RRP - (Prelims) Economy Ready Reckoner

RRP – (Prelims) Economy Ready Reckoner
www.laexias.com Page 1 elearn.laex.in

RRP-(Prelims)
ECONOMY READY RECKONER
INDEX
Sl. No. Topic Page No.
1. Basic Concepts of Economy 1 – 10
2. Planning 10 – 14
3. Fiscal Policy 14 – 19
4. Monetary Policy and Banking 19 – 23
5. Banking System in India 23 – 33
6. Taxation 34 – 40
7. Financial Markets 40 – 49
8. Inflation 49 – 52
9. Poverty 52 – 55
10. Unemployment 55 – 58
11. Agriculture 58 – 66
12. Industry and Infrastructure 66 – 69
13. Balance of Payments (BOP) 69 – 73
14. Foreign Investment 73 – 75
15. Economic Integration 75 – 78
16. WTO: Evolution and Contemporary Issues 79 – 87
17. Reports and Indices 87 – 89
18. Important Graphs 90 - 92

economies in
1. Basic Concepts of Economy 17th, 18th
centuries
Economics is a social science concerned  Could not
address great
with the production, distribution and
depression
consumption of goods and services.
(1929)
Branches of Economics:
 Socialists believe larger part of
economic resources should be in
government hands to achieve
socioeconomic objectives.
 Nehruvian socialism – coexistence of
private and public sector
 Mao’s socialism –Complete
dominance of public sector
 Gandhian Economics-
Economics it is the set of
ideas that Gandhi propounded for
economic management and
distribution
Economic Agents:
Individuals
ndividuals or institutions that take Structural Composition of an Economy:
economic decisions, may be – Producers,
Consumers, Government, Corporations,
Banks etc.
Role of State in an Economy:

John Liberals &
Adam Smith
Keynes Neoliberals
 Classical
economy
Need for
 If buyers and
state
sellers can
interventi
make decision
on at Minimal
based on
macro state
Individual self-
scale intervention  Primary sector: Describes all
interest, it
in an industries that are engaged in the
automatically
Ex: New economy extraction of natural resources or the
ensures
Deal
welfare of production of raw materials. Ex:
program Ex: IMF,
country. Farming, Fishing, Mining etc.
in USA to world bank
 The state shall  Secondary sector: It includes all
deal with policies
not intervene
Great industries that are concerned with
in the
depressio the manufacturing of usable products
product
economy.
n or finished goods. Ex
Ex: Heavy
 Ex: Laissez
faire Industry (steel, chemical, automotive)

and Light Industry (food, apparel,  Luxury good: As income increases,

cosmetics) etc. demand for certain goods increases.
 Tertiary sector: Describes all Ex: Gold
industries that provide services to  Complementary goods:goods Goods which
other businesses or final consumers. are used together. Ex: TV and DVD
Ex: Retail, Healthcare, Insura
Insurance etc. player, Pen and refill etc
 Quaternary sector:: It includes all  Substitute goods:
goods Goods which are
industries that are concerned with alternatives. Ex: Tea and coffee
the creation and distribution of  Veblen / Snob good:good A good where
knowledge. Ex: Research and an increase in price encourages
development, Education etc. people to buy more of it. This is
 Quinary sector:: Highest levels of because they think more expensive
decision making in an economy. goods are better. Ex: Diamonds,
Formal and Informal sectors ctors in the limited edition cars etc
economy:  Giffen good: Demand goes up as and
 Formal Sector- This sector is one when prices increase, it’s a Symbol
that is registered with the of status.
government, and they are regulated  Public good:: Non rival consumption
by many government laws like (one’s consumption does not diminish
companies act, factories act. them for others) non-excludable.
non Ex:
 Informal Sector- The unorganised park, defence etc
sector refers to those enterprises  Private goods:: Is both rival (ex: club
whose activities or collection of data membership) and excludable (if I own
is not regulated under any legal a house, others cannot use it).
provision or do not maintain any  Merit goods
goods: Have positive
regular accounts Ex: Farmers, externalities ex: health, education
landless labourers, street venders etc.  Demerit
emerit goods
goods: Have negative
externalities. Ex: Alcohol, cigarettes
Types of Goods
etc
 Intermediate good: An item used by
Circular flow in a simple economy
other producers as material input for
production Ex: Rubber used for tyres. Measurement of economic growth
 Final goods: An item that is meant
for final use and will not pass
through any more stages of
production or transformations. Ex:
Car.
 Consumer goods:: Goods th that are
consumed when purchased by their
ultimate consumers. Ex: Clothes
 Capital goods:: Goods which are of
durable character used in the
production process like tools,
machines.

National Income Accounting balances of primary income of all

 It refers to a set of rules and resident institutional units.
techniques that are used to measure  Market price (MP) refers to actual
the output of a country. transacted price and includes indirect
taxes.
Measurement of Economic Growth  Factor cost (FC) refers to actual cost
 Economic growth is the increase or of production it includes government
decrease in the value of goods and grants and subsidies but excludes
services produced in an economy indirect taxes.
 National income is the aggregate  Transfer payment
ment – is the payment
money value of all incomes earned by by the government in grants,
individualss and enterprises. allowances, pensions etc. to people
 Gross investment is that part of our such as pensioners, widows, sick or
final output that comprises of capital unemployed people or others with
goods. little or no income. It does not
 Net Investment = Gross investment – include subsidies given by
Depreciation government.
 Depreciation:: Subtraction from gross Ex: PM KISAN amount transfer
transf
investment to accommodate wear and
tear of capital. Factors of Production in an Economy
 GDP (Gross Domestic Product) is
the total market value of all final
goods and services produced within
the geographic boundaries of a
country during a specified period of
time, normally a year.
 Nominal GDP refers to current year
production of final goods and
services. It is not corrected for
inflation.
 Real GDP refers to current year
production of goods and services GDP@FC = GDP@MP – indirect taxes +
valued at base year prices. Real GDP subsidies
NDP@FC = GDP@FC – depreciation
is corrected for inflation
inflation.
National income (NNP@FC) = GNP @MP –
 GDP Deflator – Measure of iinflation
depreciation
calculated as the ratio of GDP at GDP@MP = GNP @ MP – net income from
current prices to GDP at constant abroad
prices. GNP @ FC = GNP @ MP – net indirect taxes
 Base year:: it is a year in which prices NDP @MP = NNP@MP – net income from
are constant, not much fluctuating. abroad
 Gross National Income (GNI): it is NNP @FC=NNP @MP–– indirect taxes
the aggregate value of the gross

Note: GDP @ MP = GNP @ MP – net income Gross

from abroad or income earned from National
abroad. Expenditure

Depreciation
Income earned from abroad includes,
=
1. Trade balance = Exports - Imports
Net National Income = Net National
(negative)
Product = Net National Expenditure
2. Interest of external loans-Net output
w.r.t interest payments (negative)
Gross Value Added
3. Private remittances (positive)
Gross value added (GVA) is an economic
productivity metric that measures the
Therefore, GNP = GDP + (1 + 2 + 3) as 1
contribution of a corporate subsidiary,
and 2 are negative GNP = GDP  (1 + 2 + 3)
company or municipality to an economy,
i.e., GNP < GDP
producer, sector or region.
Three methods of National Accounting

GDP = GVA + taxes on products –
 Expenditure method: Measuring the subsidies on products
aggregate value of spending that the GVA = GDP - indirect taxes
firms receive for the final goods and
services which they produce. Difference between GDP and GNP
 Product method: Measuring the Gross Domestic Gross National
aggregate value of final goods and Product (GDP) Product (GNP)
services produced by all the firms. It is the value of a It is the value of all
 Income method: Measuring the sum nation's final finished goods and
domestic goods and services owned by a
total of all factor payments.
services during a country's residents
specific time period. over a period of time.
3 Methods Of Calculating National Income
GDP: Consumer GNP: GDP+ NR (Net
Income Out Put Expenditure
spending + receipts from abroad
Methods Method Method
Government or inflows from
Gross Gross Gross
spending + abroad) – NP (Net
Domestic Domestic Domestic
Investments + Net payment outflow to
Income product Expenditure
exports foreign assets)
+ + +
Application: To see Application: To see
Net Income Net Income Net Income
the strength of how the nationals of
from from from Overseas
country’s local a country are doing
Overseas Overseas and Exports
economy economically
= = 
GDP is the most GNP is not used
Gross Gross Imports
commonly used by much by global
National National =
global economies. economies
Income Product Gross
  National
Depreciation Depreciation Expenditure+
= = Subsidies-tax

Difference between GDP and GVA Gross Capital Formation (GCF)

Gross domestic Gross Value  The percentage of the investment
product (GDP) Added (GVA) made each year out of the total GDP
It the sum of private It provides the is called Gross Capital Formation
consumption, gross rupee value for  High GCF denotes higher rate of
investment in the the amount of savings in the economy which is
economy, goods and required for high rate of production,
government services produced capital formation, changes in
investment, in an economy production techniques
government after deducting  GCF includes capital formation in
spending and net the cost of inputs public sector, private sector and also
foreign trade and raw materials household sector
(difference between that have gone
exports and imports) into the CSO vs NSSO
production of National Sample
Central Statistical
those goods and Survey Office
Office (CSO)
(NSSO)
services.
It is responsible for
New GDP Series 2011-12 coordination of
 Change of base year – 2004-05 to statistical activities in It is responsible for
2011-12 the country and for conducting socio-of
evolving and economic surveys.
 Change in GDP calculation to using
maintaining statistical
market prices rather than factor
standards.
costs.
 Adopted the international practice of The surveys on
valuing industry-wise estimates as Its activities include Consumer
compilation of Expenditure,
gross value added (GVA) at basic
National Accounts; Employment –
prices.
conduct of Annual Unemployment,
Survey of Industries Social Consumption
GDP Back Series and Economic (Health, Education
 An expert committee set up by Censuses, compilation etc.), Manufacturing
National Statistical Commission of Index of Industrial Enterprises, and
(NSC) released recently the report on Production, as well as Service Sector
back series GDP data. Consumer Price Enterprises are
 The back-series data provides the Indices carries out once in
earlier years’ data using the new 5 years by them.
calculations. It also deals with The survey of Land

 It helps in understanding the various social and Livestock
economy, its size, growth rate more statistics training, Holding and Debt
accurately. international and Investment are
cooperation, Industrial carried out once in
Classification etc. 10 years.

MOSPI has merged the CSO and NSSO To recover an economy, governments go for
into National statistical office (NSO). tax breaks, interest cuts, an increase in
the salaries etc.
Note: National statistical commission
established in 2006, based on Rangarajan Boom: Accelerate and prolonged increase
commission,, oversees statistical works in in the demand, it exceeds sustainable
India. production, economy heats up and faces
structural problems, demand and supply
Business Cycle
Disequilibrium.
The business cycle describes the rise and
fall in production output of goods and
Economic Recession
ecession - is a period of
services in an economy. Business cycles
general economic decline and is typically
are generally measured using the rise and
accompanied by a drop in the stock
fall in real gross domestic product (GDP) or
market, an increase in unemployment, and
GDP adjusted for inflation.
a decline in the housing market.
 When a slowdown leads to negative
growth it is recession.
 It is less severe than a depression.
depre
Double-Dip- Depression: A recession

followed by a short-lived
short Recovery and
followed by another recession. GDP growth
sliding back to negative after two positive
growths.
Characterized by four stages
 Depression Economic Slowdown-
Slowdown A situation in which
 Recovery GDP growth slows but does not decline.
decline
 Boom For example, if GDP goes from 5% growth
 Recession to 3% growth, an economy is experiencing
a slowdown.
Depression - A depression is a severe and
prolonged downturn in economic activity. It In November 2020, RBI in its bulletin said
is as an extreme recession that lasts three that India has entered a ‘Technical
or more years or leads to a decline in real Recession’ in first half of 2020-21
2020 for first
gross domestic product (GDP) of at least 10 time in its history.
percent.
Ex: The Great Depression of 1930 Terminologies With Respect To
Recession:
Recovery: Upturn in aggregate demand in  Expansionary Phase: When the
turn lead to increase in production level overall output of goods and services
and new investments. Increase in inflation, (measured by GDP) increases from
Unemployment rate starts declining. one quarter to another, the economy
is said to be in expansionary phase.

 Recessionary Phase: When the progress when real GDP has declined
overall output of goods and services for at least two consecutive quarters
(measured by GDP) decreases from in order to get around the empirical
one quarter to another, the economy technicalities associated with the
is said to be in recessionary phase. In recession.
this phase, the GDP contracts from
one quarter to another. Recovery - Economic recovery is the
 Business cycle: In an economy, the business cycle stage following a
expansionary phase and recessionary recession that is characterized by a
phase together are called a “business sustained period of improving business
cycle” activity.
 Technical Recession: It is often
considered a recession to be in
Types of Economic Recovery:

Recovery
Features Graph
Type
It is the most-optimistic scenario in

which the economy quickly rises after
an economic crash.
Z shaped
In this economic disruption lasts for a
small period wherein more than people’s
incomes, it is their ability to spend is
restricted.
Here the economy quickly recoups lost

ground and gets back to the normal
growth trend-line. In this, incomes and
V shaped jobs are not permanently lost, and the
economic growth recovers sharply and
returns to the path it was following before
the disruption.

In this, the economy, after falling,

struggles around a low growth rate for
some time, before rising gradually to
U shaped usual levels.
In this case several jobs are lost and

people fall upon their savings.
It is a dangerous creature. In this, growth

falls and rises, but falls again before
recovering, thus forming a W-like chart.
W shaped
The double-dip depicted by a W-shaped
recovery can be due to the second wave
of the pandemic.
In this, the economy fails to regain the

level of GDP even after years go by.
L shaped
The shape shows that there is a
permanent loss to the economy’s ability to
produce

It is an unrealistic scenario. The growth

J shaped rises sharply from the lows much higher
than the trend-line and stays there
A "K-shaped" recovery is somewhere

between a "V" and "L", depending on type
of employment
K shaped
K shaped economic recovery, which allows
workers at the top to prosper while
sending working class American into
further debt

Growth vs Development
2. Planning
A five-year
year plan formed the most basic unit
of planning in India. Efforts towards
GDP, GVA, GNP all measure the
economic planning in India began even
quantitative growth while neglecting the
prior to independence.
Qualitative Progress.
Hence following indices were brought as National Planning Committee (1938)

alternative to measure growth. Subhas Chandra Bose set up National
 Human Development Index
Index- HDI Planning Committee in 1938 under the
 Inequality Adjusted HDI chairmanship of J.Nehru.
 Social Progress Index
The Bombay Plan (1944)
 National Happiness Index
In 1944 Eight Industrialists of Bombay viz.
 Green GDP
Mr. JRD Tata GD Birla, Purshottamdas
Demand and Supply Side Economics Thakurdas, LalaShriram, Kasturbhai
Lalbhai, AD Shroff, Ardeshir
Arde Dalal, & John
Mathai working together prepared what is
known as “Bombay Plan”. It
recommended a substantially
interventionist state and an economy
with a sizeable public sector.
Gandhian Plan (1944)
This plan was drafted by S.N. Agarwal,

Agarwal
principal of Wardha Commercial College. It
emphasized the economic
decentralization with primacy to rural
development by developing the cottage
industries.

People’s Plan (1945) with particular emphasis

People’s Plan (1945) was drafted by MN on the development of
Roy. It gave equal importance to both basic and heavy
agriculture and industries. This plan was industries
(iii) large expansion of
for ten years. It recommended
employment
nationalization of all agriculture and
opportunities
production. (iv) Reduction of inequalities
in income and wealth
Sarvodaya Plan (1950) and a more even
Sarvodaya Plan as drafted by Jaiprakash distribution of economic
Narayan. This plan itself was inspired by power.
Gandhian Plan and Sarvodaya Idea of  Aimed at securing a
Vinoba Bhave. This plan emphasized on marked advance
agriculture and small and cottage towards self-sustaining
industries. growth.
 The Plan aimed at
increasing the national
Five-year plans after independence
income by about 30 per
The concept of economic planning in India
cent
is derived from the Russia (then USSR).
India has launched 12 five year plans so Objectives:
far. First five-year plan was launched in (i) increase in the national
1951. income of over five per
Third Five
Plan Description cent per annum
Year Plan
 Highest priority to (ii) achieve self-sufficiency
(1961-1996)
agriculture including in food grains and
irrigation and power increase agricultural
First Five projects production to meet the
Year Plan  Aimed at increasing the requirements of industry
(1951-1956) rate of investment from and exports
five to about seven per (iii) expand basic industries
cent of the national (iv) fully utilize the
income. manpower resources of
 To promote a pattern of the country and ensure a
development, which substantial expansion in
would ultimately lead to employment
the establishment of a opportunities
socialistic pattern of  The situation created by
Second Five
society in India. the Indo-Pakistan
Year Plan
conflict in 1965, two
(1956-1961)
Aims: Annual Plan successive years of
(i) an increase of 25 per (1966-1969) severe drought,
cent in the national devaluation of the
income currency, general rise in
(ii) rapid industrialization prices and erosion of

resources available for systematic approach with

Plan purposes delayed greater management,
the finalization of the efficiency and intensive
Fourth Five Year Plan. monitoring in all sectors.
 Instead, between 1966  emphasized policies and
and 1969, three Annual programmes, which
Plans were formulated aimed at rapid growth in
within the framework of food grains production,
the draft outline of the increased employment
Seventh
Fourth plan. opportunities and
Five Year
 Aimed at accelerating Plan
productivity within the
the tempo of framework of basic
(1985-1990)
development of reducing tenets of planning,
fluctuations in namely, growth,
agricultural production modernization, self
as well as the impact of reliance and social
Fourth Five uncertainties of foreign justice.
Year Plan aid.  The Eighth Five-Year
(1969-1974)  Particular emphasis on Plan (1990-95) could not
improving the condition take off due to the fast-
of the less privileged and changing political
Annual
weaker sections situation at the Centre.
Plans
especially through
(1990-1992)
 basic thrust of these
provision of employment Annual Plans was on
and education. maximization of
 formulated against the employment and social
backdrop of severe transformation.
inflationary pressures.  growth targets were
 objective were to achieve planned to be achieved
self- reliance and adopt with relative price
measures for raising the stability and substantial
Fifth Five
consumption standard of improvement in the
Year Plan
people living below the country’s Balance of
(1974-1979)
poverty line Payments.
 Gave high priority to Eighth Five
bring inflation under Year Plan Salient features of
control and to achieve (1992-1997) economic performance
stability in the economic  Faster economic growth
situation.  Faster growth of
Rolling Plan (1979-1980) manufacturing sector
 Removal of poverty was and agriculture and
the foremost objective of allied sectors
Sixth Five
the Sixth Plan  Significant growth rate in
Year Plan
(1980-1985)
 Stress was laid on import and export
tackling interrelated Ninth Five  launched in the fiftieth
problems through a Year Plan year of India’s

(1997-2002) Independence. economic and social

 Aimed at achieving a conditions of our people.
targeted GDP growth rate  Last Five Year Plan
of seven per cent per
annum and there was NITI Aayog:
emphasis on the seven Government scrapped Planning
identified Basic Minimum commission and, in its place, it has
Services (BMS) introduced NITI Aayog.
 Also aimed at pursuing a
policy of fiscal NITI Aayog Composition:
consolidation, reduction  Prime Minister of India as the
in the revenue deficit of Chairperson. Vice-chairperson to be
the Government, appointed by the PM.
decentralization of  Governing Council comprising the
planning and Chief Ministers of all the States and
implementation through
Lt. Governors of Union Territories.
greater reliance on States
 Experts, specialists and
and Panchayati Raj
Institutions.
practitioners with relevant domain
knowledge as special invitees
 approved by the National
Development Council nominated by the Prime Minister.
(NDC)  Regional Councils will be formed to
 aims at harnessing the address specific issues and
benefits of growth to contingencies impacting more than
improve the quality of life one state or a region.
Tenth Five
of the people
Year Plan Planning
(2002-2007)
 Plan recognized the rapid Niti Aayog
Commission
growth in the labour
Prime
force Chairperson Prime Minsiter
Minister
 Plan addresses the issue Deputy
of poverty and the Vice- Appointed by Chairman
unacceptably low levels Chairperson PM (Nominated-
of social indicators. Cabinet Rank)
 Provided a National
Governing CM’s and
comprehensive strategy Development
Council LG’s
for inclusive Council
Eleventh
development, building on Secretaries or
Five Year To be known
the growing strength of member
Plan as the CEO
the economy, while Member secretaries
(2007-2012) and to be
also addressing Secretary were appointed
appointed by
weaknesses that have through usual
PM
process
surfaced.
To have part
 Recognizes that the
Twelfth Five time No provision
objective of development Part time
Year Plan members for part time
is broad- based members
(2012-2017) depending on members
improvement in the the need

Last Increasing government

Fewer than
Full time commission spending provides the
Planning
members had 8 full time
Commission Increase funds needed for
members
Government consumers and
Spending businesses to purchase
3. Fiscal Policy goods and service.
Demand is increased.
Fiscal Policy is that part of government
Contractionary Fiscal Policy
policy concerned with raising revenue
Action Effect
through taxation and spending for socio
Increasing tax,
economic development.
expenditures decrease,
money available for
Objectives of fiscal policy:
Raise Taxes spending decreases, so
 Growth
consumers and
 Equity
businesses spend less.
 Holistic development of all sectors of
Demand is decreased.
economy
Decreasing government
 Employment
Decrease spending reduces the
 Export promotion
Govern funds needed for
 Labour intensive growth ment consumers and
 Sustainability Spendin businesses to purchase
g goods and services
demand is decreased.
 Revenue budget: Revenue budget

includes income and expenditure for
the year and those that will be
incurred regularly in the running of
businesses. Ex: sales, purchase,
salaries, wages and rent.
 Capital budget: A capital budget
estimates inflows and outflows on
account of capital expenses. Capital
Types of Fiscal Policy expenses mean those expenses which
Expansionary Fiscal Policy will be incurred for asset creation.
Action Effect Ex: plant & machinery, shares,
Decreasing tax, savings furniture etc
increases, available funds  Revenue receipts: These are
for spending increases, so recurrent receipts.
receipts These include
Lower Taxes revenue raised from tax and non-tax
non
consumers and
businesses purchase sources.
more. Demand increases.

Ex: Tax resources: Income tax, 4. Finance Bill [Article 110(a)]: It is

corporation tax, corporation tax, presented to enact a law for
excise duty etc. imposition, abolition, remission,
 Non-Tax resources: User charges, alteration or regulation of taxes
interest receipts, interest dividends proposed in the Budget.
etc
 Revenue expenditure: It does not Deficits
create any assets. It is incurred on  A deficit occurs when expenses
maintenance and consumption of the exceed revenues, imports exceed
government. Ex: Salaries, interest exports, or liabilities exceed assets.
payments, defence, subsidies  Revenue Deficit (RD): It is the
 Capital account receipts: These are difference between the revenue
money raised through borrowing receipts (RR) and the revenue
(debt) or sale of assets (non-debt) Ex: expenditure (RE).
Recoveries of loan; borrowing from
India and abroad; disinvestment RD= RR-RE
proceeds  Effective Revenue deficit (ERD): It
 Capital account expenditure: is defined as the difference between
Expenditure made for asset creation. the revenue deficit and creation of
Ex: Loans repaid, asset creation in capital assets.
infrastructure and social areas  Fiscal Deficit (FD): It is the
difference between what government
Components of Budget earns and its total expenditure
1. Annual Financial Statement (excluding non-debt creating
[Article 112]: This document capital expenditure)
comprises the receipts and FD= (Revenue receipts + non-debt
expenditures of the government of creating capital receipts)- Total
current year, previous year and expenditure
budget year in three separate parts  Budget Deficit: The difference
viz. Consolidated Fund of India, between the total budgeted receipts
Contingency Fund of India and and expenditure.
Public Account of India. BD = Budgetary receipt – Budgetary
2. Demands for Grants [Article 113]: expenditure
The estimates of expenditures are  Primary deficit: It is the difference
presented to Lok Sabha in the form of between fiscal deficit and interest
Demands for Grants. Ministry wise payments
demand for grants is presented to Lok PD = FD-interest payment
Sabha. Deficit financing: financing of gap
3. Appropriation Bill [Article 114(3)]: between government receipts and
The article 114(3) stipulates that no expenditure.
amount can be withdrawn from the
Consolidated Fund of India without
enactment of appropriation bill.

How does the government manage its document sets forth a three-year
deficits? rolling target for the expenditure
1. Monetized deficit – Borrowings indicators with specification of
made from RBI through printing fresh underlying assumptions and risks
currency. The printed money is called involved.
high power money. FRBM act
disallow RBI to do this under normal FRBM ACT, 2003
conditions  In the Fiscal Responsibility & Budget
2. Ways and Means Advances (WMA): Management Act made obligatory for
The Reserve Bank of India gives the govt. to reduce its RD & FD.
temporary loan facilities to the centre  Reduction beginning from 2004 – 05.
as a banker to government against Yearly reduction from 2004 - 05
adhoc treasury bill. There is no 2008 – 09
collateral but penal interest rate is RD 0.5% of GDP 0
charged. FD 0.3% 3%
By 2016-17 bring down (FRBM
In case of state government there are two amendments) 2016-17
types of WMA, normal WMA are unsecured FD 3%
advances extended at bank rate. While RD 1.5%
special WMA are extended against ERD 0
government securities.
Escape Clause in the FRBM Act
Escape clause refers to the situation
Fiscal Responsibility and Budget
under which the central government
Management act (FRBMA), 2003
can flexibly follow fiscal deficit target
during special circumstances.
Introduction of a transparent system of
fiscal management within the country to
This terminology was innovated by the
ensure fiscal stability.
NK Singh Committee on FRBM.
It is mandated by the act that,

The government has utilised 'escape
1. Macro - Economic Framework
clause' under the Fiscal Responsibility
Statement: It comprises an
and Budget Management (FRBM) Act
assessment of the overall growth
which provides it leeway for relaxation of
prospects of the economy with
fiscal deficit roadmap during time of
specific underlying assumptions.
stress.
2. Medium Term Fiscal Policy
Statement (MTFP): It is a statement
"Section 4 (2) of the FRBM Act
that is presented in the Parliament
provides for a trigger mechanism for a
under Section 3(2) of the Fiscal
deviation from the estimated fiscal
Responsibility and Budget
deficit on account of structural
Management (FRBM) Act, 2003.
reforms in the economy with
3. Medium Term Expenditure
unanticipated fiscal implications.
Framework Statement: This

Fiscal consolidation:: It means payments on its debt. It affects

strengthening
ng of government finances and borrowing
orrowing cost and government bond
includes the following, yields.
Revenue side
 Rationalization of tax exemptions,
 Improving efficiency of tax collections
 Tax stability etc
Expenditure side
 Cutting out non-essential
essential and
unproductive activities,
 Rationalizing subsidies
 Reduce time and cost overruns etc
Government Debt
Various classification of government debt
 Government liabilities have been
broadly classified as debt contracted Budget: According to Article 112 of the
against the Consolidated Fund of Indian Constitution, the Union Budget of a
India (defined as Public Debt) and year is referred to as the Annual Financial
liabilities in
n the Public Account, Statement (AFS). It is a statement of the
called Other Liabilities. estimated receipts and expenditure of the
 Public debt is further classified into Government in a financial year.
internal and external debt.
 Internal debt is debt taken from Various Budgeting Techniques:
sources within the country by selling Incremental budgeting
of Treasury bills, loan from market. takes last year’s actual
 External debt loan from foreign figures and adds or
countries, international financial subtracts a percentage to
institutions, external commercial Incremental obtain the current year’s
borrowings (largest borrowing
borrowing), NRI budgeting budget. It is the most
deposits, bilateral and multilateral common method of
debt, Trade credit. budgeting because it is
 Rupee debt: refers to that part of simple and easy to
India’s total external debt understand.
denominated in Rupees. Activity
Activity-based budgeting
 Other Liabilities include liabilities on is a top-down
top budgeting
Activity
account of Provident Funds, Reserve approach that determines
based
Funds Deposits, Other Accounts, etc the number of inputs
budgeting
 Government debt as a percent of required to support the
GDP is used by investors to measure targets or outputs set by
country ability to make future

the company.  Crowding out: Excessive government

Value proposition borrowing can lead to shrinkage of
budgeting is really a the liquidity in the market, it forces
Value mindset about making the interest rates to go up which in
proposition sure that everything that turn affect private investment.
budgeting is included in the budget  Pump-priming: Deficit financing
delivers value for the and spending by the government on
business. public works in an attempt to revive
Zero-based budgeting economy during recession
starts with the  Twin deficit: Worsening of both
assumption that all Current Account deficit (CAD) and
department budgets are Fiscal deficit (FD) simultaneously in
zero and must be rebuilt the economy.
from scratch.  Fiscal cliff: The fiscal cliff refers to a
Zero based combination of expiring tax cuts and
budgeting Zero-based budgeting is across-the-board government
very tight, aiming to avoid spending cuts
any and all expenditures  Economic stimulus refers to
that are not considered coordinated efforts to boost economic
absolutely essential to the growth, especially during a recession.
company’s successful  Fiscal stimulus measures are those
(profitable) operation. enacted by government, such as
It encompasses the extent lowering taxes.
Gender
of spending for women  Monetary stimulus measures are
budgeting
empowerment produced by central banks and may
The outcome-based include lowering interest rates
Outcome budgeting refers to the  Sovereign Debt Crisis (SDC): It is
based or practice of suggesting the term that describes the difficulties
performance and listing of estimated that a nation faces to service the
-based outcomes of each loans it takes from the foreign
budgeting programmes or schemes sources in foreign currency.
designed.  State development Loans (SDL):
SDLs are debt securities auctioned by
Terminologies: RBI to raise loans for state
 Fiscal drag: It is a situation where governments
inflation pushes income into  Off budget financing: This refers to
higher tax bracket. The result is expenditure that’s not funded
increase in income taxes but no through the budget.
increase in real purchasing power o For example, the government sets up
 Fiscal neutrality: When the net effect a special purpose vehicle (SPV) to
of taxation and public spending is construct a bridge.
neutral

o The SPV will likely borrow money to

build the bridge on the strength of a 4. Monetary Policy and Banking
government guarantee.
o It is not taken into account when Monetary Policy is made by central bank
calculating fiscal indicators. by using interest rate and other
o Hence, Parliamentary control on such instruments to influence money supply in
spending is also reduced. the economy to achieve certain macro-
macro
Note: Some reforms related to budget economic goals.
 Budget is preponed to 1st FEB
 Railway budget merged with general Objectives:
budget 1. Accelerating economic growth.
 No vote on account 2. Price stability.
 Plan and non-plan plan expenditure 3. Exchange rate stabilization.
removed. 4. Balancing savings and investment.
Finance Commission: 5. Employment generation.
 Article 280 of our constitution
directs President to constitute Types of Monetary Policy
Finance commission every 5 years
to look into matter of tax devolutions.
 Recently, 15th Finance Commission
submitted its report. Its term has
been extended by a year i.e., term =
2020-2026.
 Major recommendations:
 Vertical Devolution = 41% -- 1% less
than 14th commission. that 1% is
devoted for the newly created Union
Territories of Jammu and Kashmir
and Ladakh.
 Horizontal Devolution: The criteria
and the weights assigned for
horizontal devolution are:
o Population – 15%
o Area – 15%
o Forest & Ecology – 10%
o Income Distance – 45%
o Tax and Fiscal Efforts – 2.5%
o Demographic Performance –
12.5%
 Recommendation to create a nonnon-
lapsable pool for the defence and
internal security sector under the
Public Accounts of India.

banks lend to RBI).

(banks RBI It absorbs
excess liquidity.
 Marginal Standing Facility (MSF):
(MSF A
window through which commercial
banks can borrow from RBI at a rate
greater than repo rate, rate which is
meant to ease liquidity
liquidit in the market.
 Monetary policy Corridor:
Corridor The MSF
rate and reverse repo rate determine
the corridor for the daily movement in
the weighted average call money rate.
 Reserve requirements:
requirements Fraction of
total deposits managed by a bank as
reserves that are not to be lent, which
is calculated as a percentage of each
bank’s net demand and time
liabilities (NDTL).
Terminologies This are used for, providing loans to the

 Bank Rate:: Rate at which RBI lends government, safe banking operations,
long term loan to commercial banks. liquidity regulation, management of
It is used for managing money interest rates etc. they can be CRR or SLR.
supply.  Cash Reserve Ratio (CRR): It is the
 Liquidity Adjustment Facility portion of the bank deposits that a
(LAF): LAF are used by banks for day- bank should keep with the RBI in
to-day
day mismatches in liquidity. RBI cash form, with no interest.
lends money at repo rate.
 Repo Rate: It is the Fixed interest It is used to manage liquidity and
rate charged by RBI while extending inflation.
short term loan on the security of  Statutory Liquidity Ratio (SLR):
government bonds. Banks undertake portion of time and demand deposits
to repurchase them sam
same at a later banks should keep with themselves
RBI lends to banks
date. (RBI banks) in the form of designated liquid assets
 It is used as Policy rate rate, which like Government securities, public
signals to the financial system to sector bond, current account
adjust their lending and borrowing balances with banks and gold.
operations.  Liquidity coverage ratio: The LCR is
 Reverse Repo: RBI borrows from the the requirement
requiremen whereby banks must
market on the basis of securities and hold an amount of high-quality
repurchases them later. Rat
Rate charged liquid assets that's enough to fund
by bank is called Reverse repo rate. cash outflows for 30 days.

 The high-quality liquid assets High Interest Low Interest

include only those with a high Rates Rates
potential to be converted easily and Rupee gets
Rupee weakens
quickly into cash stronger
 Standing Deposit Facility (SDF) is a Encourages Encourages
collateral free arrangement meaning saving spending
that RBI need not give collateral for Less disposable More disposable
liquidity absorption. income income
Loan
Loan repayments
repayments
The SDF will allow the RBI to suck out increase
decrease
liquidity without offering government
Savings earn Savings earn
securities as collateral.
more interest less interest
 Open Market Operations (OMOs):
Higher inflation Low inflation
These include both, outright
purchase and sale of government  Hawkish stance is when a central
securities, for injection and bank wants to guard against
absorption of liquidity. excessive inflation, there by
Note: Tools of liquidity adjustment- increases interest rates.
CRR, repo and reverse repo.  Dovish is the opposite of hawkish,
 Market Stabilisation Scheme (MSS): interest rates are reduced to fuel
Surplus liquidity of a more enduring growth.
nature arising from large capital  Benchmark Prime Lending Rate
inflows is absorbed through the sale (BPLR) was the rate at which
of short-dated government securities commercial banks can lend to
and treasury bills. customers who are most credit
 It is a sterilization effort of the central worthy.
bank. (RBI borrows from market  Base Rate is the interest rate below
absorbing excess liquidity) which Scheduled Commercial Banks
 Long Term Repo Rate: The LTRO is (SCBs) will lend no loans to its
a tool under which the central bank customers.
provides one-year to three-year  Base rate is replaced with MCLR
money to banks at the prevailing (Marginal Cost of funds-based
repo rate, accepting government Lending Rate)
securities with matching or higher  Marginal Cost of funds based on
tenure as the collateral. Lending Rate (MCLR): It is the
 Interest rates: A rate which is minimum interest rate below which
financial institutes cannot lend,
charged or paid for the use of money.
except in certain cases. It is a tenor-
It is often expressed as an annual
linked internal benchmark, which
percentage of the principal.
means the rate is determined
internally by the bank depending on
the period left for the repayment of a
loan.

 Public Sector Asset Rehabilitation

Agency (PARA)
 The Public Sector
Sect Asset Rehabilitation
Agency (PARA) colloquially called
“Bad Bank” is a proposed agency
to assume the Non-Performing
Non
Assets (NPA) of public sector banks
in India and to deal with the recovery
of the bad loans.
 Helicopter Money: A helicopter drop,
or helicopter
elicopter money, is a
hypothetical, unconventional tool of
 Inflation Targeting: A central bank monetary policy that involves printing
has an explicit target inflation rate large sums of money and distributing
range. Government and RBI agree on it to the public in order to stimulate
convergence between fiscal a and the economy.
monetary policies.  Liquidity Trap: it happens when
Urjit Patel committee 2014: monetary policy becomes ineffective
inflation targeting due to very low interest rates and
 Inflation target:: 4% +/
+/- 2% consumers preferring to save rather
 Nominal anchor should be than invest in higher
higher-yielding
defined in terms of headline bonds/investments.
inflation.
 Setting up Monetary Policy Reserve Bank of India:
Committee (covered in It was set up in 1935 (by the RBI Act,
Inflation) 1934). Nationalized in 1949, governed by
Central board of directors. It is the central
 Twin Balance Sheet (TBS) challenge
bank of India and is regulator and
deals with balance sheet of Indian
controller of banking system.
companies and Indian Banks.
1. Overleveraged companies:
Its functions are as follows,
Debt accumulation on
1. Bank of issue:
issue It has sole right to
companies is very high and thus
issue bank notes of all
they are unable to pay interest
denominations. Distribution of coin
payments on loans.
and 1rs notes is done by RBI on
2. Bad-loan-encumbered
encumbered-banks:
behalf of GOI.
Non-Performing
Performing Assets (NPA) of
2. Banker to Government: Will
the banks is 9% for the total
transact government business,
banking system of India. It is as
receive and make payments on behalf
high as 12.1% for Public Sector
of government.
Banks. As companies fail to pay
3. Bankers bank and lender of last
back principal or interest, banks
resort: scheduled banks can borrow
are also in trouble.
from RBI by rediscounting bills of

exchange. RBI is the lender of last

resort. 5. Banking System in India
4. Controller of credit:: it has the power
to influence the volume of credit A bank is a financial institution which
created by bank in India. performs the deposit and lending function.
5. Agent and advisor of the
government: It issues government Banks Classification.
Classification
bonds, treasury bills, financial
adviser to government, as an agent of
government manages public debts.
6. National clearing house:: RBI acts as
the clearing house for settlement of
banking transactions.
7. Custodian of foreign reserves: It
takes up operation in forex market to
stabilise the exchange rate of rupee
and ensure there is no speculation.
Forex includes- foreign currency
assets, gold, IMF- SDR (special
drawing rights).
8. Supervisory functions: Supervises
and control over commercial and
cooperative banks.
9. Promotional functions: to promote
banking habit and extend banking
facilities, it has set up IFCI,
CI, SFC, IDB Commercial Banks:
etc. Banks are broadly classified into two
types- Scheduled Banks and Non-
scheduled Banks.
Scheduled banks are those banks which

are included in the Second Scheduled of
the Reserve Bank Act, 1934.
1934 They satisfy
two conditions under the Reserve Bank of
India Act.
1. Paid-up
up capital and reserves of an
aggregate value of not less than Rs. 5
lakhs.
2. Itt must satisfy RBI that its affairs are
not conducted in a manner
detrimental to the depositors.

Non-scheduled banks are those banks The RRBs mobilize deposits primarily from
which are not included in the second rural/semi-urban
urban areas and provide loans
schedule
dule of the RBI Act as they do not and advances mostly to small and
comply with the above criteria and so they marginal farmers, agricultural laborers,
do not enjoy the benefits either. rural artisans and other segments of
priority sector.
Public Sector Banks:
They are owned by the Government either Cooperative Banks:
totally or as a majority stake holder.
 Initially set up to supplant indigenous
State Bank of India and its five associate
sources of rural credit, mostly serve
banks called the State Bank group
the needs of agriculture and allied
Nationalization of Banks- 50 years activities, rural-based
rural industries and
 SBI Act, 1955 partially nationalized to a lesser extent, trade and industry
the three Imperial Banks. in urban centres.
 Partially nationalized eight more
private banks via the SBI (Associates)
Act, 1959 and named them as the
Associates of the SBI
 With Banking Nationalization Act,
1969, the government nationalized
(i) 14 banks were nationalized in
July 1969.
(ii) 6 banks were nationalized in
April 1980.
Regional Rural Banks Co-operative

operative banks have a three-tier
three
RRBs were established under the structure:
provisions of an Ordinance promulgated on (i) Primary Credit Societies-PCSs
the 26th September 1975 and the RRB Act, (agriculture or urban).
1976 with an objective to ensure sufficient (ii) District Central Co-Operative
Co Banks-
institutional credit for agriculture and DCCBs.
other rural sectors. (iii) State Co-Operative
Operative Banks-SCBs
Banks (at
the apex level).
The area of operation of RRBs is limited to
the area as notified by GoI covering one or Commercial
more districts in the State. Cooperative Banks
Banks
Commercial banks
RRBs are jointly owned by GoI, the These are Co
Co-
are joint stock
concerned State Government and Sponsor operative Societies
companies they are
Banks (27 scheduled commercial banks governed by the Co-Co
governed by the
and one State Cooperative Bank), the operative societies
Banking Regulation
issued capital of a RRB is shared by the Act, 1904.
Act, 1949.
owners in the proportion of 50%, 15% and
Cooperative Banks Commercial banks
35% respectively.

generally provide generally provide is under stress.

short, medium- and short medium- and  Appointments of chief executives will
long-term finance to long-term finance, also require permission from the
agriculture and allied to trade, commerce banking regulator, as is the case for
commercial banks.
sectors. and industry.
Cooperative Banks Commercial banks Banking Sector Reforms
lend finance to their lend to anyone who Post 1991 Reforms
members only, is willing to borrow
 Interest rates were deregulated to
shareholders borrow and satisfies the
make banks respond dynamically to
from a co-operative conditions of the
the market conditions. Even savings
bank. bank.
bank deposit rates were deregulated
Cooperative Banks Their operations
in 2011.
operate on a are on a large
 Voluntary Retirement Scheme (VRS)
relatively small scale. scale.
Scope of activities of
for better work culture and
Commercial banks productivity.
a co-operate bank is
offer a wide range  Floor and cap on CRR were removed
limited to providing
of financial and floor on SLR was removed in
different types of
assistance and
loans to their 2006.
financial services.
members.  Near level playing field for public,
Commercial banks private and foreign banks in entry.
Cooperative banks
have the structure  Basel norms adopted for safe
operate as federal
of a joint stock banking.
structure in India.
company.  FDI up to 74 per cent was permitted
Co-operative Barks Commercial Banks in private banks.
are subject to the come directly  Bank consolidation through merger.
supervision of the under the
 Indra Dhanush comprising banking
state governments, Supervision of the
sector reforms for professionalization
NABARD and the Reserve Bank of
and strength.
RBI. India.
Narasimhan Committee I aimed at:

Union Cabinet has approved to  Ensuring a degree of operational
bring regulation of cooperative banks
under Reserve Bank of India. In order to flexibility.
achieve this, the Cabinet approved  Internal autonomy for public sector
amendments to Banking regulation act. banks (PSBs) in their decision-
The amendments will apply to all making process.
urban co-operative banks and multi-
state cooperative banks  Greater degree of professionalism in
banking operation.
As per the changes:
 Cooperative banks will be audited Narasimhan 2 (1998) Recommendations
according to RBI’s norms. 1. Need of stronger banking system with
 RBI can supersede the board, in merger of PSB.
consultation with the state 2. Legal framework for loan recovery
government, if any cooperative bank
3. 3 tier banking structure etc.

Sarfaesi Act companies and individuals. These

The Securitisation and Reconstruction of processes will be completed within
Financial Assets and Enforcement of 180 days. If insolvency cannot be
Securities Interest (SARFAESI) Act, 2002, resolved,
was enforced in the year 2004.  The resolution processes will be
conducted by licensed insolvency
SARFAESI was created to allow banks and professionals (IPs). These IPs will be
financial institutions to auction properties members of insolvency professional
(residential and commercial) if the agencies (IPAs). IPAs also furnish
borrowers fail to repay the loans. performance bonds equal to the
Act applies to outstanding loans (above Rs. assets of a company under insolvency
1 lakh), which are classified as Non- resolution.
Performing Assets (NPA).  Information utilities (IUs) are
established to collect, collate and
Methods of Recovery under the Act disseminate financial information to
1. Securitisation facilitate insolvency resolution.
2. Asset Reconstruction  The National Company Law Tribunal
3. Enforcement of security without the (NCLT) adjudicate insolvency
interruption of the court resolution for companies. The Debt
Recovery Tribunal (DRT) adjudicate
Asset Reconstruction Company: insolvency resolution for individuals.
It is a special type of financial institution  The Insolvency and Bankruptcy
that buys the debtors of the bank at a Board of India regulate functioning of
mutually agreed value and attempts to IPs, IPAs and IUs.
recover the debts or associated securities IBC, 2019 amendments:
by itself. Narasimhan Committee 1  The entire procedure of IBC
envisaged setting up an Asset must finish within 330 days.
Reconstruction Fund to facilitate banks to  If there are too many
financial creditors, they may
improve their balance sheets by clearing
appoint a representative to
NPAs. attend committee of creditors
on their behalf.
Insolvency and Bankruptcy Code, 2016  Ring fencing from any risk of
criminal proceedings.
 IBC is considered as one of the
biggest insolvency reforms in the
Bank Recapitalisation
economic history of India. This was
 As the name suggests, means
enacted for reorganization and
recapitalising banks with new capital
insolvency resolution of corporate
to improve their balance sheet.
persons, partnership firms and
 Since the government is the biggest
individuals in a time-bound manner
shareholder in public sector banks,
for maximization of the value of
the responsibility of infusing capital
assets of such persons.
majorly lies with the government.
 The Code creates time-bound
processes for insolvency resolution of

 The recapitalisation plan comes into  Certain structured and discretionary

action when banks get caught in a actions are initiated in respect of
situation where their liabilities are banks hitting such trigger points.
comparatively higher than their  The PCA framework is applicable only
assets. to commercial banks and not to co-
operative banks and non-banking
Recapitalisation Bonds financial companies (NBFCs).
 A government bond is an instrument
to raise money from the market with Priority Sector Lending
a promise to pay to repay the face  Lending programme is to ensure that
value of the maturity date and a adequate institutional credit flows
periodic interest. into some of the vulnerable sectors of
 A bond issued for the purpose of the economy.
recapitalisation is called
recapitalisation bonds. Indian Banks need to lend 40%
 Sub target- 18% Agriculture,10%
Prompt corrective Action Framework weaker
 PCA is a framework under which  Sections, and other to housing,
banks with weak financial metrics are education, renewable energy, MSME,
put under watch by the RBI. sanitation.
 Introduced by RBI in 2002 as a
structured early-intervention Foreign Banks (having less than 20
mechanism for banks that become branches) have to fulfil only 36%
undercapitalised due to poor asset (reach 40 in phased manner), sub-
quality, or vulnerable due to loss of targets for the exports, small and
profitability. medium enterprises, micro
 It aims to check the problem of Non- enterprises.
Performing Assets (NPAs) in the
Indian banking sector. Basel Norms
 PCA is intended to help alert the  Basel Committee on Banking
regulator as well as investors and Supervision is an international
depositors if a bank is heading for committee formed in 1974 to develop
trouble. standards for banking regulation.
 The idea is to head off problems  It consists of central bankers from 27
before they attain crisis proportions. countries and the European Union.
 The PCA framework deems banks as  It is headquartered in the office of
risky if they slip some trigger points - Bank for International Settlements
capital to risk weighted assets ratio (BIS) in Basel, Switzerland.
(CRAR), net NPA, Return on Assets  It developed a series of policy
(RoA) and Tier 1 Leverage ratio. recommendations with respect to
Capital risk, market risk and

operational risk known as Basel Basel III norms aim at making most
Accords. banking activities such as their trading
 Tier 1 capital which can absorb book activities more capital-intensive.
losses without a bank being required
to cease trading. The guidelines aim to promote a more
 Tier 2 capital absorb losses in the resilient banking system by focusing on
event of winding up, which provide four vital banking parameters viz.
lesser degree of protection to capital, leverage, funding and liquidity.
depositors.
 Tier 3 capital tertiary capital of Presently Indian banking system follows
banks which are used to meet market Basel II norms.
risk, commodity risk and foreign Basel III Compliant Bonds: The bonds
currency risk. qualify as tier II capital of the bank, and
has a face value of Rs 10 lakh each. There
AT1 Bonds: is a call option after 5 years
Also known as Additional Tier 1 bonds.
These are unsecured perpetual bonds Major Features of Basel III
issued by banks to shore up their capital 1. Revised Minimum Equity & Tier I
base to meet Basel III requirements. Capital Requirements
2. Better Capital Quality
Capital Adequacy Ratio (CAR) 3. Leverage Ratio
 CAR = (Tier I + Tier II Capital)/Risk 4. Liquidity Ratio
Weighted Assets 5. Countercyclical Buffer
 Expressed as a percentage of a bank’s 6. Capital Conservation Buffer
risk weighted credit exposures.
 Measure of bank’s financial strength Ratio under consideration
to ensure that banks have enough CAR   Tier 1 Capital  Tier 2 Capital 
cushions to absorb losses before
Risk Weighted Assets
becoming insolvent and losing
Tier 1Capital
depositors’ funds. Leverage Ratio =  3%
Total Exposure
 CAR is required to be 9% by RBI
(based on BASEL III norms), where Liquidity Coverage Ratio =
7% has to be met by Tier 1 capital High  quality liquid assets
 100%
while the remaining 2% by Tier 2 Total net cash outflows over the next 30 calender days
capital. Net Stable Funding Ratio =

Available stable funding
 100%
Basel III Framework Required stable funding
In 2010, Basel III guidelines were released.
These guidelines were introduced in India and Basel Norms Implementation:
response to the financial crisis of 2008.  RBI’s version of Basel III norms
requires Indian banks to hold a
minimum capital amounting to 11.5%
of their risk-weighted loans.

 The key capital adequacy parameter each rupee of money of the Central
has been stipulated at 9% higher Bank in India, how many rupees get
than the international norm of 8%. generated in the Indian Economy.
 Recapitalisation:: lending to the bank Note: Liquidity-As
Liquidity we move from M1
resources needed to conform to the to M4 the liquidity of the money goes
capital adequacy norms which Stand on decreasing.
at 8% today - minimum level.
Two basic changes in the new monetary
Stock of money aggregates.
 Reserve Money (M0) = Currency in
circulation + Bankers’ Deposits with Monetary aggregates:
the RBI + ‘Other’ deposits with the  NM1 = Currency with the Public +
RBI. Demand Deposits with the Banking
 Narrow Money (M1) = Currency with System +‘Other’ Deposits with the
the Public + Demand Deposits with RBI.
the Banking System + ‘Other’  NM2 = NM1 + Short Term Time
deposits with the RBI. Deposits of Residents (including the
 M2 = M1 + Savings Deposits o of Post contractual maturity of one year).
office Savings Banks.  NM3 = NM2 + Long-term
Long Time
 Broad Money (M3) = M1 + Time Deposits of Residents + Call/Term
Deposits with the Banking System. Funding from Financial Institutions.
 M4 = M3 + All deposits with Post
Liquidity Aggregates:
ggregates:
Office Savings Banks (excluding
 L1 = NM3 + All Deposits with the Post
National Savings Certificates).
Office Savings Banks.
 L2 = L1 + Term deposits with Term
Lending Institutions and Refinancing
Institutions (FIs) + Term Borrowing by
FIs +Certificates of Deposit issued by
FIs
 L3 = L2 + Public Deposits of Non- Non
Banking Financial Companies.
High Powered Money:oney: The new currency

printed by the central bank foe deficit
financing is called ‘high powered money’.
Cryptocurrencies: A cryptocurrency is a
form of digital money which is designed to
work as a medium of exchange and uses a
Money Multiplier
cryptography method to keep it secure the
 It is the ratio of Broad money (M3)
transaction.
divided by Reserve Money (M0). It
represents money supply as in, for

Crypto currency uses the decentralized recovery efforts are continued at

network. That means you don’t need any branch level – Done by banks to clean
third-party server like bank, government, up their balance books.
other authorities to perform any type of  Non-performing asset (NPA)
transaction with the merchants. Ex:  It is a loan or advance for which the
Bitcoin principal or interest payment
remained overdue for a period of 90
Labels of ATMs days or more. In case of
The automated teller machine (ATM) Agriculture/Farm Loans, the NPA
entered India by late 1980s and have varies for short duration crop
evolved into three of its types, (interest not paid for2 crop seasons)
(i) Bank’s own ATMs: These are owned and long duration crops (interest not
and operated by the concerned bank paid for 1 Crop season).
and carry the bank’s ‘logo’. They are
the costliest way to provide such Substandard, Doubtful & Loss Assets
service to bank’s customers.  Substandard assets: Assets which
(ii) Brown Label ATMs (BLAs): These have remained NPA for a period less
are owned by third party (a non- than or equal to 12 months.
banking firm). The concerned banks  Doubtful assets: Assets which have
only handle part of the process that remained in the substandard category
is ‘cash handling’ and ‘back-end for a period of 12 months
server’ connectivity. They carry ‘logo’  Loss assets: Loss asset is considered
of the bank which outsources their uncollectible and of such little value
service. that its continuance as a bankable
(iii) White Label ATMs: ‘owned’ and asset is not warranted, although
‘operated’ by a third party (a non- there may be some salvage or
banking firm). They do not bear recovery value.
‘logo’ of the banks they serve. In
place, they carry logo of the firm Differentiated Banking
which own them. It serves many The banks which could be differentiated on
banks. the account of capital requirement, scope
of activities and serve the needs of a
Classification of Assets certain demographic segment of the
 Stressed Assets: It is a broader term population are called as Differentiated
and comprises of NPAs, restructured Banks or Niche Banks.
loans and written off assets.  The idea of Differentiated Bank was
 Restructured Loans: Assets/loans mooted by Nachiket Mor Committee
which have been restructured by 2014, for Financial Inclusion.
giving a longer duration for  It can be classified as Payment
repayment, lowering interest or by Banks, Small Finance Banks,
converting them to equity. Regional Rural Banks, Local Area
 Written off Assets: Assets/loans
which aren’t counted as dues, but

Banks Wholesale and Long-Term  Have Rs. 1 business

Finance (WLTF) banks etc. lakh cap for correspon
deposits in dent
 Wholesale and long-term finance
one a/c. network.
banks focused primarily on lending to
 Offer
infrastructure sector and small,  Sell forex
internet
medium and corporate businesses. to
banking
customer
Payments  Sell mutual
Small Banks s
Banks funds,
 Sell
Prepaid card insurance,
Individuals/pr mutual
issuers, telecom pensions.
ofessionals funds,
companies,  Offer bill
Who with 10 years’ insurance
NBFCs, business payment
Can experience in ,
correspondent, What service for
Promote finance, pensions.
supermarket They customers
NBFCs,  Can
chains, Can Do Have ATMs
microfinance convert
corporates, real and
cos, local area into a
estate sector Co- business
barks. full-
OPS & PSUS. corresponde
fledged
 Have a nts (BC).
 Have a bank.
minimum  Can
minimum  Expand
capital of Rs function as
capital of across
100cr. BC of
Rs 100cr. the
 Maintain another
 Extend country.
75% of bank.
75% of
deposits in  Extend
loans to
govt. bonds.  Offer credit large
priority
 Maintain cards. loans
sector.
25% of  Extend  Float
 Have 25%
deposits in What loans. subsidiari
of
other They  Handle es
branches
banks. Can’t cross-  Cannot
in
 Have at Do border deal in
What unbanke
least 26% remittances. sophistic
They d areas.
investment  Accept NRI ated
Must Do  Maintain
by Indians. Deposits. financial
reserve
 Get listed if products.
requirem
net worth
ents.
crosses Rs.
 Cap loans Banking Correspondents
500cr.
to  They are individuals/entities engaged
 Have 25% of
individual by a bank in India for providing
branches in
s and
unbanked banking services in unbanked /
groups at
areas. under-banked geographical
10% and
 Be fully
15% of territories.
networked
and
net  They work as an agent of the bank
worth. and substitutes for the brick-and-
technology
driven.  Have a mortar branch of the bank.

public.
Chief Compliance Officer Banking
Regulated Companies
RBI has issued guidelines for appointment Regulation Act
under Act 2013
of Chief Compliance Officer in banks, to 1949
ensure uniform approach with regard to Demand Cannot be Can be
compliance and risk management culture. Deposit accepted accepted
He/she must be appointed for minimum 3 Allowed up to
years of term. Foreign Allowed up 74% for
Investment to 100% private-sector
Non-Banking Financial Company (NBFC) banks
Payment
 It is a company registered under Not a part An integral
and
Companies Act that provides financial of the Part of the
Settlement
services without meeting the legal system. System.
System
definition of a bank.
Maintenan
 It can engage in the business of loans
ce of Not
and advances, acquisition of shares / Mandatory
Reserve required
stocks / bonds / debentures / Ratios
securities issued by Government or Deposit
local authority or other marketable Not
insurance Available
securities, leasing, hire-purchase, available
facility
insurance business, chit business NBFC does
Credit Banks create
etc. not create
Creation credit
 It does not include any institution credit
whose principal business is that of Cannot be
Transactio Provided by
agriculture activity, industrial provided by
n services Banks
activity, purchase/sale of any goods NBFC
(other than securities) and
sale/purchase/construction of Shadow Banking
immovable property.  It is a set of activities or institutions
 It can either be deposit taking (need that operate partially outside the
an RBI registration) or non-deposit traditional commercial banks.
taking.  They are not fully regulated by RBI.
 They are not under Banking
Basic NBFCs Banks Regulations Act, 1950.
They It is a
provide government Segments of Shadow Banking
banking authorized Housing finance companies.
services to financial HFC Ex: Dewan Housing Finance
Meaning people intermediary Limited
without which aims at
Liquid Debt Mutual Funds.
holding providing
LDMF They invest client money into
Bank banking
short term debt instruments
license. services to the

like T-Bills Miscellaneous:

Retail Ex: Gold Loan Companies,  Bilateral Netting: It is an agreement
NBFCs Asset Finance Companies. that enables two counterparties in a
financial contract to offset claims
All India Financial Institution against each other to determine a
Bank Role single net payment obligation due
Export–Import Bank of from one counter party to other.
India established in 1982 Netting refers to offsetting of all
under Export-Import Bank claims arising from dealings between
EXIM Bank of India Act 1981, a catalyst two parties, to determine a net
and a key player in the amount payable or receivable from
promotion of cross border one party to other.
trade and investment.  Development Finance Institution
Established on the (DFI): They provide long term credit
recommendations of B.
National for capital intensive investments
Sivaraman Committee, on
Bank for spread over a long period and yielding
12 July 1982, matters
Agriculture low rates of return. They often lend at
concerning policy, planning
and Rural low and stable rates of interest to
and operations in the field
Developmen promote long term investments with
of credit for agriculture and
t NABARD considerable social benefits.
other economic activities in
rural areas in India.  Bad Banks: It is set up to buy the
Established on April 2, bad loans and other liquid holdings of
1990, through an Act of another financial institution. The
Parliament. provide entity holding significant NPAs will
refinance facilities and sell these holdings to bad bank at
Small
short-term lending to market price.
Industries
industries, and serves as  Positive Pay System: It is introduced
Developmen
the principal financial by RBI for cheque transactions above
t Bank of
institution in the Micro, Rs. 50000. It involves a process of
India (SIDBI)
Small and Medium reconfirming key details of large value
Enterprises (MSME) sector. cheques. The issuer will electronically
SBI is the largest submit certain minimum details of
shareholder. that cheque to drawee bank. It will be
Subsidiary of Reserve Bank developed by National Payments
of India (RBI), was set up Corporation of India (NPCI).
on 9 July 1988 under the
National National Housing Bank Act,
Housing 1987. a principal agency to
Bank (NHB) promote housing finance
institutions both at local
and regional levels and to
provide financial support.

their income. Ex: Income tax of

6. Taxation 10% that does not change as
income rises or falls.
Taxes are involuntary fees levied on
individuals or corporations and enforced Retrospective Taxation:
by a government entity.  It allows a country to pass a rule on
taxing certainn products, items or
services and deals and charge
companies from a time behind the
date on which the law is passed.
passed
 Countries use this route to correct
any anomalies in their taxation
policies that have, in the past,
allowed companies to take advantage
off such loopholes.
Specific and Ad-valorem

valorem tax (another
classification of taxes)
 A Specific tax is a set amount of tax
per unit sold, based on weight/
Three methods of taxation number etc.
1. Progressive  An Ad valorem tax is a percentage
 It is based on the taxpayer's tax based on the value added by the
ability to pay. As income producer. As the value
value-added
increases, taxes increases
increases. increases, taxes also increase. Ex:
High income earner will pay Real estate.
more tax than low low-income
earner. Ex:: Indian income tax Two types of taxation
2. Regressive  Direct Tax
 A regressive tax is assessed as a o A direct tax is paid directly by an
percentage of the item being individual or organization to the
purchased. imposing entity. Ex: Real property
 Everyone pays the same tax, personal property tax, income tax
percentage, regardless of or taxes on assets.
assets
earnings, so people with low  Indirect Tax
incomes are hit much harder o An indirect tax is collected by one
than those with large incomes. entity in the supply chain (usually a
Ex: Sales tax. producer or retailer) and paid to the
3. Proportional government, but it is passed on to the
 Proportional taxes are a flat tax consumer as part of o the purchase
system in which taxpayers pay a price of a good or service. Ex: Excise,
set percentage, regardless of sales tax, etc.,

Five principles of a good tax system Other Direct Taxes in India

1. Fairness: horizontal equity and Fringe Benefits Tax (FBT) is a tax
vertical equity. payable by employers for benefits
FBT
2. Efficiency: raise revenue with least paid to an employee in place of salary
cost. or wages.
3. Administrative simplicity: reduce Dividend distribution tax is the tax
the work required to collect and pay imposed by the Indian Government
taxes DDT on India companies according to the
4. Flexibility: modify when needed dividend paid to a company's
5. Transparency: where the money is investors/shareholders.
Minimum Alternative Tax is payable
coming from, where it is going should
under the Income Tax Act. The
be open to all.
concept of MAT was introduced to
target those companies that make
Various Direct Taxes in India MAT
huge profits and pay the dividend to
 It is charged directly on
their shareholders but pay
the income of a person.
Income no/minimal tax under the normal
 The rate charged is
tax provisions of the Income Tax Act.
proportional to level of
Securities Transaction Tax is a tax
Income.
payable in India on the value of
 Levied on companies who STT securities (excluding commodities
exist as separate entities and currency) transacted through a
from their shareholders recognized stock exchange
 Foreign companies are
taxed on income that Direct Tax Code
arises, or is deemed to  The task force on the direct tax code
Corporat arise, in India. (DTC) submitted its final report to the
e tax  Minimum Alternative Tax finance minister.
(MAT), Fringe Benefit Tax
 The Task Force, initially headed by
(FBT), Dividend
former CBDT Member (Legislation)
Distribution Tax (DDT),
Arvind Modi and later on by Akhilesh
Securities Transaction
Ranjan, was constituted in November
Tax (STT) are all levied on
2017 in order to review the Income-
corporate
tax Act and to draft a new Direct Tax
 Wealth tax is charged on
Wealth Law.
the benefits derived from
tax  The proposed new code will replace
property ownership.
 Taxed on the income the Income-tax Act of 1961.
derived from the sale of  The panel on the Direct Tax Code
assets or investments (DTC) has suggested a rejig of
Capital
 Capital investments cover personal income tax slabs, roadmap
gains tax
homes, farms, of corporate tax rate cut to 25% for
businesses, works of art, companies, provisions to reduce
etc compliance burden by simplification
of procedures and litigation

management. It has also suggested and is traded to another state

some changes in Dividend (interstate trade). In this case, the
Distribution
bution Tax and Minimum share of SGST should go to the
Alternate Tax. consuming state (as the GST is a
destination-based
based tax).
Indirect Taxes  Composition scheme:
scheme Is an easy, low
GST-AA big bang reform post 1991 procedure and compliance friendly
Definition: It is a comprehensive tax levied tax scheme for small and medium
on the manufacture, sale, and enterprises (goods and services).
consumption of goods and services. o Less number of tax returns file return
on quarterly basis.
basis
Features of GST o Turnover limit for availing this
 The GST is a destination
destination-based 1.5 crores.
scheme <1.5 cr
consumption tax made on value o Available only for intra-state
addition. supplies.
 GST includes services tax also. o No input scheme facility is available
 Central Value Added Tax, Additional o Ecommerce firms can’t opt
Customs Duty, Special Additional  Exports are exempted from GST as
Duty of Customs, Central Sales Tax, in the case of the previous regime.
Service Tax, state VAT (Sales tax) are
some of the taxes that has been Advantages of GST--Image Enhancement
merged to form the GST
 The GST proposes a four four-tier rate
structure. The tax slabs are fixed at
5%, 12%, 18% and 28% besides the
0% tax on essentials.
 GST is applied when turnover of the
business exceeds Rs 20lakhs per year
(Limit is Rs 10lakhs for the North
North-
Eastern States)
 Input
put tax credit: Input credit means
at the time of paying tax on output,
tax paid on Input would be deducted.
 The centre and states will share GST
tax revenues at 50:50 ratio (except
the IGST)
Goods and services tax council
 The GST Council has adopted a dual
 It is a constitutional body under
GST with two components – the
Article 279A. It makes
Central GST (CGST) and the State
recommendations to the Union and
GST (SGST).
State Government on issues related
 The IGST comes to play when the
to GST
commodity is produced in one state

 It was introduced by the Constitution Goods and Services Tax Network (GSTN)
(One Hundred and First Amendment)  It not for profit organisation jointly
Act, 2016. owned by government and private
 The GST Council is chaired by the players.
Union Finance Minister.  GSTN has been entrusted with the
 It is considered as a federal body responsibility of building Indirect
where both the centre and the states Taxation platform for GST to help one
get due representation. prepare, file, rectify returns and make
 The GST council is the key decision- payments of your indirect tax
making body that will take all liabilities.
important decisions (tax rate, tax
exemption, the due date of forms, tax E Way Bill
laws, and tax deadlines)  The E-way bill is a document to be
 Every decision of the Goods and generated online under the GST
Services Tax Council shall be taken at system, when goods of the value of
a meeting by a majority of not less more than Rs.50,000 are shipped
than three-fourths of the weighted inter-State or intra-State.
votes of the members present and  The E-way bill must be raised before
voting, in accordance with the the goods are shipped and should
following principles, namely: include details of the goods, their
 the vote of the Central Government consignor, recipient and transporter.
shall have a weightage of one third of  The transporter has to carry the
the total votes cast, and the votes of invoice and the copy of E-way bill as
all the State Governments taken support documents for the movement
together shall have a weightage of of goods.
two-thirds of the total votes cast, in  Though check-posts have been
that meeting. abolished under GST, a consignment
 The Council will also set up Anti- can be intercepted at any point for
profiteering screening committees the verification of its E-way bill, for all
that will make the National Anti- inter-State and intra-State movement
Profiteering Authority stronger under of goods.
the GST law.  If a consignment is found without an
E-way bill, a penalty of Rs.10,000 or
National anti-profiteering authority tax sought to be evaded, whichever is
It is institutional mechanism under GST greater, can be levied.
law to check the unfair profit-making  Whether goods are transported on
activities by the trading community, with one’s own or hired conveyance, by air,
core function of ensuring tax reduction will rail or road, the E-way bill has to be
be passed on to end customer. generated.
Tax Planning, Tax Avoidance and Tax

Evasion: The tax liability of a person can

be reduced through Tax Planning, Tax taxpayer and at least one tax
Avoidance and Tax Evasion. authority specifying the pricing
 Tax Avoidance basically method that the taxpayer will
means making use of the apply to its related-company
loopholes in the Tax Law transactions
Tax to one’s own advantage to  APAs gives certainty to
Avoidance reduce the tax burden.
taxpayers, reduce disputes,
 Although Tax Avoidance is
avoid tax avoidance.
100% legal, it is not
3. General Anti Avoidance Rules:
advisable.
 Tax evasion involves  GAAR usually consists of a set
breaking the law, not paying of broad rules which are based
one’s taxes on general principles to check
 Tax evasion is the method the potential avoidance of the
Tax
by which a person illegally tax in general.
Evasion
reduces his tax burden by  The government set up a panel
either deflating their under Parthasarathy Shome to
income or inflating their
review the proposals with
expenses
regards to GAAR.
 It is the art of reducing the
4. Base Erosion and Profit Shifting
tax liability by using the
(BEPS)
various provisions of Law.
 The government provides  BEPS refers to tax planning
Tax various deductions and strategies that exploit gaps and
Planning exemptions which can be mismatches in tax rules to
used by a person to reduce artificially shift profits to low or
his tax liability. Ex: no-tax locations where there is
Investment in mutual funds, little or no economic activity.
Savings certificates  OECD and G20 countries along
with developing countries that
Steps taken by the government to participated in the development
reduce tax avoidance in India of the BEPS Package are
1. Renegotiating Double taxation establishing a modern
avoidance agreement (DTAA) international tax framework
 DTAA also referred as Tax under which profits are taxed
Treaty is a bilateral economic where economic activity and
agreement between two nations value creation occur.
that aims to avoid or eliminate
double taxation of the same
income in two countries.
 India has DTAA with 84 nations.
2. Advanced pricing agreements (APA)
 An APA is a contract, usually for
multiple years, between a

 Tax expenditure: Revenue forgone as

a result of exemptions and
concessions given by government.
 Tax base: Volumeolume of goods and
services on which tax is imposed.
 Tax buoyancy: % change in tax
revenue with growth of national
income.
 Transfer pricing: Is the setting of
the price for goods and services sold
between controlled (or related) legal
entities within an enterprise.
 Arm’s length principle:
principle Arm’s length
5. Other steps taken by the
price, is the price at which two
government in recent times to
unrelated parties will make a deal.
prevent tax avoidance and evasion
hence market forces of supply- supply
1. Enactment of the black money
demand will work.
(Undisclosed Foreign Income
 Cess: Tax or additional levy on tax.
and Assets) and Imposition of
It is imposed for specific purpose
Tax Act, 2015
and can be used for designated ends
2. Enactment of the Benami
only.. Ex: Education cess
Transactions (Prohibition)
 Surcharge: Tax or additional levy
Amendment Act, 2016
on tax. It is imposed for general
3. Quoting of PAN made mandatory
purpose and can be used for any
for sale or purchase of any
purpose.
goods/services above Rs. 2
Lakh.  Tax elasticity: % change in tax
4. Proactively engaging with foreign revenue with respect to change in tax
governments to enhance the rate and extension of coverage.
coverage
exchange of information (EoI)  The tax-to-GDP
GDP ratio is a ratio of a
under tax treaties nation's tax revenue relative to its
5. India joined a group of 48 gross domestic product.
countries as early adopters to Countries with higher GDP generally
new global standards for collect more taxes, while those with
automatically exchanging lower taxes produce a lower GDP.
information from 2017  Capital Gains tax:
tax Capital gains tax
is a levy assessed on the positive
Terminologies Related
elated to Taxation difference between the sale price of
 Tax incidence: Entity
ntity on whom tax is the asset and its original purchase
imposed. price.
 Tax burden: Those who pay tax. Long-term
term capital gains tax is a levy
on the profits from the sale of assets
held for more than a year

 Inverted duty structure is a  Fringe Benefit Tax (FBT) is

situation where import duty on fundamentally a tax that an employer
finished goods is low compared to the has to pay in lieu of the benefits that
import duty on raw materials that are are given to his/her employees.
used in the production of such  Hidden/implicit taxes: taxes that
finished goods are concealed in the price of articles
 Tax planning: it is the analysis of that one buys.
finances from a tax perspective, with  Negative income tax: subsidies
the purpose of ensuring maximum given by the government
tax efficiency.  Buyback Tax: Tax imposed on profit
 Tax avoidance: it is the use of legal making companies on repurchase of
methods to modify an individual's their own shares back from
financial situation to lower the shareholders.
amount of income tax owed.  Sabka Vishwas Legacy Dispute
This is generally accomplished by Scheme, 2019: To resolve disputes
claiming the permissible deductions related to indirect taxes.
and credits. It differs from tax  Vivad se Vishwas Scheme: To
evasion. resolve disputes related to direct
 Tax evasion can be either the illegal taxes.
non-payment or underpayment of
actual tax liabilities due. 7. Financial Markets
 Tax shelter: it is a place to legally
store assets so that current or future A financial market brings buyers and
tax liabilities are minimized. sellers together to trade in financial assets
A tax shelter is a tax minimization such as stocks, bonds, commodities,
strategy, and should not be confused derivatives and currencies. The purpose of
with the illegal practice of tax a financial market is to set prices for global
evasion. trade, raise capital, and transfer liquidity
 Tax haven is defined as a country or and risk.
place with very low "effective" rates of
taxation for foreign investors. Classification of Financial Markets
Money Market Capital Market
Ex Panama, Bermuda, Cayman Islands, Money markets Capital markets
Hong Kong etc. are used by are more frequently
 Tobin tax: it is a tax on spot government and used for long-term
currency conversions that was corporate entities assets, which are
originally proposed with the intention as a means for those with
of penalizing short-term currency borrowing and maturities of
speculation. lending in the greater than one
 Pigouvian tax: it is intended to tax short year.
the producer of goods or services that term, usually for Capital markets
create adverse side effects for society. assets being held include the equity

for up to a year. (stock) market and redeemed at par, so no

and debt (bond) interest rate (zero coupon
market. instrument). Most secure as it
is backed by government.
Money Market Ensures Short term liquidity.
Structure of Money Market  Banks, insurance companies
1. Organized money market: and financial institutions
Organized structure includes, Reserve participate.
bank of India, DFHI (Discount and 3. Cash Management Bills: they are
Finance House of India), Commercial like T-bills but are issued for
Banks, Development bank IDBI, IFCI, maturities less than 91 days, to
ICICI, NABARD, LIC, GIC, UTI etc. adjust temporary mismatches in
2. The unorganized structure includes: government cash flow.
Indigenous banks, Money lenders, 4. Certificate of Deposits:
Chits and Nidhis, Co-operative Sector  These are negotiable
promissory notes, secure and
Money Market Instruments short term issued by scheduled
1. Call Money Market commercial banks (>15days to
 Money borrowed or lent for a 1 year) and Financial
very short period of time institutions (>1year to 3 year).
 1-14 days it is called notice  Regional rural banks and Local
money, else it is called call area banks cannot issue CDs
money  These are also issued at a
 No collateral required discount to the face value to
 Commercial banks, co-op banks, individuals and firm.
DFHI participate both as lenders 5. Inter Corporate Deposit Market:
and borrowers.  It is an unsecured loan
 LIC, SEBI participate as only extended by one corporate to
lenders. another.
 Market determined Interest 6. Commercial Paper
rates  It is a short term unsecured
2. Government Securities promissory note issued by top
 These are dated securities rated Corporate and Financial
issued by the Government of institutions at a discounted
India and state governments, value on face value for 7days to
managed by RBI. 1year.
 Treasury-Bills: T-bills are short-  They yield higher returns as
term securities that mature in compared to T -Bills as they are
one year or less from their issue less secure in comparison to
date. They are issued 91, 182, these bills
364 days of maturity periods. 7. Ready Forward Contracts (REPO):
These are issued at discount  Covered in banking section

8. Commercial Bill financial asset that provide for

 Bills of exchange are negotiable an equal distribution in any
instruments drawn by the seller profits, if any are declared, in
of goods or services on the buyer the form of dividends.
of goods for the value of goods  The two main types of shares
delivered, called as trade bills. are common shares and
 When trade bills are accepted by preferred shares.
commercial banks for
discounting are called Difference between common stock and
commercial bill. preferred stock
Common Stock Preferred Stock
Discount and Finance House of India
1. It was established by RBI in 1988 1. Preferred stock
pays a
2. Objective: it is to facilitate the
predetermined
smoothening of short-term liquidity 1. Common
dividend, whereas
imbalances by developing active stock allows
the dividends paid
money market and integrating its holders to
to common
various segments of money market. make a profit
shareholders tend
through
to vary according to
Capital Markets rising share
the company's
prices and
 It refers to market for funds with a fortunes
dividend
maturity of 1 year or more. 2. Holders of preferred
payments.
 The capital market includes primary stock do not get a
2. Holders of
and secondary markets. vote on company
common
matters
 The primary market is the part of stock have
3. if a company's
the capital market that deals with the voting rights
assets are
issuance and sale of equity-backed 3. If a company
liquidated, the
securities to investors directly by the goes bust,
preferred
issuer. they are paid
stockholders get to
last
 The secondary market is where redeem their shares
investors buy and sell securities they before common
already own. stockholders
 Stock is the capital raised by a
Significance of Capital Markets corporation through the sale of
 Growth of savings. shares.
 Efficient allocation of investment 2. Debentures
resources and Better utilization of the  A debenture is a type of debt
existing resources. instrument that is not secured
by physical assets or
Capital Market Instruments collateral.
1. Shares  Debentures are backed only by
 Shares are units of ownership the general creditworthiness
interest in a corporation or and reputation of the issuer.

 Both corporations and the culture and cuisine of

governments frequently issue India.
this type of bond to secure  Low-cost borrowing,
capital. Diversified funds.
 There are two types of
debentures as of 2016: Zero-Coupon Bonds or Accrual
convertible and nonconvertible. Bonds
 Convertible debentures are  A zero-coupon bond is a debt
bonds that can convert into security that does not pay
equity shares of the issuing interest but instead trades at
corporation after a specific a deep discount, rendering a
period of time. profit at maturity, when the
 Nonconvertible debentures are bond is redeemed for its full-face
regular debentures that cannot value. zero-coupon bonds tend
be converted into equity of the to fluctuate in price, much more
issuing corporation so than coupon bonds.
3. Bond
 Bonds and debentures represent Floating Rate Bonds (FRBs)
the majority of issued debt  These are securities issued at
capital. Although the term variable coupon rates.
bonds and debentures are often  Social Impact Bonds:
used interchangeably the two  Are those that will be offered to
are distinctly different: High-Net-worth Individuals,
 A bond is typically a loan that is Impact Investors etc.
secured by a specific physical  They earn 3% annual Interest
asset. A debenture is secured Rate for tenure of 5 years
only by the issuer’s promise to
pay the interest and loan 4. Derivatives
principal.  A derivative is a financial
 Bonds have lower interest rates security with a value that is
compared to debentures derived from, an underlying
asset or group of assets
Masala Bonds  The most common underlying
 Masala bonds are bonds assets include stocks, bonds,
issued by Indian entities commodities, currencies,
outside India but interest rates and market
denominated in Indian indexes.
Rupees, not foreign  Derivatives can either be traded
currency. over-the-counter (OTC) or on an
 The term was used by the exchange
International Finance
Corporation (IFC) to evoke

Types of Derivatives: A public offer is open for all Indian

It is an agreement between two citizens, the most broad-based
parties for the purchase and method of raising capital and the
Futures
delivery of an asset at an agreed most prestigious.
upon price at a future date  Rights Issue
It is a non-standardized Raising capital from the existing
contract between two parties to shareholders of a company, it means
buy or to sell an asset at a it is a preferential kind of issue
Forward
specified future time at a price restricted to a certain category of the
agreed upon today, making it a
public only.
type of derivative instrument
 Private Placement
Swaps are another common
Raising capital by selling shares to a
type of derivative that is often
select group of investors, usually
used to swap one kind of cash
financial institutions (FIs) but may be
flow with another. For example,
Swaps to individuals also.
one might use an interest rate
swap to switch from a variable G-Secs (Gilt Edged Securities):
interest rate loan to a fixed It is a tradable instrument (bond) issued by
interest rate loan, or vice versa. central / state government. They are risk
The key difference between free tradable instruments.
options and futures is that,
with an option, the buyer is not Central government issues both short term
obligated to "exercise" the (Treasury bills) and long term (G-secs),
Options option, while the option seller is whereas state government can issue only
obligated to either buy or sell long term / dated securities.
the underlying asset if the
buyer chooses to exercise the Players in the Indian capital market
contract. 1. Merchant banks:
Warrant Longer dated options (>1 year) It manages and underwrites new
The acronym LEAPS mean issues, provide consultancy and
Long-Term Equity Anticipation corporate advisory services for raising
LEAPS Securities. These are options funds and other financial aspects.
having a maturity of up to three 2. Mutual funds:
years.
A mutual fund is a type of financial
vehicle made up of a pool of money
Stock Exchange: A physically existing
collected from many investors to
institutionalized set-up where instruments
invest in securities such as stocks,
of security stock market (shares, bonds,
bonds, money market instruments,
debentures, securities, etc.) are traded.
and other assets.
Ex: BSE, NSE
ESG Funds:
There are three ways in which a company
ESG is a combination of three words i.e.,
raises capital in the primary market.
environment, social and governance. It is a
 Public Issue kind of mutual fund. Its investing is used

synonymously with sustainable investing 5. Angel investors:

or socially responsible investing. ESG fund  He/she is an affluent individual
focuses on companies with environment- who provides capital for a
friendly practices, ethical business business start-up usually in
practices and an employee-friendly record. exchange for convertible debt or
The fund is regulated by Securities and ownership of equity.
Exchange Board of India (SEBI) 6. Collective investment schemes
(CIS)
Types of Mutual Funds  It is an arrangement which
 Open ended funds: an investor can pools funds from investors to
buy or sell as and when they intend pool their money for investment
to in particular asset.
 Close-ended funds: usually issue  SEBI regulates players involved
units to investors only once, when in CIS.
they launch an offer, called New Fund 7. Alternative investment Funds (AIF)
Offer.  It is a newly created investment
 Exchange-Traded Funds (ETFs): vehicle for real estate, private
ETFs are a mix of open-ended and equity and hedge funds.
close-ended schemes. ETFs, like  SEBI regulates AIF in India
close-ended schemes, are listed and  It does not include mutual
traded on a stock exchange on a daily funds, family trusts, employee
basis, but the price is usually very stock option or CIS.
close to its underlying asset. 8. Foreign portfolio investor
3. Hedge Funds:  FPIs generally participate
 A hedge fund is an investment through the stock markets and
fund that pools capital from gets in and out of a particular
accredited investors or stock at much faster
institutional investors and frequencies.
invests in a variety of assets,  Globally FPIs are defined as
often with complex portfolio- those who hold less than 10% in
construction and risk a company.
management techniques  FIIs, Sub-Accounts and
4. Venture Capital: Qualified Foreign Investment
 Venture capital is a type of (QFI) are merged together to
private equity, a form of form the new investor class,
financing that is provided by namely Foreign Portfolio
firms or funds to small, early- Investors, with an aggregate
stage, emerging firms that are investment limit of 24% which
deemed to have high growth can be raised by the Company
potential, or which have up to the applicable sectoral
demonstrated high growth. cap.

 They are not permitted to invest o The FATF Secretariat is housed

in unlisted shares and also in T- at the OECD headquarters in
bills. Paris
9. QFI 3. IOSCO
 The Qualified Foreign Investor o It is an association of
(QFI) is an individual group or organisations that regulate the
association resident in a foreign world’s securities and futures
country that is compliant with markets. Members are typically
FATF standards. primary securities and/or
 They can directly invest in futures regulators in a national
corporate debt, equities and jurisdiction or the main
mutual funds etc. financial regulator from each
country.
Prominent institutions with respect to 4. Sustainable stock exchange
securities market o They provide a unique, high-
1. SEBI level platform to explore how the
o The Securities and Exchange world's exchanges can work
Board of India (SEBI) is the together with investors,
regulator for the securities regulators and companies to
market in India. It was create more sustainable capital
established in 1988 and given markets.
statutory powers on 30 January o They are designed to analyse,
1992 through the SEBI Act, promote and foster
1992 communication on stock
o SEBI has three functions rolled exchanges’ sustainability-related
into one body: quasi-legislative, activities.
quasi-judicial and quasi- 5. Social Stock Exchange:
executive. o Social Stock Exchange (SSE) is
o Regulate the working of stock an electronic fundraising
exchanges and intermediaries, platform that allows investors to
accords approvals for mutual buy shares in a social enterprise
fund, registers FII who wish to that has been vetted by the
trade in stock markets. exchange.
2. FATF o Social enterprises include is a
o It is an intergovernmental revenue-generating business
organization founded in 1989 on whose primary objective is to
the initiative of the G7 to achieve a social objective, for
develop policies to combat example, providing healthcare or
money laundering. clean energy.
o In 2001 its mandate expanded 6. India Energy Index:
to include terrorism financing o It is a digital trading platform that will
allow buyers and sellers of natural
gas to trade both in the spot market

and in the forward market for launched the NSE Mumbai inter-
imported natural gas across three bank bid rate (MIBID) and NSE
hubs  Dahej and Hazira in Gujarat, Mumbai inter-bank offer rate
and Kakinada in Andhra Pradesh. (MIBOR) for the overnight money
market in 1998
External Commercial Borrowings
 ECB are loans in India made by non- International Stock exchange
resident lenders in foreign currency  The India International Exchange
to Indian borrowers. They are used (INX) is India's first international
widely in India to facilitate access to stock exchange, opened in 2017.
foreign money by Indian corporations  It is located in the state of Gujarat.
and PSUs  It is one of the most advanced stock
 Ministry of Finance and RBI regulate exchanges in the world.
the amount of money that can be
raised by the players under this Demutualization means ownership,
mechanism management and trading is in the hands of
 ECB be raised through two routes, three different sets of people. This concept
Automatic route and the approval was first brought in by National Stock
route. The former does not require Exchange of India Ltd.
any permission by the authorities
while the latter does BSE SME and NSE Emerge: SME
exchange platform to enable small and
Stock Exchange medium enterprises to raise funds and get
 It is a facility where stock brokers and listed as public entities.
traders can buy and sell securities,
such as shares of stock and bonds Commodity exchanges
and other financial instruments.  It is an independent commodity
exchange based in India. It was
Stock exchanges in India established in 2003 and is based in
 Most of the trading in the Indian Mumbai
stock market takes place on its two  Commodities traded include metal,
stock exchanges: the Bombay Stock bullion, agro-commodities, energy etc.
Exchange (BSE) and the National  It was regulated by Forward market
Stock Exchange (NSE). commission (Ministry of Consumer
 The BSE has been in existence since affairs), it was merged with SEBI in
1875, S & P BSE SENSEX India’s 2015
most widely traded benchmark index.
 The NSE, on the other hand, was Terminologies:
founded in 1992 and started trading  Bear: is an investor who believes that
in 1994. S & P crisil NSE index 50 or market will go down.
S & P CNX nifty. National Stock  Bull: is an investor who believes that
Exchange (NSE) had developed and market will go up.

 Bear market:: a sustained period of provide price quotes to brokers and

falling stock prices. dealers.
 Bull market: period characterized by  Shariah index: The NIFTY Shariah
rising prices over a long period of Indices are designed to offer investors
time. Shariah-compliant
compliant investment
 Gilt: it is a bond issued by the solutions. Shariah compliant
government which carries less risk. companies are ones who do not deal
 Blue chip Company:: shares of the in alcohol, entertainment, tobacco,
company that are the most valuable. pork, meat etc
 Retail investor:: it is an investor
whose subscription to securities if of Pension Fund Regulatory and
value less than 2 lakh. Development Authority (PFRDA)
 Negotiated dealing system
system: it is an  Pension Fund regulatory is a pension
electronic platform for facilitating related authority, which was
dealing in government securities and established in the year 2003 by the
money market instruments. Indian Government.
 It is authorized by the Finance
Short selling Ministry, and it helps in promoting
income security of old age by
regulating and also developing
pension funds.
Insurance Regulatory and Development

Developmen
Authority of India (IRDAI)
 The Insurance Regulatory and
Development Authority (IRDA) is a
national agency of the Government of
 Market capitalization:: price per
India.
share multiplied by the total number
 It was formed by an Act of Indian
of shares outstanding.
Parliament known as IRDA Act 1999,
 Depository:: it holds securities
which was amended in 2002 to
(shares, debentures, bonds) in
incorporate some emerg
emerging
electronic format
requirements.
 Insurance Regulatory and
National Securities Depository Limited
Development Authority of India is the
(NSDL)
regulator of all private sector
 It holds securities in depository
insurance business and public sector
accounts, just like funds in bank in
insurance business in India.
accounts.
 IRDA issues guidelines for various
 NSDL was established according to
insurance companies.
depositories act, 1996.
 Nasdaq:: is an electronic stock market
that uses a computerized system to

Largest Stock Exchanges in the world 3. Imported inflation

inflation: When the
exchange rate suffers such that the
Rupee currency has become less
valuable relative to foreign currency,
this makes foreign commodities and
goods more expensive to Indian
consumers.
4. Structural inflation
inflation: Persistent
inflation due to inadequacies in
economy like backward agriculture,
inefficient storage and distribution
network etc.
5. Speculation in commodity
exchanges.
6. Cartelization of Produc
Producers:
producers manipulate prices in
market for their profit.
7. Hoarding: accumulation of huge
quantities of goods and releasing
them into market in condition of
scarcity at higher prices.
8. Inflation Kinds of inflation- based on the rate of

inflation
Inflation is persistent rise in the price of
goods and services.
Causes of Inflation
1. Demand-pull inflation:: “too much
money chasing too few goods.” As
wages increase within an economic
system, people will have more money
to spend on consumer goods. As a
result of the increased demand,
companies will raise prices.
2. Cost-push
push inflation
inflation: when
Creeping (General Price Raise By 4%),
companies are faced with increased
Trotting (4% To 8%), Galloping (8% To
input costs like raw goods, materials
10%), Runaway (>10% And < 20%), Hyper
or wages, they will preserve their
Inflation (20 Or 30 %)
profitability by passing this increased
cost of production onto the consumer
in the form of higher prices.

Terminologies: Effects of Inflation:

1. Stagflation: A combination of 1. Creditors and debtors: Lenders
Inflation and unemployment (usually suffer and debtors benefit. lending
in the time of Recession). intuition will suffer.
2. Disinflation: Reduction in the rate of 2. Aggregate demand: High demand,
inflation. low supply, higher purchasing power.
3. Deflation: General fall in the level of 3. Investment: short run – boost the
prices. investment.
4. Reflation: Rise in the prices to a. High inflation – high demand –
counter deflation. It is when inflation more production – more
returns after a spell of deflation and investment.
recession. b. Inflation lowers rate of interest.
5. Skewflation: It is a phenomenon in Long run – saving decreases,
which there is a price rise of one or a purchasing power decreases, less
small group of commodities over investment, less demand.
sustained period of time 4. Saving: short run – saving increases
6. Inflation gap: Excess of government Long run – saving decreases
spending above national income. 5. Tax – 2 distortions
7. Deflationary gap: Shortfall in total a. Tax payer suffers.
spending over national income. Indirect tax – as value is added
8. Inflation tax: Due to price rise, cost increases– more goods in
wages increase, as wage increases tax bracket (more taxes)
taxes on this increase, more revenue Direct tax – gross income
for government. Increases – crosses lower tax
9. Inflation spiral: wage- price spiral slabs- increases taxes.
ie., when wages press prices up and b. Tax collection by government –
prices pull wages down. Inflation increases nominal
10. Inflation accounting: Firms value of gross tax revenue while
calculate profit after adjusting to real value suffers.
inflation. 6. Exchange rate: As Inflation increases
11. Inflation premium: Bonus brought currency depreciates.
by inflation to borrowers. Real 7. Export: Increases (depreciation of
interest rate (nominal IR adjusted to currency), volume of exports also
inflation) <<nominal interest rate increases.
(charged on lending) 8. Import: foreign goods become costlier
12. Headline inflation: Entire economic as currency depreciates, import
inflation. substitution measure would be taken.
13. Core inflation: Excluding primary 9. Trade balance: Developed countries
articles, food etc which induces – inflation Is favourable. Developing
volatility /short term fluctuations. countries – inflation unfavourable.
10. Employment: In short run
employment increases, but decreases
in long run.

11. Wages: Increases nominal value of Of these, the first three are compiled by
wage but real value falls. the Labour Bureau in the Ministry of
Labour and Employment. Fourth is
Inflation Indices compiled by the Central Statistical
In India, generally, two kinds of indices are Organisation (CSO) in the Ministry of
used to measure inflation—Wholesale Price Statistics and Programme Implementation.
Index (WPI) and Consumer Price Index
(CPI). GDP deflator and inflation
 The GDP deflator, also called implicit
WPI CPI price deflator, is a measure of
 A wholesale price  Consumer Price inflation.
index (WPI) is an Index is a  GDP deflator= (GDP nominal/GDP
index that measure of
real) *100
measures and change in retail
 The deflator covers the entire range of
tracks the prices of goods
goods and services produced in the
changes in the and services
price of goods in consumed by economy — as against the limited
the stages before defined commodity baskets for the wholesale
the retail level population or consumer price indices
 WPI (base year- group in a given  GDP deflator is available only on a
2012) is area with quarterly basis along with GDP
composed of reference to a estimates, whereas CPI and WPI data
three groups: base year are released every month.
Manufactured  The CPI (Rural,
Products (65 Urban, Producer Price Index
percent of total Combined) on
 It measures the average change in
weight), Primary Base 2012=100
the prices of both goods and services,
Articles like is being
food, etc. (20.1 prepared by either as they leave the place of
percent), and Ministry of production called Output PPI or as
Fuel and Power Statistics and they enter the input production
(14.9 percent). programme process called as input PPI; thus, PPI
 The WPI is implementatio estimates the change in average
calculated by the n prices that a producer receives.
Ministry of  Food and  While WPI does not include services,
Commerce and beverages are
but PPI includes services thus
Industry. given maximum
making the index more inclusive.
weightage under
 PPI eliminates the multiple counting
CPI-combined
bias which is inherent in the
Wholesale Price Index.
Four types of CPI are as follows:
(i) CPI for Industrial Workers (IW).  In PPI the weights of the items are
(ii) CPI for Agricultural Labourer (AL). derived based on Supply use Tables.
(iii) CPI for Rural Labourer (RL).  PPI is considered as a better measure
(iv) CPI (Rural/Urban/Combined). of inflation as the price change at the
primary and intermediate stage can

be tracked before it gets built in the  Decisions are taken by majority with
finished good stage and due to this the Governor having the casting vote
reason, many countries have in case of a tie
switched over to the PPI.  The current mandate of the
committee is to maintain 4% annual
Base effect and inflation
inflation until March 31, 2021 with
 The base effect relates to inflation in
an upper tolerance of 6% and a lower
the corresponding period of the
tolerance of 2%.
previous year, if the inflation rate was
too low in the corresponding period of
the previous year, even a smaller rise
9. Poverty
in the Price Index will arithmetically
give a high rate of inflation Poverty is a social phenomenon in which
there is deprivation of basic human needs.
Inflation targeting  Absolute Poverty: it is defined as
 Inflation targeting is a monetary condition characterized by severe
policy strategy used by Central Banks deprivation of basic human needs.
for maintaining price level at a certain  Relative poverty: it is defined as
level or within a range. It indicates condition in which people lack the
the primacy of price stability as the minimum amount of income needed
key objective of monetary policy. in order to maintain the average
o The Reserve Bank of India and standard of living in the society in
Government of India signed a which they live.
Monetary Policy Framework  Poverty line: it is the level of income
Agreement below which one cannot afford to
o RBI would aim to contain consumer purchase all resources one requires
price inflation within 6 percent and to live.
within 4 percent with a band of (+/-)  Headcount ratio: Percentage of
2 percent] population below poverty line to total
population.
Monetary Policy Committee (MPC)
 Poverty gap: it is difference between
 MPC would be the institutional
the mean income among the poor and
arrangement at the disposal of RBI
the poverty line.
for targeting inflation.
 The committee comprises six
members - three officials of the
Reserve Bank of India and three
external members nominated by the
Government of India.
 The Governor of Reserve Bank of
India is the chairperson ex officio of
the committee.

Causes: Daily per capita expenditure for

Rural- Rs. 33 and Daily per capita
expenditure
diture for Urban-
Urban Rs. 47
 Overall poverty-
poverty 29.5 Percent (in the
year 2011-12)
 Rural- 30.9 Percent (in the year 2011-
2011
12)
 Urban- 26.4 Percent (in the year
2011-12)
SECC Methodology:
ethodology:
To estimate the BPL population, SECC
followed a three-step
step process:
Committees:  Automatic Exclusion.
YK Alagh Committee:  Automatic Inclusion.
 First to come up with an official  Neither automatically included nor
poverty line, based on calorie intake. automatically excluded.
After applying above methodology, it
 2100 calorie in Urban areas, 2400
was found that the percentage of
calories in rural areas.
people below the poverty line in 2011-
2011
Tendulkar Methodology: 12 was 30.95 percent in rural areas
Committee headed by Suresh Tendulkar. and 26.4 percent
ercent in urban areas.
India currently follows this method,
Covid 19 and Poverty
 Changed calorie-based
based estimation to
expenditure based.  According to a UNICEF report, an
estimated 120 million of children
 Introduce a new term Poverty Line
living in South Asian countries,
Basket (PLB) which is the basbasket of
including India, could slip into
all goods selected to determine
poverty.
poverty.
 According to a UN report, Covid-19
 Consumption quantity fixed the same
pandemic will disproportionately
for both rural and urban people but
affect women and push 47 million
price differs. Daily per capita
more women and girls into
expenditure for Rural- Rs. 27, Daily
extreme poverty by 2021. The
per capita expenditure for Urban
Urban- Rs.
poverty rate for women was
33.
expected to decrease by 2.7 per cent
 Estimated that 21.5% of tthe Indian
between 2019 and 2021, but
population as poor.
projections now point to an increase
Rangarajan Committee: of 9.1 per cent due to the pandemic
 Adopted the calorie-based
based approach and its fallout
which was used in past.
 Monthly consumption expenditure
per person or per household as a tool,

Components:
1. Food component
2. Non-food
food component such as,
Education Clothing, Conveyance,
Rent, Behavior related expenditures.
Poverty Trap:
Y K Alagh Lakdawala Tendulkar Saxena Rangarajan

Committees
Committee Committee Committee Committee
ommittee Committee
Year 1979 1993 2005 2009 2013
Planning Ministry of
Constituted Planning Planning Commission Government of
Commission Rural
by Commission Expert Group India
Expert Group development
Basket of
Calories in addition
consumption
with clothing, Calories
goods
education, shelter. (It included
(Monthly
nutrition, fat
Based On Calories spending on
Poverty line based on and other
education,
household per capita essential non-
health, electricity
consumption food items)
and transport
expenditure.
also.)
2090 kcal
Rural
2400 kcal 2400 kcal 48g protein
calories
26g fat
2155 kcal
Urban
2100 kcal 2100 kcal 50g protein
calories
28g fat
Rural Rs. 446.68 per Rs. 972 per
Rupees capita per month capita per month
Urban Rs. 578.80 per Rs. 1181 per
Rupees capita per month capita per month
Poor The people All persons who live Based on cost of A household is
Definition consuming less in households with living considered poor

than 2100 per capita if it is unable to

calories in the expenditures below save.
urban areas or the estimated value.
less than 2400
calories in the
rural areas
Percent of
16 percent 36.3 per cent 21.9% (2011-12) 29.5% (2011-12)
Poor
YK Alagh
Gave
eventually
Shift from methodolog
defined the first
State specific Calorie y Poverty
poverty line in
poverty lines should Consumption of estimated was
India.
Other be updated using the based Poverty automatic 7% higher than
Observations CPI-IW in urban Estimation. inclusion Tendulkar
Assumption;
areas and CPI-AL in All India Uniform and committee
health and
rural areas. Poverty line automatic estimation
education is
Basket exclusion
taken care by
on BPL
state
 17.8% of young people (15-29 years)
in the labour force are unemployed.
10. Unemployment  The unemployment rates in urban
areas are higher than those in rural
Unemployment is a phenomenon that
areas.
occurs when a person who is capable of
 In urban areas, the unemployment
working and is actively searching for the
rate among men is more than twice
work is unable to find work.
and has increased twice among
Unemployment Statistics in India women
Unemployment in India statistics is  Among religious groups, Christians
released once every five years by the have the highest UR in both urban
Ministry of Labour and Employment (MLE), and rural areas.
primarily from sample studies conducted  Regular wage/salaried workforce 8%
by the National Sample Survey Office. in 2017-18 (7% in 2011-12) [other
countries regular work salaried force
Unemployment Trends in India is far higher than India. China
The Periodic Labour Force Survey (PLFS) (53.1%), Brazil (67.7%) and South
of the National Sample Survey Office Africa (84.8%)]
(NSSO)
 The unemployment rate in the
country in FY18 was at 5.3% in rural
India and 7.8% in urban India,
resulting in overall unemployment
rate of 6.1%.
 The unemployment rate (UR) in both
rural and urban India is at its highest
since 1972.

b. Worker Population Ratio (WPR):

WPR is defined as the percentage of
employed persons in the population.
c. Proportion Unemployed (PU): It is
defined as the percentage of persons
unemployed in the population.
d. Unemployment Rate (UR): UR is
defined as the percentage of persons
unemployed d among the persons in
the labour force.
e. Activity Status - Usual Status: The
activity status of a person is
determined on the basis of the
activities pursued by the person
during the specified reference period.
When the activity status is
determined on the basis of the
reference period of last 365 days
preceding the date of survey, it is
known as the usual activity status of
the person.
f. Activity Status - Current Weekly
Status (CWS): The activity status
determined on the basis of a reference
period of last 7 days preceding the
Key Employment nt and Unemployment date of survey is known as the
Indicators current weekly status (CWS) of the
a. Labour Force Participation Rate person.
(LFPR): LFPR is defined as the
percentage of persons in labour force Current Daily Status Unemployment
(i.e., working or seeking or available (CDS):
for work) in the population.  Here the reference period is each of
the 7 days,, preceding the date of
survey in each of these days. It
records the activity status of a person
for each day of the 7 days preceding
the survey i.e. persons who did not
find work on a day or some days
during the survey week. The Current
daily status approach
appro gives a
composite or comprehensive

measure of unemployment
unemployment, i.e., it is 1. Voluntary Unemployment:
a measure of chronic unemployment.  Voluntary unemployment refers
to a situation where workers are
Labour Force: either not seeking for work or
 Persons who are either working (or are in transition from one job to
employed) or seeking or available for another.
work (or unemployed) during the 2. Involuntary Unemployment:
reference period togethe
together constitute  Involuntary unemployment
the labour force. refers to a situation where
workers are seeking work and
Work Force: are willing to work but are
 All people in age group of 15 -59 unable to get work.
years. 3. Frictional Unemployment:
 The minimum amount of
Work Force > Labour Force
unemployment that prevails in
an economy due to workers
Employment Rate:
quitting their previous jobs and
 ratio of employed person to
are searching for the new jobs is
population (15 to 59 years)
called Frictional Unemployment.
Employment Elasticity:  This type of unemployment is of
 Percentage changes in employment voluntary nature.
induced by changes in GDP, which 4. Cyclical Unemployment:
captures responsiveness of labour  Cyclical unemployment is due to
market. lack of demand in the economy
and slowdown of economic
Employment Intensity: activity.
 Extent to which growth creates  Cyclical unemployment is a type
employment. of unemployment which is
related to the cyclical trends of
Types of Unemployment: booms and recessions of the
business cycle.
 This type of unemployment is of
involuntary
nvoluntary nature.
5. Structural Unemployment:
 It refers to a situation which
arises due to change in the
structure of the economy or
mismatch of skills. Ex: An
economy transforms itself from
a Labour-intensive
intensive economy to a
Capital-intensive
intensive economy.

6. Seasonall Unemployment: Monitoring Indian Economy weekly

 Seasonal unemployment occurs tracker.
during certain seasons of the
year. It occurs in Agricultural
sector, Tourism sector and in
factories producing seasonal
goods. Therefore, they offer
employment for only a certain
period of time in a year
year.
7. Disguised
ised Unemployment:
 Disguised unemployment is
when too many people are
employed than what is required 11. Agriculture
to produce efficiently.
 Production does not suffer even Agriculture remains the most important
if some of the employed people sector of the Indian economy, whether it be
are withdrawn. the pre-independence
independence or the post-
post
 The key point to remember is independence periods.
that the marginal produc
productivity  In the fiscal 1950–51
1950 agriculture
of labourers under disguised accounted for 55.4 per cent of the
unemployment is zero zero. GDP.
8. Under Employment:  The Economic Survey 2017-18
2017 states
 Underemployment is the most that agriculture
culture employs more than
dangerous kind of 50% of total work force and 17- 17
unemployment in an economy. 18% share in GDP.
GDP
Underemployment is a situation
under which People with a Share of agriculture in GDP
higher level of skills are
employed in less productive
jobs. It simply means that the
Labour force of the economy is
not fully utilised as per their
skills and experience.
Covid-19 and
nd Unemployment
 Early estimates of jobs data indicate
that the coronavirus effect may have
 Agriculture is the biggest unorganised
left a devastating impact on the
sector of the economy accounting for
economy, sending urban
more than 90 per cent share in the
unemployment rate soaring to
total unorganised labour-force.
labour
30.9%. Overall unemployment rose to
23.4% - according to Centre for

Cropping Seasons: Farming Systems

The agricultural crop year in India is from 1. Wet land farming: Soils flooded or
July to June. The Indian cropping seasons irrigated through lake, pond or canal
are classified in to, and land is always in submerged
1. Kharif: The kharif cropping season is condition.
from July to October during the 2. Dry land farming: The practice of
South-West Monsoon. crop production entirely depending
The kharif crops include Rice, upon rainfall and the moisture
maize, sorghum, pearl millet/bajra, conserved in the soil.
finger millet/ragi (cereals), arhar 3. Rain fed farming: Crop production in
(pulses), soyabean, groundnut areas where rainfall is, more than
(oilseeds), cotton etc. 750mm (i.e assured rainfall areas).
2. Rabi: The rabi cropping season is 4. Mixed farming: System of farming on
from October to March during the a particular farm which includes crop
North-East Monsoon. production, raising livestock, poultry,
The rabi crops include wheat, fisheries, bee keeping etc.
barley, oats (cereals), chickpea/ Mixed cropping, also known as
gram (pulses), linseed, mustard polyculture, inter-cropping is a type
(oilseeds) etc. of agriculture that involves planting
3. Zaid: The crop season between March two or more plants simultaneously in
to June. Seasonal fruits and the same field, interdigitating the
vegetables. crops
Strip cropping is a method of
Cropping farming which involves cultivating a
Cropping intensity: field partitioned into long, narrow
 Number of crops cultivated in a piece strips which are alternated in a crop
of land per annum is cropping rotation system. It is used when a
intensity. slope is too steep or when there is no
alternative method of preventing soil
Cropping pattern: erosion.
 The cropping pattern depends on a Contour bunding is the farming
farm and its interactions with farm practice of ploughing and/or planting
resources, other farm enterprises, across a slope following its
and available technology which elevation contour lines. These contour
determine their makeup. lines create a water break which
 Multiple cropping: Growing more reduces the formation of rills and
than two crops in a piece of land in a gullies during times of heavy water
year in orderly succession run-off; which is a major cause of soil
 Intercropping: Growing two or more erosion.
crops simultaneously with distinct
row arrangement on the same field at Organic Farming
same time.  Farming where all kinds of
agricultural products are produced

organically i.e, avoids or largely National Mission for Sustainable

excludes the use of synthetic Agriculture:
fertilizers, pesticides, growth  Aims at making agriculture more
regulators and livestock feed productive, sustainable and
additives. remunerative and climate resilient by
promoting location specific
Integrated Farming System integrated/composite farming
 Integration of farm enterprises such systems; soil and moisture
as cropping systems, animal conservation measures;
husbandry, fisheries, forestry etc. for comprehensive soil health
optimal utilisation of resources management; efficient wat
water
bringing prosperity to the farmer. management practices and
mainstreaming rainfed technologies.
Zero Budget Natural Farming
arming
 Natural farming is “do nothing Revolutions related to Agriculture
farming”, no-till,
till, no chemical use  Green Revolution: The Green
farming. It is use of locally available Revolution, spreading over the period
materials: seeds treated with cow from1967/68 to 1977/78, changed
dung and urine; soil rejuvenated with India’s status from a food-deficient
food
cow dung etc,. country to one of the world's leading
 Zero budget refers to the zero net cost agricultural nations.
of production of all crops (inter crops, Use of high yielding variety (HYV)
border
er crops, multi crops). seeds, tractors, irrigation facilities,
pesticides, and fertilizers resulted in
increase in agricultural productivity.
 White Revolution:
Revolution Operation Flood
started the White Revolution
Revolut in India
and made our country self-sufficient
self
in milk.
 Yellow Revolution: The growth,
development and adoption of new
varieties of oilseeds to increase the
productivity.
 Blue Revolution: Fish Production
 Red Revolution: Meat, Tomato
production
 Pink Revolution:
lution: Onions, prawns
 Round Revolution:
Revolution Potato
 Silver Revolution: Egg production
 Grey Revolution: Fertilizers
 Second Green Revolution:
Revolution The
Second Green Revolution is a change

in agricultural production widely 2nd Generation Land Reforms (Focused

thought necessary to feed and on Marketisation)
sustain the growing population on 1. Land records modernization/
Earth. computerization - Ex: The National
 Bringing Green Revolution in Land Records Modernisation
Eastern India (BGREI): It is about Programme (NLRMP).
binging similar benefits to eastern 2. Appropriate land compensation - Ex:
India through green revolution. LARR act, 2013.
3. Land leasing - Ex: Model Agricultural
Land Reforms Land Leasing Act, 2016 (T Haque
 At the time of independence committee).
ownership of land was concentrated 4. Contract farming - Ex: Draft Model
in the hands of a few. This led to Contract Farming Act, 2018.
exploitation of farmers and was a 5. Consolidation of land holdings so
major hurdle in socio-economic that huge machineries can be utilized
development of the rural population. – Ex: by bringing people out of
 Land reforms in India had three agriculture.
objectives, 6. FDI in agricultural sector.
1. Removing institutional 7. Use of land banks (ex: Odisha) and
discrepancies of the agrarian land pooling.
structure inherited from the
past. Land Acquisition, Rehabilitation and
2. Issue of socioeconomic Resettlement Act (LAAR)
inequality in the country.  Compensation: four times the
3. Increasing agricultural market value in rural areas and twice
production for solving the inter- the market value in urban areas.
related problems of poverty,  Rehabilitation and Resettlement:
malnutrition and food This is the very first law that links
insecurity. land acquisition and the
accompanying obligations for
1st Generation Land Reforms resettlement and rehabilitation
Steps taken  Retrospective operation
1. Abolition of intermediaries  Multiple checks and balances
2. Tenancy reforms  Special safeguards for tribal
3. Redistribution of land communities and other
4. Cooperative farming disadvantaged groups: PESA and
5. Consolidation of land FRA to be followed
Except for abolishing the  Displacement only after
intermediaries all other initiatives compensation
have mixed results and certainly not  Compensation for livelihood losers
satisfactory which varies from state to
state. The most successful land
reforms happened in WB and Kerala.

Consent: sharp fall in farm prices —a

In cases where PPP projects are involved or guarantee price to save farmers from
acquisition is taking place for private distress sale.
companies, consent of no less than 70%  The MSPs are announced at the
and 80% respectively (in both cases) of beginning of the sowing season for
those whose land is sought to be acquired. certain crops on the basis of o the
 Caps on acquisition of multi
multi-crop and recommendations of the
agricultural land: Commission for Agricultural Costs
 Return of unutilized land to the and Prices (CACP, 1985).
owner or to the State Land Bank
Bank.  MSPs are announced for 24
 Exemption from income tax and commodities including seven cereals
stamp duty on amount given as (paddy, wheat, barley, jowar, bajra,
compensation maize and ragi); five pulses (gram,
 Share in appreciated land value: arhar/tur, moong, urad and lentil);
lentil
Where the acquired land is sold to a eight oilseeds (groundnut,
third party for a higher price, 40% of rapeseed/mustard, toria, soyabean,
the appreciated land value (or profit) sunflower seed, sesamum, safflower
will be shared with the original seed and nigerseed); copra, raw
owners. cotton, raw jute and virginia flu
cured (VFC) tobacco.
Agricultural holdings:
 The average size of land holding in Calculation of MSP
India is continuously decreasing due According to the formula prescribed by the
to rapid and high population growth. Swaminathan
athan Committee,
Committee there are three
 The average landholding size of a variables that determine production cost –
household has shrunk marginally to 1. A2
1.1 hectare (ha) in 2015-16
16 from 1.16 2. A2+FL
ha in 2012-13. 3. C2
 The percentage of female operational
land holders increased from 12.79% A2 includes out-of-pocket
pocket expenses borne
in 2010-11
11 to 13.87% in 2015
2015-16. by farmers, such as term loans for
 86.21% of India's cultivated farmland machinery, fertilisers, fuel, irrigation, cost
is held by small and marginal farmers of hired labour and leasing land.
with less than two hectares of land, New Method
while those with 10 hectares and  Budget for 2018-19
2018 announced
more account for just 0.57%. that MSPs would henceforth be
fixed at 1½ times of production
Minimum Support Price (MSP) costs for crops as a “pre- “pre
 Minimum Support Price (MSP) is a determined principle”.
form of market intervention
ervention by the
Government of India to insure
agricultural producers against any This will be the official MSP

 A2 -- Actual costs incurred by producing states which are

farmer on seeds, fertilizers, generally higher than FRP.
pesticides, hired labour,
depreciation on farm Market Intervention Scheme (MIS)
 Buildings & machinery, interest on  The Market Intervention Scheme
working capital, diesel/electricity (MIS) is similar to MSP, which is
for tractor/ pump sets etc. implemented on the request of state
FL -- Imputed cost of (unpaid) governments for procurement of
family labour. perishable and horticultural
commodities in the event of fall in
The Comprehensive Cost (Cost C2) market prices.
Method
 The Comprehensive Cost (C2) is more Price Stabilization Fund (PSF)
reflective of the actual cost of  It is a Central Sector Scheme to
production since it takes it accounts support market interventions for
for rent and interest foregone on price control of perishable agri -
owned land and machinery, over and horticultural commodities.
above the A2+FL rate.  Pradhan Mantri Annadata Aay
 The ideal formula according to the Sanrakshan Abhiyan (PM-AASHA):
M.S Swaminathan Committee to ensure that poor farmers growing
recommendation would be: pulses and oilseeds benefit from
MSP = C2+ 50% of C2. higher minimum support prices
(MSPs).
Fair and Remunerative Price (FRP)-
Sugarcane Farm Subsidies
 FRP is used in sugarcane industry to  Direct farm subsidies: These are the
replace the MSP kinds of subsidies in which direct
 It is based on the Rangarajan cash incentives are paid to the
Committee report of reorganizing the farmers in order to make their
sugarcane industry. products more competitive in the
 FRP is announced by central global markets.
government.  Indirect farm subsidies: These are
 Like MSP, FRP is also based on the the farm subsidies which are
recommendation of the Commission provided in the form of cheaper credit
for Agricultural Costs and Prices facilities, farm loan waivers, reduction
(CACP) and are announced by in irrigation and electricity bills,
the Cabinet Committee on Economic fertilizers, seeds and pesticides
Affairs, which is chaired by Prime subsidy as well as the investments in
Minister. agricultural research, environmental
 The State Advised Prices (SAP) are assistance, farmer training, etc.
announced by key sugarcane  The World Trade Organization (WTO)
has put some ceilings on the amount

of direct and indirect subsidies being platforms (e-NAM) to eliminate

provided by the government. shortcomings of all the 585 centers.
6. To mitigate the risk, introduction of
Irrigation crop insurance scheme at a lower
 Major Irrigation Schemes: those cost.
with cultivable command areas (CCA) 7. Promotion of allied activities such as
of more than 10,000 hectares. Dairy-Animal husbandry, Poultry,
 Medium Irrigation Schemes: those Bee-keeping, Medh Per Ped,
with cultivable command areas (CCA) Horticulture, and Fisheries.
between 2,000 and 10,000 hectares.
 Minor Irrigation Schemes: those Ashok Dalwai Committee:
with cultivable command area (CCA)  The committee constituted in 2016,
up to 2,000 hectares. reported that Doubling Farmers’
 Rural Infrastructure Development income deserves attention.
Fund (RIDF): With a view to ensuring  The solutions were categorized into 4
early completion of projects for areas; Land, Access to Market,
providing irrigation. Increase in productivity and
 Accelerated Irrigation Benefits Diversification towards high-yield
Programme (AIBP): loan assistance crops and non-farm activities.
to the states to help them complete
some of the incomplete Major Recommendations:
major/medium irrigation projects,  The committee has called for placing
which were in an advanced stage of agricultural marketing in
completion. the Concurrent list which facilitates
one-India market concept.
Doubling Farm Income  Recommended greater private sector
Government of India has announced a participation in agri-marketing and
‘seven-point strategy’ which aims to logistics.
double the farm income by 2022.  Farmer producer and village producer
1. Emphasis on irrigation along with organisations (FPO/VPO) could play a
end-to-end solution on creation of critical role in integrating small and
resources for ‘More crop per drop' marginal farmers into the agricultural
2. Provision of quality seeds and market system.
nutrients according to the soil  Key aspect of doubling farmers’
quality of each farm. income is to focus on export. The aim
3. Large investments in warehouses should be to raise agricultural export
and cold chains to prevent Post- by a minimum of three times by
harvest losses. 2022-23.
4. Promotion of value addition through  Climate Smart Agriculture (CSA)
food processing.  Climate-smart agriculture (CSA) is an
5. Implementation of National approach that helps to guide actions
Agricultural Markets and e- needed to transform and reorient

agricultural systems to effectively processing/packaging, leading to final

support development and ensure food exports, along with convergence of
security in a changing climate. central and state government
schemes. 60 Agri Export Zones
CSA aims to tackle three main (AEZ) have been notified.
objectives:
1. Sustainably increasing agricultural Agriculture Census
productivity and incomes.  Agriculture Census in India is
2. Adapting and building resilience to conducted at every five-year interval
climate change. to collect data on structural aspects
3. Reducing and/or removing of farm holdings. The basic statistical
greenhouse gas emissions, where unit for data collection is 'Operational
possible. Holding'.
 The first census was conducted with
NABARD reference year 1970-71. So far, nine
 Established under NABARD Act of censuses have been done and this is
1981 with an objective of providing the 10th in series.
and regulating credit to farmers,  Operational holding has been defined
small- scale industries, cottage and as all land used wholly or partly for
village industries, handicrafts etc in agricultural production.
rural areas.  Total operated area, which includes
 Refinances the financial institutions both cultivated and uncultivated area
like state cooperative agriculture and provided part of it is put to farm
rural development banks (SCARDBs), production during the reference
state co-operative banks (SCBs), period.
regional rural banks (RRBs),
commercial banks (CBs) which Agricultural Cess:
finances the rural sector.  Union Finance Minister proposed the
 Promotes SHG-Bank linkage imposition of Agriculture
programme for encouraging banks to Infrastructure and Development Cess
lend to SHGs. (AIDC) during the Union Budget
2021. She announced AIDC of Rs 2.5
Long Term Irrigation Fund (LTIF): per litre on petrol and Rs 4 per litre
 it has been established in NABARD on diesel. The cess is not uniform and
during Budget 2016-17, as a part of will vary from product to product.
PMKSY with an initial corpus of
20,000 cr Farm Bills:
1. The farmers' produce trade and
Agri Export Zones commerce (promotion and
 It was introduced in 2001, through facilitation) act, 2020
EXIM Policy 1997-2001, for the  The Act allows intra-state and
purpose of developing and sourcing inter-state trade of farmers’
the raw materials, their produce outside: (i) the physical

premises of market yards run by

market committees formed under
12. Industry and Infrastructure
the state APMC Acts and (ii) other
markets notified under the state
APMC Acts. Public Sector
 It permits the electronic trading of In PSU the majority of the shares is owned
scheduled farmers’ produce in the by government directly or indirectly
specified trade area. through government institutions.
 The Act prohibits state
governments from levying any Departmental Undertaking:
market fee, cess or levy on  Set up by executive actions, for
farmers, traders, and electronic specifically defined functions, subject
trading platforms for trade of
to budgetary, audit and other
farmers’ produce conducted in an
controls of government.
‘outside trade area’.
2. The farmers (empowerment and
Statutory Corporations:
protection) agreement on price
assurance and farm services act,  Set up by the act of legislature,
2020 engaged in economic and
 The Act provides for a farming
manufacturing activity. These are
agreement between a farmer and separate legal entities. Financing is
a buyer prior to the production or not part of the budget.
rearing of any farm produce.
 The price of farming produce Control Boards:
should be mentioned in the  They are set up to manage
agreement government projects.
 A farming agreement must
provide for a conciliation board as
Cooperative Society Form:
well as a conciliation process for
 To support cooperative movement.
settlement of dispute
3. The essential commodities  Last type is companies registered
(amendment) act, 2020 under companies act. Post new
 The Act provides that the central industrial policy 1991, only 3
government may regulate the industries are reserved, they are,
supply of certain food items 1. Atomic energy.
including cereals, pulses, 2. Minerals specified in the
potatoes, onions, edible oilseeds, schedule to atomic energy act.
and oils, only under extraordinary 3. Railway passenger transport.
circumstances
Industries which require compulsory
licensing involves:
1. Drugs and pharmaceuticals.
2. Hazardous chemicals.
3. Gun powder, industrial explosives
etc.

4. Aerospace and defence related with induction of nonofficial part time

electronics. professional directors.
5. Alcohol drinks.  Invest up to rupees 1000 crores or
6. Tobacco, cigarette and related 15% of their net worth on single
products. project without seeking government
approval
Disinvestment:
 It is the sale of shares of the Miniratna Companies
government to retail public/ Category 1 Miniratna
employees etc. there is no change in There are PSEs that have made profits
the management as government holds continuously for the last 3 years and
the majority equity. earned net profit of rupees 30 crores are
more in one of the three years. These
Privatisation: Miniratna are granted certain autonomy
 The government sells chunk of equity like incurring capital expenditure without
to a single buyer-26% or 51% to government approval up to rupees 500
whom management is crores or equal to their net worth
whichever is lower. There are 48 Miniratna
Corporatization: bridge and roof Company (India) Limited as
 Government units are reorganised on added late in 2010.
the lines of business.
Category II Miniratna
Cross Holdings: This category includes those PSEs which
 State owned companies buy shares of have made profit for the last 3 years
one another as the companies are continuously and should have a positive
related and have synergies. net worth. Category II Miniratna have
autonomy to incurring the capital
Navratna expenditure without government approval
 Government introduced in Navratna up to rupees 300 crores or up to 50% of
concept in 1997, it granted enhanced their net worth whichever is lower. There
autonomy to nine selected PSEs are 14 such Miniratna Bharat pumps and
referred to as “Navratna”. These Compressors Limited was added late in
Navratna were subject certain 2010.
guidelines now they have freedom to
Incur capital expenditure decide upon Maharatna
joint ventures set up subsidiaries/ The category of PSEs was created in 2011.
offices abroad enter into technological To be eligible for the grant of the
and strategic alliances. They can Maharatna status the company should
raise funds from capital markets have an average turnover of over RS 25000
(International and Domestic) enjoy crores average, annual net worth of more
substantial operational and than 15000 crores and average annual net
managerial autonomy. Boards of profit of over rupees 5,000 crore during the
these PSEs have been board based last 3 years.

Maharatna status it's board would not be Build Operate Transfer (BOT-TOLL and
required to take the government BOT-ANNUITY)
permission for investments up to rupees  Private partner is responsible to
5000 crores in a joint venture project or design, build, operate (during the
wholly owned subsidiary. For the Navratna contracted period) and transfer back
companies, the limit is rupees 1000 crore. the facility to the public sector.
NIF-National Investment Fund  Role of the private sector partner is to
 The proceeds from disinvestment of bring the finance for the project and
UPUSs will be channelised into NIFs, take the responsibility to construct
which is to be maintained outside the and maintain it.
consolidated Fund of India.  In return, the public sector will allow
 75% of the annual income of finance it to collect revenue from the users in
selected social sector schemes, which BOT –Toll model and Government
promote education, health and pays an annual fee in BOT- Annuity
employment. The residual 25% of the model
annual income of the fund will be  The national highway projects
used to meet the capital investment contracted out by NHAI under PPP
requirements of profitable and mode is a major example for the BOT
revivable CPSUs that yield adequate model.
returns.
Engineer Procure Construct Model
Exchange Traded Fund: (EPC):
 It will cumulate the shares of selected  Under this system the entire project
PSUs proposed for disinvestment is funded by the government.
under a single fund. Then these  The EPC entails the contractor build
cumulated shares are divided into the project by designing, installing
different units/shares. The value of and procuring necessary labour and
one unit depends upon prices of land to construct the infrastructure,
underlying PSU shares. These units either directly or by subcontracting.
can be listed in the stock exchange as  Under EPC model the contractor is
ETF and can be traded like ordinary legally responsible to complete the
shares. project under some fixed
predetermined timeline and may also
Bharath -22 involve scope for penalty in case of
 Bharath -22 has 19 central public time overrun.
sector enterprises, government  In EPC as all the clearances, land
banks and some holdings of the acquisition and regulatory norms
government investment arm SUUTI. have to be completed by the
 Public Private Partnership means an government itself and the private
arrangement between a government / players do not have to get itself
statutory entity / government owned involved in these time taking
entity on one side and a private sector procedures.
entity on the other.

Hybrid Annuity Model: The Government has facilitated the

 In India, the new HAM is a mix of PPP sector by offering:
BOT Annuity and EPC models.  Viability Gap Funding (VGF) Means
 As per the design, the government will a grant one-time or deferred, provided
contribute to 40% of the project cost to support infrastructure projects
in the first five years through annual that are economically justified but fall
payments (annuity). Whereas the short of financial viability. VGF
remaining 60% is raised by developer subsidy up to 40% of the cost of the
from equity or loan as variable project can be accessed in the form of
depending upon the value of assets a capital grant.
created.  India Infrastructure Project
 Under HAM, Revenue collection would Development Fund (IIPDF)- Scheme
be the responsibility of the National supports the Central and the State
Highways Authority of India (NHAI). Governments and local bodies
The developer doesn’t have right to through financial support for project
collect revenue. development activities (feasibility
reports, project structuring etc) for
Swiss Challenge PPP projects IIFCL - long-term debt
 A ‘Swiss Challenge’ is a way to award for financing infrastructure projects
a project to a private player on an that typically involve long gestation
unsolicited proposal periods since debt finance for such
 Such projects may not be in the projects should be of a sufficient.
bouquet of projects planned by the  Foreign Direct Investment (FDI) -
state or a state-owned agency, but up to 100% FDI in equity of SPVs in
are considered given the gaps in the PPP sector is allowed on the
physical or social infrastructure that automatic route for most sectors.
they propose to fill, and the
innovation and enterprise that private 13. Balance of Payments (BoP)
players bring.
 The government may enter into direct External Sector
negotiations with a private player who All economic activities of an economy
submits a proposal and, if they which take place in foreign currency fall in
cannot agree on the terms of the the external sector such as export, import,
project, consider calling for bids from foreign investment, external debt, current
other interested players. account, capital account, balance of
 In one variant of the Challenge, the payment, etc.
government awards bonus points to
the project’s ideate; in another, it
calls for comparative bids, but gives
the first right of refusal to the original
player.

Closed and open economics Balance of Payments (BoP)

 The Balance of Payments (BoP) is the
international balance sheet of a
nation that records all international
transactions in goods, services, and
assets over a year.
 Balance of payment consists of
Balance of trade, balance of current
account and capital account.
 The balance of payments divides
transactions in two accounts: the
current account and the capital
account.
 These are short term
implication transactions
 It includes export and
import of goods (trade
(
account
account) and services,
repayments and dividends
from loans, transfers,
investments.
 Components
1. Merchandise
transactions or the
Current visible trade
account (export and import
of goods)
2. Invisible trade (the
export and import
of services)
3. Unilateral or
unrequited
transfers (one
sided transactions)
 Income receipts and
payments (investment
income)
 This involves long term
transaction.
 Deals with investment
Capital and borrowing.
account  Components
1. Borrowing and
lendings from
foreign countries

2. Investments to and 2. Level of consumer spending

from the foreign (economic growth) and hence import
countries spending.
3. Foreign direct 3. Capital flows to finance deficit in
investment (FDI)
long-term.
4. Foreign portfolio
4. Saving rates: influencing level of
investment (FPI)
import spending.
 Changes in the Foreign
Exchange Reserves 5. Relative inflation/competitiveness.
 Depreciation: In foreign exchange
market,, it is a situation when
domestic currency loses its value in
front of a foreign currency which is
market-driven..
 Devaluation: In the foreign exchange
market when exchange rate of a
domestic currency is lowered by its
government,, it is called devaluation.
Official depreciation is devaluation.
devaluation
 Appreciation: In foreign exchange
market, if a free-floating
free domestic
currency increases its value against
the value of a foreign currency, it is
appreciation.
 Revaluation: A term used in foreign
exchange market which means a
government increasing the exchange
rate of its currency against any
foreign currency. It is official
appreciation.
 Exchange rate An exchange rate is
the price at which one currency is
converted into or exchanged for
another currency.
Current Account Deficit (CAD)
 Current account deficit = balance of
Various exchange
ange rate mechanisms:
trade (exports – imports) + net factor
1. Floating exchange rate:
rate Forces of
income (interest, dividends etc) + net
demand and supply determine the
transfer payment (foreign aid)
valuation and role of monetary
authority is nil..
Factors influencing Current Account
2. Fixed exchange rate:
rate central bank
deficit (CAD)
artificially and arbitrarily fixes the
1. Exchange rate (overvalued exchange
exchange rate irrespective of market
rate would cause large deficit).
forces.

3. Pegged float exchange rate: A  Current account convertibility: It

currency is pegged to international refers to the freedom to convert
hard currency. domestic currency into foreign
4. Managed float exchange rate: currency and vice versa for exports
Exchange rate is largely market and imports, interest payments,
determined but the central bank remittances, travel, education etc.
manages the rate in specific band.  Capital account convertibility: It
5. Nominal Effective Exchange Rate refers to the freedom to convert
(NEER) is the weighted average of domestic currency into foreign
bilateral nominal exchange rates of currency, which implies there should
the rupee in terms of foreign be 100% FDI and FII allowed across
currencies. It is simple and direct for all sectors.
example - one US Dollar as per NEER  Full convertibility: It refers to the
will be, say 66 rupees. freedom to convert domestic currency
6. Real Effective Exchange Rate into foreign currency, and vice versa
(REER) is the weighted average of for both current and capital account
nominal exchange rates, adjusted for with least restrictions.
inflation. The indices of Nominal  Partial convertibility: the portion
Effective Exchange Rate (NEER) and allowed by the government can be
Real Effective Exchange Rate (REER) converted into foreign currency for
are used as indicators of external current and capital purposes.
competitiveness by RBI.
Convertibility in India
Nominal Effective Exchange Rate  Current account is today fully
(NEER): prevailing official exchange convertible (operationalised on 19
rate. August, 1994). But in case of capital
 Real Effective Exchange Rate account convertibility India is still
(REER): inflation adjusted exchange following partial current account
rate. convertibility.
 LERMS (Liberalised Exchange Rate Tarapore committee I and II were
Mechanism System): it was set up for fuller convertibility of
operationalized in 1993. India capital accounts. Advantages of
delinked its currency from the fixed capital account convertibility,
currency system and moved into the
era of floating exchange-rate system Foreign capital for investment.
under it.  FII flows can increase liquidity.
 Competition for domestic players.
Convertibility  Technology transfer.
 Convertible currencies give freedom  Macroeconomic discipline.
to the holder of currency to convert  India will have wider range of choice
them freely into other currencies at for
the prevailing market rate.  Investment and borrowing.

Extended fund Facility (EFF) forex reserves, interest rate, CAD,

 It is a service provided by the IMF to international prices of commodities,
its member countries which political stability.
authorises them to raise any amount  Forex reserve: RBI holds foreign
of foreign exchange from it to fulfil exchange reserves which are made up
their BoP crisis, but on the conditions of, foreign currency, bank deposits,
of structural reforms in the economy government securities, gold reserves,
put by the body. It is the first special drawing rights of IMF.
agreement of its kind. India had  Capital control: Any measure taken
signed this agreement with the IMF in by government / central bank to limit
the financial year 1981–82. the flow of foreign capital in and out
 Hard currency: any globally traded of the domestic economy. Ex: Tobin
currency which has global demand, tax, quantitative restrictions.
liquid (adequate supply) and stable  Beggar they neighbour policy: When
(does not fluctuate) a country damages its competitors
 Soft currency: It is basically the through a weak currency.
opposite term for the hard currency.  Weak currency: Cheapens the rate of
 Hot currency: Hot currency is a term country’s export, making them more
of the forex market and is a attractive to international buyers.
temporary name for any hard  Sovereign wealth fund: It is the fund
currency. of foreign currency that is meant to
 Heated currency: A term used in the be invested in global assets like,
forex market to denote the domestic shares, bonds, energy assets etc. It
currency which is under enough diversifies the income, secure
pressure (heat) of depreciation due to external account.
a hard currency’s high tendency of  Internationalization of rupee: A
exiting the economy. currency used by other countries
 Cheap Currency: If a government banks, firms and citizens as financial
starts re-purchasing its bonds before security. Degree of
their maturities (at full-maturity internationalization depends on,
prices) the money which flows into traded actively, liquid and stable. Ex:
the economy is known as the cheap US dollar, euro, yen, pound,
currency, also called cheap money. renminbi.
 Dear Currency: when a government
issues bonds, the money which flows 14. Foreign Investment
from the public to the government or
the money in the economy in general Foreign investment involves capital flows
is called dear currency, also called as from one country to another, granting
dear money. extensive ownership stakes in domestic
 Real value of rupee: it depends on, companies and assets.
Demand and supply, net capital
inflows, performance of economy,

Types of foreign investment: Difference between FDI and FPI

 Foreign Direct Investment (FDI) FDI FPI
 Foreign Institutional Investment (FII) Investment in
 Qualified foreign investment (QFI) productive assets
Investment in
 Foreign Portfolio Investment (FPI) (whose value
financial assets like
increase over time)
stocks, bonds,
like plant and
Details on each of the Foreign mutual funds, etc.
machinery for a
Investment type can be found below:
business
Foreign direct investment (FDI) is
Investment gives Investment gives
when a foreign company or
investors investors only
individual establishes new
ownership right as ownership right and
FDI business operations or acquiring
well as not management
business assets, including
management right right
controlling interests, in an
Engage in decision Not involved in
already existing Indian company
making of a firm decision making
FII is when foreign institutional
Investors can plan
investors invest in the shares of an Investors enter a
for long but often
Indian company, or in bonds country with long-
have short-term
offered by an Indian company. term approach
plans
FII
So investors Investors can easily
Only institutional investors like
cannot depart from depart from the
Investment companies, Insurance
the country easily country
funds etc. are allowed to invest in
Investment is Investment is less
Indian stock market directly.
greater than 10% than 10%
QFI was introduced in 2002. A
Qualified Foreign Investor can
Investments through Participatory
invest in India without sub-
notes (PN), (ADR) and (GDR)
account.
 Participatory notes also referred to
as P-Notes, or PNs, are financial
The Qualified foreign investor (QFI)
instruments required by investors or
QFI can be an individual, group or an
hedge funds to invest in Indian
association.
securities without having to register
with the Securities and Exchange
The QFI should be resident in a
Board of India (SEBI).
foreign country that is compliant
with the standards of Financial
ADR (American Depository
Action Task Force (FATF).
receipts) and GDR (Global
In the Indian context, FIIs (along
depository receipts) are commonly
with sub-accounts with FIIs) and
used by the Indian companies to raise
FPI QFIs can be collectively classified
funds from the foreign capital
as Foreign Portfolio Investment
market. While ADR is traded on US
(FPI).

stock exchanges, GDR is traded on  From 16th to 18th century,

European stock exchanges. economists believed in
mercantilism.
Department of Industrial policy  A nation’s power and wealth is
and promotion (DIPP), Ministry of best served by increasing
Commerce and industry exports and receiving payments
in gold, silver and precious
The Department of Industrial Policy & metals.
Promotion was established in 1995  Therefore, any import was seen
and has been reconstituted in the as loss of nations wealth in gold
year 2000 with the merger of the payment.
Department of Industrial 2. Adam Smith’s theory of Absolute Cost
Development. Advantage:
 The theory tells us that an
FATF individual, business, or country
 The FATF is an inter-governmental is said to have an absolute
body that works to set standards and advantage if it can produce a
promote effective implementation of good at a lower cost than
legal, regulatory and operational another individual, business, or
measures for combating money country.
laundering, terrorist financing and  Theory assumes that;
other related threats to the integrity  There are no production costs
of the international financial system. except labourers; no transport
 A country is put on the grey list when cost and there is no free trade.
it fails to curb terrorism financing 3. David Richardo's theory of
and money laundering. Comparative Advantage:
 Putting a country on the  The theory attributed the cause
blacklist means shutting all Doors to and benefits of international
international finance for that trade to the differences in the
country. relative opportunity costs (costs
in terms of other goods given up)
Functions: of producing the same
1. Formulation of Foreign Direct commodities among countries.
Investment (FDI) Policy and
promotion, approval and facilitation
15. Economic Integration
of FDI.
2. Encouragement to foreign technology Economic integration and trade
collaborations at enterprise level and agreements
formulating policy parameters for the Economic integration refers to trade
same. unification between different states by the
partial or full abolishing of customs tariffs
Theories of International Trade
1. Mercantilist Theory:

on trade taking place within the borders of Various levels of Economic Integration
each state.
Advantages
1. Increases the combined economic
productivity of the countries – easier
access of goods and services
2. It increases competitiveness
competitiveness.
3. Economic integration can broaden
markets, boost employment, and spur
political cooperation
4. Regions may agree to economic
integration to better serve their
citizens.
5. Political cooperation among
countries can improve because 1. PTA – Preferential Trade Agreement
of stronger economic ties, which can  A preferential trade agreement,
help resolve conflicts peacefully is a trading bloc that gives
and lead to greater stability. preferential access to certain
products from the participating
What is a Trade Agreement?
countries.
 A trade agreement is a contract /
 This is done by reducing tariffs
agreement / pact between two or
but not by abolishing them
more nations that outlin
outlines how they
completely. A PTA can be
will work together to ensure mutual
established through a trade
benefit in the field of trade and
pact. It is the first stage of
investment.
economic integration. For
example,
o Asia-Pacific
Pacific Trade Agreement
(APTA): formerly known as the
Bangkok Agreement, was signed
on 31st of July 1975 as an
initiative of the United Nations
Economic and Social
Commission for Asia and the
Pacific (ESCAP). ESCAP is the
regional
gional development arm of the
United Nations for the Asia-Asia
Pacific region.
o India-Mercosur
Mercosur Preferential
Trade Agreement
(PTA): Mercosur is a sub- sub
regional bloc with its member

countries – full members are interested in exporting to these

Argentina, Brazil, Paraguay, countries. For example,
Uruguay and Venezuela.  Southern Common Market –
2. FTA – Free Trade Agreement Mercosur (Argentina; Bolivia;
 A free-trade area is a trade bloc Brazil; Paraguay; Uruguay; and
whose member countries have Venezuela)
signed a free-trade agreement  Gulf Cooperation Council
(FTA), which eliminates tariffs, (GCC) – Bahrain, Kuwait, Oman,
import quotas, and preferences Qatar, Saudi Arabia, and the
on most (if not all) goods and United Arab Emirates
services traded between them.  East African Community (EAC)
For example, – composed of 5 countries in the
o Evolution of SAPTA to SAFTA African Great Lakes region in
(South Asian PTA to FTA) eastern Africa: Burundi, Kenya,
o ASEAN FTA (Trade agreement Rwanda, Tanzania, and Uganda.
within the Southeast asian 5. Common Market
nations)  A type of custom union where
3. CECA (Comprehensive Economic there are common policies on
Cooperation Agreement) / CEPA product regulation, and free
(Comprehensive Economic movement of goods and services,
partnership Agreement): capital and labor.
 When the countries go beyond 6. Economic Union
FTA and agree for a greater  An economic union is a type of
degree of economic integration trade bloc which is composed of
which extends to capital and a common market with a
human resources, and to customs union. The participant
expand trade and investment, it countries have both common
would result in CECA or CEPA. policies on product regulation,
 CEPA has a bit wider scope than freedom of movement of goods,
CECA. While CECA come first services and the factors of
with elimination of tariffs, CEPA production (capital and labour)
comes later including trade in and a common external trade
services and investments. For policy.
example, 7. Economic and Monetary Union
India has signed CECA with  When an economic union
Singapore and CEPA with South involves unifying currency, it
Korea becomes an economic and
4. Customs Union monetary union. For example,
 An agreement among countries European union.
to have free trade among
themselves and to adopt
common external barriers
against any other country

Few agreements which have been in the RCEP (Reginal Comprehensive

news recently Economic Partnership)
Trade Countries Features It is a proposed free trade agreement
The aim of between ASEAN countries + Australia,
Trans- this China, Indian, Japan, South Korea and
Atlantic trade European agreement is New Zealand.
and union and for promoting
investment United trade and RCEP aims to boost goods trade by
partnership states multilateral
eliminating most tariff and non-tariff
non
(TTIP) economic
barriers — a move that is expected to
growth.
provide the region’s consumers greater
Brunei,
Cambodia, choice of quality products at affordable
Indonesia, It would be rates
Laos, the largest
Malaysia, economic India did not join the RCEP for the
Myanmar, bloc. This following reasons;
Regional Philippines, agreement o Around 65% tariff lines to be removed
comprehensiv Singapore, would have for imports from Japan and Korea.
e Economic Thailand, Strategic o 80% tariff lines be abolished for
partnership Vietnam, Partnership, imports from ASEAN
(RCEP). Australia, enhance
o India worried that China would dump
China, regional
its low-cost
cost steel and other products
Japan, connectivity,
that harms our domestic industries.
South promote trade
Korea and & investment
New
Zealand
Australia, It is the third
Brunei, largest free
free-
Canada, trade area in
Comprehensiv Chile, the world by
e and Japan, GDP. It
Progressive Malaysia, removes
Agreement for Mexico, tariffs on an
Trans-Pacific New estimated
Partnership Zealand, 95% of goods
(CPTPP) Peru, traded
Singapore, between
and member
Vietnam. countries
countries.

institutional and implementing

foundation to agencies
16. WTO: Evolution and
implement these
Contemporary Issues rules
Background of International Trading

Guiding principles of WTO
Regime after World War II
Principles guiding the WTO are:
In 1947, 23 countries arrived at an
1. Non-Discriminatory and rule based
agreement, namely, General Agreement
trading system where foreign goods
on Tariffs and Trade (GATT). GATT
and services should receive the same
established a free and fair international
treatment as domestically sourced
regime based on dismantling of trade
ones.
barriers --- tariff (high duties regime) and
2. Trade barriers should be dismantled
non-tariff (quota regime). The agreement
and international trade should be
came into force in 1948 and India was a
free.
founder member.
3. Developing countries should receive
Emergence of World Trade Organisation preferential terms of trade.
(WTO) Principles
 Uruguay Round of GATT was o Purpose: Eliminate
discriminatory policies
concluded in 1994 with Marrakesh
by members.
Treaty and this treaty laid down the
o If a member extends
foundation of WTO in 1995 by
special treatment to
replacing GATT. first round was the
Most any nation then similar
Doha round which started in 2001
Favoured treatment must be
and is yet to complete. Headquarter
Nation extended to all.
is in Geneva, Switzerland. It has 164 o Some Exceptions: a)
members as of 2017. Afghanistan Differential treatment
became 164th member in 2016. under Free Trade
Agreements is allowed,
Difference: WTO v/s GATT b) National Security
GATT WTO
o No discrimination
WTO is an
GATT is a treaty National between imported and
organisation
Treatment domestically produced
GATT had no dispute WTO has dispute
goods.
settlement settlement
o WTO follows the
mechanism mechanism
Democratic principle of “One
GATT was essentially
WTO has much more principle nation, One vote, One
concerned with
extensive coverage of value”.
traditional trade
issues such as IPR, o Developing countries
issues such as tariff Special and
Services among receive preferential
and non-tariff issues Differential
others
in international trade terms of trade within
Treatment
GATT had small WTO has a full- WTO framework
secretariat with no fledged secretariat

Governing Structure of WTO 6. 12th Ministerial Summit in

Ministerial o Highest decision
decision- Kazakhstan. However, it has refused
Conference making body to host the conference because of
(Highest o Meet twice a year COVID 19 PANDEMIC. In April 2020,
Decision- Minister of Commerce Kazakhstan informed WTO members
Making Body – represent India in this that it remained ready to host MC12
Level I) body in June 2021 in Nur-Sultan
Nur and
o Perform day to day asked the General Council chair to
work and implement consult with WTO members on its
MC’s decisions proposal.
o General Council also
General meets as Trade policy
Objectives of WTO
Council & review body to
1. To improve the standard of living of
Dispute undertake trade
people in the member countries.
Settlement policy reviews of
2. To ensure full employment and broad
Body (Level-2) Members
increase
ase in effective demand.
o DSB redresses the
trade related 3. To enlarge production and trade of
grievances of WTO goods.
members 4. To increase the trade of services.
o There are 3 councils: a) 5. To ensure optimum utilization of
Council for trade in world resources.
Goods b) Council for 6. To protect the environment.
Councils of
TRIPS c) Council for 7. To accept the concept of sustainable
Trade (Level-3)
trade in services development.
o These councils work
under General Council
o Head of WTO
Director
o Elected by Ministerial
General
Council for 4 years
Chronology of Trade Negotiations under

WTO
1. 1996 – 1st Ministerial conference in
Singapore led to Birth of ““Singapore
issues”
2. 2001 – 4th Ministerial conference -
Doha Development Round
3. 9th Ministerial Summit in Bali in
2013 WTO Agreements

4. 10th Ministerial Summit in Nairobi Agreement on Agriculture:
5. 11th Ministerial Summit in Buenos  It is aimed to remove trade barriers
Aires, Argentina in 2017 and to promote transparent market

access and integration of global MSP- minimum support

markets. price
 It has 3 pillars: Domestic Support,  Blue Box subsidies are
Export Subsidies, Market Access. direct payments under
1. Domestic Support refers to production limiting
domestic subsidies that a program. There is no limit.
government provide to a farmer It is also considered trade
such as fertilizer, power etc. distorting Ex: subsidies
These subsidies are grouped linked with acreage or
into 3 classes or boxes: Green number of animals
Box, Blue Box and Amber Box. 2. Export Subsidies
 Green Box includes  Agricultural export
subsidies on which there subsidies are to be limited
are no limits as they are by developed countries
not considered as trade either in value or volume
distorting or they terms so that international
minimally distort the prices are not lowered
international trade. These below a point and exports
subsidies must be and domestic markets of
government funded. the developing countries
These subsidies in general are not priced out. Nairobi
are not directed at Ministerial in 2015
particular products (unlike decided to phase them
MSP) and they may out.
include income support 3. Market Access
that is decoupled from It means that all member
production level or prices countries should throw open
(Ex: Telangana’s Rythu their domestic market to
Bandhu Scheme, PM- agricultural imports by
KISAN). reduction of tariff and removal of
 Amber Box subsidies cover non-tariff barriers. Hence,
all domestic support members should undertake:
measures considered to 1. Tariffication – to convert
distort production and non-tariff barriers (like
trade. These are required quotas) to tariffs
to be maintained within 5- 2. Bind their tariff to agree
10% of production value to a limit that is bounded
(5% for developed countries rate and not increase the
and 10% for developing rates beyond them.
countries).
 Reduced based on a Special Products
formula called “Aggregate These are agricultural products of
Measure of Support” Ex: particular importance to farming

communities in developing countries for resolution procedures and enforcement

reasons of food security, livelihood, procedures.
security and rural development. Under the
Doha Development Round, it was decided Types of
that the Special products would attract Intellectual
Explanations
lower levels of tariff reduction commitment Property
than other agricultural products so as to Rights
It may be granted for a new,
protect and enhance livelihood and food
useful, and non-obvious
security in domestic economy.
invention, and gives patent
Patent holder an exclusive right to
Special Product regime is a component of commercially exploit the
WTO’s Special and Differential (S & D) invention for a certain period of
provision and is available only to time (typically 20 years)
developing country members of WTO. It is given for creative and
artistic works (e.g., books,
The current discussions over Special movies, music) and gives
Products are mainly focused on: Copyright copyright holder the exclusive
right to control reproduction or
1. The number of products to be given
adaptation of such works for a
Special Product status
certain period of time.
2. The modalities to select Special
It is a distinctive sign which is
Products used to distinguish the
Trademark
products or services of different
Special Safeguard Mechanism businesses
 SSM is a trade defence mechanism to It protects the form of
essentially counter the volatility of Industrial appearance, style or design of
international commodity prices. design an industrial objects (e.g., spare
 SSM provisions are available to all parts, textile)
developing and least developed
country members of WTO. Ministerial  Patent is an incentive to innovate and
Decision at Nairobi in 2015 invent and thus sustains R&D. In
recognizes that the developing return for the patent, inventor offers
members will have the right to the knowledge with commercial use to
temporarily increase tariffs in face of be put in public domain after the
import surges by using an SSM. expiry of the patent.
 Under WTO, patents can be granted
TRIPS Agreement for process or product. Product
It lays down legal standards to protect patent provide for absolute protection
intellectual property by way of copyright of product exhausting all processes
rights; geographical indications; that may lead to the product, whereas
industrial designs; integrated circuit process patents provide protection in
layout-designs; patents; monopolies for respect of a specific method of
developers of new plant varieties; production.
trademarks. It also regulates dispute

 Under TRIPS, only product patents Sui Generis System

must be awarded for food,  TRIPS agreement provides sui
pharmaceuticals and chemicals. generis option regarding patent laws.
These patents should be valid for 20 Sui generis means generating by
years. itself or of itself. It means that they
 From the above discussion, it is clear can protect inventions either on the
that product patent has the potential basis of TRIPS pattern of patents or
to raise prices, safeguards have been any other indigenous system (sui
built in the TRIPS Agreement called: generis).
“Parallel Imports” and “Compulsory
Licensing”. Geographical Indications
 Parallel Importation is the  There are some goods that owe their
importation of drugs at a lower price properties (e.g., its special quality or
to meet a public health crisis if the reputation) to the region in which
company holding the patent is they originate and are nurtured. Such
unwilling to provide the patented products are given Geographical
drug at lower price. Indications. GI is used to identify
 Compulsory Licensing means that agricultural, natural or manufactured
the government of a country facing goods.
health crisis can ask for production  In India, Geographical Indications
and sale of drugs in the country at registration is administered by the
concessional price based on a Geographical Indications of Goods
compulsory license that it issues. (Registration and Protection) Act,
This allows generic copies of a 1999 which came into force with
patented product to be produced effect from September 2003. The first
domestically, with compensation paid product in India to be accorded with
to the patent holder. GI tag was Darjeeling tea in the year
Anti-Counterfeiting Trade Agreement 2004-05.
 It is a multinational treaty for the  There are a number of benefits that
purpose of establishing international GI confers on a particular good:
standards for intellectual property 1. It confers legal protection to GI
rights enforcement. in India.
 It aims to establish an international 2. Prevents unauthorised use of a
legal framework for targeting Registered Geographical
counterfeit goods, generics medicines Indication by others.
and copyright infringement on the 3. It provides legal protection to
Internet, and would create a new Indian Geographical Indications
governing body outside existing which in turn boost exports.
forums, such as WTO, World 4. It promotes economic prosperity
Intellectual Property Organisation or of producers of goods produced
UN. It was signed in 2011. in a geographical territory.
 GI generally is not awarded to an
individual. It is given for a period of

10 years and may be renewed for Commer within the territory Service
another 10 years on expiry. GI cial of the member, supplier
prevents spurious goods from Presence through the present
entering the market. It helps commercial within the
presence of the territory of
maintain quality. There is greater
supplier the
accountability, too. It boots exports.
member
Sanitary and Phyto-sanitary Measures

Safeguard Duty
 It is an international treaty under
 Under WTO regime, a safeguard is
WTO that aims to set constraints on
used to restrain international trade in
member state’s policies relating to
order to protect a certain home
food safety (bacterial, pesticides,
industry from foreign competition like
inspection and labelling) as well as
Dumping, Subsidy that attracts
animal and plant health (Phyto-
countervailing duty
sanitary) about imported pests and
diseases.
Countervailing Duty (CVD)
 Many countries subsidise their
General Agreement on Trade in Services
products and make them cheap to be
(GATS)
exported. In such cases, importing
 It is the set of regulations that
country can take the recourse to
governs trade in services among WTO
CVDs. Thus, CVDs are anti-subsidy
members.
duties. These are import duties to
neutralize the negative effects of
GATS cover four modes of supply for the
subsidies.
delivery of services in international
 Director General of Anti-Dumping
trade:
and Allied Duties (DGAD)
Supplier
Criteria recommends the duty but Finance
Presence
Service
Ministry imposes it.
Service delivered supplier
Mode–1: Anti-Dumping Duty
within the territory not present
Cross
of the Member, within the  Dumping is the act of charging a
Border
from the territory territory of lower price in a foreign market for a
Supply
of another member the product than the price of the same
member product in a domestic market or in a
Service delivered 3rd country market. In simple words,
outside the
it is selling at less than fair value.
Mode–2: territory of
 Under WTO, dumping is prohibited if
Consum Member, in the
ption territory of another it causes or threatens to cause injury
abroad member, to a to a domestic industry in the
service consumer importing country. Otherwise, it is
of the member. not prohibited.
Mode–3: Service delivered

 Director General of Anti-Dumping WTO rules and trade

and Allied Duties initiates the obligations under
imposition of Anti-dumping duty. environmental
agreements. Important
issues were:
Overview of WTO Ministerial
o Fisheries subsidies and
Conferences and Contemporary Issues
environmental G&S
Doha Round (Presently, this is the active
Trade o Negotiate to conclude an
round of negotiation)
facilitation agreement
o Improve trading
July 2008 Package
prospects of developing
o To conclude Doha
world.(Hence, also called Aim
Development Agenda
as Doha Development
Outcome: Draft could not be finalized due to
Aim Agenda)
wide divergences among members.
o Started at 4th Ministerial
Finer Points Were:
Conference in Doha,
o Developed countries to
Qatar, in 2001.
end export subsidies
Every item was part of an
by 2013.
indivisible package, i.e.,
o Green Box: Revisions
Package “single undertaking”:
and tighter monitoring.
“Nothing is agreed until Agriculture
o Blue Box: Cap on
everything is agreed”.
subsidies provided
Outcome: Members committed to negotiate o Negotiate modalities of
on Special safeguard
o Market access mechanism.
o Reductions in Exports o In 2005 Hong Kong MC,
subsidies it was decided that
Agriculture Non-
o Reductions in domestic Swiss formula would be
support that distort Agricultural
used for NAMA.
trade Market
o Different tariff cuts were
Access
Market specified for developed
(NAMA)
Access for and developing
o Cutting Tariff and Non-
Non- countries in 2008.
Tariff barrier
Agricultural o Developing countries
Trade
Products agreed, if safeguards are
facilitation
o Interpretation of TRIPS provided.
to supports public 9 Ministerial summit – “Bali package”
th
TRIPS health — promoting: (2013)

access of medicines and o Negotiate towards
creation of new ones. Aim concluding Doha
o Non-imposition of Development Agenda
customs duties on o On public
Electronic
electronic transmissions stockholding: Interim
Commerce
agreed at 2nd MC in peace clause was
Agriculture
1998 to continue. agreed upon and
Trade and o Launch negotiations on permanent solution was
environment relationship between to be found by 2017.

o Developing countries countries were side-lined and new

will have right to issues which were important to
recourse to Special developed world are introduced and
safeguard mechanism emphasized.
but there is no
 This became explicit in Nairobi
agreement over
Declaration which did not mention
“implementation
unanimous commitment to Doha
modalities”.
SMEs (Small
Agenda.
and Medium o Keep negotiating  Principle of reciprocity was side-lined:
Enterprise) Trade Facilitation Agreement was
o Negotiations on the concluded while developed
Trade
agreement were countries went back on their
Facilitation
concluded. promise of permanent solution to
Electronic public stock holding.
o Keep negotiating
Commerce
10th Ministerial summit – “Nairobi Agenda for 11th Ministerial Conference
package” (2015) at Buenos Aires, 2017:
Outcome: No explicit commitment to Doha Developing
Development Agenda (DDA). Declaration, Developed Countries
Countries
recognized divergence in viewpoint among
Bringing Doha
members over DDA.
Agenda back to the
o On public
table and any
stockholding: Keep Equal importance to
negotiation on “new
engaging to arrive at a “new issues” along
issues” (discussed
permanent solution. [No with contentious ones
below) to start after
time-frame specified] under Doha Agenda
conclusion of Doha
o Special safeguard
Agenda, that too
mechanism. [No time-
with “consensus”
Agriculture frame specified to
Negotiation on
finalise the Reforming
“Domestic support”
implementation Agreement on
under Agreement on
modalities] Agriculture to
Agriculture to phase
o Export subsidies: make it more
out trade-distorting
Immediate elimination equitable.
subsidies.
by developed countries
was agreed upon. Negotiate on Fisheries
SMEs (Small subsidies leading to Securing mandate
and Medium o Keep negotiating overfishing and IUU on Special
Enterprise) (Illegal, unreported Safeguard
Electronic and unregulated) Mechanism.
o Keep negotiating fishing.
Commerce
Negotiate applicability
Negotiating
of differential
 It has been said that the Doha permanent
treatment to fast
Agenda lost its relevance after 2008 solution to the
growing economies
Ministerial summit because, the issue of Public
such as India and
issues of relevance for developing Stockholding.
China.

Who said what? 6. India Development

Developing Countries Update
o West provides subsidies 7. Global Economic
amounting to billions of Prospect (GEP) report
8. Global Financial
dollars under green
Development Report
box.
9. Logistics Performance
o Studies have pointed out
Index
that green box
1. Global Financial
subsidies are trade- International
Stability report
distorting. Thus 'Green Monetary
2. World Economic
Reform of Box' needs to be Fund (IMF)
Outlook
Agreement reformed.
1. The Programme for
on o Public stockholding Organisation
International Student
Agriculture subsidies are calculated of Economic
Assessment (PISA)
at 1986-88 price level Development
2. Global Index of
and on total production and
Countries
value. 30 year old price Cooperation
3. Government at a
reference level is (OECD)
Glance Report
unrealistic today and
World Trade outlook
subsidies must be WTO
Indicator
calculated on quantity
Bank for
procured.
International Global Financial System
Interim Peace clause in
Settlements Report
Public current form is difficult to (BIS)
Stock invoke because of conditions
Financial
Holding attached. Hence, G33 called Global Money Laundering
Action Task
for “legal certainty”. Report
Force (FATF)
Special 1. Global Information
It needs to be negotiated and
Safeguard Technology Report
agreed upon at earliest.
Mechanism 2. Travel and Tourism
Negotiate “Domestic support” Competitiveness
to “reduce” subsidies by Report
Developed
developing countries without 3. Global
Countries
any commitment on above Competitiveness
issues. Report
4. Enabling Trade Report
World 5. Global Environment
17. Reports and Indices Economic Performance Index
Forum (WEF) 6. World Power Language
Index
Financial Organisation and Report
7. Inclusive Development
1. Ease of Doing
Index
Business
8. Human Capital Index
2. World Development
9. Energy Transition
Report
World Bank Index
3. Universal Health
10. Global Manufacturing
Coverage Index
Index
4. Remittance Report
11. Global Gender Gap
5. Ease of Living Index

Index Institute (IFPRI)

12. Global Hunger Index, Gender Gender
Global Gender
2017 Inequality Parity
Gap Index
 Undernourishme Index Index
nt  It is
 Child wasting release
 It is published
d by
 Child stunting by World
UNESC
 Child mortality Economic
O.
UN and its Specialised Agencies Forum.
 It is a
United Nations  It measures
Gender Inequality socioec
progress
Development onomic
Index towards parity
Programme (UNDP) index
between men
United Nations 1. Gender Parity usually
and women in
Educational, Index  It is design
–
Scientific and 2. Global compute ed to
1. Economy
Cultural education d by measu
2. Education
Organization monitoring United re the
3. Health &
Nations relative
(UNESCO) Report 4. Political
Developm access
UN – Sustainable representation.
ent to
Development World Happiness  The index lies
Program educati
Solutions Network Report between 0 and
me on of
(SDSN) 1, with 1
(UNDP) males
1. Actions on Air denoting
 It uses and
Quality complete parity
three female
and 0,
United Nations 2. Global dimensio s.
complete
Environment Environment ns  Ratio
inequality.
Programme (UNEP) Outlook o Reproduc of girls
 In its recent
3. Emission Gap tive to boys
(2017) report,
Report Health in
India has been
1. World State of o Empower primar
ranked 108 out
Forest Report ment & y,
FAO of 144
o Labour second
2. Global Food countries in
Market ary
Price Index the recent
Participat and
1. World Health report.
ion. tertiary
Statistics  This is a fall of
 India levels
2. World 21 places from
World Health ranked of
Tuberculosis the last year‘s
Organization (WHO) 122 out educati
Report 87, and India's
of 162 on to
3. Ambient Air lowest since
countries the
the index was
Pollution Report in 2016. numbe
developed in
r of
2006.
Non – Profit Organisations male
 The country
studen
1. Global rankings allow
ts in
Corruption for effective
Transparency each
Report (GCR) comparisons
International level is
2. Corruption across regions
taken
Perception Index and income
in to
International Food groups.
Global Hunger Index accoun
Policy Research
t.

Annual Purchasing
Basis for Wholesale Consumer Index of industrial
survey Managers’ Index
comparison Price Index Price Index production
Industries (PMI)
Consumer Industrial
Wholesale
Price Index statistics in
Price Index It is an index of
(CPI), India
(WPI), the prevailing
indicates providing
amounts to Measures the short-term direction of
the average information
Meaning the average changes in the volume of economic trends
change in on important
change in production of a basket of in the
the prices characteristi
prices of industrial products. manufacturing
of cs of
commodities and service
commoditie registered
at wholesale sectors.
s, at retail manufacturi
level.
level. ng sector
PMI Data is
Central published by
Statistics Japanese firm
Published Office of Central
Office (CSO) Nikkei but
by Economic Statistics Central statistical organisation
and compiled and
Advisor Office
Industrial constructed by
Statistics (IS) Market
Economics
Manufacturing
Goods and Manufacturi
Covers Goods only Industrial sector and services
Services ng sector
sectors
Output, New
Orders,
Organised Employment,
Eight Core Industries
manufacturi Input Costs,
Prices of Prices of ng sector Output Prices,
Electricity, steel, refinery
goods traded goods data, details Backlogs of
products, crude oil, coal,
Focuses on between purchased of Work, Export
cement, natural gas and
business by production, Orders, Quantity
fertilisers.
houses. consumers. investment, of Purchases,
employment Stocks of
and costs. Purchases and
Stocks of
Finished Goods
Base year 2011 -2012 2011-2012 2011-2012 2013 -2014 NA
Manufacturing (77%) followed
by mining (14.7%) and
Primary
electricity (7.9%)
Articles
(22.62% of Food and
Among the Index of eight core
total weight), beverages
industries under IIP, the
Share in the Fuel and have
sector wise contribution is: NA NA
index Power maximum
(13.15%) and weightage
Refinery products (28%),
Manufacture under this.
electricity (19%), Steel (17%),
d Products
coal (10%), crude oil (8%),
(64.23%).
natural gas (6%), cement (5%),
Fertilizers (2%)

Laffer curve shows the relationship

18. Important Graphs between tax revenue and tax rate. Its
message is that if the tax is fixed at an
Philips curve shows the trade-off between optimum (reasonably low levels), tax
unemployment and inflation. It indicates revenue will be maximum.
that to reduce un-employment, an
economy has to adjust with higher level of
inflation.
Lorenz curve indicate inequality in an

economy. It is a graphical representation of
the distribution of income or of wealth
Kuznets curve explain the relationship
between growth and inequality. During the
initial stages of development inequality
increases with economic growth.
Environmental Kuznets curve explains

the relationship between economic growth
and environmental degradation. J curve effect: it is a theory stating that a
country’s trade deficit will initially worsen
after the depreciation of its currency, as
higher prices on imports will be greater
than reduced volume of imports and
growth in exports initially. When exports
become price competitive and imports are
reduced due to high cost, the BOP turns
positive.

Interrelations
Increase in repo rate When inflation is high
Decrease in repo rate When inflation is low
Increase in reverse repo rate When inflation is high
Decrease in reverse repo rate When inflation is low
When inflation is very high and needs extreme
Increase in CRR
measures to control it
When inflation is very low and needs extreme
Decrease in CRR
measures to bring It to healthy levels
Bond yields increase As bond prices fall
Bond prices rise When interest rates fall
Increase in taxes Leads to lower aggregate demand and inflation
Decrease in taxes Leads to higher aggregate demand and inflation
Increase in government spending Leads to higher aggregate demand and inflation
Decrease in govt. spending Leads to Lower aggregate demand and inflation
Increased government spending Leads to Crowding out effect
Reduced government spending Leads to crowding in effect
 Leads to lower disposable income
 Leads to higher tax collections
 Is correlated with reduced unemployment
Increase in inflation
 Real debt levels fall
 Competitiveness in external market suffers
 Consequences of depreciation
 Indicates increased borrowings
 May lead to higher inflation
Increased fiscal deficit
 Correlated with higher interest rates
 Lower sovereign rating of a country
Increased external debt Leads to loss of sovereignty
Increased overall debt Leads to higher interest burden for the future
Increased share of indirect taxes
Indicator of regressive tax regime
among tax revenue
Increased share of direct taxes
Indicator of progressive tax regime
among tax revenue
 exports increase as the goods price is less
 inessential imports will reduce
 more FII
Rupee depreciation  remittances will increase
 debt servicing would be costly
 fiscal deficit increases
 inflation increases
Rupee appreciation  Booming economy

 Huge FII
 Less cost of imports
 Export suffers
 Manage inflation
 Brings in competition
 Net outflow of foreign currency
Current account deficit
 Depletion of forex reserves
 Macro-economic instability
 Increase in debt
Large Fiscal deficit  Increase in interest payments
 BOP crisis
 Downgrading rating


RRP - (Prelims) Economy Ready Reckoner

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

RRP - (Prelims) Economy Ready Reckoner

Uploaded by

Copyright:

Available Formats

RRP – (Prelims) Economy Ready Reckoner

www.laexias.com Page 1 elearn.laex.in

Sl. No. Topic Page No.

1. Basic Concepts of Economy 1 – 10

4. Monetary Policy and Banking 19 – 23

5. Banking System in India 23 – 33

12. Industry and Infrastructure 66 – 69

13. Balance of Payments (BOP) 69 – 73

14. Foreign Investment 73 – 75

15. Economic Integration 75 – 78

16. WTO: Evolution and Contemporary Issues 79 – 87

17. Reports and Indices 87 – 89

18. Important Graphs 90 - 92

www.laexias.com Page 2 elearn.laex.in

Role of State in an Economy:

www.laexias.com Page 1 elearn.laex.in

and Light Industry (food, apparel,  Luxury good: As income increases,

www.laexias.com Page 2 elearn.laex.in

National Income Accounting balances of primary income of all

www.laexias.com Page 3 elearn.laex.in

Note: GDP @ MP = GNP @ MP – net income Gross

Three methods of National Accounting

www.laexias.com Page 4 elearn.laex.in

Difference between GDP and GVA Gross Capital Formation (GCF)

calculations. It also deals with The survey of Land

www.laexias.com Page 5 elearn.laex.in

Double-Dip- Depression: A recession

www.laexias.com Page 6 elearn.laex.in

Types of Economic Recovery:

It is the most-optimistic scenario in

Here the economy quickly recoups lost

www.laexias.com Page 7 elearn.laex.in

In this, the economy, after falling,

In this case several jobs are lost and

It is a dangerous creature. In this, growth

In this, the economy fails to regain the

www.laexias.com Page 8 elearn.laex.in

It is an unrealistic scenario. The growth

A "K-shaped" recovery is somewhere

www.laexias.com Page 9 elearn.laex.in

Hence following indices were brought as National Planning Committee (1938)

This plan was drafted by S.N. Agarwal,

www.laexias.com Page 10 elearn.laex.in

People’s Plan (1945) with particular emphasis

www.laexias.com Page 11 elearn.laex.in

resources available for systematic approach with

www.laexias.com Page 12 elearn.laex.in

(1997-2002) Independence. economic and social

www.laexias.com Page 13 elearn.laex.in

Last Increasing government

 Revenue budget: Revenue budget

www.laexias.com Page 14 elearn.laex.in

Ex: Tax resources: Income tax, 4. Finance Bill [Article 110(a)]: It is

www.laexias.com Page 15 elearn.laex.in

It is mandated by the act that,

www.laexias.com Page 16 elearn.laex.in

Fiscal consolidation:: It means payments on its debt. It affects

www.laexias.com Page 17 elearn.laex.in

the company.  Crowding out: Excessive government

www.laexias.com Page 18 elearn.laex.in

o The SPV will likely borrow money to

www.laexias.com Page 19 elearn.laex.in

banks lend to RBI).