Economy – Basic Terms by Teju, NextGen IAS

Based on Previous Years’ UPSC and State PSC Question Papers

PDF – Table of Contents

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

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

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

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

Cost push inflation ........................................................................................................................................................................................... 14

Demand Pull Inflation...................................................................................................................................................................................... 14

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

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

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

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

Headline inflation .............................................................................................................................................................................................. 15

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

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

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

WPI Inflation ....................................................................................................................................................................................................... 16

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

Monetised deficit .............................................................................................................................................................................................. 18

Current Account Deficit .................................................................................................................................................................................. 19

Trade Deficit ........................................................................................................................................................................................................ 19

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

Revenue Deficit .................................................................................................................................................................................................. 19
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Effective Revenue Deficit ............................................................................................................................................................................... 20

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Primary Deficit .................................................................................................................................................................................................... 20

Unemployment .......................................................................................................................................................... 21

Disguised Unemployment ............................................................................................................................................................................. 21

 Seasonal Unemployment ............................................................................................................................................................................... 21

Structural Unemployment ............................................................................................................................................................................. 21

Cyclical Unemployment .................................................................................................................................................................................. 21

Technological Unemployment ..................................................................................................................................................................... 22

Frictional Unemployment .............................................................................................................................................................................. 22

Unemployment Trap ........................................................................................................................................................................................ 22

Philips Curve ....................................................................................................................................................................................................... 22

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

Proportion Unemployed (PU) ...................................................................................................................................................................... 22

Unemployment Rate (UR) .............................................................................................................................................................................. 22

Activity Status – Usual Status ....................................................................................................................................................................... 23

Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) ................................................................................ 23

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

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

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

Formal Sector Employment .......................................................................................................................................................................... 24

LPG .............................................................................................................................................................................. 24

Liberalisation ....................................................................................................................................................................................................... 24

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

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

Population .................................................................................................................................................................. 25

Population Explosion ....................................................................................................................................................................................... 25

Sources of Population Data .......................................................................................................................................................................... 25

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

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

Growth of Population ...................................................................................................................................................................................... 26

Standard Census Definition .......................................................................................................................................................................... 26
Demographic Dividend................................................................................................................................................................................... 26
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Growth rate of population ............................................................................................................................................................................ 26

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

Infant Mortality Rate ........................................................................................................................................................................................ 27

Maternal mortality rate ................................................................................................................................................................................... 27

Life Expectancy................................................................................................................................................................................................... 27
Sex Ratio ............................................................................................................................................................................................................... 27
 Child mortality .................................................................................................................................................................................................... 27

Perinatal mortality (PNM) .............................................................................................................................................................................. 27

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

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

Census ................................................................................................................................................................................................................... 28

Taxes ........................................................................................................................................................................... 28

Direct and Indirect Taxes ............................................................................................................................................................................... 28

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

Surcharge ............................................................................................................................................................................................................. 31
Excise Duty ........................................................................................................................................................................................................... 32

Customs Duty ..................................................................................................................................................................................................... 32

Ad valorem tax and Specific Tax ................................................................................................................................................................. 33

MODVAT............................................................................................................................................................................................................... 33

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

Revenue ...................................................................................................................................................................... 34

Tax Revenue ........................................................................................................................................................................................................ 34

Non-Tax Revenue ............................................................................................................................................................................................. 34

Non-Debt Capital Receipts ........................................................................................................................................................................... 34

Tax Buoyancy ...................................................................................................................................................................................................... 35

Expenditure ................................................................................................................................................................ 35

Capital Expenditure .......................................................................................................................................................................................... 35

Revenue Expenditure ....................................................................................................................................................................................... 35

Debt ............................................................................................................................................................................ 36

Debt Trap ............................................................................................................................................................................................................. 36

Net Debt Per Capita ......................................................................................................................................................................................... 36
External Debt ...................................................................................................................................................................................................... 36

Internal Debt ....................................................................................................................................................................................................... 37

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Intellectual Property ................................................................................................................................................. 38

International Intellectual Property Index ................................................................................................................................................. 38

World Intellectual Property Organization (WIPO) ............................................................................................................................... 39

Intellectual Property Appellate Board (IPAB) ......................................................................................................................................... 39

 Intellectual Property Rights ........................................................................................................................................................................... 39

Patents................................................................................................................................................................................................................... 39
Patent Prosecution Highway ........................................................................................................................................................................ 39

Product Patent ................................................................................................................................................................................................... 40

Process Patent .................................................................................................................................................................................................... 40

Copyrights............................................................................................................................................................................................................ 40
Copyright Act...................................................................................................................................................................................................... 40

Trade marks ......................................................................................................................................................................................................... 40

Industrial Designs ............................................................................................................................................................................................. 41

Trade Secret ........................................................................................................................................................................................................ 41

Utility Model ....................................................................................................................................................................................................... 41

Finance Commission and its related terms ............................................................................................................. 41

14th Finance Commission ............................................................................................................................................................................... 41

15th Finance Commission ............................................................................................................................................................................... 42

GDP and its related terms ......................................................................................................................................... 43

Advance Estimates ............................................................................................................................................................................................ 44

Current Account (% of GDP) ......................................................................................................................................................................... 44

Debt-to-GDP ratio ............................................................................................................................................................................................ 45

What is gross value added? .......................................................................................................................................................................... 45

Gross National Product (GNP) ..................................................................................................................................................................... 47

Income Accruing (State Economy) ............................................................................................................................................................ 47

Income Originating (State Economy) ........................................................................................................................................................ 48

Gross State Domestic Product (GSDP) (State Economy) ................................................................................................................... 48

Gross Value Added (State Economy) ....................................................................................................................................................... 48

Net State Domestic Product (NSDP) (State Economy) ....................................................................................................................... 48

Cash to GDP Ratio ............................................................................................................................................................................................ 48

Money and its related terms .................................................................................................................................... 48

Reserve Money .................................................................................................................................................................................................. 48

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Dear Money Policy ........................................................................................................................................................................................... 49

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Cheap Money Policy ........................................................................................................................................................................................ 49

Currency Notes (Bank Notes) ....................................................................................................................................................................... 50

Cryptocurrency................................................................................................................................................................................................... 55

Money Multiplier ............................................................................................................................................................................................... 55

Banking and its related terms .................................................................................................................................. 55

Nationalisation of Banks ................................................................................................................................................................................ 55

Recapitalisation of Banks ............................................................................................................................................................................... 56

Prompt Corrective Action .............................................................................................................................................................................. 57
Basel III .................................................................................................................................................................................................................. 57

Liabilities of Commercial Banks ................................................................................................................................................................... 57

Financial Assets of a Commercial Bank .................................................................................................................................................... 58
World Bank – Lending Instruments ........................................................................................................................................................... 58
Reserve Bank of India (RBI) ........................................................................................................................................................................... 59

Open Market Operations ............................................................................................................................................................................... 60

Monetary Policy Committee ......................................................................................................................................................................... 61
National Payments Corporation of India (NPCI) .................................................................................................................................. 61

NABARD-National bank for Agriculture and Rural Development ................................................................................................. 61

SHGs ....................................................................................................................................................................................................................... 62

Microfinance ....................................................................................................................................................................................................... 62

Regional Rural Bank ......................................................................................................................................................................................... 63

NBFC ...................................................................................................................................................................................................................... 63

Minimum Reserve Ratio ................................................................................................................................................................................. 64

Currency in Circulation ................................................................................................................................................................................... 64
Marginal Standing Facility ............................................................................................................................................................................. 64

Repo Rate ............................................................................................................................................................................................................. 65

Reverse Repo Rate............................................................................................................................................................................................ 65

CRR and SLR ........................................................................................................................................................................................................ 66

NDTL ...................................................................................................................................................................................................................... 67

Bank Rate ............................................................................................................................................................................................................. 68

Liquidity Adjustment Facility ........................................................................................................................................................................ 69

Liquidity aggregates ........................................................................................................................................................................................ 69

Green Banking .................................................................................................................................................................................................... 69

Base Rate of Interest ........................................................................................................................................................................................ 70

Market Stabilization Scheme (MSS) ........................................................................................................................................................... 70

Capital to Risk Weighted Assets Ratio ..................................................................................................................................................... 70

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Seigniorage ......................................................................................................................................................................................................... 70
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Sustainable Development Goals (SDGs) .................................................................................................................. 70

Why do we need SDGs? ................................................................................................................................................................................. 70

Voluntary National Review (VNR) Report................................................................................................................................................ 72
Types of Economy ..................................................................................................................................................... 72

Traditional economy ........................................................................................................................................................................................ 72

Free market economy ..................................................................................................................................................................................... 72

Command economy ........................................................................................................................................................................................ 72
Mixed economy ................................................................................................................................................................................................. 72

Open economy .................................................................................................................................................................................................. 73

Closed economy ................................................................................................................................................................................................ 73
Capitalist economy ........................................................................................................................................................................................... 73
Socialist economy ............................................................................................................................................................................................. 73

Blue Economy ..................................................................................................................................................................................................... 73

Green Economy ................................................................................................................................................................................................. 74

Poverty ....................................................................................................................................................................... 74

Human Poverty Index ...................................................................................................................................................................................... 74

Head Count Ratio ............................................................................................................................................................................................. 74

Poverty Line ......................................................................................................................................................................................................... 74
International Poverty Line.............................................................................................................................................................................. 75

Sen Index .............................................................................................................................................................................................................. 75

Incidence of Poverty ........................................................................................................................................................................................ 75

World Poverty Clock ........................................................................................................................................................................................ 75

Global Multidimensional Poverty Index ................................................................................................................................................... 75

Imp Terms related to Agriculture ............................................................................................................................ 76

MSP ........................................................................................................................................................................................................................ 76

e-NAM ................................................................................................................................................................................................................... 77

APMC ..................................................................................................................................................................................................................... 77

Interest Subvention Scheme ......................................................................................................................................................................... 77

Food Credit and Non Food Credit ............................................................................................................................................................. 78

Kisan Credit Card Scheme ............................................................................................................................................................................. 78

Operation Barga ................................................................................................................................................................................................ 78
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Operation Green................................................................................................................................................................................................ 78

Zero-Budget Natural Farming ..................................................................................................................................................................... 79

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Index of Crop Diversification ........................................................................................................................................................................ 79

Direct Benefit Transfer (DBT) ........................................................................................................................................................................ 79

Operational Holdings ...................................................................................................................................................................................... 79

Peace Clause ....................................................................................................................................................................................................... 80
 Contract Farming .............................................................................................................................................................................................. 80

Central issue prices........................................................................................................................................................................................... 80

Commission for Agricultural Costs and Prices (CACP) ....................................................................................................................... 81

Long Term Irrigation Fund ............................................................................................................................................................................ 81

Agro-Climatic Zone .......................................................................................................................................................................................... 81

‘License – Permit – Quota Raj’ ..................................................................................................................................................................... 81

Goods.......................................................................................................................................................................... 82

Normal Goods .................................................................................................................................................................................................... 82

Average Normal Goods .................................................................................................................................................................................. 82

Inferior Goods .................................................................................................................................................................................................... 82

Imp Terms related to Industry ................................................................................................................................. 82

Index of Industrial Production ..................................................................................................................................................................... 82

Central Public Sector Enterprises ................................................................................................................................................................ 83

Strategic Disinvestment.................................................................................................................................................................................. 83

Champions Sectors........................................................................................................................................................................................... 84

Startup India hub .............................................................................................................................................................................................. 84

Special Economic Zone (SEZ) ....................................................................................................................................................................... 84

PMI or Purchasing Managers’ Index (PMI).............................................................................................................................................. 84

Navaratna Status ............................................................................................................................................................................................... 85

Maharatna Status .............................................................................................................................................................................................. 85

Miniratna Status ................................................................................................................................................................................................ 85

National Company Law Tribunal (NCLT) .................................................................................................................................................. 85

National Company Law Appellate Tribunal (NCLAT) .......................................................................................................................... 86

Planning ..................................................................................................................................................................... 86

Planning Commission ...................................................................................................................................................................................... 86

Plan Holiday ........................................................................................................................................................................................................ 86

NITI Aayog ........................................................................................................................................................................................................... 87
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Imp Bonds .................................................................................................................................................................. 88

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Green bonds ....................................................................................................................................................................................................... 88

Blue Bonds ........................................................................................................................................................................................................... 88

Imp Terms related to Financial Market ................................................................................................................... 88

 Components of Money Market in India ................................................................................................................................................... 88

Capital Market .................................................................................................................................................................................................... 89

Primary Market .................................................................................................................................................................................................. 89

Secondary Market ............................................................................................................................................................................................. 89

Capital Market in India.................................................................................................................................................................................... 89

Capital Market .................................................................................................................................................................................................... 90

Primary Market .................................................................................................................................................................................................. 90

Secondary Market ............................................................................................................................................................................................. 90

Securities and Exchange Board of India (SEBI) ...................................................................................................................................... 90

SENSEX .................................................................................................................................................................................................................. 91

NIFTY ...................................................................................................................................................................................................................... 91

Bombay Stock Exchange ................................................................................................................................................................................ 91

Peer to peer lending (P2P) ............................................................................................................................................................................ 92
Venture Capital .................................................................................................................................................................................................. 92

Gilt Edged Market ............................................................................................................................................................................................. 92

Imp Terms related to Insurance ............................................................................................................................... 92

Insurance Penetration ..................................................................................................................................................................................... 92

Insurance Density .............................................................................................................................................................................................. 92

Penetration Rate ................................................................................................................................................................................................ 92

Imp Terms related to Balance of Payments ............................................................................................................ 92

Balance of Current Account .......................................................................................................................................................................... 93

Current Account Convertibility .................................................................................................................................................................... 93

Invisibles ............................................................................................................................................................................................................... 93

Foreign Exchange Reserves........................................................................................................................................................................... 93

Balance of Payments ........................................................................................................................................................................................ 93

Special Drawing Rights ................................................................................................................................................................................... 94

Foreign Capital ................................................................................................................................................................................................... 94

Foreign Direct Investment ............................................................................................................................................................................. 95

Foreign Portfolio Investment ....................................................................................................................................................................... 95

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Foreign Institutional Investment ............................................................................................................................. 95

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Participatory Notes........................................................................................................................................................................................... 96

Exchange Rate System .............................................................................................................................................. 96

 Flexible Exchange Rate System ................................................................................................................................................................... 96

Floating Exchange Rate System .................................................................................................................................................................. 97

Imp Terms related to Foreign Trade ........................................................................................................................ 97

Import Quota ...................................................................................................................................................................................................... 97

Export Quota....................................................................................................................................................................................................... 97
Uruguay Round .................................................................................................................................................................................................. 97

Regional economic integration ................................................................................................................................................................... 98

Entrepot trade .................................................................................................................................................................................................... 98

Export merchandising ..................................................................................................................................................................................... 98

Miscellaneous ............................................................................................................................................................ 98

Behavioural Economics ................................................................................................................................................................................... 98

Board for Industrial and Financial Reconstruction (BIFR) .................................................................................................................. 98

Business Reform Action Plan (BRAP) ......................................................................................................................................................... 99

Central Statistical Office (CSO) Divisions ................................................................................................................................................. 99

Central Statistics Office (CSO) .................................................................................................................................................................... 100

Competition Act , 2002 ................................................................................................................................................................................. 101

Consumer Surplus........................................................................................................................................................................................... 101

Cost Inflation Index ........................................................................................................................................................................................ 101

Deflationary effect on an economy ......................................................................................................................................................... 101

Determinants of Economic Development ............................................................................................................................................. 102

Determinants of Economic Growth ......................................................................................................................................................... 102

Devaluation ....................................................................................................................................................................................................... 102

Disposable Income ......................................................................................................................................................................................... 103

Ease of doing business report ................................................................................................................................................................... 103

Economic Corridor .......................................................................................................................................................................................... 103

Environmental Kuznets curve (EKC) ......................................................................................................................................................... 104

Exclusive Economic Zone ............................................................................................................................................................................. 104

Financial Action Task Force (FATF) ........................................................................................................................................................... 105

Financial Capital............................................................................................................................................................................................... 105

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Financial Rotation ........................................................................................................................................................................................... 105

Forward Market ............................................................................................................................................................................................... 105
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GDI and GEM .................................................................................................................................................................................................... 105

Gini Coefficient ................................................................................................................................................................................................ 106

Human Development Index ........................................................................................................................................................................ 106
Imperfect Competition ................................................................................................................................................................................. 107
India’s statistical system ............................................................................................................................................................................... 107

Innovation Theory of Business Cycles..................................................................................................................................................... 108

International Development Association (IDA) ..................................................................................................................................... 108

International Finance Corporation (IFC) ................................................................................................................................................. 108

International Liquidity ................................................................................................................................................................................... 109

International Monetary Fund (IMF).......................................................................................................................................................... 109

Kuznets Curve in Economics ....................................................................................................................................................................... 109

Laffer Effect........................................................................................................................................................................................................ 110

Liquidity aggregates ...................................................................................................................................................................................... 111

Lorenz Curve ..................................................................................................................................................................................................... 111

Marginal Cost ................................................................................................................................................................................................... 111

Miracle economies ......................................................................................................................................................................................... 111

Monopolistic competition ........................................................................................................................................................................... 112
Mudra Yojana ................................................................................................................................................................................................... 112

National Anti-Profiteering Authority (NAA) ......................................................................................................................................... 112

National Income .............................................................................................................................................................................................. 112

National Sample Survey Office (NSSO) .................................................................................................................................................. 113

Oligopsony ........................................................................................................................................................................................................ 113

Paradox of Thrift .............................................................................................................................................................................................. 113

Perfect Competition ....................................................................................................................................................................................... 114

Perfect Competition ....................................................................................................................................................................................... 114

Philips Curve ..................................................................................................................................................................................................... 114

PPAs...................................................................................................................................................................................................................... 114

Purchasing power parity (PPP)................................................................................................................................................................... 114

Recalibration ..................................................................................................................................................................................................... 115

Recapitalisation ................................................................................................................................................................................................ 115

Sectors ................................................................................................................................................................................................................. 115

Structural adjustment programs (SAPs) ................................................................................................................................................. 116

Swaminathan Commission .......................................................................................................................................................................... 116

Transfer Earnings............................................................................................................................................................................................. 116

Transfer Payments .......................................................................................................................................................................................... 116

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Vicious Circle Argument ............................................................................................................................................................................... 116

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

Full Budget

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

Vote on Account

➔ In the absence of presentation of a Full Budget, the outgoing government seeks a vote on
account from the Parliament for proposed expenditure to be incurred in the next few months till
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the new government takes over.

➔ There are no major announcements related to any new schemes or sops during a vote on account as
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the new government's stance could differ from that of the outgoing government.
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 Inflation

Low inflation has many benefits

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

Cost push inflation

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

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

Demand Pull Inflation

➢ Due to increase in Aggregate demand

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

Creeping inflation

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

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

Galloping inflation

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

Hyperinflation

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

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

Headline inflation

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

Stagflation

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

CPI Inflation

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

Food Inflation

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

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

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

Wholesale Price Index (WPI)

➢ Price of a representative basket of wholesale goods

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

Consumer Price Index CPI

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

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

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Difference between CPI and WPI

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

Producer Price Index

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

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

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

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

Deficits
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➢ A deficit occurs when expenses exceed revenues

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➢ Imports exceed exports, or liabilities exceed assets

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

Monetised deficit

➢ Borrowings made from RBI through printing fresh currency

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

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

• Fiscal deficit is the difference of government expenditure and government revenue.(assume that
government expenditure is more than revenue).
• More fiscal deficit means government has no money, he has to borrow money from central bank or
through some bond/scheme.
• If government is borrowing from RBI, in other words RBI has to print more money, so it will
increase the liquidity of money in the market. So people will have more money in their hand, but we
have limited resources. For example, before there was 5 car buyers for 1 car, now there is 10 car buyer
for 1 car. So demand for car will increase and it will increase the price of car. So price of everything will
go up. Ultimately Inflation will go up.
• If government is borrowing money from people as bond or some scheme through, government
has to pay high interest after some year. So people will invest their money in government
schemes, so liquidity of the money will come down. Before we have 5 car buyer for 1 car, now we
have 2 car buyer for 1 car, so car price will go down. Price of everything will go down, people will buy
less things. It will slow down the industrial growth and it will be deflation in the country. It will make
economic growth sluggish. And in the situation of the deflation, Government has to pay high interest
to the people.
• Third case, government has to borrow money from world bank or from some other country.
Because of that Government has to devalue it’s currency.
• As government has no money, government can’t bring any new development scheme. It will become
difficult to tackle any crisis over country.
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What is meant by “Govt to target fiscal deficit at 3% of GDP”?

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• Fiscal deficit is the difference between the government’s expenditures and its revenues (excluding the
money it’s borrowed)
• A country’s fiscal deficit is usually communicated as a percentage of its gross domestic product
(GDP).
• If a country's income is 100 rupees and expenses are 104 rupees ,then fiscal deficit is 4.
• Let's say GDP of the nation is 400 rupees total value of goods and services produced in the country in
an year .Then the deficit of the nation is 1%.[F.D. → 1% of 400 = 4]

Same way in this case the deficit is 3% of the GDP

• More fiscal deficit means more borrowing.

• When the government earns more than it spends, it's called fiscal surplus.
• When the government spends more than it earns, it's called fiscal deficit.

Current Account Deficit

➢ Current account deficit is a measurement of a country's trade where the value of the goods and
services it imports exceeds the value of the goods and services it exports.

Trade Deficit

▪ A trade deficit is an economic measure of international trade in which a country's imports exceeds its
exports.
▪ A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to
as a negative balance of trade (BOT).
▪ Trade Deficit = Total Value of Imports – Total Value of Exports

Twin deficit hypothesis

✓ As the fiscal deficit of the country goes up its trade deficit (i.e. the difference between exports and
imports) also goes up.
✓ When a govt of a country spends more than what it earns, the country also ends up importing more
than exporting.
✓ In India, the trade deficit story is basically about oil and gold – two commodities that the country
does not produce much but imports a hell of a lot.

Revenue Deficit

 It is the difference between the revenue receipts (RR) and the revenue expenditure (RE)
 Revenue deficit arises when the Govt's actual net receipts is lower than the projected receipts.
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Example
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 If a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net
revenue of Rs 25.
 But the actual revenue of Rs 90 is realised and an expenditure is Rs 70. This translates into net
revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit.
Effective Revenue Deficit

• It is defined as the difference between the revenue deficit and creation of capital assets.
• Effective Revenue Deficit excludes those revenue expenditures which were done in the form of
grants for the creation of capital assets.
• There are several grants which the Union Government gives to the state / UTs and some of which do
create some assets, which are not owned by union govt. but by the state govt.

Example

Under the MGNREGA programme, some capital assets such as roads, ponds etc. are created thus the
grants for such expenditure will not strictly fall in the revenue expenditure

Primary Deficit

• It is the difference between fiscal deficit and interest payments

• Primary deficit is measured to know the amount of borrowing that the government can utilize,
excluding the interest payments.
• The total government expenditure constitutes of (the need for government borrowings) as follows

Purchase of goods and services for public consumption

Public investment
Income transfer payments (pensions, social benefits)
Capital transfer payments
National defence
Infrastructure
Health and welfare benefits

Example
1. Revenue Receipts = Rs. 3,00,000
2. Capital Receipts = Rs. 1,60,000
a) Loan recoveries + other receipts = Rs. 10,000
b) Borrowings & Other liabilities = Rs. 1,50,000
3. Total Receipts (1 +2) = Rs. 4,60,000
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4. Revenue Expenditure = Rs.3,50,000

5. Capital Expenditure = Rs. 1,10,000
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6. Total Expenditure (4+5) = Rs. 4,60,000

7. Budget Deficit (3-6) =NIL
8. Fiscal Deficit [1+2(a) - 6 =3- 2(b)-6=7 + 2 (b)]= Rs. 1,50,000
Simply
 If Govt expenditure is more than it collects then deficit occurs and its known as fiscal deficit and to
finance the deficit it borrows money .
 If it borrows the amount equals to fiscal deficit ,then the budget deficit becomes zero and if it borrows
less than the fiscal deficit amount, then budget deficit occurs.

Primary deficit = Fiscal deficit- Interest payments

Interest payment is a part of Revenue expenditure. In the above example suppose out of total revenue
expenditure is Rs.3,50,000 and interest payment is Rs. 1,20,000.
Then Primary deficit = 8 - Interest Payment part of 4 = Rs.1,50,000 – Rs.1,20,000= Rs.30,000

Unemployment

National Sample Survey Organization (NSSO) defines employment and unemployment on the
following activity statuses of an individual

Working (engaged in an economic activity) i.e. 'Employed'

Seeking or available for work i.e. 'Unemployed'
Neither seeking nor available for work

Disguised Unemployment

➔ It is a phenomenon wherein more people are employed than actually needed.

➔ It is primarily traced in the agricultural and the unorganised sectors of India.
➔ Here the marginal productivity of labour is zero.

Seasonal Unemployment

➔ It is an unemployment that occurs during certain seasons of the year

➔ Agricultural labourers in India rarely have work throughout the year

Structural Unemployment

➔ It is a category of unemployment arising from the mismatch between the jobs available in the
market and the skills of the available workers in the market.
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➔ Many people in India do not get job due to lack of requisite skills and due to poor education level, it
becomes difficult to train them.
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Cyclical Unemployment

➔ It is result of the business cycle, where unemployment rises during recessions and declines with
economic growth.
➔ Cyclical unemployment figures in India are negligible. It is a phenomenon that is mostly found in
capitalist economies.

Technological Unemployment

➔ It is loss of jobs due to changes in technology.

Frictional Unemployment

➔ The Frictional Unemployment also called as Search Unemployment, refers to the time lag between the
jobs when an individual is searching for a new job or is switching between the jobs.

Unemployment Trap

➔ It is a situation when unemployment benefits discourage the unemployed to go to work. People

find the opportunity cost of going to work too high when one can simply enjoy the benefits by doing
nothing.

Philips Curve

➔ Describes inverse relationship between rates of unemployment and corresponding rates of rises in
wages that result within an economy
➔ Simply decreased unemployment, (i.e., increased levels of employment) in an economy will
correlate with higher rates of wage rises
➔ The trade-off between inflation and unemployment is explained by Philips Curve
➔ Phillips curve remains the primary framework for understanding and forecasting inflation used in
central banks

Jobless Growth

➔ At the height of economic growth , if unemployment of labour increases , it is called jobless

growth
➔ The term was coined by the economist Nick Perna in the early 1990s

Proportion Unemployed (PU)

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➔ It is defined as the percentage of persons unemployed in the population.

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Unemployment Rate (UR)

➔ UR is defined as the percentage of persons unemployed among the persons in the labour force.
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.

Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)

➔ Mahatma Gandhi Employment Guarantee Act 2005 later renamed as the "Mahatma Gandhi
National Rural Employment Guarantee Act", MGNREGA, is an Indian labour law and social security
measure that aims to guarantee the 'right to work'.
➔ This act was passed in September 2005
➔ The act was first proposed in 1991 by P.V. Narasimha Rao
➔ Commenced implementation in 625 districts of India. Based on this pilot experience, NREGA was
scoped up to cover all the districts of India from April 1, 2008
➔ In its World Development Report 2014, the World Bank termed it a "stellar example of rural
development"
➔ MGNREGA was initiated with the objective of "enhancing livelihood security in rural areas by providing
at least 100 days of guaranteed wage employment in a financial year, to every household whose
adult members volunteer to do unskilled manual work"
➔ Another aim of MGNREGA is to create durable assets (such as roads, canals, ponds and wells).
➔ Employment is to be provided within 5 km of an applicant's residence, and minimum wages are to be
paid.
➔ If work is not provided within 15 days of applying, applicants are entitled to an unemployment
allowance.
➔ That is, if the government fails to provide employment, it has to provide certain unemployment
allowances to those people. Thus, employment under MGNREGA is a legal entitlement.
➔ MGNREGA is to be implemented mainly by gram panchayats

Employment

Labour Force Participation Rate

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➔ Labour force participation rate is defined as the section of working population in the age group of
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16-64 in the economy currently employed or seeking employment.

➔ People who are still undergoing studies, housewives and persons above the age of 64 are not reckoned
in the labour force.

Worker Population Ratio (WPR)

➔ WPR is defined as the percentage of employed persons in the population

Formal Sector Employment

➔ The information relating to employment in the formal sector is collected by the Union Ministry of
Labour through employment exchanges located in different parts of the country.

LPG

Liberalisation

➔ It is a process whereby a state lifts restrictions on some private individual activities.

➔ Liberalization occurs when something which used to be banned is no longer banned, or when
government regulations are relaxed.
➔ Economic liberalization is the reduction of state involvement in the economy.
➔ Liberalisation refers to end of license, quota and many more restrcitions and controls which were
put on industries before 1991 in India.

Indian companies got liberalisation in the following way

a) Abolition of license except in few
b) No restriction on expansion or contraction of buisness activities
c) Freedom in fixing prices
d) Liberalisation in import and export
e) Easy and simplifying the procedure to attract foreign capital in India
f) Freedom in movement of goods and services
g) Freedom in fixing the prices of goods and services

Privatisation

Privatisation refers to giving greater role to private sector and reducing the role of public sector.
To execute the policy of privatisation govt. took the following steps
➔ Disinvestment of public sector i.e. transfer of public sector enterprise to private sector
➔ Setting up of board of Industrial and Financial Reconstruction (BIFR)→ This board was setup to
revive sick units in public sector enterprises suffering loss
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➔ Dilution of stake of the govt → If in the process of disinvestment private sector acquires more than
51% shares then it results in transfer of ownership and management to the private sector
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Globalisation

➔ Globalization refers to integration of various economies of the world.

➔ Till 1991 Indian Govt was following strict policy in regard to import and foreign investment with regard
to licensing of imports, tariff, restrictions etc. but after new policy govt adopted globalization by
following measures

a) Import liberlisation → govt removed many restrcitions from import of capital goods
b) Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act(FEMA)
c) Rationalisation of tariff structure
d) Abolition of export duty
e) Reduction of import duty

Population

Population Explosion

➔ It is a sudden, large increase in the size of a population

➔ The period from 1901-1921 is referred to as a period of stagnant or stationary phase of growth of
India’s population, since in this period growth rate was very low, even recording a negative growth
rate during 1911-1921
➔ The decades 1921-1951 are referred to as the period of steady population growth. An overall
improvement in health and sanitation throughout the country brought down the mortality rate
➔ The decades 1951-1981 are referred to as the period of population explosion in India, which was
caused by a rapid fall in the mortality rate but a high fertility rate of population in the country

Sources of Population Data

➔ Population data are collected through Census operation held every 10 years in our country.
➔ The first population Census in India was conducted in 1872 but its first complete Census was
conducted only in 1881.

Density of Population

➔ Density of population, is expressed as number of persons per unit area.

➔ It helps in getting a better understanding of the spatial distribution of population in relation to
land.
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➔ It is a crude measure of human and land relationship.

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Physiological density = total population / net cultivated area

Agricultural density = total agricultural population / net cultivable area

Population Doubling Time

➔ Population doubling time is the time taken by any population to double itself at its current annual
growth rate.

Growth of Population

➔ Growth of population is the change in the number of people living in a particular area between
two points of time. Its rate is expressed in percentage.
➔ Population growth has two components namely; natural and induced
➔ Natural growth is analysed assessing the crude birth and death rates
➔ Induced components are explained by the volume of inward and outward movement of people in any
given area

Standard Census Definition

➔ Main Worker is a person who works for atleast 183 days ( or six months) in a year
➔ Marginal Worker is a person who works for less than 183 days ( or six months) in a year

Demographic Dividend

➔ The demographic advantage or ‘dividend’ to be derived from the age structure of the population
➔ The ‘demographic dividend’ results from an increase in the proportion of workers relative to non-
workers in the population.
➔ In terms of age, the working population is roughly that between 15 and 64 years of age.
➔ According to United Nations Population Fund (UNFPA), demographic dividend means, "the economic
growth potential that can result from shifts in a population’s age structure, mainly when the
share of the working-age population (15 to 64) is larger than non-working-age share of the
population (14 and younger, and 65 and older)".

Growth rate of population

➔ The rate of natural increase or the growth rate of population refers to the difference between the
birth rate and the death rate.
➔ When this difference is zero (or, in practice, very small) then we say that the population has
‘stabilised’, or has reached the ‘replacement level’, which is the rate of growth required for new
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generations to replace the older ones that are dying out.

➔ Sometimes, societies can experience a negative growth rate – that is, their fertility levels are below
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the replacement rate.

Fertility Rate
➔ The fertility rate refers to the number of live births per 1000 women in the child-bearing age
group, usually taken to be 15 to 49 years.

Infant Mortality Rate

➔ The infant mortality rate is the number of deaths of babies before the age of one year per 1000 live
births.

Maternal mortality rate

➔ Maternal mortality rate is the number of women who die in childbirth per 1000 live births.

Life Expectancy

➔ It refers to the estimated number of years that an average person is expected to survive.
➔ It is calculated on the basis of data on age-specific death rates in a given area over a period of time

Sex Ratio

➔ The sex ratio refers to the number of females per 1000 males in a given area at a specified time period.

Child mortality

➔ It refers to the mortality of children under the age of 5 yrs

➔ The child mortality rate, also 'under-five mortality rate', refers to the probability of dying between birth
and exactly five years of age expressed per 1,000 live births
➔ It encompasses neonatal mortality and infant mortality (the probability of death in the first year of life)

Perinatal mortality (PNM)

➔ It refers to the death of a foetus or neonate and is the basis to calculate the perinatal mortality rate

Fetal mortality

➔ It refers to stillbirths or fetal death. It encompasses any death of a foetus after 20 weeks of gestation
or 500 gm.
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Neonatal mortality
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➔ Neonatal mortality refers to death of a live-born baby within the first 28 days of life.
➔ Early neonatal mortality refers to the death of a live-born baby within the first seven days of life, while
late neonatal mortality refers to death after 7 days until before 28 days.
Census

➔ A census is an official enumeration of population done periodically.

➔ In India the first census was held in the year 1872.
➔ The first complete census, however was taken in the year 1881.
➔ Since then censuses have been held regularly every tenth year.

Taxes

Direct and Indirect Taxes

Income Tax

➔ Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families
or firms or co-operative societies (other than companies) and trusts (identified as bodies of
individuals associations of persons) or every artificial juridical person.
➔ The inclusion of a particular income in the total incomes of a person for income-tax in India is based
on his residential status.

Corporation Tax
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➔ The companies and business organizations in India are taxed on the income from their worldwide
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transactions under the provision of Income Tax Act, 1961.

➔ A corporation is deemed to be resident in India if it is incorporated in India or if it’s control and
management is situated entirely in India.
➔ In case of non resident corporations, tax is levied on the income which is earned from their business
transactions in India or any other Indian sources depending on bilateral agreement of that country.

Property Tax

➔ Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed
on owners.
➔ The tax power is vested in the states and it is delegated by law to the local bodies, specifying the
valuation method, rate band, and collection procedures.
➔ The tax base is the annual ratable value (ARV) or areabased rating.
➔ Owner-occupied and other properties not producing rent are assessed on cost and then converted into
ARV by applying a percentage of cost, usually 6%.
➔ Vacant land is generally exempted from the assessment.
➔ The properties lying under control of Central are exempted from the taxation. Instead a 'service charge'
is permissible under executive order.
➔ Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity.

Inheritance (Estate) Tax

➔ An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of
an individual.
➔ It is a tax on the estate, or total value of the money and property, of a person who has died.
➔ India enforced estate duty from 1953 to 1985.
➔ Estate Duty Act, 1953 came into existence w.e.f. 15th October, 1953.
➔ Estate Duty on agricultural land was discontinued under the Estate Duty (Amendment) Act, 1984.
➔ The levy of Estate Duty in respect of property (other than agricultural land) passing on death occurring
on or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment) Act,
1985.

Gift Tax

➔ Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April, 1958.
➔ As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others,
received from one who doesn't have blood relations with the recipient, were taxable.
➔ However, with effect from 1st October, 1998, gift tax got demolished and all the gifts made on or after
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the date were free from tax. But in 2004, the act was again revived partially.
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➔ A new provision was introduced in the Income Tax Act 1961 under section 56 (2).
➔ According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs.
50,000 in a year would be taxable.

Sales Tax
➔ Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a
particular commodity within the country.
➔ Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales
Tax) Legislation.
➔ Generally, each State follows its own Sales Tax Act and levies tax at various rates.
➔ Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover
tax and purchaser tax.
➔ Thus, Sales Tax Acts as a major revenue-generator for the various State Governments.

Value added tax

➔ When a person purchases a certain kind of product, a special tax is added at every stage wherever a
certain amount of ‘value is added’ to the product, as well as at the final sale of that particular item.
➔ This tax falls under the category of indirect tax because it is paid by the taxpayer to the Government
indirectly through the producers of various goods and services.
➔ It is a multi-stage tax that is imposed at various stages of purchase and sale of goods and services.
➔ The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials
used in the product that have already been taxed.
➔ The basic concept of VAT was originally proposed by Dr. Wilhelm von Siemens

Securities Transaction Tax (STT)

➔ STT is a tax being levied on all transactions done on the stock exchanges.
➔ STT is applicable on purchase or sale of equity shares, derivatives, equity oriented funds and equity
oriented Mutual Funds.

Angel Tax

➔ An angel investor is one who provides capital for a business start-up, usually in exchange for
convertible debt or ownership equity
➔ Angel tax is the tax levied on such investments made by external investors in startups or
companies.
➔ Introduced in the 2012 Union Budget to arrest laundering of illegal wealth by means of investments
in the shares of unlisted private companies at extraordinary valuations.
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Cess
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➔ CESS is tax on tax and usually levied for the specific purposes.
➔ Once its purpose is solved they are stopped.
➔ Unlike the other taxes that have to be shared with other Indian states, the centre keeps the entire
amount raised from the Cess.
➔ The collection through the CESS is kept in the Consolidated Fund of India.

Clean Energy Cess

➔ It is a kind of carbon tax was levied on coal produced in India or imported coal
➔ Under segment 83 (3) of the Finance Act, 2010 on Coal, Lignite and Peat with a specific end goal to
back and advance clean condition activities, subsidizing research in the zone of clean condition or for
any such related purposes.

Clean Environment Cess

➔ In the Union budget 2016-17, tax on coal was renamed as Clean Environment Cess.

Surcharge

➔ ‘Surcharge’ is an additional charge or tax levied on an existing tax.

➔ Unlike a cess, which is meant to raise revenue for a temporary need, surcharge is usually permanent in
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nature.
➔ It is levied as a percentage on the income tax payable as per normal rates.
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➔ In case no tax is due for a financial year, then no surcharge is levied.

➔ The revenue earned via surcharge is solely retained by the Centre and, unlike other tax revenues, is
not shared with States.
➔ Collections from surcharge flow into the Consolidated Fund of India.
Excise Duty

➔ Union excise duty is a type of indirect tax on goods manufactured in India.

➔ Excise duty is a form of tax imposed on goods for their production, licensing and sale.
➔ Central Board of Excise and Customs (CBEC) is responsible for collecting excise duty.
➔ The rates of Central Excise Duty are defined by the Central Excise Tariff Act, 1985.

There are 3 types of excise duties in India

Basic Excise Duty- Sometimes referred to as Central Value Added Tax (CENVAT), this type of excise
duty is imposed on goods classified under the first schedule of the Central Excise Tariff Act, 1985. This
duty is imposed under Section 3(1) (a) of the Central Excise Act, 1944 and levied on all excisable goods
in the country except salt.
Additional Excise Duty- According to the Section 3 of the Additional Duties of Excise (Goods of
Special Importance) Act, 1957, this duty is levied on goods listed in Schedule 1 of the given act. Such
duty is levied on some specific goods and is charged by the central and state government as a
substitute of the sales tax. The Additional Duties of Excise (Textiles and Textile Articles) Act, 1978 also
provide for a similar legislation.
Special Excise Duty- This kind of duty is levied on special goods specified under the Second Schedule
to the Central Excise Tariff Act, 1985.

Customs Duty

➔ The custom duty in India is regulated by Customs Act of 1962.

➔ This duty is imposed on the imported and exported goods in the country.
➔ This duty is one of the most important duty because it hampers illegal import and export of goods.

Import duties are generally of the following types

1. Basic duty
2. Additional Customs duty
3. True Countervailing duty or additional duty of customs
4. Anti dumping duty/Safeguard duty

Minimum Alternate Tax (MAT)

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➔ It was created to bring these ‘zero-tax paying companies’ within the ambit of income tax and make
them pay a minimum amount in tax to the government.
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➔ It was introduced in the budget of 1986-87 when the applicable rate was 15.75 %
➔ Introduced by the Finance Act, 1987, MAT came into effect from assessment year 1988-89.
➔ Discontinued from 1990-91 and reintroduced in 1996-97 when the effective rate was 11.87%
➔ MAT credit is the difference between the tax the company pays under MAT and the regular tax.
Progressive Taxation

➔ Progressive taxation means higher tax rates for those with higher income or more wealth, so that
those who earn or have more are taxed at a higher rate.
➔ Income redistribution is possible by progressive taxation

Regressive Taxation

➔ Regressive taxation means the poor pay a greater proportion of their available resources than the
rich.
➔ Consumption taxes which employ a flat rate are the clearest example of regressive taxes.

Ad valorem tax and Specific Tax

NOTE The amount of tax to be paid is proportionate to the value of the commodity in respect of Ad
valorem tax

MODVAT
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➔ First Indirect Tax Reform occurred in India when the Modified Value Added Tax (MODVAT) was
introduced for selected commodities in 1986 to replace the Central Excise Duty.
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➔ It was gradually extended to all commodities through Central Value Added Tax (CENVAT).
➔ The states also followed the suit and enacted the VAT acts to replace the sales tax with Value Added
Tax.

Central Board of Direct Taxes (CBDT)

➔ It is a part of Department of Revenue in the Ministry of Finance.
➔ It provides inputs for policy and planning of direct taxes in India, and is also responsible for
administration of direct tax laws through the IT Department.
➔ It is a statutory authority functioning under the Central Board of Revenue Act, 1963.
➔ It is headed by Chairman and also comprises six members, all of whom are ex officio Special
Secretary to the Government of India.

Revenue

Tax Revenue

• Taxes collected from both direct and indirect taxes are considered in Tax Revenue
• It gives a detailed report on revenue collected from different items like corporation tax, income tax,
wealth tax, customs, union excise, service, taxes on UTs like land revenue, stamp registration etc.

Non-Tax Revenue

• Revenue receipts which are not generated by taxing the public➔ Non-Tax Revenue

Examples

o Money which the Govt earns as “Dividends and profits” from its profit making public enterprises
(PSUs).
o Interest which the Govt earns on the money lent by it to external or internal borrowers. Thus this
revenue receipts may be in foreign currency as well as Indian Rupees.
o The money which the govt receives out of its fiscal services such as stamp printing, currency
printing, medal printing etc.
o Money which the Govt earns from its “General Services” such as power distribution, irrigation,
banking services, insurance, and community services etc. which make the part of the Government
business.
o Money which the govt accrues as fees, fines, penalties etc.
o Grants the Govt of India receives from the external sources. In case of the State Govts, it may be the
internal grant from the central Government.
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Non-Debt Capital Receipts

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• A receipt that results in either reduction in govt assets (sale of share, disinvestment) or increase in
some liability (government borrowings) is a capital receipt.
• Examples market loans, external loans, small savings, Government Provident Funds
• Non-debt receipts are those which come to the govt by sale of some assets.
• Debt receipts are those which govt needs to repay along with interest
Tax Buoyancy

• As the economy achieves faster growth, the tax revenue of the govt also goes up➔ Tax buoyancy
explains this relationship between the changes in govt’s tax revenue growth and the changes in
GDP
• It refers to the responsiveness of tax revenue growth to changes in GDP.
• When a tax is buoyant, its revenue increases without increasing the tax rate.

Hence, tax buoyancy shows the association between economy’s performance and the government’s
‘happiness’ (tax revenue). It indicates the high sensitiveness of tax revenue realisation to GDP growth.
This concept reveals some interesting aspects as well as some interesting questions.

✓ First thing is that the govt can feel relieved and happy if the economy achieves higher growth. It may
not borrow highly to finance the budget. New schemes and programmes can be lavished because of
high revenue growth.
✓ Second is that tax buoyancy will be highest for direct taxes. As the economy grows fast, the additional
income generated may go to the rich group. A part of that they have to pay to the govt in the form of
taxes. So if the GDP growth rate registers high say, 9%, direct income tax collection will accelerate.
Generally, direct taxes are more sensitive to GDP growth rate.

Expenditure

Govt expenditure can be classified in two broad formats Capital Expenditure and Revenue Expenditure

Capital Expenditure

✓ This expenditure basically associated with Govt’s asset creation activity.

✓ Example Building roads, airports, or buying defence equipments, loans given by centre to state govt.
etc.

Revenue Expenditure

✓ This expenditure basically refers to expenditure by Govt to maintain its assets.

✓ Broadly it encompasses expenditure made by govt on salaries for employees, pensions, maintenance of
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infrastructure, buying accessories of various equipments which are part of govt asset , subsidies on
education, PDS, loan that has been repaid by govt etc.
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Government Final Consumption Expenditure

• Final consumption expenditure of administrative departments is equivalent to the current expenditure
on compensation of employees, purchase of non-durable goods and services net of sales and the
CFC.
• By convention, expenditure on durable goods, which are used for defence, are also treated as part of
consumption expenditure of the Government.

Consumption Expenditure

• Consumption Expenditure is the spending by households on goods and services, excluding new
housing.

Debt

Debt Trap

➔ If a government has to borrow to make interest payments, it is called Debt trap.

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Net Debt Per Capita

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➔ Net debt per capita is simply a country’s total debt divided by the population living there.

External Debt
o It refers to money borrowed from a source outside the country.
o External debt has to be paid back in the currency in which it is borrowed
o External debt can be obtained from foreign commercial banks, international financial institutions like
IMF, World Bank, ADB etc and from the government of foreign nations.
o Government and corporations are eligible to raise loans from abroad. These are in the form of external
commercial borrowings.
o The interest rate on foreign loans is linked to LIBOR (London Interbank Offer rate) and the actual
rate will be LIBOR plus applicable spread, depending upon the credit rating of the borrower.
o As State Governments are not empowered to contract external debt, all external debt is contracted
by the Central Government and those intended for state government projects are on-lent to States.
o Under Article 292 of the Constitution of India, the Central Government may borrow from within as well
as outside the territory of the country.
o There is no borrowing from international capital markets. The entire External Debt is originally
long-term and a major part is at fixed interest rates.

Internal Debt

• Internal debt consists of marketable debt and non-marketable debt.

• Government dated securities and Treasury Bills, issued through auctions, together comprises
marketable debt.
• Intermediate Treasury Bills issued to State governments and select Central Banks (14 days ITB), special
securities issued to National Small Savings Fund (NSSF), securities issued to international financial
institutions, etc., are part of non-marketable internal debt.
• While treasury bills are issued to meet short-term cash requirements of the Government, dated
securities are issued to mobilise longer term resources to finance the fiscal deficit.
• All marketable debt is issued through auctions as per the schedule notified through half-yearly /
quarterly auction calendars.

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 38

Intellectual Property
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International Intellectual Property Index

➢ Ranks 50 economies based on 45 unique indicators across 8 separate categories that are critical to
an innovation-led economy supported by robust patent, trademark, copyright, and trade secrets
protection.
➢ Global Intellectual Property Centre of the USCC works around the world to examine the Intellectual
Property (IP) rights and their role in creating jobs, saving lives, advancing global economic growth, etc.
➢ It provides both an IP report card for the world and a blueprint for policymakers in various countries.
➢ The Index covers 50 economies, representing 90 percent of global GDP.

World Intellectual Property Organization (WIPO)

➢ Established in 1893
➢ To administer Berne Convention for the Protection of Literary and Artistic Works and Paris
Convention for the Protection of Industrial Property.
➢ World Intellectual Property Indicators is an annual report published by the WIPO

Intellectual Property Appellate Board (IPAB)

➢ Constituted on September 15, 2003

➢ To hear and resolve the appeals against the decisions of the registrar under the Indian Trademarks
Act, 1999 and the Geographical Indications of Goods (Registration and Protection) Act, 1999.
➢ Since April 2, 2007, IPAB has been authorized to hear and adjudicate upon the appeals from most of
the decisions, orders or directions made by the Patent Controller under the Patents Act.
➢ Therefore all pending appeals of Indian High Courts under the Patents Act were transferred to IPAB.

Intellectual Property Rights

➢ Intellectual property rights refer to the rights given to people over the creations of their minds.
➢ They usually give the creator an exclusive right over the use for a certain period of time.

Patents

➢ Patent is one of the most important IPR under which protection is granted for an exclusive right to
exploit an invention.
➢ The invention must be a product or a process that provides a novelty and must have commercial
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application.
➢ The owner of a patent is usually granted 20 years of patent protection.
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Patent Prosecution Highway

➢ Set of initiatives for providing accelerated patent prosecution procedures by sharing information
between some patent offices.
➢ National policy on Electronics 2019 created Sovereign Patent Fund (SPF) to promote the
development and acquisition of IPs in ESDM sector.

Product Patent

➢ Article 28 of TRIPS confers on the owner of a product patent an exclusive right to prevent third
parties without his consent, from the acts of making, using, offering for sale, selling or importing that
product.

Process Patent

➢ The TRIPs regulation provides for registration of both the product patent as well as a process
patent under the new patent regime.

Copyrights

➢ Copyrights include the right of the author of computer programs and cinema to graphic works apart
from the general work of art and literature.
➢ Article 12 provides for protection of copyrights for at least fifty years.

Copyright Act

➔ Enacted in India in the year 1957

➔ Act is applicable from January21, 1958
➔ Copyright Act 1957 was the first post-independence copyright legislation in India and the law has
been amended six times since 1957
➔ India is a member of most of the important international conventions governing the area of copyright
law, including the
Berne Convention of 1886 (as modified at Paris in 1971)
Universal Copyright Convention of 1951
Rome Convention of 1961
Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)

Trade marks
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➢ It means any sign or any combination of signs capable of distinguishing the goods or services
from those of other undertakings.
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➢ The term of protection is for seven years and is renewable indefinitely.

➢ The owner of a registered trademark has the right to assign his trademark with or without the transfer
of his business.
Industrial Designs

➢ Design broadly implies to the characteristics of shape, pattern, configuration, or composition of

lines or colors which is tested to any commodity by any industrial process or means, which is judged
by eyes.

Trade Secret

➢ Trade secrets with commercial value must be protected against breach of confidence, breach of
contract, inducements and other acts contrary to “honest commercial practices”.
➢ Furthermore, reasonable steps must be taken to keep the information secret.
➢ Governments must protect against unfair commercial use test data submitted to obtain marketing
approval for new pharmaceutical or agricultural chemicals.

Utility Model

➢ A utility model is an exclusive right granted for an invention, which allows the right holder to
prevent others from commercially using the protected invention, without his authorization, for a
limited period of time.
➢ In its basic definition, which may vary from one country (where such protection is available) to another,
a utility model is similar to a patent.
➢ In fact, utility models are sometimes referred to as "petty patents" or "innovation patents."

Finance Commission and its related terms

14th Finance Commission

➔ Constituted on January 2, 2013

➔ The commission's chairman was former Reserve Bank of India governor Y. V. Reddy
➔ Members were Sushma Nath, M. Govinda Rao, Abhijit Sen, Sudipto Mundle, and AN Jha
➔ Recommendations of the commission entered force on April 2015
➔ Govt. of India on February 24, 2015 accepted the recommendations of the 14th finance commission for
increasing share of states in central taxes to 42% ,the single largest increase ever recommended.
This is 10% more compared to 32% target set by 13th finance commission.
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➔ The Commission recommended that distribution of grants shall be given to the States using 2011
population data with weight of 90 % and area with weight of 10 %
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➔ The commission followed the method adopted by the 12th commission and put the floor limit at 2 %
for smaller States and assigned 15 % weight.
➔ The commission assigned 50% weight to income distance as it is the only measure of fiscal capacity.
It is the distance of actual per capita income of a state from the state with the highest per capita. The
commission calculated the income distance following the method used the 12th commission.
➔ Income distance has been computed by taking the distance from the state having highest per
capita GSDP. Goa had the highest, followed by Sikkim. Since these two are very small states, income
distance had been computed from the third, Haryana. Goa, Sikkim and Haryana are assigned the same
distance as obtained for Haryana.

15th Finance Commission

➔ Article 280 of the Constitution of India provides for a quasi-judicial body, the Finance Commission.
➔ It is constituted by the President of India every 5th year or at such earlier time as he considers
necessary.
➔ 15th Finance commission makes recommendations for the period of 2020-2025 (5 years)
➔ Recommended a one percentage point reduction in the vertical split of the divisible pool of tax
revenues accruing to States to 41%.

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States share of taxes and Duties

• 42% of the total share of tax of Union will go to states. This is as per the recommendations of the
14th Finance Commission.
• Note Finance Commission is required to recommend the distribution of the net proceeds of taxes of
the Union between the Union and the States (commonly referred to as vertical devolution); and the
allocation between the States of the respective shares of such proceeds (commonly known as
horizontal devolution).
• Horizontal division of taxes among the states using 5 factor formula census 1971, census 2011,
income distance, area and forest cover

Horizontal Distribution

➔ Inter se distribution of tax shares, by the Finance Commission, amongst the states is known as
Horizontal Distribution

Horizontal Devolution

➔ Distribution of net proceeds of taxes among states is called as horizontal devolution

➔ It’s like sharing of resources between the different components of a single entity.

Vertical Devolution

➔ Distribution of net proceeds of taxes between the Union and States is called Vertical devolution

GDP and its related terms

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Advance Estimates

• It is the first estimate of gross domestic product (GDP) and its components for a quarter
• In calculating quarterly GDP, the first estimate published approximately one month after the end of a
quarter. It includes all information then available, but because relevant information may not be
available immediately or may be subject to revision, it is subject to scrutiny and is usually revised in the
preliminary estimate and later in the final estimate
• First Advance Estimates ➔released by CSO
• The approach for compiling the advance estimates is based on benchmark-indicator method

Current Account (% of GDP)

▪ The current account is one of the two components of a country's balance of payments, the other being
the capital account.
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▪ It consists of the trade balance (the difference between the total value of exports of goods and
services and the total value of imports of goods and services), the net factor income (difference
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between the return on investments generated by citizens abroad and payments made to foreign
investors domestically) and net cash transfers, where all these elements are measured in the domestic
currency.
▪ When a country's current account balance is positive (also known as incurring a surplus), the country
is a net lender to the rest of the world. When a country's current account balance is negative (also
known as running a deficit), the country is a net borrower from the rest of the world.
▪ The ratio of the current account balance to the Gross Domestic Product (or % of GDP) provides an
indication of the country’s level of international competitiveness.

Debt-to-GDP ratio

▪ Debt-to-GDP ratio is the ratio between a country's government debt (a cumulative amount) and its
gross domestic product (GDP) (measured in years).
▪ A low debt-to-GDP ratio indicates an economy that produces and sells goods and services sufficient
to pay back debts without incurring further debt.

What is gross value added?

• Put simply, it is a measure of total output and income in the economy.

• It provides the rupee value for the amount of goods and services produced in an economy after
deducting the cost of inputs and raw materials that have gone into the production of those goods
and services.
• It also gives sector-specific picture like what is the growth in an area, industry or sector of an
economy.

• Example Imagine buying a cake from a bakery

• The cake is a produced good, or output, created by the bakery
• The price charged for the cake [OUTPUT] is included in the GVA for bakery
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• But .. in order to produce the cake, the baker will need to purchase a number of ingredients like eggs,
flour and butter ➔INTERMEDIATE CONSUMPTION
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• The total value of this intermediate consumption is subtracted from output and this gives the total
GVA from the sale of this cake
 By adding up GVA of all firms, we can calculate total GVA of the country

How is it measured?

 At the macro level, from national accounting perspective, it is the sum of a country’s GDP and net of
subsidies and taxes in the economy.
 When measured from the production side, it is a balancing item of the national accounts.

What is the difference between GVA and GDP ?

GVA gives a picture of the state of economic activity from the producer’s side or supply side
GDP gives the picture from the consumer’s side or demand perspective.
Both measures need not match because of the difference in treatment of net taxes.
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Gross National Product (GNP)

• The word “national” here refers to all the citizens of a country

• Gross National Product refers to the money value of total output or production of final goods and
services produced by the nationals of a country during a given period of time, generally a year.
• In the calculation of GNP, we include the money value of goods and services produced by nationals
outside the country.
• Hence, income produced and received by nationals of a country within the boundaries of foreign
countries should be added in Gross Domestic Product (GDP) of the country.
• Similarly, income received by foreign nationals within the boundary of the country should be
excluded from GDP.. let’s make it simple
It considers income of both resident and non -resident citizens of a country while the income of
foreigners who reside within the geographical boundary of the country is excluded

Income Accruing (State Economy)

➔ Sum of money received in regular or increasing amounts over time (Individual level)
➔ Total Value of Goods & Services earned by the State Citizens in a Year
➔ Includes our State Citizen Income in other States & other Country ➔ (Inter State Income) 47
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Income generated by state citizens in other State & other countries are included in Income Accruing
 IA = SI + ISI
 SI State Income [Income within State by State Citizens only]
 ISI Inter State & Country Income [Income of our State Citizens in other States & Other
Countries]

Income Originating (State Economy)

➔ Income of the value of the Goods & Services produced in a State in a year within the four Geographical
boundaries of the State
➔ Note Inter State & Country incomes are not included

Gross State Domestic Product (GSDP) (State Economy)

▪ Volume of all goods and services produced within the boundaries of the State during a given
period of time, accounted without duplication
▪ Stamp duties and property taxes ➔ production taxes
▪ Subsidies to labour, capital and investment (apprentice subsidies and interest subsidies)➔ production
subsidies

Gross Value Added (State Economy)

▪ Value of all final goods and services produced by all sectors of the economy
▪ Used in the estimation of GSDP
▪ Key indicator of the state of the whole economy
▪ Economic growth is measured by Gross Value Added (GVA)

Net State Domestic Product (NSDP) (State Economy)

▪ Volume of all goods and services produced within the boundaries of the State during a given period of
time after deducting the wear and tear or depreciation, accounted without duplication

Cash to GDP Ratio

➔ Cash to GDP ratio gives the ratio of cash currency available in the market to the total monetary
value of GDP
➔ Cash to GDP = Amount of cash in circulation / total GDP value
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Money and its related terms

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Reserve Money

• It is “High Powered Money” and also “Monetary Base”.

• Reserve Money is all the Cash in the economy and denoted by M0
• This has the following components

1. Currency with Public

2. Other Deposits with the RBI
3. Cash Reserves of the banks held with themselves
4. Cash Reserves of the Banks held with RBI

✓ Narrow Money (M1) = Currency with the public + Demand Deposits of public in Banks
✓ When a third component viz. Post office Savings Deposits is also added to M1, it becomes M2.

M2 = M1 + Post Office Savings

✓ M3 (Broad concept of money supply)

M3 (Broad Money)= M1+ Time deposits with the banking system

✓ M4 = M3 + All deposits with post office savings banks (excluding National Savings Certificates)

Dear Money Policy

A policy in which a govt reduces the amount of money being spent in an economy by raising
interest rates, making it more expensive to borrow money

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Cheap Money Policy

It is a monetary policy that increases the money supply usually by lowering interest rates. It occurs
when a country's central bank decides to allow new cash flows into the banking system.
Currency Notes (Bank Notes)

➔ The number of languages on the language panel of a currency note is 15

➔ The front side of the banknote contains only two languages. The denomination is written in both
official languages English and Hindi.
➔ In back side, there is a language panel on left side of the banknotes. There are 15 scheduled
Indian languages written inside the panel excluding Hindi and English.
➔ Out of 22 languages have been accorded official language status as per the eighth schedule of the
constitution of India, gets places only 16 languages in the Indian currency notes.
➔ The another one language is additional official language English. Totally 17.
➔ However, the 6 scheduled languages are missing in Indian Currency notes.

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Rs. 2000 Note

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➔ Colour Magenta
➔ Release Date 8th November 2016
➔ Size 166mm X 66mm

Front

✓ Image of Mahatma Gandhi

✓ 2000 written in Devanagari
✓ At 45 degree angle, you can see 2000 written in watermark

Back

✓ Image of Mangalyaan
✓ Swachh Bharat Logo and slogan
✓ Language panel

Rs. 500 Note

➔ Colour Stone Gray

➔ Release Date 10th November 2016
➔ Size 150mm X 66mm

Front ➔ Image of Mahatma Gandhi

Back
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✓ Image of Red Fort

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✓ Swachh Bharat Logo and slogan

✓ Language Panel
 Rs. 100 Note
➔ Color Lavender
➔ Release Date 19th July 2018
➔ Size 142 mm × 66 mm

Front

 Image of Mahatma Gandhi in center

 100 written in Devanagari

Back

 Rani ki vav
 Swachh Bharat logo and slogan
 Language panel
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Rs. 200 Note

➔ Colour Bright Yellow
➔ Release Date 25th August 2017
➔ Size 146mm X 66mm
➔ Front – Image of Mahatma Gandhi in center
➔ Back – Image of the Sanchi Stupa

Rs. 50 Note
Colour Fluorescent Blue
Release Date 10th November 2017
Size 135mm X 66mm

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Front
 Image of Mahatma Gandhi in center
 50 written in Devanagari

Back
 Image of Hampi
 Swachh Bharat logo and slogan
 Language panel

Rs. 20 Note
Colour Greenish-Yellow
Release Date 26th April 2019
Size 129 mm × 63 mm

Front
 Image of Mahatma Gandhi in center
 100 written in Devanagari

Back
 Ellora Caves
 Swachh Bharat logo and slogan
 Language panel

Rs. 10 Note
Colour Chocolate Brown
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Release Date 5th Jan 2018

Size 123mm X 63mm
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Front
 Image of Mahatma Gandhi in center
 10 written in Devanagari
 Back
 Motif of the Konark Sun Temple
 Swachh Bharat logo and slogan
 Language panel

Cryptocurrency

➔ It is a digital or virtual currency designed to work as a medium of exchange.

➔ It uses cryptography to secure and verify transactions as well as to control the creation of new units of
a particular cryptocurrency.
➔ It typically does not exist in physical form (like paper money) and is typically not issued by a central
authority
➔ Bitcoin, first released as open-source software in 2009, is generally considered the first decentralized
cryptocurrency
➔ Top Cryptocurrencies → Ethereum, Ripple, NEO, Litecoin, Bitcoin Cash, Libra, Binance coin etc.

Money Multiplier

➔ It describes how an initial deposit leads to a greater final increase in the total money supply.
➔ It represents the largest degree to which the money supply is influenced by changes in the quantity of
deposits.

Banking and its related terms

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Nationalisation of Banks
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➔ Celebrated 50 years of bank nationalisation on July 19, 2019

➔ State Bank of India nationalised in 1955
➔ Indira Gandhi expressed the intention of the Government of India in the annual conference of the All
India Congress Meeting in a paper entitled Stray thoughts on Bank Nationalization
➔ July 19, 1969 under the Indira Gandhi govt. 14 banks were nationalised → held 85% of bank
deposits in the country
➔ A second round of nationalization of 6 more commercial banks followed in 1980.

The following banks were nationalized in 1969

1) Allahabad Bank(now Indian Bank)

2) Bank of Baroda
3) Bank of India
4) Bank of Maharashtra
5) Central Bank of India
6) Canara Bank
7) Dena Bank (Now Bank of Baroda)
8) Indian Bank
9) Indian Overseas Bank
10) Punjab National Bank
11) Syndicate Bank( now Canara Bank)
12) UCO Bank
13) Union Bank of India
14) United Bank of India( now Punjab National Bank)

The following banks were nationalized in 1980

1) Punjab and Sind Bank
2) Vijaya Bank (Now Bank of Baroda)
3) Oriental Bank of India (now Punjab National Bank)
4) Corporation Bank ( now Union Bank of India)
5) Andhra Bank (now Union Bank of India)

Recapitalisation of Banks

To understand this, one must examine the way banks loan money. The banks create loans based on the
amount of capital in hand. Taking an example, let us say that a bank has forwarded loans of 100cr. To
back this loan, the bank must have at least 10% of the loan amount as capital i.e. 10cr. Now suppose,
the bank loses 5cr on the loans due to a defaulter, it turns the loan into a non-performing asset (NPA)
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and this loss hits the capital.

Now, the bank has 5cr ( 10cr - 5cr loss) capital against a loan of 95cr which comes out to be nearly 5 %.
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This is way below the required 10% ratio. So, the bank needs to increase its capital ratio and this
can be achieved by the following methods

➔ Recall loans worth 45cr so that the remaining loans to capital ratio now increases to 10%.
➔ Freeze disbursement of loans
 The banks have resorted to the latter as loan recall is not a viable option. This has adversely affected
the economic growth of the country as a credit crunch has reduced private investment and stressed
corporate balance sheets further. The twin-balance sheet problem has thus been exacerbated.
Simply, Bank recapitalization means infusing more capital in state-run banks so that they meet the
capital adequacy norms.

Prompt Corrective Action

➔ PCA is a framework under which banks with weak financial metrics are put under watch by the RBI
➔ The PCA framework deems banks as risky if they slip below certain norms on three parameters —
capital ratios, asset quality and profitability.
➔ It has 3 risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on
these ratios.
➔ Banks with a capital to risk-weighted assets ratio (CRAR) of less than 10.25 per cent but more than 7.75
per cent fall under threshold 1.
➔ Those with CRAR of more than 6.25 per cent but less than 7.75 per cent fall in the second threshold.
➔ In case a bank’s common equity Tier 1 (the bare minimum capital under CRAR) falls below 3.625 per
cent, it gets categorised under the third threshold level.
➔ Banks that have a net NPA of 6 % or more but less than 9 % fall under threshold 1, and those with
12 % or more fall under the third threshold level.

Basel III

➔ It is an internationally agreed set of measures developed by the Basel Committee on Bank

Supervision (BCBS) in response to the financial crisis of 2007-09.
➔ The measures aim to strengthen the regulation, supervision and risk management of banks.

Measures are based on three pillars

Pillar 1 Improve the banking sector's ability to absorb ups and downs arising from financial and
economic instability
Pillar 2 Improve risk management ability and governance of banking sector
Pillar 3 Strengthen banks' transparency and disclosures

Liabilities of Commercial Banks

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Financial Assets of a Commercial Bank

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World Bank – Lending Instruments

➔ World Bank is an international financial institution that provides loans and grants to the
governments of poorer countries for the purpose of pursuing capital projects.
➔ It has 2 basic types of lending instruments investment loans and adjustment loans.
➔ Investment loans have a long-term focus (5 to 10 years), and finance goods, works, and services in
support of economic and social development projects in a broad range of sectors.
➔ Adjustment loans are provided by the World Bank to countries that experienced economic crises.
➔ Medium and Long term loans are sanctioned by World Bank

Reserve Bank of India (RBI)

➔ Reserve Bank of India (RBI) is India's central bank, which controls the issue and supply of the Indian
rupee.
➔ RBI is the regulator of entire Banking in India.
➔ RBI regulates commercial banks and non-banking finance companies working in India.
➔ It serves as the leader of the banking system and the money market.
➔ It regulates money supply and credit in the country.
➔ The RBI carries out India's monetary policy and exercises supervision and control over banks and
non-banking finance companies in India.
➔ RBI was set up in 1935 under the Reserve Bank of India Act,1934
➔ RBI was nationalised on January 1, 1949
➔ Headquarters ➔ Mumbai
➔ Reserve Bank of India has offices at 31 locations.
➔ Reserve Bank of India was conceptualized based on the guidelines presented by
Dr. Ambedkar to the "Royal Commission on Indian Currency & Finance” in 1925.
➔ RBI is a leading member of the Alliance for Financial Inclusion (AFI).
➔ RBI is also known as banker's bank and is often referred to by the name 'Mint Street'.
➔ The bank was set up based on the recommendations of the 1926 Royal Commission on Indian
Currency and Finance, also known as the Hilton–Young Commission.
➔ The original choice for the seal of RBI was the East India Company Double Mohur, with the sketch
of the Lion and Palm Tree. However, it was decided to replace the lion with the tiger, the national
animal of India.
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➔ The Central Office of the RBI was established in Calcutta (now Kolkata) but was moved to Bombay
(now Mumbai) in 1937.
➔ RBI has 4 regional representations North in New Delhi, South in Chennai, East in Kolkata and West in
Mumbai.
➔ It has 2 training colleges for its officers, viz. Reserve Bank Staff College, Chennai and College of
Agricultural Banking, Pune.
➔ There are 3 autonomous institutions run by RBI namely National Institute of Bank Management
(NIBM), Indira Gandhi Institute of Development Research (IGIDR), Institute for Development and
Research in Banking Technology (IDRBT).
➔ Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI
deputy governor S. S. Tarapore to "lay the road map" to capital account convertibility.
➔ Security Printing and Minting Corporation of India Limited (SPMCIL), a wholly owned company of
the Government of India, has printing presses at Nashik, Maharashtra and Dewas, Madhya Pradesh.
➔ Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), owned by the RBI, has printing
facilities in Mysore, Karnataka and Salboni, West Bengal.
➔ For the minting of coins, SPMCIL has four mints at Mumbai, Noida, Kolkata and Hyderabad for coin
production.
➔ Whilst coins are minted by, and Re.1 notes are issued by the Government of India (GoI), the RBI works
as an agent of GoI for the distribution and handling of coins.
➔ New Rs. 500 and Rs. 2,000 notes were been issued on 8 November 2016. The old series of Rs. 1,000
and Rs. 500 notes were demonetized from midnight on 8 November 2016.

NOTE Under Section 22 of the Reserve Bank of India Act, RBI has sole right to issue currency
notes of various denominations except one rupee notes. The One Rupee note is issued by Ministry
of Finance and it bears the signatures of Finance Secretary, while other notes bear the signature of
Governor RBI.

Sir Osborne Smith

➔ The first Reserve Bank of India Governor, Sir Osborne Smith, is the only apex bank Governor who
did not sign any Indian currency notes.
➔ The notes signed by Smith could not be put in circulation as the then King of England, Edward VII,
had just stepped down.

Open Market Operations

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➔ Open market operations is the sale and purchase of govt. securities and treasury bills by RBI or the
central bank of the country.
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➔ The objective of OMO is to regulate the money supply in the economy.

➔ When the RBI wants to increase the money supply in the economy, it purchases the government
securities from the market and it sells government securities to suck out liquidity from the
system.
➔ RBI carries out the OMO through commercial banks and does not directly deal with the public.
➔ OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and
minimise its impact on the interest rate and inflation rate levels.
➔ OMO is a part of credit policy.

Monetary Policy Committee

▪ It is constituted by RBI and lead by its Governor which is assigned with the mission of fixing the
benchmark policy interest rate (repo rate) to restrain inflation within the particular target level.
▪ Total 6 members body, 3 from RBI & other 3 appointed by the government.
▪ MPC takes decisions based on majority vote

National Payments Corporation of India (NPCI)

➔ It is an umbrella organisation for operating retail payments and settlement systems in India.
➔ Founded in 2008
➔ NPCI is a not-for-profit organisation registered under section 8 of the Companies Act 2013
➔ Established by Reserve Bank of India & IBA
➔ NPCI was incorporated in December 2008 and the Certificate of Commencement of Business was
issued in April 2009

NABARD-National bank for Agriculture and Rural Development

➔ It is an Apex Development Financial Institution in India

➔ Entrusted with "matters concerning Policy Planning and Operations in the field of credit for Agriculture
and other Economic activities in Rural areas in India".
➔ NABARD is active in developing Financial Inclusion policy.
➔ Established on the recommendations of B.Sivaramman Committee on July 12, 1982 to implement
the National Bank for Agriculture and Rural Development Act 1981.
➔ Replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of
Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC).
➔ NABARD is India's specialised bank for Agriculture and Rural Development in India.
➔ Initial Corpus – 100 cr
➔ NABARD is the most important institution in the country which looks after the development of the
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cottage industry, small scale industry and village industry, and other rural industries.
➔ Headquarters Mumbai
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➔ NABARD is also known for its 'SHG Bank Linkage Programme' which encourages India's banks to
lend to self-help groups (SHGs).
➔ Largely because SHGs are composed mainly of poor women, this has evolved into an important Indian
tool for microfinance.
SHGs

➔ Self-Help Groups (SHGs) are informal associations of people who choose to come together to find
ways to improve their living conditions.
➔ Villages face numerous problems related to poverty, illiteracy, lack of skills, lack of formal credit etc.
These problems cannot be tackled at an individual level and need collective efforts.
➔ Thus SHG can become a vehicle of change for the poor and marginalized.
➔ SHG rely on the notion of “Self Help” to encourage self-employment and poverty alleviation.
➔ Genesis of SHG in India can be traced to formation of Self-Employed Women’s Association (SEWA)
in 1970
➔ SHG Bank Linkage Project launched by NABARD in 1992 has blossomed into the world’s largest
microfinance project.

Microfinance

➔ It is a category of financial services targeting individuals and small businesses who lack access to
conventional banking and related services.
➔ It includes microcredit, the provision of small loans to poor clients; savings and checking accounts;
microinsurance; and payment systems, among other branches.
➔ The modern use of the expression "microfinancing" has roots in 1976 @ Grameen Bank of
Bangladesh
➔ Founded by microfinance pioneer Muhammad Yunus
➔ Another pioneer in this sector is Pakistani social scientist Akhtar Hameed Khan

Development of women and children in Rural Areas (DWCRA)

➔ It was introduced in 1982- 83 by the Department of Rural Development, Ministry of Rural

Development
➔ Launched as a sub scheme of IRDP during the year 1982-83 in 50 districts.
➔ It subsequently extended to cover all the districts in the country by 1994-95.
➔ DWCRA with exclusive focus on economic empowerment of women provides all these inputs by
considering women as critical to development.
➔ DWCRA was introduced for ensuring that the benefits of IRDP reach to women directly.
➔ The programme seeks to improve the access of rural women to health, education, safe drinking water,
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sanitation, nutrition etc; thereby bringing about an enhancement in the quality of general well being of
women & children.
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➔ DWCRA also recognises that the banks do not cater to the consumption loan needs of rural women,
and so a feature of DWCRA is the “Thrift and Credit Society” within the group.
➔ Development of Women and Children in Rural Areas (DWCRA) programme was introduced in
Andhra Pradesh in 1982-83 with UNICEF cooperation with the primary objective of focusing
 attention on the women members of the rural families living below poverty line with a view to provide
them with opportunities of self-employment on a sustained basis.

Regional Rural Bank

➔ Regional Rural Banks (RRBs) are Scheduled Commercial Banks (Government Banks) operating at
regional level in different States of India.
➔ They have been created with a view of serving primarily the rural areas of India with basic banking
and financial services.
➔ RRBs may have branches set up for urban operations and their area of operation may include urban
areas too. [RURAL + URBAN]
➔ Established under the provisions of an Ordinance passed on September 26, 1975 and the RRB Act 1976
➔ Founded on October 2nd, 1975
➔ 5 Regional Rural Banks were set up on 2 October 1975,Gandhi Jayanti
➔ Set up on the recommendations of Narshimham committee Working Group during the tenure of
Indira Gandhi's Government
➔ First RRB - Prathama Bank, Head Office at Moradabad (U.P.)
➔ Prathama bank was sponsored by Syndicate Bank
➔ Regional Rural Banks were owned by the Central Government, the State Government and the Sponsor
Bank (Any commercial bank can sponsor the regional rural banks) who held shares in the ratios as
follows Central Government – 50%, State Government – 15% and Sponsored Banks – 35%.

NBFC

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Minimum Reserve Ratio

➔ The ratio which is maintained by the commercial banks in India between the customer deposits and
bills discounted is called Minimum Reserve Ratio

Currency in Circulation

• It is a major liability component of a central bank’s balance sheet.

• It comprises of

a) Currency notes and coins with the public

b) Cash in hand with banks

Marginal Standing Facility

• Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank
of India in its credit policy of May 2011.
• MSF is the rate at which the banks are able to borrow overnight funds from RBI against the
approved government securities.
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• This window was created for commercial banks to borrow from RBI in certain emergency conditions
when inter-bank liquidity dries up completely and there is a volatility in the overnight interest rates.
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• To curb this volatility, RBI allowed them to pledge Govt-securities and get more funds from RBI at a
rate higher than the repo rate. Thus, overall idea behind the MSF is to contain volatility in the
overnight inter-bank rates.
• Although, the system of lending remains same just like under repo ➔ SBI sells Government security to
RBI, and promises to buy it back after sometime, at a higher rate. Difference in selling and purchase =
interest rate earned by RBI.

In short→

Repo rate = reverse repo + 1%

MSF rate= repo rate + 1%

Repo Rate

• It is rate at which RBI lends to its clients generally against Govt securities
• When SBI wants to borrow money from RBI for short term, SBI will have to pay this much interest rate

Example

 RBI has cash of Rs.100 lakhs.

 SBI has Government securities worth Rs.100 lakhs.
 SBI enters into Repo agreement with RBI.
 The agreement reads “I (SBI) am selling my Government securities worth Rs.100 lakh to RBI and I (SBI)
promise to buy back(repurchase) those securities from RBI after 6 months @Rs.107 lakhs.

Time After 6 months.

RBI’s investment Rs.100 lakhs
After 6 months, RBI gets Rs.107 lakhs from SBI.
So profit of RBI (or interest earned by RBI or interest paid by SBI)=(107-100)/100 = 7%. This is Repo
rate.
What is the difference between bank rate and repo rate??
Bank Rate ➔RBI lends money to its clients for long term loans @this interest rate
Repo Rate ➔RBI lends money to banks for short term loans @this interest rate

Reverse Repo Rate

• It is the rate at which banks lend funds to RBI

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• When SBI parks its surplus money in RBI for short term, SBI makes this much profit.
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Example

o RBI has Government securities worth Rs.100 lakhs.

o SBI has surplus Rs.100 lakhs and nobody is taking them as loans. But SBI is sure more people will come
to take loans before Makar Sankranti. So SBI just wants to park this surplus 100 lakhs somewhere for
the short-term.
o SBI enters into Reverse Repo agreement with RBI.
o The agreement reads “I (SBI) will give buy Government securities worth Rs.100 lakhs from the RBI, and
RBI promises to buy back those securities from me after 6 months @Rs.106 lakhs.

Time After 6 months,

SBI’s investment Rs.100 lakhs
After 6 months, SBI gets Rs.106 lakhs.
So profit of SBI (or interest earned by SBI or interest paid by RBI)=(106-100)/100 = 6%. This is reverse
repo rate.

CRR and SLR

• Let’s assume there are only four people in India 1) common men and 2) businessmen 3) Commercial
banks (like SBI) 4) Central Bank (RBI.)
• Now the Question How do commercial banks make money?
• Common men save their money in bank. Bank gives them say 4% interest rate on savings.
• Then Bank gives that money as loan to businessmen and charges 10% interest rate.
• So 10-4=6% is the profit of Bank. Although that’s technically incorrect, because we’ve not counted
bank’s input cost=staff salary, telephone-internet-electricity bill, office rent, xerox machine etc. So
actual profit will be less than 6%.

Example
 SBI has only one branch in a small town. It was opened on Monday.
 On the very same day, Total 100 common men deposited 1 lakh each in their savings accounts here
(=total deposit is 1 crore)
 SBI offered them 4% interest rate per year on their savings

Here comes the concept of Cash Reserve Ratio

✓ On Tuesday, SBI Branch manager gives away entire 1 crore to a businessman as loan for 10% interest
rate for 5 years.
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✓ From SBI’s point of view, sounds very good right? 10-4=6% profit!
✓ But we’ve not considered the fact that on Wednesday, some of those common men (account holders)
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will need to take out some money from their banks savings account- to pay for gas, electricity, mobile
bills, college fees, writing cheques and demand drafts etc.
✓ But SBI’s office doesn’t have a single paisa left! = problem, protest, rioting, suicides.
✓ So condition #1 Banks must not give away all of the deposit money to businessmen for loans.
Banks must keep some money with aside.
✓ Ok but who’ll decide how much minimum cash should a bank keep aside? Ans. RBI via CRR.(Cash
reserve ratio).

Why SLR Statutory liquidity ratio?

• Continuing the same example. SBI got 1 crore on Monday.

• But suppose, RBI gave him order, “you must keep Rs.10 lakhs aside. (CRR)”
• Thus, SBI is left with only 1 crore – 10 lakhs = 90 lakh rupees.
• So SBI manager decides to get maximum profit out of remaining money. Suppose ongoing rate for
business loans is 10%.
• But there is one businessman Mr.Naidu.
• No bank is offering him loan, because his past track record is not good his earlier business adventures
were epic fail.
• This Mr.Naidu comes to SBI
• After six months, Mr. Naidu’s new business project = BIG FAILURE
• He cannot pay back the EMIs.
• Although SBI can attach his assets and auction them to recover the money. But it’ll take lot of time.
• In the mean time, common-men also read this story in local newspapers and they panic that SBI will
collapse and bank manager will shut down the office and run away.
• So all the common men line up in front of bank and demand back their money. Recall that SBI still has
10 lakh left in CRR. But people want total 1 crore back!
• Again money of account holders (common men) is stuck =problem, protest, rioting, suicides.
• So, condition #2 Bank must not give away all its loans to risky loan takers. Banks must invest
part of its money in “safe and liquid” investment. So during emergency, bank can sell those
“liquid” investments and take out the money.
• For example, Government securities, gold, corporate bonds of reputed companies like Infosys, reliance,
TCS. These are “safe” investments.
• These are also “liquid”, because you can sell them quickly whenever you want. (recall that SBI could
also auction Mr.Naidu’s properties, but it’ll take lot of time in paperwork, legal issues etc.)
• Ok so, bank should invest part of common-men’s money in “safe” investments like Government
securities, gold and corporate bonds of highly reputed companies.
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• BUT who will decide how much money should be invested in this sector? Ans. RBI via SLR (Statutory
liquidity ratio).
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• Let’s assume RBI ordered SBI to keep Rs.25 lakhs under SLR.
• Thus, out of original Rs.1 crore that SBI had, 10 lakhs (CRR) + 25 lakhs (SLR) are gone.

NDTL
 CRR, SLR is counted on amount of money a bank receives.
But bank receives lot of money,

• from depositors,
• from loan takers who’re re-paying EMI,
• (fraudulent) hidden charges imposed on credit cards
• Commission charged on giving demand draft
• Commission charged on online money transfer
• Commission charged on foreign currency conversion etc.etc.etc.
• So how does bank exactly count CRR, SLR requirements? = Net Demand and Time Liabilities
(NDTL)

Time Liabilities

✓ Money deposited in Fixed deposits (FD)

✓ Cash certificates
✓ Gold deposits
✓ Staff security deposit. E.g. in some banks when you join as Probationary officer, you’ve to sign bond
worth Rs.1-2 lakh rupees.

Demand Liabilities

✓ Money deposited in savings account

✓ Money deposited in current account
✓ Demand drafts
✓ Unclaimed deposits

Bank Rate

• When banks borrow long term funds from RBI, they have to pay this much interest rate to RBI
• Collateral NIL (Bank can borrow money without pledging government securities to RBI)

What’s the use of Bank rate?

• Penal rates are linked with Bank rate. For example, If a bank doesn’t maintain CRR, SLR as per the
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prescribed limit.
• Then RBI can impose penalty interest on such notorious bank.
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• At present, Penalty rate = Bank rate + 3% (or 5% in some cases)

• Meaning if Bank rate = 7% then penalty rate=7+3=10%

What if RBI wants to fight inflation using bank rate as a “tool”?

 Obviously they should increase bank rate. That way it becomes harder (more expensive) for banks to
borrow from RBI ➔ SBI increases its loan rates (to keep the profit margin same). Result?

• Less people get home loan, bike loan, business loans

• Less business expansion
• Less jobs
• Less incomes
• Less demand
• Ultimately shopkeeper will bring down the prices to attract people into buying more things.
• Thus inflation is reduced

Policy Dear Money Cheap Money

Tool To fight inflation To fight deflation
Reserve Ratio (CRR, Increase them Decrease them
SLR)
Open Market Operation RBI sells securities RBI buys securities
(OMO)
Bank Rate Increase Decrease

Liquidity Adjustment Facility

➔ It is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI), that allows banks
to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI
through reverse repo agreements.

Liquidity aggregates

➔ Aggregate liquidity refers to the ease of execution for financial transactions for everyone in the
entire market which is highly dependent on the availability of credit in the markets and the size of
the money supply in a country.

The following Liquidity aggregates have been formulated for monitoring the state of liquidity in an
economy.
L1=M3+Postal Deposits (excluding National Saving Certificate)
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L2= L1+Term Money Borrowings, Certificate of Deposits and Term Deposits of Financial Institutions
like IDBI, IFCI, Exim Bank, NABARD, SIDBI etc.
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L3= L2+ Public Deposit with non-banking financial institutions

Green Banking
➔ Green banking means promoting environmental friendly practices and reducing your carbon footprints
from your banking activities.

Base Rate of Interest

➔ It is the actual lending rate plus borrower specific charges

Market Stabilization Scheme (MSS)

• It is a monetary policy intervention by the RBI to withdraw excess liquidity (or money supply) by
selling government securities in the economy.
• MSS is used when there is high liquidity in the system.

Capital to Risk Weighted Assets Ratio

▪ Also known as Capital Adequacy Ratio

▪ It is a measure of a bank’s ability to absorb losses.
▪ Formula value of its capital divided by the value of risk-weighted assets.
▪ Simply CAR= bank’s capital / bank’s risky assets.
▪ A low capital adequacy ratio (CAR) = bank has a limited ability to absorb losses (meaning bank is
more likely to collapse if people start defaulting on their loans.)
▪ High CAR= bank has good ability to absorb losses
▪ In public sector banks, Govt of India (GOI) has regularly infused capital to keep the CAR high.

Seigniorage

➔ Seigniorage is the difference between the value of currency/money and the cost of producing it.
➔ It is essentially the profit earned by the government by printing currency.

Sustainable Development Goals (SDGs)

 SDGs are a set of 17 goals and 169 targets aimed at resolving global social, economic and
environmental problems.
 These new SDGs replace the Millennium Development Goals (MDGs) which were adopted in 2000
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 Aiming to encompass almost every aspect of human life, the main themes of the SDGs are ending
poverty, tackling inequality and combating climate change.
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 According to the UN’s own estimates, achieving the 17 Sustainable Development Goals and 169 targets
meant to transform the world will require over 250 billion dollars annually for the next 15 years.

Why do we need SDGs?

✓ Some 795 million people around the world still go hungry and around 800 million people live in
extreme poverty, with fragile and conflict-torn states experiencing the highest poverty rates
✓ Between 2008 and 2012, 144 million people were displaced from their homes by natural disasters, a
number predicted to rise as the planet warms, bringing more extreme weather and rising seas
✓ Water scarcity affects 40% of the global population and is projected to increase
✓ Some 946 million people still practice open defecation
✓ Gender inequality persists in spite of more representation for women in parliaments and more girls
going to school
✓ 57 million children still denied right to primary education

What is the difference between MDG and SDG?

Aims at global systemic reforms

(1)First 7 SDGs are an extension of the MDGs
(2)Goal 8, 9 and 10 cover aspects such as

▪ Inclusiveness and jobs

▪ Infrastructure and industrialisation
▪ Distribution

(3) Final set of 7 goals lay down framework for sustainability spanning
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▪ Urbanisation
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▪ Consumption and production

▪ Climate change
▪ Resources and environment
▪ Peace and justice
▪ Means of implementation and global partnership

Voluntary National Review (VNR) Report

• The VNR report is based on an analysis of progress under various programmes and initiatives in
the country.
• The VNR report focused on 7 SDGs 1 (No Poverty); 2 (Zero Hunger); 3 (Good Health and Well-Being);
5 (Gender Equality); 9 (Industry, Innovation and Infrastructure), 14 (Life below Water) and 17
(Partnerships for the Goals).

Types of Economy

Traditional economy

• Very little govt involvement

• Allocation of resources based on rituals, habits or customs
• Economic roles → family and people work together for the common good
• Very little individual choice in this system
• Ex tribes in Amazon, Aborigines in Australia etc

Free market economy

• Very little govt control

• Economic decisions based on market principles
• Lot of competition between firms >> many choices to consumers
• Resources for production are under private ownership and they make their decisions with the
desire to maximise profits.
• There are no pure free market economies, United States and Australia come close to this type

Command economy

• Resources of production are completely under govt control

• These economies are run based on central planning
• Due to lack of competition, resource allocation is inefficient and consumers have very little choices
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• Ex Former Soviet Union, Cuba, North Korea etc.

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Mixed economy

• Combination of public sector and private sector units

• Govt is the decision maker for the public sector
• Individuals and businesses for private sector
• Basically incorporates governmental involvement in a market based economy
• Ex India, Russia and UK

Open economy

• Trade with other economies

• Market is mostly free from trade barriers >> exports and imports form of a large percentage of the
GDP
• The degrees of the openness of an economy determines govt's freedom to pursue economic policies
of its choice and the susceptibility of the country to international economic cycles

Closed economy

• No trade or trade area with other economies

• Consumer get everything within the economic borders and govt act as the arbitrator, articulator and
facilitator

Capitalist economy

• Capitalism - basic economic system based on private or corporate ownership of production and
distribution of goods.
• Capitalists favour a system of free enterprise which means the govt does not interfere in the
economy that the laws of supply and demand will make sure that the economy runs most efficiently in
meeting people's needs.
• Capitalism is characterised by competition in which there is rivalry in supplying or getting an
economic service or good

Socialist economy

• Socialism is an economic theory or idea that states the govt or the state should be incharge of
economic planning , production and distribution of goods
• Socialism tends to favour cooperation whereas capitalism is characterised by competitions
• Communism advocates class struggle and revolution to establish a society of cooperation with strong
govt control
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• Communism predominated in the former Soviet Union and much of eastern Europe at one time.
• Today it predominates in China and Cuba, but its influence has lessened
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Blue Economy

➔ Related to the exploitation and preservation of the marine environment

➔ The concept was introduced by Gunter Pauli in his 2010 book- “The Blue Economy 10 years, 100
innovations, 100 million jobs”.
➔ It emphasizes on integration of development of ocean economy with social inclusion, environmental
sustainability, combined with innovative business model.
➔ This is reflected in Sustainable Development Goal (SDG 14), which calls to conserve and sustainably
use the oceans, seas and marine resources for sustainable development.

Green Economy

➔ Aims at making issues of reducing environmental risks and ecological scarcities, and that aims for
sustainable development without degrading the environment.
➔ The green economy requires that economic development is decoupled from the use of resources
and environmental degradation. Decoupling refers to reducing the environmental impact (in terms
of both resource use and the generation of pollution and wastes) associated with any economic
activity.
➔ Green jobs are work in agriculture, industry, services and administration that contribute to preserving
or restoring the quality of the environment.

Poverty

Human Poverty Index

➔ Human Poverty Index (HPI) was an indication of the poverty of community in a country, developed
by the United Nations to complement the Human Development Index (HDI) and was first reported as
part of the Human Deprivation Report in 1997.
➔ HPI concentrates on the deprivation in the three essential elements of human life already reflected in
the HDI longevity, knowledge and a decent standard of living.
➔ It is an indication of Standard of Living

Head Count Ratio

➔ It is the proportion of a population that exists, or lives, below the poverty line.
➔ Definition-When the number of poor is estimated as the proportion of people below the poverty
line, it is known as 'head count ratio'.
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Poverty Line
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➔ Poverty trends in India and the world are illustrated through the concept of the poverty line.
➔ A common method used to measure poverty is based on the income or consumption levels.
➔ A person is considered poor if his or her income or consumption level falls below a given
“minimum level” necessary to fulfill basic needs.
➔ While determining the poverty line in India, a minimum level of food requirement, clothing, footwear,
fuel and light, educational and medical requirement etc. are determined for subsistence. These physical
quantities are multiplied by their prices in rupees.
➔ The present formula for food requirement while estimating the poverty line is based on the desired
calorie requirement.
➔ The accepted average calorie requirement in India is 2400 calories per person per day in rural areas
and 2100 calories per person per day in urban areas.
➔ Since people living in rural areas engage themselves in more physical work, calorie requirements in
rural areas are considered to be higher than urban areas.
➔ The poverty line is estimated periodically (normally every five years) by conducting sample surveys.
These surveys are carried out by the National Sample Survey Organisation (NSSO).

International Poverty Line

➔ The international poverty line is a monetary threshold under which an individual is considered to
be living in poverty.
➔ It is calculated by taking the poverty threshold from each country—given the value of the goods
needed to sustain one adult—and converting it into dollars.

Sen Index

➔ Developed by Amartya Sen (Nobel Laurete)

Incidence of Poverty

➔ Incidence of poverty shows the proportion of people who are under the poverty line
➔ Mixed Recall Period and Uniform Recall Period are calculated for the measurement of Incidence of
poverty

World Poverty Clock

➔ It is a tool to monitor progress against poverty globally and regionally, created by an NGO,
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World Data Lab.

➔ It takes into account household surveys and projections of economic growth from the
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International Monetary Fund's World Economic Outlook.

Global Multidimensional Poverty Index

➔ Developed in 2010 by the Oxford Poverty & Human Development Initiative (OPHI) and the United
Nations Development Programme (UNDP)
➔ Uses health, education and standard of living indicators to determine the degree of poverty
experienced by a population.
➔ Global MPI is released annually by OPHI
➔ It replaced the Human Poverty Index
➔ The global MPI scrutinizes a person’s deprivations across 10 indicators in health, education and
standard of living and offers a high-resolution lens to identify both who is poor and how they are
poor.
➔ It complements the international $1.90 a day poverty rate by showing the nature and extent of
overlapping deprivations for each person.
➔ Sustainable Development Goal (SDG) 1 aims to end poverty in all its forms and dimensions

Imp Terms related to Agriculture

MSP
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▪ A Minimum Support Price (MSP) is a form of market intervention by the Government of India to insure
agricultural producers against any sharp fall in farm prices.
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▪ The minimum support prices are announced by the Govt of India at the beginning of the sowing
season for certain crops on the basis of the recommendations of the Commission for
Agricultural Costs and Prices (CACP).
▪ MSP is price fixed by Government of India to protect the producer - farmers - against excessive fall
in price during bumper production years.
▪ The minimum support prices are a guarantee price for their produce from the Government.
▪ The major objectives are to support the farmers from distress sales and to procure food grains for
public distribution.
▪ In case the market price for the commodity falls below the announced minimum price due to bumper
production and glut in the market, government agencies purchase the entire quantity offered by the
farmers at the announced minimum price.

e-NAM

▪ Department of Agriculture & Cooperation formulated a Central Sector scheme for Promotion of
National Agriculture Market through Agri-Tech Infrastructure Fund (ATIF) through provision of the
common e-platform.
▪ Electronic National Agriculture Market (e-NAM) platform seeks to create a common national
market, for enhancing farmer’s access to buyers
▪ NAM is an online platform with a physical market or mandi at the backend
▪ It will make price discovery and trading transparent.
▪ It seeks to leverage the physical infrastructure of mandis through an online trading portal, enabling
buyers situated even outside the state to participate in trading at the local level

APMC

▪ Agricultural Produce Market Committee (APMC)

▪ Statutory market committee constituted by a State Government in respect of trade in certain
notified agricultural or horticultural or livestock products, under the Agricultural Produce Market
Committee Act issued by that state govt
▪ One main function of which is basically to provide a platform for farmers to sell their produce
▪ In simple terms, the APMC (Agricultural Produce Market Committees) is a relic of the past that forces
the farmers to sell their produce only to middlemen approved by the govt in authorized Mandis
(markets)
If you are a vegetable producer and I’m a supermarket, I cannot directly buy from you. Both of us need
to go through a broker. This increases prices for the end buyer and unnecessarily adds redtape.
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Interest Subvention Scheme

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 Under it, farmer can effectively avail short term crop loans up to Rs. 3 lakh payable within one year
at only 4% per annum
 It also gives loans at concessional rate of 7% for storage in ware houses accredited by Warehousing
Development Regulatory Authority(WDRA) for upto 6 months post harvest for avoiding distress sale
Food Credit and Non Food Credit

➢ Banks provide credit or loans to various organizations and when these loans are given to Food
Corporation of India (FCI) or for promotion of food safety etc. they are known as Food credit and
loans other that related to food are called Non food credit

Kisan Credit Card Scheme

▪ Kisan Credit Card (KCC) scheme was introduced in August 1998 by NABARD and RBI
▪ This model scheme was prepared by the National Bank for Agriculture and Rural Development
(NABARD) on the recommendations of R.V.GUPTA to provide term loans and agricultural needs.
▪ Credit delivery mechanism that is aimed at enabling farmers to have quick and timely access to
affordable credit
▪ The scheme aims to reduce farmer dependence on the informal banking sector for credit – which
can be very expensive and suck them into a debt spiral.
▪ The card is offered by cooperative banks, regional rural banks and public sector banks.

Operation Barga

➔ It was a land reform movement throughout rural West Bengal for recording the names of
sharecroppers (bargadars) while avoiding the time-consuming method of recording through the
settlement machinery
➔ Launched in 1978
➔ The ultimate aim of these land reforms was to facilitate the conversion of the state's bargadars into
landowners, in line with the Directive Principles of State Policy of the Indian Constitution.

Operation Green

➔ Tomato, onion and potato are basic vegetables consumed throughout the year.
➔ Seasonal and regional production of these perishable commodities pose a challenge in connecting
farmers and consumers in a manner that satisfies both.
➔ To reduce the fluctuation in pricing of Onion, Tomatoes and Potatoes the scheme has been launched.
➔ ‘‘Operation Greens’’ on the lines of ‘‘Operation Flood’’
➔ The operation aims to aid farmers and help control and limit the erratic fluctuations in the prices of
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onions, potatoes and tomatoes.

➔ ‘‘Operation Greens’’ shall promote Farmer Producers Organizations (FPOs), agri-logistics, processing
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facilities and professional management.

➔ The idea behind Operation Greens is to double the income of farmers by the end of 2022.
➔ Operation is essentially a price fixation scheme that aims to ensure farmers are given the right price
for their produce.
Zero-Budget Natural Farming

➔ It is a method of farming where the cost of growing and harvesting plants is zero.
➔ This means that farmers need not purchase fertilizers and pesticides in order to ensure the
healthy growth of crops.
➔ It was originally promoted by Maharashtrian agriculturist and Padma Shri recipient Subhash
Palekar, who developed it in the mid-1990s as an alternative to the Green Revolution’s methods driven
by chemical fertilizers and pesticides and intensive irrigation.

Index of Crop Diversification

➔ Concept of crop diversification means competition among various grown crops for space in a given
region.
➔ Index of Crop Diversification is computed for major States and All India to examine whether there
are major changes in the cropping patterns across States.
➔ The index value ranges between 0 and 1 and higher the value, greater the diversification.

Direct Benefit Transfer (DBT)

➔ It is an attempt to change the mechanism of transferring subsidies launched by Government of

India on January 1, 2013.
➔ It was launched in 20 districts, covering scholarships and social security pensions initially.
➔ This program aims to transfer subsidies directly to the people through their bank accounts.
➔ The primary aim of this Direct Benefit Transfer program is to bring transparency and terminate
pilferage from distribution of funds sponsored by Central Government of India.
➔ In DBT, benefit or subsidy will be directly transferred to citizens living below poverty line
➔ Central Plan Scheme Monitoring System (CPSMS), being implemented by the Office of Controller
General of Accounts, will act as the common platform for routing DBT.
➔ CPSMS can be used for the preparation of beneficiary list, digitally signing the same and processing of
payments in the bank accounts of the beneficiary using the Aadhaar Payment Bridge of NPCI
➔ Former Union Minister for Rural Development of India Jairam Ramesh and former Chief Minister of
Andhra Pradesh N. Kiran Kumar Reddy inaugurated the scheme at Gollaprolu in East Godavari
district on 6 January 2013.
➔ M Veerappa Moily formally launched the scheme direct benefit transfer for LPG (DBTL) Scheme in 20
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high Aadhaar coverage districts.

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Operational Holdings

➔ All land which is used wholly or partly for agricultural production and is operated as one technical
unit by one person alone or with others without regard to the title, legal form, size or location is
known as operational holding.
➔ Operational holdings are also classified in three social groups, viz., Scheduled Castes, Scheduled
Tribes and Others
➔ In agriculture Census, the operational holdings are categorised in five size classes as follows

Peace Clause

➔ The term ‘peace clause’ has been a cause of disquiet ever since India dug in its heels on the issue of
domestic food security in the recent world trade organisation (WTO) negotiations, leading to a
deadlock.
➔ The ‘peace clause’ said that no country would be legally barred from food security programmes
even if the subsidy breached the limits specified in the WTO agreement on agriculture.

Contract Farming

➔ Contract farming is an arrangement between the farmer producer and agri-business firms to sell
the produce at a pre-fixed Price or Quantity or Time or All Three.
➔ The farmer undertakes to supply agreed quantities of a crop or livestock product, based on the
quality standards and delivery requirements of the purchaser.
➔ In return, the buyer, usually a company, agrees to buy the product, often at a price that is
established in advance.
➔ The company often also agrees to support the farmer through, e.g., supplying inputs, assisting with
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land preparation, providing production advice and transporting produce to its premises.
➔ The term "outgrower scheme" is sometimes used synonymously with contract farming, most
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commonly in Eastern and Southern Africa.

Central issue prices

➔ The prices at which the central government supplies food grains to the states for the distribution
through fair price or ration shops are called Central issue prices
➔ The states fix retail price to be charged at fair price shops.
➔ The state government's responsibility in PDS is operational.

NOTE Centre procures food grains from farmers at a minimum support price (MSP) and sells it to
states at central issue prices.

Commission for Agricultural Costs and Prices (CACP)

➔ It is a decentralised agency of the Government of India.

➔ It was established in 1965 as the Agricultural Prices Commission, and was given its present name in
1985.
➔ It is an attached office of the Ministry of Agriculture & Farmers Welfare, Government of India.
➔ The commission was established to recommend Minimum Support Prices (MSPs), to motivate
cultivators and farmers to adopt the latest technology in order to optimise the use of resources and
increase productivity.

Long Term Irrigation Fund

▪ To address the problems associated with perennial irrigation water crisis in rural India, Ministry of
Water Resources, River Development and Ganga Rejuvenation has signed an agreement with
NABARD to operationalise the Long Term Irrigation Fund (LTIF).
▪ LTIF has instituted in NABARD as a part of Pradhan Mantri Krishi Sinchayee Yojana (PMKSY).

Agro-Climatic Zone

➔ “Agro-climatic zone” is a land unit in terms of major climates, suitable for a certain range of crops
and cultivars.
➔ The planning aims at scientific management of regional resources to meet the food, fiber, fodder
and fuel wood without adversely affecting the status of natural resources and environment.
➔ Agro-climatic conditions mainly refer to soil types, rainfall, temperature and water availability which
influence the type of vegetations.
➔ Agro-ecological zone is the land unit carved out of agro-climatic zone superimposed on landform
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which acts as modifier to climate and length of growing period.

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‘License – Permit – Quota Raj’

➔ Rajagopalachari, the founder of the first market friendly political party, the Swatantra Party, in late
1950s coined the term “Quota-Permit-License Raj” to describe the Indian model of socialism.
➔ It is the elaborate system of licences, regulations and accompanying red tape that were required to set
up and run businesses in India between 1947 and 1990
➔ Under ‘License – Permit – Quota Raj’ govt. control was so strong that it decided which company would
produce what
➔ With the nationalization of banks in 1969 and the Monopolies and Restrictive Trade Practices (MRTP)
Act of 1970, the License Raj was further strengthened.
➔ License Raj created a ‘scarcity economy’, and this scarcity also applied to foreign reserves since we
practiced ‘swadeshi’. The Balance of Payment crisis arose in the 1970s and worsened towards the end
of 1980s. The balance of payments situation came to the verge of collapse in 1991, mainly because the
current account deficits were financed by borrowings from abroad.
➔ Licence Raj system was in place for four decades. In 1991, the government of India initiated a
liberalisation policy under P. V. Narasimha Rao.
➔ ‘License – Permit – Quota Raj’ was abolished in the year 1991.

Goods

Normal Goods

➔ The quantity of a good that the consumer demands can increase or decrease with the rise in
income depending on the nature of the good.
➔ For most goods, the quantity that a consumer chooses, increases as the consumer’s income
increases and decreases as the consumer’s income decreases. Such goods are called normal goods.

Average Normal Goods

➔ Goods for which demand directly (positively) related to income are called Average Normal Goods

Inferior Goods

➔ There are some goods the demands for which move in the opposite direction of the income of the
consumer. Such goods are called inferior goods.
➔ As the income of the consumer increases, the demand for an inferior good falls, and as the income
decreases, the demand for an inferior good rises.
➔ Examples of inferior goods include low quality food items like coarse cereals.
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Imp Terms related to Industry

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Index of Industrial Production

o Index of Industrial Production (IIP) is an index for India which details out the growth of various
sectors in an economy such as mineral mining, electricity and manufacturing
o The all India IIP is a composite indicator that measures the short-term changes in the volume of
production of a basket of industrial products during a given period with respect to that in a chosen
base period
o Calculated and published by the Central Statistical Organisation (CSO) every month
o IIP is published monthly, six weeks after the reference month ends
o 8 Core Industries comprise nearly 40.27% of the weight of items included in the Index of
Industrial Production (IIP). These are electricity , steel, refinery products, crude oil, coal, cement,
natural gas and fertilisers.

Industry groups that it measures are classified under the following

➔ Broad sectors like manufacturing, mining and electricity.

➔ Use-based sectors like capital goods, basic goods, intermediate goods, infrastructure goods,
consumer durables and consumer non-durables.

Total – 8 Core Industries

Industry Weight
Refinery Products [HIGHEST] 28.04
Electricity 19.85
Steel 17.92
Coal 10.33
Crude Oil 8.98
Natural Gas 6.88
Cement 5.37
Fertilisers [LOWEST] 2.63
Total 100

Central Public Sector Enterprises

▪ Central Public Sector Enterprises (CPSEs) are those companies in which the direct holding of the
Central Govt or other CPSEs is 51% or more
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Strategic Disinvestment
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✓ Strategic sale of a PSU is different from the ordinary disinvestment.

✓ This is because in the case of strategic sale, the control and a significant proportion of a PSU’s
share goes to a private sector strategic partner.
 ✓ According to the Department of Disinvestment, in the strategic sale of a company, the transaction has
two elements
i. Transfer of a block of shares to a Strategic Partner
ii. Transfer of management control to the Strategic Partner

Champions Sectors

 Champions Sectors include Capital goods, Auto and Auto Components, Defence & Aerospace,
Biotechnology, Pharmaceuticals and Medical Devices, Chemicals, Electronic System Design &
Manufacturing (ESDM), Leather & Footwear, Textiles & Apparels, Food Processing, Gems & Jewellery,
New & Renewable Energy, Construction, Shipping and Railways.

Startup India hub

• Developed as a single point of contact for the entire Startup ecosystem and enables knowledge
exchange
• Fund of Funds for Startups (FFS), managed by SIDBI, has been created with a corpus of 10,000
crores to provide financial support.
• Seed Fund and Equity Funding support is also provided to Bio-Tech Startups.

Special Economic Zone (SEZ)

➔ In recent years, the central and state governments in India are taking special steps to attract foreign
companies to invest in India. Industrial zones, called Special Economic Zones (SEZs), are being set up.
➔ It is an area in a country that is subject to unique economic regulations that differ from other regions of
the same country.
➔ The SEZ regulations tend to be conducive to foreign direct investment (FDI).
➔ Conducting business in an SEZ typically implies that the company will receive tax incentives and the
opportunity to pay lower tariffs.
➔ SEZs are to have world class facilities electricity, water, roads, transport, storage, recreational and
educational facilities

PMI or Purchasing Managers’ Index (PMI)

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➢ Indicator of business activity — both in the manufacturing and services sectors.

➢ It is a survey-based measure that asks the respondents about changes in their perception of some key
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business variables from the month before.

➢ It is calculated separately for the manufacturing and services sectors and then a composite index is
constructed.
➢ A figure above 50 denotes expansion in business activity. Anything below 50 denotes
contraction.
➢ Higher the difference from this mid-point greater the expansion or contraction.

Navaratna Status

➔ Given to PSUs depending on their success

➔ Department of Public Enterprises under Ministry of Heavy Industries & Public Enterprises grants
these status
➔ Government had introduced Navratna scheme, in 1997, to identify CPSEs that had comparative
advantages and to support them in their drive to become global giants.

Maharatna Status

➔ Given to PSUs depending on their success

➔ Department of Public Enterprises under Ministry of Heavy Industries & Public Enterprises grants
these status
➔ “Maharatna” category for CPSEs was introduced in 2009 with objective to empower mega CPSEs to
expand their operations and emerge as global giants or become Indian Multinational Companies
(MNCs).

Miniratna Status

➔ Given to PSUs depending on their success

➔ Department of Public Enterprises under Ministry of Heavy Industries & Public Enterprises grants
these status
➔ CPSEs which have made profits in the last three years continuously and have positive net worth
are eligible to be considered for grant of Miniratna status

National Company Law Tribunal (NCLT)

➔ It is a quasi-judicial body in India that adjudicates issues relating to companies in India.

➔ Constituted under section 408 of the Companies Act, 2013
➔ Established on 1st June, 2016 (Companies Act, 2013)
➔ Formed on recommendation of the V. Balakrishna Eradi committee on law relating to the insolvency
and the winding up of companies
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➔ It is the adjudicating authority for the insolvency resolution process of companies and limited liability
partnerships under the Insolvency and Bankruptcy Code, 2016.
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➔ Total 16 benches

It has the power under the Companies Act to adjudicate proceedings

Initiated before the Company Law Board under the previous act (the Companies Act 1956);
 Pending before the Board for Industrial and Financial Reconstruction, including those pending under
the Sick Industrial Companies (Special Provisions) Act, 1985;
Pending before the Appellate Authority for Industrial and Financial Reconstruction; and
Pertaining to claims of oppression and mismanagement of a company, winding up of companies and
all other powers prescribed under the Companies Act.

National Company Law Appellate Tribunal (NCLAT)

➔ It is a tribunal which was formed by the Central Government of India under Section 410 of the
Companies Act, 2013.
➔ NCLAT includes a Chairperson, a judicial member, and a technical member. It consists of a total of
not more than 11 members
➔ The tribunal is responsible for hearing appeals from the orders of National Company Law
Tribunal(s) (NCLT), starting on 1 June 2016.
➔ The tribunal also hears appeals from orders issued by the Insolvency and Bankruptcy Board of India
under Section 202 and Section 211 of IBC.
➔ It also hears appeals from any direction issued, decision made, or order passed by the Competition
Commission of India (CCI).

Planning

Planning Commission

➔ Planning Commission was an institution in the Government of India, which formulated India's Five-
Year Plans
➔ Formed on March 15, 1950 with Prime Minister Jawaharlal Nehru as the Chairman.
➔ Prime Minister was the ex officio Chairman
➔ The first Five-Year Plan was launched in 1951, focusing mainly on development of the agricultural
sector.

Plan Holiday

➔ Due to miserable failure of the Third Plan the government was forced to declare "plan holidays"
(from 1966–67, 1967–68, and 1968–69).
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➔ Three annual plans were drawn during this intervening period. During 1966–67 there was again the
problem of drought.
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➔ Equal priority was given to agriculture, its allied activities, and industrial sector.
➔ The government of India declared "Devaluation of Rupee" to increase the exports of the country.
➔ The main reasons for plan holidays were the war, lack of resources and increase in inflation.
NITI Aayog

➔ NITI → National Institution for Transforming India

➔ Established by the Govt of India as a replacement for the Planning Commission
➔ It is a policy think tank of the Government of India, established with the aim to achieve sustainable
development goals with cooperative federalism by fostering the involvement of State Governments
of India in the economic policy-making process using a bottom-up approach.
➔ Co-operative federalism as a principle of NITI Aayog is also called Marble-cake federalism

NITI Ayog’s Full-time Organisational Framework

Chairperson - Prime Minister

Vice-Chairperson
Members Full-time
(appointed by PM)

Max. 2 Max. 4 Chief

Part time Ex-officio Executive Secretariat
members members Officer

• Prime Minister as the Chairperson

• Vice-Chairperson to be appointed by the Prime Minister
• Members full-time
• Part-time Members maximum of 2, from leading universities, research organisations and other
relevant institutions in an ex-officio capacity. Part time members will be on a rotational.
• Ex-Officio Members maximum of 4 members of the Union Council of Ministers to be nominated by
the Prime Minister.
• Chief Executive Officer to be appointed by the Prime Minister for a fixed tenure, in the rank of
Secretary to the Government of India.
• Secretariat as deemed necessary

Hubs @ NITI AAYOG

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➔ At the core of NITI Aayog’s creation are two hubs – Team India Hub and the Knowledge and
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Innovation Hub.
➔ Team India Hub leads the engagement of states with the Central government
➔ Knowledge and Innovation Hub builds NITI’s think-tank capabilities.
➔ NITI Aayog is the premier policy ‘Think Tank’ of the Government of India, providing both
directional and policy inputs.
➔ NITI Aayog, was formed via a resolution of the Union Cabinet on January 1, 2015
➔ NITI Aayog acts as the quintessential platform of the Government of India to bring States to act
together in national interest, and thereby fosters Cooperative Federalism.

Imp Bonds

Green bonds

• Debt instruments
• Specifically earmarked to be used for climate and environmental projects
• These bonds are typically asset-linked and backed by the issuer's balance sheet, and are also referred
to as climate bonds.
• Intended to encourage sustainability and to support climate-related or other types of special
environmental projects.
• Green bonds come with tax incentives such as tax exemption and tax credits, making them a more
attractive investment compared to a comparable taxable bond.
• To qualify for green bond status, they are often verified by a third party such as the Climate
Bond Standard Board, which certifies Bond.
• Green bonds can be released by financial institutions like World Bank, IMF, commercial banks,
corporates and even governments.

Blue Bonds

➔ It is a debt instrument issued by governments, development banks etc. to raise capital from
investors to finance marine and ocean-based projects.
➔ It will help in expansion of marine protected areas and improved governance of priority fisheries
➔ Seychelles was the first country in the world to launch sovereign Blue Bonds.

Imp Terms related to Financial Market

Components of Money Market in India

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Capital Market

▪ The market in which bonds, shares and securities are bought and sold is called as Capital Market
▪ It is an institutional arrangement for medium and long-term funds and provides facilities for
marketing and trading of securities.
▪ Securities➔ shares, bonds, debentures etc.

Primary Market

Consists of arrangements for procurement of long-term funds by companies by fresh issue of shares
and debentures.

Secondary Market

Secondary Market or stock exchange provides a ready market for existing long term securities.

Capital Market in India

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Capital Market

▪ The market in which bonds, shares and securities are bought and sold is called as Capital Market
▪ It is an institutional arrangement for medium and long-term funds and provides facilities for
marketing and trading of securities.
▪ Securities ➔ shares, bonds, debentures etc.

Primary Market

Consists of arrangements for procurement of long-term funds by companies by fresh issue of shares
and debentures.

Secondary Market

Secondary Market or stock exchange provides a ready market for existing long term securities.

Capital Market Instruments in India

➔ The main instruments traded in the capital market are – equity shares, debentures, bonds,
preference shares etc.
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Securities and Exchange Board of India (SEBI)

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➔ It is the regulator of the securities and commodity market in India owned by the Government of
India.
➔ It was established on April 12, 1988 and given Statutory Powers on 30 January 1992 through the
SEBI Act, 1992
➔ It became an autonomous body on 12 April 1992
➔ Headquarters Mumbai
➔ Northern Regional Office – New Delhi
➔ Eastern Regional Office – Kolkata
➔ Southern Regional Office - Chennai
➔ Western Regional Office - Ahmedabad
➔ SEBI has to be responsive to the needs of three groups, which constitute the market

issuers of securities
investors
market intermediaries

SENSEX

➔ It is a free-float market-weighted stock market index of 30 well-established and financially sound

companies listed on Bombay Stock Exchange.
➔ These 30 companies are known as Blue chip companies.
➔ Published since January 1, 1986, the S&P BSE SENSEX is regarded as the pulse of the domestic
stock markets in India.
➔ The base value of the SENSEX was taken as 100 on 1 April 1979 and its base year as 1978–79.
➔ On July 25,2001 BSE launched DOLLEX-30, a dollar-linked version of the SENSEX

NIFTY

➔ NIFTY 50 index is National Stock Exchange of India's benchmark broad based stock market index
for the Indian equity market
➔ It represents the weighted average of 50 Indian company stocks in 13 sectors
➔ Nifty is owned and managed by India Index Services and Products (IISL), which is a wholly owned
subsidiary of the NSE Strategic Investment Corporation Limited.
➔ Launched on April 1, 1996
➔ NIFTY 50 index is a free float market capitalisation weighted index.
➔ The index was initially calculated on full market capitalisation methodology.
➔ From 26 June 2009, the computation was changed to a free-float methodology
➔ The base period for the CNX Nifty index is 3 November 1995, which marked the completion of one
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year of operations of National Stock Exchange Equity Market Segment.

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Bombay Stock Exchange

➔ Located at Dalal Street, Mumbai

➔ Established in 1875
➔ Asia's oldest stock exchange
➔ On August 31, 1957, the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act
➔ BSE established India INX on 30 December 2016
➔ India INX is the first international exchange of India

Peer to peer lending (P2P)

➔ It is the practice of lending money to individuals or businesses through online services that match
lenders with borrowers.
➔ P2P lending is a form of crowd-funding used to raise loans which are paid back with interest by
bringing together people who need to borrow, from those who want to invest.
➔ It can be defined as the use of an online platform that matches lenders with borrowers to provide
unsecured loans.

Venture Capital

➔ Venture capital is a type of private equity, a form of financing that is provided by firms or funds to
small, early-stage, emerging firms that are deemed to have high growth potential, or which have
demonstrated high growth.

Gilt Edged Market

➔ It deals with Govt. securities as well as those guaranteed by Govt.

Imp Terms related to Insurance

Insurance Penetration

o The ratio of premium underwritten in a given year to the gross domestic product (GDP).

Insurance Density

o The ratio of premium underwritten in a given year to the total population

Penetration Rate
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➔ Penetration rate indicates the level of development of insurance sector in a country.

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➔ Penetration rate is measured as the ratio of premium underwritten in a particular year to the GDP.

Imp Terms related to Balance of Payments

Balance of Current Account

➔ The balance of exports and imports of goods is referred to as the trade balance.
➔ Adding trade in services and net transfers to the trade balance, we get the current account
balance.
➔ A country is said to be in balance of payments equilibrium when the sum of its current account
and its non-reserve capital account equals zero, so that the current account balance is financed
entirely by international lending without reserve movements.
➔ The difference between value of exports and imports of goods and services and unrequited
transfers are the items that are included in balance of current account.

Current Account Convertibility

➔ Current account convertibility means freedom to convert domestic currency into foreign currency
and vice versa for trade in goods and invisibles (services, transfers or income from investment).
➔ Individuals and entities can convert currencies in the foreign exchange market.

Invisibles

▪ Payments and receipts resulting from international trade in 'invisible' services instead of 'visible'
goods.
▪ Invisibles include banking, franchising, insurance, interest (on foreign investments), licensing, profit
repatriation (from foreign subsidiaries), salary remittances (from nationals employed abroad), shipping,
and tourism.

Foreign Exchange Reserves

o Holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies
other than India's national currency, the Indian rupee.
o The reserves are managed by the Reserve Bank of India for GOI and the main component is foreign
currency assets.

Balance of Payments

According to the RBI, balance of payment is a statistical statement that shows

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1) The transaction in goods, services and income between an economy and the rest of the world
2) Changes of ownership and other changes in that economy’s monetary gold, special drawing rights
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(SDRs), and financial claims on and liabilities to the rest of the world
3) Unrequited transfers
 BoP is made up of two parts Current account and capital account (As per IMF definition, three
parts Current Account + Capital account+ Financial account)
Current Account

• Imports and Exports

• Income from abroad (interest, dividends paid on Indian investor’s FDI, FII in USA etc.)
• Transfer (gift, remittances from NRI to their families etc.

Capital and Financial Account

• Foreign investment in India (FDI, FII, ADR, direct purchase of land, assets)
• External commercial borrowing, external assistance etc.

Special Drawing Rights

o SDR is an international reserve asset, created by the IMF in 1969 to supplement its member
countries’ official reserves
o SDRs can be exchanged for freely usable currencies.
o The value of the SDR is based on a basket of five major currencies—the US dollar, the euro, the
Chinese renminbi (RMB), the Japanese yen, and the British pound sterling.

Foreign Capital

➔ Foreign capital is money entering the country in the form of concessional assistance or non-
concessional flows.
➔ It includes Foreign direct investment, Trade credit, NRI deposits and External commercial
borrowings.

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Foreign Direct Investment

➔ Foreign direct investment is a form of investment that earns interest in enterprises which function
outside the domestic territory of the investor.
➔ Foreign direct investment is a component of a country's national financial account.
➔ Foreign direct investment is a lead driver for economic growth and brings certain benefits to
national economies.
➔ It can contribute to Gross Domestic Product (GDP), Gross Fixed Capital Formation (total investment in a
host economy) and Balance of Payments.

Foreign Portfolio Investment

➔ Foreign portfolio investment is the entry of funds into a country where foreigners deposit money
in a country's bank or make purchases in the country's stock and bond markets, sometimes for
speculation.
➔ In 1992, India opened up its economy and allowed foreign portfolio investment in its domestic
stock markets.
➔ Since then, foreign portfolio investment has emerged as a major source of private capital inflow in this
country.
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➔ FPI is investment by non-resident in Indian securities including shares, govt. bonds, infrastructure
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securities etc.

Foreign Institutional Investment

➔ FII (Foreign Institutional Investment) and FPI (Foreign Portfolio Investment) are same things.
➔ The foreign institutions invest in a capital / money market which is not their home country.
➔ Such kinds of investments are seen in the Mutual Funds, Investment Companies, Pension Funds and
Insurance Houses.
➔ This means that FII/ FPI brings only capital.

Participatory Notes

➔ Commonly known as a P-note or PN

➔ It is an instrument issued by a registered foreign institutional investor (FII) to an overseas investor
who wishes to invest in Indian stock markets without registering themselves with the market
regulator, the Securities and Exchange Board of India (SEBI).
➔ SEBI permitted foreign institutional investors to register and participate in the Indian stock market in
1992.
➔ These notes are a unique Indian invention started in 2000 by SEBI to enable foreign corporates
and high networth investors enter the Indian market without having to go through the process of
registering as Foreign Institutional Investor
➔ Participatory notes are instruments used for making investments in the stock markets
➔ They are not used within the country; they are used outside of India for making investments in stocks
listed on Indian stock markets, which is why they're also referred to as offshore derivative instruments.
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Exchange Rate System

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Flexible Exchange Rate System

➔ A flexible exchange-rate system is a monetary system that allows the exchange rate to be
determined by the forces of supply and demand in the foreign exchange market
➔ Here a currency is pegged or held at the same value relative to another currency.
➔ According to their degree of flexibility, post-Bretton Woods-exchange rate regimes are arranged into
three categories currency unions, dollarized regimes, currency boards and conventional currency pegs
are described as “fixed-rate regimes”
➔ Horizontal bands, crawling pegs and crawling bands are grouped into “intermediate regimes”
➔ Managed and independent floats are described as flexible regimes.

Floating Exchange Rate System

➔ A floating exchange rate is a regime where the currency price of a nation is set by the forex market
based on supply and demand relative to other currencies.
➔ This is in contrast to a fixed exchange rate, in which the government entirely or predominantly
determines the rate.
➔ A floating exchange rate is one that is determined by supply and demand on the open market.

Imp Terms related to Foreign Trade

Import Quota

➔ It is a type of trade restriction that sets a physical limit on the quantity of a good that can be
imported into a country in a given period of time.

Export Quota

➔ A restriction imposed by a government on the amount or number of goods or services that may be
exported within a given period, usually with the intent of keeping prices of those goods or services low
for domestic users

Uruguay Round

➔ Uruguay Round was the 8th round of multilateral trade negotiations (MTN) conducted within the
framework of the General Agreement on Tariffs and Trade (GATT), spanning from September 1986
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to 1993 and embracing 123 countries as "contracting parties"

➔ The Round led to the creation of the World Trade Organization, with GATT remaining as an integral
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part of the WTO agreements

➔ World Trade Organization, which came into being upon its entry into force on 1 January 1995, to replace
the GATT system

The main objectives of the Uruguay Round were

 To reduce agricultural subsidies
To lift restrictions on foreign investment
To begin the process of opening trade in services like banking and insurance.
To include the protection of intellectual property

Regional economic integration

➔ It has enabled countries to focus on issues that are relevant to their stage of development as well as
encourage trade between neighbors.
➔ There are four main types of regional economic integration
1) Free Trade Area
2) Customs Union
3) Common Market
4) Economic Union

Note Economic Union is the highest form of regional economic integration

Entrepot trade

➔ International trade in which imported goods are re-exported with or without any processing or
packaging is called Entrepot trade

Export merchandising

➔ It is a method of offering retail goods for sale in a foreign consumer market.

➔ Many large companies across the country maintain entire divisions devoted to finding ways to better
enter foreign retail markets through export merchandising to increase profit and sustain growth

Miscellaneous

Behavioural Economics

➔ The economic analysis that applies psychological insights into human behaviour to explain
economic decision making is called Behavioural Economics
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Board for Industrial and Financial Reconstruction (BIFR)

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➔ Established under SICA or Sick Industrial Companies (Special Provisions) Act, 1985
➔ Tiwari Committee suggested a comprehensive special legislation designed to deal with the problem
of sickness laying down its basic objectives and parameters, remedies necessary for revival of Sick
Units
➔ SICA came into existence in 1985 and BIFR started functioning from 1987
➔ SICA covers both public and private companies that have industrial undertakings
➔ On 1 December 2016, the Modi government dissolved BIFR and referred all proceedings to the
National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) as per
provisions of Insolvency and Bankruptcy Code
➔ BIFR Extinction Nov 30, 2016

Business Reform Action Plan (BRAP)

➔ Business Reform Action Plan (BRAP) for implementation by States/UTs was released for the first time
in 2015
➔ It is released by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce
and Industry in partnership with the World Bank Group
➔ BRAP includes recommendations for reforms on regulatory processes across various reform areas such
as labour regulation enablers; contract enforcement; registering property; inspection reform enablers;
single window system etc.

Central Statistical Office (CSO) Divisions

Total – 5 Divisions

National Accounts Division (NAD)

 This Division is responsible for the preparation of national accounts, which includes
▪ Gross Domestic Product
▪ Government and Private Final Consumption Expenditure
▪ Fixed Capital Formation
▪ Other macro-economic aggregates.
 The Division brings out an annual publication, titled “National Accounts Statistics”, containing these
statistics.

Social Statistics Division (SSD)

 This Division is entrusted with Statistical monitoring of the

▪ Millennium Development Goals
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▪ Environmental Economic Accounting

▪ Grant-in-aid for research
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▪ Workshop/seminars/conferences in Official/Applied Statistics

▪ National/International awards for Statisticians
▪ National Data Bank (NDB) on socio-religious categories
▪ Basic Statistics for Local Level Development (BSLLD) Pilot scheme
▪ Time-use survey and release of regular and ad-hoc statistical publications

Economic Statistics Division (ESD)

 This Division conducts Economic Censuses, compiles

▪ All India Index of Industrial Production(IIP)
▪ Energy Statistics and Infrastructure Statistics
▪ Develops classifications like, National Industrial Classification (NIC) and National Product Classification
(NPC)

Training Division

▪ This Division is primarily responsible for the training manpower in theoretical and applied statistics
to tackle the emerging challenges of data collection, collation, analysis and dissemination required for
evidence based policy making as also for planning, monitoring and evaluation.
▪ The Division also looks after the National Statistical Systems Training Academy (NSSTA), which is a
premier Institute fostering human resource development in official statistics in India as well as at
international level, particularly amongst developing and SAARC countries.

Coordination and Publications Division (CAP)

▪ The Division looks after co-ordination work within CSO as well as with the line Ministries and
State/UT Governments in statistical matters.
▪ The Division is also responsible for implementation of Capacity Development Scheme and Support for
Statistical Strengthening (SSS) , a Central Sector Scheme aimed at improving the Statistical Capacity
and Infrastructure of the State Statistical System for Collecting, Compiling and Disseminating relevant
and reliable official statistics for policy making and to promote their usage at the State/District and
Block Levels.
▪ It is a nodal Division for administering the Collection of Statistics Act, 2008 and coordination of
follow-up on the implementation of recommendations of NSC recommendations.

Central Statistics Office (CSO)

➔ It is a governmental agency in India under the Ministry of Statistics and Programme

Implementation responsible for co-ordination of statistical activities in India, and evolving and
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maintaining statistical standards.

➔ It is responsible for the compilation of National Accounts Statistics (NAS)
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➔ At the State level, State Directorates of Economy and Statistics (DESs) have the responsibility of
compiling their State Domestic Product and other aggregates.
➔ CSO through its Industrial Statistical wing conducts the Annual Survey of Industries and publishes
the result.
➔ Location New Delhi
➔ Formed on May 2, 1951. At that time the name of CSO was Central Statistical Institute.
➔ In 1954 the CSI merged with CSO and the new name was Central Statistical Organization.
➔ Recently, for a third time its name changed and now it is called as Central Statistics Office

Competition Act , 2002

➔ An Act to provide, keeping in view of the economic development of the country, for the establishment
of a Commission to prevent practices having adverse effect on competition, to promote and
sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade
carried on by other participants in markets, in India, and for matters connected therewith or incidental
thereto
➔ It replaced the Monopolies and Restrictive Trade Practices Act, 1969
➔ This act extends to whole of India
➔ Commenced on March 31, 2003
➔ Introduced by Arun Jaitley

Consumer Surplus

➔ Consumer Surplus is the difference between the price that consumers pay and the price that they
are willing to pay.
➔ On a supply and demand curve, it is the area between the equilibrium price and the demand curve.
➔ Consumer surplus is highest in necessities.

Cost Inflation Index

➔ Cost Inflation Index is a measure of inflation, used to calculate long-term capital gains from sale of
capital assets.
➔ Capital gains is the profit that you make from selling an asset, which can be real estate, jewellery,
stock, etc.
➔ Indexation benefits on Capital Gains are adjusted by means of a Cost Inflation Index

Deflationary effect on an economy

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➔ Deflation is a fall in the overall level of prices in an economy and an increase in the purchasing
power of the currency.
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➔ It can be driven by an increase in productivity and the abundance of goods and services, by a
decrease in total or aggregate demand, or by a decrease in the supply of money and credit.
➔ It leads to lower wages, which leads to lower demand by businesses and consumers, which lead
to further decreases in prices
Determinants of Economic Development

Determinants of Economic Growth

Growth Enhancing

Schooling, education investment

Capital, savings investment
Equipment investment
Level of Human Capital

Growth Reducing

Govt. consumption spending

Political, Social instability
Trade barriers

Devaluation

➔ In modern monetary policy, devaluation is an official lowering of the value of a country's currency
within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange
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rate of the national currency in relation to a foreign reference currency or currency basket.
➔ Devaluation is an indication that the monetary authority will buy and sell foreign currency at a lower
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rate
➔ Devaluation is an expenditure-switching policy which makes the country’s goods relatively
cheaper compared with foreign goods, will tend to switch both domestic and foreign expenditures
towards the home-produced goods.
➔ Devaluation is the appropriate expenditure-switching policy to correct a difference in balance of
payments

Methods to correct disequilibrium in Balance of Payments

Monetary Policy (Deflection)

Exchange Depreciation
Devaluation
Exchange Control
Fiscal Policy – Import Duties
Import policy (Import Quotes)
Stimulating / Improving Export
Foreign Loans
Encouragement to foreign investment
Incentives to foreign tourists

NOTE → IMF provides loans for correcting disequilibrium in Balance of Payments

Disposable Income

➔ It is the income of individuals at their disposal after paying direct tax liabilities.
➔ Disposable = Personal Income –income Direct taxes (e.g., Income Tax)
➔ Reduction in direct taxes increases Disposable Income

Ease of doing business report

▪ International Finance Corporation (IFC), the World Bank Group’s private sector arm, first
conceptualized the Doing Business report.
▪ These rankings had a signalling effect for investors and that countries were beginning to take them
seriously.

Economic Corridor

➔ Economic corridors are integrated networks of infrastructure within a geographical area designed
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to stimulate economic development.

➔ Economic corridors often feature integrated infrastructure, such as highways, railroads and ports, and
may link cities or countries.
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➔ Asian Development Bank coined the term in 1998

➔ East Coast Economic Corridor (ECEC) is India’s first coastal economic corridor covering 2500km of
India's coastline, to be developed with the help of the Asian Development Bank (ADB).
Environmental Kuznets curve (EKC)

➔ It is a hypothesized relationship between environmental quality and economic development

various indicators of environmental degradation tend to get worse as modern economic growth occurs
until average income reaches a certain point over the course of development.
➔ EKC suggests, in sum, that "the solution to pollution is economic growth"

Exclusive Economic Zone

➔ It is a zone in the sea prescribed by the 1982 United Nations Convention on the Law of the Sea
(UNCLOS) over which a country has certain rights
➔ EEZ is an area that is adjacent to and beyond the territorial sea
➔ It can extend to a maximum of 200 nautical miles from the baseline
➔ EEZ does not include the territorial sea and also does not include the continental shelf beyond 200
nautical miles

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Financial Action Task Force (FATF)

➔ FATF is an inter-governmental body that works to set standards and promote effective implementation of
legal, regulatory and operational measures for combating money laundering, terrorist financing
and other related threats to the integrity of the international financial system.
➔ A country is put on the grey list when it fails to curb terrorism financing and money laundering.
➔ Putting a country on the blacklist means shutting all doors to international finance for that country.

Financial Capital

➔ The type of capital used by entrepreneurs to buy what they need to produce their products is known as
Financial Capital

Financial Rotation

➔ The rotation which yields the highest net return on the invested capital is called Financial rotation

Forward Market

➔ Market in which purchase and sale takes place at time ‘t’ but exchange takes place on some other
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future date i.e. t + n is forward market

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GDI and GEM

➔ Gender Related Development Index (GDI) is an index designed to measure gender equality
➔ GDI together with the Gender Empowerment Measure (GEM) were introduced in 1995 in the
Human Development Report written by the United Nations Development Program.
➔ The aim of these measurements was to add a gender-sensitive dimension to the Human
Development Index (HDI).

Gini Coefficient

➔ It is a measure of statistical dispersion intended to represent the income or wealth distribution of a

nation's residents, and is the most commonly used measurement of inequality.
➔ Gini coefficient was proposed by Gini as a measure of inequality of income or wealth
➔ It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912
paper Variability and Mutability
➔ It is derived from the Lorenz Curve, can be used as an indicator of economic development in a
country.
➔ It measures the inequality among values of a frequency distribution (for example, levels of income)
➔ It measures the degree of income equality in a population.
➔ It can vary from 0 (perfect equality) to 1 (perfect inequality).
➔ Gini Coefficient of zero means that everyone has the same income, while a Coefficient of 1
represents a single individual receiving all the income.

Human Development Index

The HDI was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone. The HDI can also
be used to question national policy choices, asking how two countries with the same level of GNI per
capita can end up with different human development outcomes. These contrasts can stimulate debate
about government policy priorities.

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➔ The Human Development Index (HDI) is a summary measure of average achievement in key
dimensions of human development a long and healthy life, being knowledgeable and have a
decent standard of living. The HDI is the geometric mean of normalized indices for each of the three
dimensions.
➔ The health dimension is assessed by life expectancy at birth, the education dimension is measured by
mean of years of schooling for adults aged 25 years and more and expected years of schooling for
children of school entering age.
➔ The standard of living dimension is measured by gross national income per capita.
➔ The HDI uses the logarithm of income, to reflect the diminishing importance of income with
increasing GNI.

The scores for the three HDI dimension indices are then aggregated into a composite index using
geometric mean.
The HDI simplifies and captures only part of what human development entails. It does not reflect on
inequalities, poverty, human security, empowerment, etc.
A fuller picture of a country's level of human development requires analysis of other indicators and
information presented in the statistical annex of the report.

 Human Development Index (HDI) is a summary measure of achievements in three key dimensions of
human development a long and healthy life, access to knowledge and a decent standard of living.
 The HDI is the geometric mean of normalized indices for each of the three dimensions.

Imperfect Competition

➔ Imperfect competition is a competitive market situation where there are many sellers, but they are
selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario.
➔ As the name suggests, competitive markets that are imperfect in nature.
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➔ “Concept of “menu costs” is incorporated in imperfect competition.

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India’s statistical system

➔ India’s apex statistical organization -- National Statistical Commission (NSC)

➔ Professor P.C. Mahalanobis, who is regarded as a pioneer in both theoretical and professional statistics,
was appointed as the first statistical adviser to the Cabinet, Government of India in January 1949.
➔ P.C. Mahalanobis - Architect of the statistical system of independent India.
➔ Professor P. V. Sukhatme, as Statistical Adviser to the Ministry of Agriculture, was responsible for the
development of Agricultural Statistics
➔ Indian Statistical Institute (ISI) was registered on 28 April 1932 at Calcutta as a non‐
profit‐distributing learned society under the Societies Registration Act, 1860, with Professor P.C.
Mahalanobis as its founder Director.
➔ Indian Statistical Institute (ISI), which is a premier statistical institute, receives budgetary
support from the MOSPI.
➔ By an Act of Parliament, the Institute was declared as an "Institute of National Importance" in 1959
and the right to hold examinations and award degrees and diplomas in Statistics was conferred on it.
➔ CSO has an Industrial Statistics Wing, namely, the CSO‐IS Wing, which is located at Kolkata.

Innovation Theory of Business Cycles

➔ It was explained by Joseph Schumpeter

➔ Explained on the basis of the timing of major innovations in a capitalist system.
➔ Innovation, thus, in economics means the commercial application of inventions like new techniques of
production, new methods of organisation, novel products, etc.
➔ Schumpeter regards trade cycles as the offspring of economic progress in a capitalist society.

International Development Association (IDA)

➔ It is an international financial institution which offers concessional loans and grants to the world's
poorest developing countries.
➔ The IDA is a member of the World Bank Group and is headquartered in Washington D.C.
➔ It was established in 1960 to complement the existing International Bank for Reconstruction and
Development by lending to developing countries which suffer from the lowest gross national income,
from troubled creditworthiness, or from the lowest per capita income.
➔ Together, the International Development Association and International Bank for Reconstruction and
Development are collectively generally known as the World Bank.

International Finance Corporation (IFC)

➔ It is an international financial institution that offers investment, advisory, and asset-management

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services to encourage private-sector development in less developed countries.

➔ IFC is a member of the World Bank Group and is headquartered in Washington, D.C. in the United
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States.
➔ Purpose Private Sector Development and Poverty Reduction
➔ Membership 184 countries
➔ It is a corporation whose shareholders are member governments that provide paid-in capital and which
have the right to vote on its matters.

International Liquidity

➔ It is the sum total of international reserves of all the nations participating in the world monetary
and trading system.
➔ It is comprised of all reserves that are available in the monetary authorities of different countries for
meeting international disbursements.
➔ The problem of international liquidity is concerned with the imbalances in the demand for and
supply of international liquidity
➔ As dollar is the dominating component in the forex, the problem of international liquidity is related to
the non-availability of dollar and other hard currencies.

Components of the international liquidity structure

1) Gold reserves with the national monetary authorities — central banks — and with the IMF
2) Dollar reserves of countries other than the USA
3) Sterling reserves of countries other than the UK
4) IMF tranche position which represents the “drawing potential” of the IMF members
5) Credit arrangements (bilateral and multi-lateral credit) between countries such as “swap agreements”
and the “Ten” of the Paris Club

International Monetary Fund (IMF)

➔ Purpose Promote international monetary co-operation, facilitate international trade, foster sustainable
economic growth, make resources available to members experiencing balance of payments difficulties
➔ Headquarters Washington D.C.
➔ Membership 189 countries
➔ Parent Organisation – United Nations
➔ Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and
John Maynard Keynes
➔ Came into formal existence on December 27, 1945 with 29 member countries and the goal of
reconstructing the international payment system.
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➔ On 1 March 1947, the IMF began its financial operations

➔ On 8 May France became the first country to borrow from it
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Kuznets Curve in Economics

➔ A curve used to demonstrate the hypothesis that economic growth initially leads to greater
inequality, followed later by the reduction of inequality.
➔ The idea was first proposed by American economist Simon Kuznets.
➔ As economic growth comes from the creation of better products, it usually boosts the income of
workers and investors who participate in the first wave of innovation.
➔ The industrialisation of an agrarian economy is a common example.
➔ This inequality, however, tends to be temporary as workers and investors who were initially left behind
soon catch up by helping offer either the same or better products. This improves their incomes.

Laffer Effect

➔ Laffer effect implies Reduction in the rate of taxation leads to more than proportionate increase in
tax yield
➔ Laffer curve illustrates a theoretical relationship between rates of taxation and the resulting levels of
the government's tax revenue.
➔ The Laffer curve assumes that no tax revenue is raised at the extreme tax rates of 0% and 100%, and
that there is a tax rate between 0% and 100% that maximizes government tax revenue.
➔ The term "Laffer curve" was coined by Jude Wanniski
➔ Laffer curve, popularised in 1974 by economist Arthur Laffer in a discussion with former U.S.
President Gerald Ford
➔ Laffer curve shows how tax revenues change when the tax rate is either increased or decreased.
Typically, it has an inverted-U shape.
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Liquidity aggregates

➔ Aggregate liquidity refers to the ease of execution for financial transactions for everyone in the
entire market which is highly dependent on the availability of credit in the markets and the size of
the money supply in a country.

The following Liquidity aggregates have been formulated for monitoring the state of liquidity in an
economy.
L1=M3+Postal Deposits (excluding National Saving Certificate)
L2= L1+Term Money Borrowings, Certificate of Deposits and Term Deposits of Financial Institutions
like IDBI, IFCI, EXIM Bank, NABARD, SIDBI etc.
L3= L2+ Public Deposit with non-banking financial institutions

Lorenz Curve

➔ Distribution of Income in an economy is represented by the Lorenz Curve

➔ It is a graphical distribution of wealth developed by Max Lorenz in 1906, shows the proportion of
income earned by any given percentage of the population.
➔ The line at the 45º angle shows perfectly equal income distribution, while the other line shows the
actual distribution of income.
➔ The further away from the diagonal, the more unequal the size of the distribution of income.
➔ Simply, Lorenz curve is a graph which indicates the degree of inequality of wealth distribution

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Marginal Cost

➔ The cost of producing an additional unit of output is marginal cost

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Miracle economies

➔ Miracle economies are defined as those with GDP growth of 7% for a decade or more.
Monopolistic competition

➔ Market structure where there exist a very large number of sellers selling differentiated but
substitutable products

Mudra Yojana

▪ MUDRA stands for Micro Units Development and Refinance Agency

▪ Nodal Ministry → Ministry of Finance
▪ The core objective of the bank is to fund the unfunded. It will finance to “Last Mile
Financiers” of small/micro businesses.
▪ The lending priority will be given to SC/ST enterprises

National Anti-Profiteering Authority (NAA)

➔ Constituted under Section 171 of the Central Goods and Services Tax Act, 2017
➔ Purpose To ensure that the reduction in rate of tax or the benefit of input tax credit is passed on to the
recipient by way of commensurate reduction in prices.
➔ Key Objective Ensure that the benefits of reduction in GST rates are passed to consumers

Steps taken by the NAA to ensure that customers get the full benefit of tax cuts

Holding regular meetings with the Zonal Screening Committees and the Chief Commissioners of
Central Tax to stress upon consumer awareness programmes
Launching a helpline to resolve the queries of citizens regarding registration of complaints against
profiteering
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Receiving complaints through email and NAA portal

Working with consumer welfare organizations in order to facilitate outreach activities
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National Income

• National income measures the net value of goods and services produced in a country during a
year and it also includes net earned foreign income.
• In other words, a total of national income measures the flow of goods and services in an
economy. National income is a flow not a stock.
• As contrasted with national wealth which measures the stock of commodities held by the nationals of a
country at a point of time, national income measures the productive power of an economy in a
given period to turn out goods and services for final consumption.

National Sample Survey Office (NSSO)

➔ National Sample Survey Office(NSSO) in India is a unique setup to carry out surveys on socio-
economic, demographic, agricultural and industrial subjects for collecting data from households
and from enterprises located in villages and in the towns
➔ It is a focal agency of the Govt. of India for collection of statistical data in the areas which are vital for
developmental planning
➔ The National Sample Survey Directorate was first setup in the country in the Ministry of finance in
1950
➔ Since 1999 it is under the newly created Ministry of Statistics and Programme
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Implementation(MOSPI)
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Oligopsony

➔ A state of the market in which only a small number of buyers exists for a product

Paradox of Thrift
➔ Also called as Paradox of Savings
➔ Paradox of thrift was popularized by Keynes
➔ It states that individuals try to save more during an economic recession, which essentially leads to
a fall in aggregate demand and hence in economic growth. Such a situation is harmful for
everybody as investments give lower returns than normal.

Perfect Competition

➔ Perfect competition refers to a market situation in which there are large number of buyers and
sellers of homogeneous products.
➔ The price of the product is determined by industry with the forces of demand and supply.

Perfect Competition

➔ Perfect competition is an ideal type of market structure where all producers and consumers have full
and symmetric information, no transaction costs, where there are a large number of producers
and consumers competing with one another.
➔ Perfect competition is theoretically the opposite of a monopolistic market.

Philips Curve

➔ Describes inverse relationship between rates of unemployment and corresponding rates of rises in
wages that result within an economy
➔ Simply decreased unemployment, (i.e., increased levels of employment) in an economy will
correlate with higher rates of wage rises
➔ The trade-off between inflation and unemployment is explained by Philips Curve
➔ Phillips curve remains the primary framework for understanding and forecasting inflation used in
central banks

PPAs

➢ PPA is a contract between purchaser of electricity and electricity generator setting out the terms
and price for supplying electricity.
➢ In the case of renewable energy, state electricity regulatory commissions set the Feed-in Tariffs for the
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purchase of electricity from these sources.

➢ PPAs were signed based on these pre-determined prices for a number of years.
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Purchasing power parity (PPP)

➔ Purchasing power parity (PPP) is a popular metric used by macroeconomic analysts that compares
different countries' currencies through a "basket of goods" approach.
➔ Purchasing power parity (PPP) allows for economists to compare economic productivity and standards of
living between countries.

Recalibration

➔ The process where the cassettes that hold cash in ATMs are modified to suit the size of the currency is
called recalibration.

Recapitalisation

➔ Restructuring of a company’s debt and equity mixture is called Recapitalisation

➔ Usually, companies perform recapitalization to make their capital structure more stable or optimal.
➔ Recapitalization essentially involves exchanging one type of financing for another – debt for
equity, or equity for debt.
➔ One example is when a company issues debt to buy back its equity shares.

Sectors

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Structural adjustment programs (SAPs)

➔ Structural adjustment programs (SAPs) consist of loans provided by the International Monetary
Fund (IMF) and the World Bank (WB) to countries that experienced economic crises
➔ SAPs are created with the goal of reducing the borrowing country's fiscal imbalances in the short
and medium term or in order to adjust the economy to long-term growth
➔ Structural adjustment policies emerged from two of the Bretton Woods institutions, the IMF and
the World Bank.

Swaminathan Commission

➔ Govt. of India constituted the National Commission on Farmers (NCF) on November 18, 2004
➔ National Commission on Farmers was chaired by Professor M.S. Swaminathan.
➔ To address the nationwide calamity of farmers suicides in India
➔ Suggestions to achieve the goal of "faster and more inclusive growth" as envisaged in the Approach to
11th Five Year Plan and are collectively termed the M.S.Swaminathan report for farmers

Transfer Earnings

➔ Minimum payments required to keep a factor of production in its present use is called Transfer
earnings

Transfer Payments
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➢ Governments typically redistribute a share of tax revenues back to specified groups of individuals
in the form of various social programs (such as welfare benefits, unemployment insurance, public
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pensions, or child benefits).

➢ These transfer payments supplement the market income of the households which receive them.

Vicious Circle Argument

➔ It points out the supply side connection between Productivity and Income.

X-inefficiency

➔ X-inefficiency is the divergence of a firm’s observed behavior in practice, influenced by a lack of

competitive pressure, from efficient behavior assumed or implied by economic theory.
➔ The concept of X-inefficiency was introduced by Harvey Leibenstein.

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