries in India employ the

largest number of workers (20 million) in the
country, next to agriculture.
 COMPETITION & UNCERTAIN EMPLOYMENT

● Globalisation have substantially impacted the workers life.

No job security- Now workers are employed flexibly.

● Large MNCs in the garment industry in Europe order their

products from Indian exporters.

● These MNCs look for cheapest goods to maximise their

profit. E.g.- to get bulky orders, Indian garment exporters
try hard to cut the cost.

● Exporters try to cut labour cost- since cost of raw materials

cannot be cut.

● Hire labour on temporary basis to avoid giving them wages

for full year.

● Workers are made to work long hours than usual such as

night shifts on regular basis during the peak season.

● To meet both ends workers work overtime in low wages.

● While MNCs make huge profits, workers are denied their fair
share and job security.
Explain the facilities available in SEZ that
are developed by Central and State
governments to attract foreign investment.

● Indian govt. in order to attract foreign investments

has set up industrial zones called Special
Economic Zones (SEZs).

● SEZs are to have world class facilities: electricity,

water, roads, transport, storage, recreational &
educational facilities.

● Companies which are set up in SEZ area will do not

have to pay taxes of initial period of 5 years.

● Govt. has allowed flexibility in labour laws such as

“short duration” hiring of workers due to work
pressure instead of regular basis to reduce cost of
companies.
Explain how government can ensure fair
globalisation to its people.

Fair globalisation would provide opportunities for all at the

same time ensuring that the benefits of globalisation are
more widely distributed. The government of a country plays a
major role in making this possible.

● Its policies must safeguard the interests of all citizens,

not just the wealthy and powerful.

● The government can ensure that labour laws are

followed and that workers' rights are upheld.

● It can help small producers improve their performance

until they are strong enough to compete.

● The government can establish trade and investment

barriers if necessary.

● The government can bargain for more equitable rules

at the World Trade Organization.

● It can also join forces with other developing countries

with similar interests to challenge the dominance of
developed countries in the World Trade Organization.
CASE-BASED
QUESTIONS
Read the given text and answer the following questions:

Globalisation and the pressure of competition have substantially changed the lives of workers. Faced with growing
competition, most employers these days prefer to employ workers ‘flexibly’. This means that workers’ jobs are no longer
secure.
Large MNCs in the garment industry in Europe and America order their products from Indian exporters. These large MNCs
with worldwide network look for the cheapest goods in order to maximise their profits. To get these large orders, Indian
garment exporters try hard to cut their own costs. As cost of raw materials cannot be reduced, exporters try to cut labour
costs. Where earlier a factory used to employ workers on a permanent basis, now they employ workers only on a temporary
basis so that they do not have to pay workers for the whole year. Workers also have to put in very long working hours and
work night shifts on a regular basis during the peak season. Wages are low and workers are forced to work overtime to
make both ends meet. While this competition among the garment exporters has allowed the MNCs to make large profits,
workers are denied their fair share of benefits brought about by globalisation

A Garment Worker
35 year old Sushila has spent many years as a worker in garment export industry of Delhi. She was employed as a
‘permanent worker’ entitled to health insurance, provident fund, overtime at a double rate, when Sushila’s factory closed in
the late 1990s. After searching for a job for six months, she finally got a job 30 km. away from where she lives. Even after
working in this factory for several years, she is a temporary worker and earns less than half of what she was earning
earlier. Sushila leaves her house every morning, seven days a week at 7:30 a.m. and returns at 10 p.m. A day off from work
means no wage. She has none of the benefits she used to get earlier. Factories closer to her home have widely fluctuating
orders and therefore pay even less.
1. Why do Indian garment exporters try to cut labour
costs?

Indian garment exporters try to cut labour cost so as

to get large orders from MNCs of Europe and America.
As cost of raw materials cannot be reduced, exports try
to cut labour costs.

2. What are the working conditions of the workers to

make their both ends meet?

● The workers are not paid for the whole year, and
are paid less.

● Their employment is not fixed.

● They have to put in very long working hours and

work night shifts on a regular basis during the
peak season.
3. What was Sushila’s employment condition before
the shut-down of garment factory in the late 1990s?

Sushila had spent many years as a worker in garment

export industry in Delhi. She was employed as
‘permanent worker’ entitled to health insurance,
provident fund, overtime at a double rate.
Read the given text and answer the following questions:

EXTRACT 1:

A news magazine published for London readers is to be designed and printed in Delhi. The text of the magazine is sent
through Internet to the Delhi office. The designers in the Delhi office get orders on how to design the magazine from the
office in London using telecommunication facilities. The designing is done on a computer. After printing, the magazines are
sent by air to London. Even the payment of money for designing and printing from a bank in London to a bank in Delhi is
done instantly through the Internet (e-banking)!

EXTRACT 2:

The agriculture sector provides the bulk of employment and a significant portion of the GDP in India. Compare this to a
developed country such as the US with the share of agriculture in GDP at 1% and, its share in total employment a tiny 0.5%.
And, yet this very small percentage of people who are engaged in agriculture in the US receive massive sums of money
from the US government for production and for exports to other countries. Due to this massive money that they receive,
US farmers can sell the farm products at abnormally low prices. The surplus farm products are sold in other country
markets at low prices, adversely affecting farmers in these countries. Developing countries are, therefore, asking the
developed country governments, “We have reduced trade barriers as per WTO rules. But you have ignored the rules of
WTO and have continued to pay your farmers vast sums of money. You have asked our governments to stop supporting
our farmers, but you are doing so yourselves. Is this free and fair trade?”
1. Analyse the role of Information Technology in
globalisation by giving three reasons

- IT enables the quick transfer of data and ideas

globally.

- IT plays a major role beyond national

boundaries.

- IT has made financial transaction very easy

across the globe.

2. Name an institution which has an aim to liberalise

the international trade

WTO
3. How far has the institution responsible for free and
fair trade succeeded in its aim? Explain by giving two
reasons.

WTO established rules regarding international trade

and sees that these rules are followed. But, in practice
it is seen that the developed countries don’t follow
WTO rules and retain trade barriers, whereas on the
other hand developing countries are forced to remove
trade barriers.