Economy – Basic Terms by Teju, NextGen IAS

Based on Previous Years’ UPSC and State PSC Question Papers

PDF – Table of Contents

Budget ........................................................................................................................................................................ 10

Full Budget........................................................................................................................................................................................................... 11

Vote on Account ............................................................................................................................................................................................... 11

Inflation ...................................................................................................................................................................... 13

Cost push inflation ........................................................................................................................................................................................... 13

Demand Pull Inflation...................................................................................................................................................................................... 13

Creeping inflation ............................................................................................................................................................................................. 14

Galloping inflation ............................................................................................................................................................................................ 14

Hyperinflation ..................................................................................................................................................................................................... 14

Core Inflation ...................................................................................................................................................................................................... 14

Headline inflation .............................................................................................................................................................................................. 14

Stagflation ............................................................................................................................................................................................................ 14
CPI Inflation ......................................................................................................................................................................................................... 15

Food Inflation ..................................................................................................................................................................................................... 15

Core Inflation ...................................................................................................................................................................................................... 15

WPI Inflation ....................................................................................................................................................................................................... 15

Deficits........................................................................................................................................................................ 17

Monetised deficit .............................................................................................................................................................................................. 17

Current Account Deficit .................................................................................................................................................................................. 18
Trade Deficit ........................................................................................................................................................................................................ 18

Twin deficit hypothesis ................................................................................................................................................................................... 19

Revenue Deficit .................................................................................................................................................................................................. 19

Effective Revenue Deficit ............................................................................................................................................................................... 19

Primary Deficit .................................................................................................................................................................................................... 19

Unemployment .......................................................................................................................................................... 20

Disguised Unemployment ............................................................................................................................................................................. 20

Seasonal Unemployment ............................................................................................................................................................................... 21
 Structural Unemployment ............................................................................................................................................................................. 21
Cyclical Unemployment .................................................................................................................................................................................. 21

Technological Unemployment ..................................................................................................................................................................... 21

Frictional Unemployment .............................................................................................................................................................................. 21

Unemployment Trap ........................................................................................................................................................................................ 21

Philips Curve ....................................................................................................................................................................................................... 21

Jobless Growth ................................................................................................................................................................................................... 22

Proportion Unemployed (PU) ...................................................................................................................................................................... 22
Unemployment Rate (UR) .............................................................................................................................................................................. 22
Activity Status – Usual Status ....................................................................................................................................................................... 22

Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) ................................................................................ 22

Employment ............................................................................................................................................................... 23

Labour Force Participation Rate .................................................................................................................................................................. 23

Worker Population Ratio (WPR) .................................................................................................................................................................. 23

Formal Sector Employment .......................................................................................................................................................................... 23

LPG .............................................................................................................................................................................. 23

Liberalisation ....................................................................................................................................................................................................... 23

Privatisation ......................................................................................................................................................................................................... 24

Globalisation ....................................................................................................................................................................................................... 24

Population .................................................................................................................................................................. 24

Population Explosion ....................................................................................................................................................................................... 24

Sources of Population Data .......................................................................................................................................................................... 24

Density of Population ...................................................................................................................................................................................... 25

Population Doubling Time ............................................................................................................................................................................ 25

Growth of Population ...................................................................................................................................................................................... 25

Standard Census Definition .......................................................................................................................................................................... 25
Demographic Dividend ................................................................................................................................................................................... 25

Growth rate of population ............................................................................................................................................................................ 26

Fertility Rate ........................................................................................................................................................................................................ 26

Infant Mortality Rate ........................................................................................................................................................................................ 26

Maternal mortality rate ................................................................................................................................................................................... 26

Life Expectancy................................................................................................................................................................................................... 26

Sex Ratio ............................................................................................................................................................................................................... 26

Child mortality .................................................................................................................................................................................................... 26

Perinatal mortality (PNM) .............................................................................................................................................................................. 26

 Fetal mortality .................................................................................................................................................................................................... 27
Neonatal mortality............................................................................................................................................................................................ 27

Census ................................................................................................................................................................................................................... 27

Taxes ........................................................................................................................................................................... 27

Direct and Indirect Taxes ............................................................................................................................................................................... 27

Cess ........................................................................................................................................................................................................................ 30

Surcharge ............................................................................................................................................................................................................. 30
Excise Duty ........................................................................................................................................................................................................... 31
Customs Duty ..................................................................................................................................................................................................... 31

Ad valorem tax and Specific Tax ................................................................................................................................................................. 32

MODVAT............................................................................................................................................................................................................... 32
Central Board of Direct Taxes (CBDT) ....................................................................................................................................................... 33

Revenue ...................................................................................................................................................................... 33

Tax Revenue ........................................................................................................................................................................................................ 33

Non-Tax Revenue ............................................................................................................................................................................................. 33
Non-Debt Capital Receipts ........................................................................................................................................................................... 33

Tax Buoyancy ...................................................................................................................................................................................................... 34

Expenditure ................................................................................................................................................................ 34

Capital Expenditure .......................................................................................................................................................................................... 34

Revenue Expenditure ....................................................................................................................................................................................... 34

Debt ............................................................................................................................................................................ 35

Debt Trap ............................................................................................................................................................................................................. 35

Net Debt Per Capita ......................................................................................................................................................................................... 35

External Debt ...................................................................................................................................................................................................... 35

Internal Debt ....................................................................................................................................................................................................... 36

Intellectual Property ................................................................................................................................................. 37

International Intellectual Property Index ................................................................................................................................................. 37

World Intellectual Property Organization (WIPO) ............................................................................................................................... 38
Intellectual Property Appellate Board (IPAB) ......................................................................................................................................... 38
Intellectual Property Rights ........................................................................................................................................................................... 38

Patents................................................................................................................................................................................................................... 38

Patent Prosecution Highway ........................................................................................................................................................................ 38

 Product Patent ................................................................................................................................................................................................... 39
Process Patent .................................................................................................................................................................................................... 39

Copyrights............................................................................................................................................................................................................ 39
Copyright Act...................................................................................................................................................................................................... 39

Trade marks ......................................................................................................................................................................................................... 39

Industrial Designs ............................................................................................................................................................................................. 39

Trade Secret ........................................................................................................................................................................................................ 40

Utility Model ....................................................................................................................................................................................................... 40

Finance Commission and its related terms ............................................................................................................. 40

14th Finance Commission ............................................................................................................................................................................... 40

15th Finance Commission ............................................................................................................................................................................... 41

GDP and its related terms ......................................................................................................................................... 42

Advance Estimates ............................................................................................................................................................................................ 43

Current Account (% of GDP) ......................................................................................................................................................................... 43

Debt-to-GDP ratio ............................................................................................................................................................................................ 44
What is gross value added? .......................................................................................................................................................................... 44

Gross National Product (GNP) ..................................................................................................................................................................... 46

Income Accruing (State Economy) ............................................................................................................................................................ 46

Income Originating (State Economy) ........................................................................................................................................................ 46

Gross State Domestic Product (GSDP) (State Economy) ................................................................................................................... 47

Gross Value Added (State Economy) ....................................................................................................................................................... 47

Net State Domestic Product (NSDP) (State Economy) ....................................................................................................................... 47

Cash to GDP Ratio ............................................................................................................................................................................................ 47

Money and its related terms .................................................................................................................................... 47

Reserve Money .................................................................................................................................................................................................. 47

Dear Money Policy ........................................................................................................................................................................................... 48
Cheap Money Policy ........................................................................................................................................................................................ 48

Currency Notes (Bank Notes) ....................................................................................................................................................................... 49

Cryptocurrency................................................................................................................................................................................................... 54

Money Multiplier ............................................................................................................................................................................................... 54

Banking and its related terms .................................................................................................................................. 54

Nationalisation of Banks ................................................................................................................................................................................ 54

Recapitalisation of Banks ............................................................................................................................................................................... 55
 Prompt Corrective Action .............................................................................................................................................................................. 56
Basel III .................................................................................................................................................................................................................. 56

Liabilities of Commercial Banks ................................................................................................................................................................... 56

Financial Assets of a Commercial Bank .................................................................................................................................................... 57

World Bank – Lending Instruments ........................................................................................................................................................... 57

Reserve Bank of India (RBI) ........................................................................................................................................................................... 57

Open Market Operations ............................................................................................................................................................................... 59

Monetary Policy Committee ......................................................................................................................................................................... 59
National Payments Corporation of India (NPCI) .................................................................................................................................. 59
NABARD-National bank for Agriculture and Rural Development ................................................................................................. 60

SHGs ....................................................................................................................................................................................................................... 60

Microfinance ....................................................................................................................................................................................................... 60
Regional Rural Bank ......................................................................................................................................................................................... 61

NBFC ...................................................................................................................................................................................................................... 62

Minimum Reserve Ratio ................................................................................................................................................................................. 62

Currency in Circulation ................................................................................................................................................................................... 63

Marginal Standing Facility ............................................................................................................................................................................. 63

Repo Rate ............................................................................................................................................................................................................. 63

Reverse Repo Rate............................................................................................................................................................................................ 64

CRR and SLR ........................................................................................................................................................................................................ 64

NDTL ...................................................................................................................................................................................................................... 66

Bank Rate ............................................................................................................................................................................................................. 66

Liquidity Adjustment Facility ........................................................................................................................................................................ 67

Liquidity aggregates ........................................................................................................................................................................................ 67

Green Banking .................................................................................................................................................................................................... 68

Base Rate of Interest ........................................................................................................................................................................................ 68

Market Stabilization Scheme (MSS) ........................................................................................................................................................... 68

Capital to Risk Weighted Assets Ratio ..................................................................................................................................................... 68

Seigniorage ......................................................................................................................................................................................................... 68

Sustainable Development Goals (SDGs) .................................................................................................................. 68

Why do we need SDGs? ................................................................................................................................................................................. 69

Voluntary National Review (VNR) Report................................................................................................................................................ 70

Types of Economy ..................................................................................................................................................... 70

Traditional economy ........................................................................................................................................................................................ 70

Free market economy ..................................................................................................................................................................................... 70
Command economy ........................................................................................................................................................................................ 70
 Mixed economy ................................................................................................................................................................................................. 71
Open economy .................................................................................................................................................................................................. 71

Closed economy ................................................................................................................................................................................................ 71

Capitalist economy ........................................................................................................................................................................................... 71

Socialist economy ............................................................................................................................................................................................. 71

Blue Economy ..................................................................................................................................................................................................... 72

Green Economy ................................................................................................................................................................................................. 72

Poverty ....................................................................................................................................................................... 72

Human Poverty Index ...................................................................................................................................................................................... 72

Head Count Ratio ............................................................................................................................................................................................. 72

Poverty Line ......................................................................................................................................................................................................... 72
International Poverty Line.............................................................................................................................................................................. 73

Sen Index .............................................................................................................................................................................................................. 73

Incidence of Poverty ........................................................................................................................................................................................ 73

World Poverty Clock ........................................................................................................................................................................................ 73

Global Multidimensional Poverty Index ................................................................................................................................................... 73

Imp Terms related to Agriculture ............................................................................................................................ 74

MSP ........................................................................................................................................................................................................................ 74

e-NAM ................................................................................................................................................................................................................... 75

APMC ..................................................................................................................................................................................................................... 75

Interest Subvention Scheme ......................................................................................................................................................................... 75

Food Credit and Non Food Credit ............................................................................................................................................................. 75

Kisan Credit Card Scheme ............................................................................................................................................................................. 76

Operation Barga ................................................................................................................................................................................................ 76

Operation Green................................................................................................................................................................................................ 76

Zero-Budget Natural Farming ..................................................................................................................................................................... 76

Index of Crop Diversification ........................................................................................................................................................................ 77

Direct Benefit Transfer (DBT) ........................................................................................................................................................................ 77

Operational Holdings ...................................................................................................................................................................................... 77

Peace Clause ....................................................................................................................................................................................................... 78
Contract Farming .............................................................................................................................................................................................. 78

Central issue prices........................................................................................................................................................................................... 78

Commission for Agricultural Costs and Prices (CACP) ....................................................................................................................... 79

Long Term Irrigation Fund ............................................................................................................................................................................ 79

Agro-Climatic Zone .......................................................................................................................................................................................... 79
‘License – Permit – Quota Raj’ ..................................................................................................................................................................... 79
Goods.......................................................................................................................................................................... 80

Normal Goods .................................................................................................................................................................................................... 80

Average Normal Goods .................................................................................................................................................................................. 80

Inferior Goods .................................................................................................................................................................................................... 80

Imp Terms related to Industry ................................................................................................................................. 80

Index of Industrial Production ..................................................................................................................................................................... 80

Central Public Sector Enterprises ................................................................................................................................................................ 81

Strategic Disinvestment.................................................................................................................................................................................. 81

Champions Sectors........................................................................................................................................................................................... 81

Startup India hub .............................................................................................................................................................................................. 82

Special Economic Zone (SEZ) ....................................................................................................................................................................... 82

PMI or Purchasing Managers’ Index (PMI).............................................................................................................................................. 82

Navaratna Status ............................................................................................................................................................................................... 82

Maharatna Status .............................................................................................................................................................................................. 83
Miniratna Status ................................................................................................................................................................................................ 83

National Company Law Tribunal (NCLT) .................................................................................................................................................. 83

National Company Law Appellate Tribunal (NCLAT) .......................................................................................................................... 83

Planning ..................................................................................................................................................................... 84

Planning Commission ...................................................................................................................................................................................... 84

Plan Holiday ........................................................................................................................................................................................................ 84

NITI Aayog ........................................................................................................................................................................................................... 84

Imp Bonds .................................................................................................................................................................. 85

Green bonds ....................................................................................................................................................................................................... 85

Blue Bonds ........................................................................................................................................................................................................... 86

Imp Terms related to Financial Market ................................................................................................................... 86

Components of Money Market in India ................................................................................................................................................... 86

Capital Market .................................................................................................................................................................................................... 86

Primary Market .................................................................................................................................................................................................. 87

Secondary Market ............................................................................................................................................................................................. 87

Capital Market in India.................................................................................................................................................................................... 87

Capital Market .................................................................................................................................................................................................... 87

Primary Market .................................................................................................................................................................................................. 87

Secondary Market ............................................................................................................................................................................................. 87

 Securities and Exchange Board of India (SEBI) ...................................................................................................................................... 88
SENSEX .................................................................................................................................................................................................................. 88

NIFTY ...................................................................................................................................................................................................................... 88
Bombay Stock Exchange ................................................................................................................................................................................ 89

Peer to peer lending (P2P) ............................................................................................................................................................................ 89

Venture Capital .................................................................................................................................................................................................. 89

Gilt Edged Market ............................................................................................................................................................................................. 89

Imp Terms related to Insurance ............................................................................................................................... 89

Insurance Penetration ..................................................................................................................................................................................... 89

Insurance Density .............................................................................................................................................................................................. 89

Penetration Rate ................................................................................................................................................................................................ 90

Imp Terms related to Balance of Payments ............................................................................................................ 90

Balance of Current Account .......................................................................................................................................................................... 90

Current Account Convertibility .................................................................................................................................................................... 90

Invisibles ............................................................................................................................................................................................................... 90
Foreign Exchange Reserves........................................................................................................................................................................... 90

Balance of Payments ........................................................................................................................................................................................ 90

Special Drawing Rights ................................................................................................................................................................................... 91

Foreign Capital ................................................................................................................................................................................................... 91

Foreign Direct Investment ............................................................................................................................................................................. 92

Foreign Portfolio Investment ....................................................................................................................................................................... 92

Foreign Institutional Investment ............................................................................................................................. 92

Participatory Notes........................................................................................................................................................................................... 93

Exchange Rate System .............................................................................................................................................. 93

Flexible Exchange Rate System ................................................................................................................................................................... 93

Floating Exchange Rate System .................................................................................................................................................................. 94

Imp Terms related to Foreign Trade ........................................................................................................................ 94

Import Quota ...................................................................................................................................................................................................... 94

Export Quota....................................................................................................................................................................................................... 94
Uruguay Round .................................................................................................................................................................................................. 94

Regional economic integration ................................................................................................................................................................... 95

Entrepot trade .................................................................................................................................................................................................... 95

 Export merchandising ..................................................................................................................................................................................... 95

Miscellaneous ............................................................................................................................................................ 95

Behavioural Economics ................................................................................................................................................................................... 95

Board for Industrial and Financial Reconstruction (BIFR) .................................................................................................................. 95
Business Reform Action Plan (BRAP) ......................................................................................................................................................... 96

Central Statistical Office (CSO) Divisions ................................................................................................................................................. 96

Central Statistics Office (CSO) ...................................................................................................................................................................... 97

Competition Act , 2002 ................................................................................................................................................................................... 98
Consumer Surplus............................................................................................................................................................................................. 98

Cost Inflation Index .......................................................................................................................................................................................... 98

Deflationary effect on an economy ........................................................................................................................................................... 98
Determinants of Economic Development ............................................................................................................................................... 98

Determinants of Economic Growth ........................................................................................................................................................... 99

Devaluation ......................................................................................................................................................................................................... 99

Disposable Income ......................................................................................................................................................................................... 100

Ease of doing business report ................................................................................................................................................................... 100

Economic Corridor .......................................................................................................................................................................................... 100

Environmental Kuznets curve (EKC) ......................................................................................................................................................... 100

Exclusive Economic Zone ............................................................................................................................................................................. 101

Financial Action Task Force (FATF) ........................................................................................................................................................... 101

Financial Capital............................................................................................................................................................................................... 102

Financial Rotation ........................................................................................................................................................................................... 102

Forward Market ............................................................................................................................................................................................... 102

GDI and GEM .................................................................................................................................................................................................... 102

Gini Coefficient ................................................................................................................................................................................................ 102

Human Development Index ........................................................................................................................................................................ 102

Imperfect Competition ................................................................................................................................................................................. 104

India’s statistical system ............................................................................................................................................................................... 104
Innovation Theory of Business Cycles..................................................................................................................................................... 104

International Development Association (IDA) ..................................................................................................................................... 104

International Finance Corporation (IFC) ................................................................................................................................................. 105

International Liquidity ................................................................................................................................................................................... 105
International Monetary Fund (IMF).......................................................................................................................................................... 105

Kuznets Curve in Economics ....................................................................................................................................................................... 106

Laffer Effect........................................................................................................................................................................................................ 106

Liquidity aggregates ...................................................................................................................................................................................... 107

Lorenz Curve ..................................................................................................................................................................................................... 107

 Marginal Cost ................................................................................................................................................................................................... 108
Miracle economies ......................................................................................................................................................................................... 108

Monopolistic competition ........................................................................................................................................................................... 108

Mudra Yojana ................................................................................................................................................................................................... 108

National Anti-Profiteering Authority (NAA) ......................................................................................................................................... 108

National Income .............................................................................................................................................................................................. 109

National Sample Survey Office (NSSO) .................................................................................................................................................. 109

Oligopsony ........................................................................................................................................................................................................ 110
Paradox of Thrift .............................................................................................................................................................................................. 110
Perfect Competition ....................................................................................................................................................................................... 110

Perfect Competition ....................................................................................................................................................................................... 110

Philips Curve ..................................................................................................................................................................................................... 110

PPAs...................................................................................................................................................................................................................... 111

Purchasing power parity (PPP)................................................................................................................................................................... 111

Recalibration ..................................................................................................................................................................................................... 111

Recapitalisation ................................................................................................................................................................................................ 111

Sectors ................................................................................................................................................................................................................. 111

Structural adjustment programs (SAPs) ................................................................................................................................................. 112

Swaminathan Commission .......................................................................................................................................................................... 112

Transfer Earnings............................................................................................................................................................................................. 113

Transfer Payments .......................................................................................................................................................................................... 113

Vicious Circle Argument ............................................................................................................................................................................... 113

X-inefficiency .................................................................................................................................................................................................... 113

Budget

➔ Budget comes from the old French bougette, meaning 'little bag'
➔ Budget Circular is issued in the month of September during the Budget cycle. It marks the
beginning of the Budget process.
➔ Made through a consultative process involving Ministry of Finance, NITI Aayog and spending
Ministries
➔ Prepared by the Budget Division Department of Economic Affairs of the Ministry of Finance
annually. The Finance Minister is the head of the budget making committee.
➔ Nodal body responsible for producing the Budget ➔ Budget Division of the Department of
Economic Affairs
➔ The printing process of the Union Budget papers is marked by the customer 'Halwa Ceremony' held
at North Block in Delhi
➔ Before presentation of the Budget, President's recommendation is obtained under Article 117(1) and
117(3) for introduction and consideration in the lower house of Parliament.
➔ Presented by Finance Minister
➔ According to Article 112 of the Constitution of India, the Union Budget of a year is a statement of the
estimated receipts and expenditure of the govt. for that particular year.

Full Budget

 A Full Budget is not just the presentation of annual finances of the government but an occasion to
change existing tax slabs, announce new schemes and sops for different sectors of the economy.
 A Full Budget includes the passage of a finance bill to get Parliament's approval for any tax
related changes.
 In an election year, the outgoing government doesn't tinker with the taxes or announce new
schemes and sops as these are left at the disposal of the new government.
 In order to manage it its expenditure for the interim period till a new government takes over
and announces the Budget, the outgoing government presents what is called a vote on account
or an interim budget to get the Parliament's approval for expenditure to be incurred for the next few
months.

Vote on Account

➔ In the absence of presentation of a Full Budget, the outgoing government seeks a vote on
account from the Parliament for proposed expenditure to be incurred in the next few months till
the new government takes over.
➔ There are no major announcements related to any new schemes or sops during a vote on account as
the new government's stance could differ from that of the outgoing government.
 Inflation

Low inflation has many benefits

• When inflation is low, consumers and businesses are better able to make long-range plans because
they know that the purchasing power of their money will hold and will not be steadily eroded year after
year.
• Low inflation also means lower nominal and real (inflation-adjusted) interest rates. Lower real
interest rates reduce the cost of borrowing. This encourages households to buy durable goods, such as
houses and autos. It also encourages businesses to invest in order to improve productivity so that they
can stay competitive and prosper without steadily having to raise prices.
• Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is
under long-term control, they do not react as quickly to short-term price pressures by seeking to raise
prices and wages. This helps to keep inflation low.

Cost push inflation

➢ Caused by an increase in prices of inputs like labour, raw material, etc.

➢ Increased price of the factors of production leads to a decreased supply of these goods.
➢ While the demand remains constant, the prices of commodities increase causing a rise in the
overall price level. This is in essence cost push inflation.

Demand Pull Inflation

➢ Due to increase in Aggregate demand

➢ Increase inAggregate demand mainly comes from either increase in Government Expenditure
(Expansionary Fiscal Policy) or by an increase in expenditure from Households and Firms.
➢ Root cause of demand pull inflation Aggregate demand > Aggregate Supply. This simply means
that the firms in the economy are not capable of producing the goods and services demanded by the
households in the present time period.
➢ The shortages of goods and services due to increase in demand fuels inflation.

Creeping inflation

➢ Inflation of a nation increases gradually, but continually, over time.

➢ The relatively small effect of creeping inflation, when viewed long-term, actually adds up to a pretty
significant increase in the cost of living.

Galloping inflation

➢ ‘Very high inflation’ running in the range of double digit or triple digit (i.e., 20 per cent, 100 per cent
or 200 per cent in a year)

Hyperinflation

➢ This form of inflation is ‘large and accelerating’ which might have the annual rates in million or even
trillion.
➢ In such inflation not only the range of increase is very large, but the increase takes place in a very short
span of time, prices shoot up overnight.

Core Inflation

➢ Inflation measure which excludes transitory or temporary price volatility as in the case of some
commodities such as food items, energy products etc.
➢ Reflects the inflation trend in an economy.
➢ Change in the costs of goods and services but does not include those from the food and energy
sectors.
➢ Excludes these items because their prices are much more volatile.
➢ Most often calculated using the consumer price index (CPI), which is a measure of prices for goods
and services.

Headline inflation

➢ A measure of the total inflation within an economy, including commodities such as food and
energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.
➢ RAW Inflation figure

Stagflation
➢ Situation in which the inflation rate is high, the economic growth rate slows, and unemployment
remains steadily high.
➢ It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate
unemployment.

CPI Inflation

➢ Comprehensive measure used for estimation of price changes in a basket of goods and services
representative of consumption expenditure in an economy is called consumer price index.
➢ Inflation is measured using CPI. The percentage change in this index over a period of time gives the
amount of inflation over that specific period, i.e. the increase in prices of a representative basket of
goods consumed.

Food Inflation

➢ Food inflation refers to the condition whereby there exist increase in wholesale price index of
essential food items (defined as food basket) relative to the general inflation or the consumer
price index

Core Inflation

➢ An inflation measure which excludes transitory or temporary price volatility as in the case of some
commodities such as food items, energy products etc.
➢ It reflects the inflation trend in an economy.

WPI Inflation

o WPI index reflects average price changes of goods that are bought and sold in the wholesale
market.
o Some countries (like the Philippines) use WPI changes as a central measure of inflation.

Wholesale Price Index (WPI)

➢ Price of a representative basket of wholesale goods

➢ Focuses on the price of goods traded between corporations, rather than the goods bought by
consumers, which is measured by the Consumer Price Index
➢ Purpose of the WPI ➔ To monitor price movements that reflect supply and demand in industry,
manufacturing and construction
➢ Helps in analyzing both macroeconomic and microeconomic conditions
➢ Published by Office of Economic Adviser, Ministry of Commerce and Industry
➢ Base year of All-India WPI ➔ revised from 2004-05 to 2011-12 in 2017

Consumer Price Index CPI

➢ Measures changes in the price level of a weighted average market basket of consumer goods and
services purchased by households.
➢ It measures changes over time in the level of retail prices of selected goods and services on which
consumers of a defined group spend their incomes.
➢ Base Year for CPI ➔ 2012

Of these, the first three are compiled by the Labour Bureau in the Ministry of Labour and
Employment. Fourth is compiled by the Central Statistical Organization (CSO) in the Ministry of
Statistics and Programme Implementation.

Difference between CPI and WPI

➢ WPI, tracks inflation at the producer level and CPI captures changes in prices levels at the consumer
level.
➢ Both baskets measure inflationary trends (the movement of price signals) within the broader economy,
the two indices differ in which weightages are assigned to food, fuel and manufactured items.
➢ WPI does not capture changes in the prices of services, which CPI does.
➢ In April 2014, the RBI had adopted the CPI as its key measure of inflation.

Producer Price Index

 It measures the average change in the prices of goods and services, either as they leave the place
of production called Output PPI or as they enter the production process called Input PPI.
 Output indices measure the average change in prices that producers receive for their outputs
 Input indices measure the average change in prices that producers pay for their inputs.
 PPI contrasts with other measures such as the Consumer Price Index (CPI) which measures changes in
prices from buyers or consumers perspective.

What about the comparisons between PPI & WPI? What are the features of it? Which is the most
viable one?

• Wholesale Price Index (WPI) basket tracks prices of bulk transactions at first stage of all intermediate
and final products.
• Drawback of aggregate basket of WPI involves multiple counting leading to bias in measures of
inflation.
• Multiple counting occurs when the price for a specific commodity and the inputs used for its
production are included in an aggregate index.
• PPIs reduce the distortion arising from multiple counting by deriving weights from Supply Use
Table compiled by the CSO.
• Scope of PPI extends to services which are not presently covered under WPI.
• Benefits of migrating from WPI to PPI are to cover bulk transactions of all goods and services.
• Do away with the bias of double counting in WPI
• To compile indices that are consistent with the National Accounts Statistics (NAS) for use as deflators.

Using population proportion as weights, an all India index as weighted average of city indices
has been computed in-house

Deficits

➢ A deficit occurs when expenses exceed revenues

➢ Imports exceed exports, or liabilities exceed assets
➢ Revenue deficit (RD) It is the difference between the revenue receipts (RR) and the revenue
expenditure (RE)
➢ Effective Revenue deficit (ERD) It is defined as the difference between the revenue deficit and
creation of capital assets.
➢ Fiscal deficit (FD)It is the difference between what government earns and its total expenditure
(excluding non-debt creating capital expenditure)
➢ Budget deficit The difference between the total budgeted receipts and expenditure
➢ Primary deficit It is the difference between fiscal deficit and interest payments

Monetised deficit

➢ Borrowings made from RBI through printing fresh currency

➢ The printed money is called high power money
➢ FRBM act disallow RBI to do this under normal conditions

What is fiscal deficit and what is its impact on the GDP?

• Fiscal deficit is the difference of government expenditure and government revenue.(assume that
government expenditure is more than revenue).
• More fiscal deficit means government has no money, he has to borrow money from central bank or
through some bond/scheme.
• If government is borrowing from RBI, in other words RBI has to print more money, so it will
increase the liquidity of money in the market. So people will have more money in their hand, but we
have limited resources. For example, before there was 5 car buyers for 1 car, now there is 10 car buyer