1.economics and Industries Notes

Saraswati IAS PCS, Ranchi, JharkhandInstitute of UPSC/ IAS, JPSC, BPSC and Others State
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8789394504
BPSC Project Manager

Indian Economy and Industries
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Highlights-:
According to BPSC Project Manager PT Syllabus
Topic wise Notes Notes
Prepared by Experience Teacher
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INDEX
Unit No Chapter Page No
1 Introduction to Economy 3-8
2. Indian Economics and Planning 9-18
3. 19-23
NITI Aayog
4 Fiscal Policy 24-45
5. Monetory Policy 46-81
6. Inflation 82-93
7. Taxation 94-120
8. Economic Reforms 121-130
9. Globalization and Its impact on Indian Economy 131-136
10 MSME 137-166
11. Bihar Industrial Investment Promotion Policy,2016 Annexue I
12. Bihar Industrial Investment Promotion Act,2016 Anexure II
13. Tetative Questions Annexure III
14. References Annexure IV
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BPSC Project Manager

Indian Economy and Industries
Unit 1
Introduction to Economy
1.1 Gross Domestic Product (GDP)What Is Gross Domestic Product (GDP)?
Gross domestic product (GDP) is the total monetary or market value of all the finished
goods and services produced within a country's borders in a specific time period(usually
as calendar year or financial year) . As a broad measure of overall domestic production, it
functions as a comprehensive scorecard of a given country’s economic health.
Though GDP is typically calculated on an annual basis, it is sometimes calculated on

a quarterly basis as well. In the U.S., for example, the government releases
an annualized GDP estimate for each fiscal quarter and also for the calendar year. The
individual data sets included in this report are given in real terms, so the data is adjusted
for price changes and is, therefore, net of inflation. In the U.S., the Bureau of Economic
Analysis (BEA) calculates the GDP using data ascertained through surveys of retailers,
manufacturers, and builders, and by looking at trade flows.
MAIN POINTS
 Gross Domestic Product (GDP) is the monetary value of all finished goods and
services made within a country during a specific period.
 GDP provides an economic snapshot of a country, used to estimate the size of an
economy and growth rate.
 GDP can be calculated in three ways, using expenditures, production, or incomes.
It can be adjusted for inflation and population to provide deeper insights.
 Though it has limitations, GDP is a key tool to guide policymakers, investors, and
businesses in strategic decision making.
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GDP Formula = C + G + I + NX (where C=consumption; G=government spending;

I=Investment; and NX=net exports). All these activities contribute to the GDP of a
country.
Understanding Gross Domestic Product (GDP)

The calculation of a country's GDP encompasses all private and public consumption,
government outlays, investments, additions to private inventories, paid-in construction
costs, and the foreign balance of trade. (Exports are added to the value and imports are
subtracted).
Of all the components that make up a country's GDP, the foreign balance of trade is
especially important. The GDP of a country tends to increase when the total value of
goods and services that domestic producers sell to foreign countries exceeds the total
value of foreign goods and services that domestic consumers buy. When this situation
occurs, a country is said to have a trade surplus. If the opposite situation occurs–if the
amount that domestic consumers spend on foreign products is greater than the total sum
of what domestic producers are able to sell to foreign consumers–it is called a trade
deficit. In this situation, the GDP of a country tends to decrease.
In addition, there are several popular variations of GDP measurements which can be
useful for different purposes:
1.2 Gross National Product'

Definition: Gross National Product (GNP) is Gross Domestic Product (GDP) plus net
factor income from abroad.
Description: GNP measures the monetary value of all the finished goods and services
produced by the country’s factors of production irrespective of their location. Only the
finished or final goods are considered as factoring intermediate goods used for
manufacturing would amount to double counting. It includes taxes but does not include
subsidies.
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The formula for GNP = GDP + Net factor income from abroad
or
GNP = C + I + G + X + Z
Where C - Consumption, I - investment, G - Government, X is net exports, and Z is net

income earned by domestic residents from overseas investments minus net income earned
by foreign residents from domestic investments.
Gross National Product (GNP) is the total value of all finished goods and services
produced by a country’s citizens in a given financial year, irrespective of their location.
GNP also measures the output generated by a country’s businesses located domestically
or abroad. It can be defined as a piece of economic statistic that comprises Gross
Domestic Product (GDP), and income earned by the residents from investments made
overseas.
In calculation, GNP adds government expenditure, personal consumption expenditure,

private domestic investments, net exports, and income earned by nationals overseas, and
eliminates the income of foreign residents within the domestic economy. Moreover, GNP
omits the value of intermediary goods to avoid double counting, as these entries get
included in the value of final products and services.
1.3 Potencial GDP
Potential GDP provides an important benchmark for regulators and policymakers to

rely on when making decisions about monetary policy.
Potential GDP depends on the size of the labor force and the pace of productivity growth
(output per hour of work), which itself is dependent on the amount of capital investment.
That is, potential GDP growth can accelerate if more people enter the labor force, more
capital is injected into the economy, or the existing labor force and capital stock become
more productive.
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 If real GDP falls short of potential GDP (i.e., if the output gap is negative), it
means demand for goods and services is weak. It’s a sign that the economy may
not be at full employment.
 If the real GDP exceeds potential GDP (i.e., if the output gap is positive), it
means the economy is producing above its sustainable limits, and that
aggregate demand is outstripping aggregate supply. In this
case, inflation and price increases are likely to follow.
 If the output gap is negative—meaning that the economy isn’t producing its full
potential—then central banks like the Fed may consider lowering interest rates
to stimulate the economy.
 The Fed is guided by what’s called the dual mandate: to keep the U.S.
economy at full employment while maintaining price stability.
 Put another way: the Fed aims to keep real GDP aligned with potential GDP.
1.4 Per Capita Income

Per capita income is a measure of the amount of money earned per person in a nation or
geographic region. Per capita income can be used to determine the average per-person
income for an area and to evaluate the standard of living and quality of life of the
population. Per capita income for a nation is calculated by dividing the country's national
income by its population.
Per capita income counts each man, woman, and child, even newborn babies, as a
member of the population. This stands in contrast to other common measurements of an
area's prosperity, such as household income, which counts all people residing under one
roof as a household, and family income, which counts as a family those related by birth,
marriage, or adoption who live under the same roof.
1.5 Purchasing power parity (PPP) attempts to solve this problem by comparing how
many goods and services an exchange-rate-adjusted unit of money can purchase in
different countries – comparing the price of an item, or basket of items, in two countries
after adjusting for the exchange rate between the two, in effect.
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Purchasing power parity (PPP) is an economic theory that allows the comparison of the
purchasing power of various world currencies to one another. It is a theoretical exchange
rate that allows you to buy the same amount of goods and services in every
country.Government agencies use PPP to compare the output of countries that use
different exchange rates. You could use it to find out where to get the cheapest
hamburger in the world.Purchasing power parity specification
1.Purchasing power parity (PPP) is an economic theory that suggests the prices of goods
and services between two countries should be equal, once their currencies have been
exchanged
2.PPP was introduced to be a more accurate and effective measure of a currency’s power
3.It is split into two types: absolute PPP, which doesn’t adjust for inflation, and relative
PPP, which does
4.PPP is used to compare economic productivity and living standards between countries
5.Purchasing power parity is used to measure GDP and is used as an alternative to

nominal GDP
6.The theory argues that tradable goods are more closely aligned with nominal exchange
rates, while non-tradeable goods and services are closer to the PPP rate
7.PPP can also be used to assess socioeconomic situations, such as carbon emissions,
global poverty, government manipulation and financial markets
8.Traders will often use PPP to assess a currency’s long-term forecast and exchange rate
valuation – using it to identify over- and under-valued currencies
9.PPP can then be used to decide whether to take a long or a short position
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10.PPP can also be used in share trading, to decide whether to hedge against currency risk
11.There are multiple indices that are used to measure PPP, including the OECD
comparative price index, Big Mac index and KFC index
12.PPP is found in everyday life to explain the differences in living costs between two
countries
13.There are significant limitations to the theory, such as its exclusion of other transactional
costs, taxes and barriers to trad
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2.Indian Economics and Planning
2.1 Economy is normally categorized into three sectors namely −
Primary Sector
Secondary Sector
Tertiary Sector
Primary Sector
Primary Sector is directly dependent on environment/ nature for manufacture and
production. For example, agriculture, mining, farming etc.
Secondary Sector
Secondary Sector adds value to the produ by transforming raw materials into valuable
products. For example, processing and construction industries.
Tertiary Sector
Tertiary Sector is involved in production and exchange of services. For example,
transportation, communication, and other services of such kind.
Tertiary Sector is also known as Services Sector as it facilitates the production and
exchanges of services.
Measurement of Economy
Gross Domestic Product (GDP) is the value of all goods and services produced by all the
three sectors over a period of time.
The majority of workers employed in a particular sector illustrate the economic and
technological advancement of the country. For example, if the majority of the people of a
country is employed in a primary sector or secondary sector, it means, this country is at a
developing stage; whereas, if most of the people are employed in the tertiary sector, it
means the country is at a developed stage. Considering this statement we can say that
India is a developing country.
India started its growth from the primary sector and over a period of time gradually
developed itself in the other sectors too.
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The tertiary sector contributes the most to the GDP of our country.
The primary sector still has a large portion of India’s population occupied in it.
Workers in the primary sector remain unemployed for most of the time in a year; hence,
if some of these workers are transferred from the primary sector to other sector, there
would be no change in the total production of the primary. This type of unemployment is
known as disguised unemployment.
The problems of disguised unemployment can be mitigated by improving the level of
transport and communication in the rural areas. This will help the people living in these
parts to commute from place to another for employment reasons.
We need to promote alternative sources of income such as small scale industries. These
industries generate employment opportunities for many who are under employed or
totally unemployed.
As per the government’s policy known as National Rural Employment Guarantee Act
2005 (NREGA 2005), all people who are able to, and are in need of work will be given
guaranteed 100 days’ employment in a year.
Organized Sector
The sector that is permanently established and offers permanent jobs is known as
Organized Sector.
Employees of organized sector work for fixed number of hours in a day. If any employee
works beyond the fixed number of hours, then he/she will be paid for the overtime.
Besides, employees of the organized sector have many advantages such as paid leave,
weekly off (paid), festival holiday (paid leave), provident fund, gratuity, and some other
perks and incentives.
Unorganized Sector
Unorganized Sector consists of all unincorporated private enterprises owned by
individuals or households engaged in the sale or production of goods and services
operated on a proprietary or partnership basis and with less than ten total workers. The
employees here are not guaranteed of any advantages as in the organized sector and there
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is no concept of overtime payment. Disadvantages like low wages and job insecurity
prevail here.
Because of faulty and weak government’s policies and corruption, employees of
unorganized sectors are facing exploitation in the hands of their employers.
There are many organized sectors that (to evade the tax) manufacture their goods and
services by informal means and for that force their employees to work for extra hours or
work in unorganized sector. As these workers are largely illiterate and poor; hence, they
don’t have any other option.
Government needs to make protective laws and take sincere action to protect the rights of
these vulnerable workers.
In addition to the above discussed points, the government could also play a significant
role in areas such as −
Children’s education.
Providing employment to poor people.
Giving subsidies to the people living below the poverty line.
Providing basic medical facilities, drinking water, and other sanitation facilities.
2.2 Visvesvaraya’s Plan:

The engineer-Statesman, Shri Visvesaraya, was the first to advocate the idea of planning
for India. In his famous book, “The Planned Economy For India”, published in 1934,
he proposed a ten-years’ plan with the aim of doubling the income of the country. His
main emphasis was on industrialisation so as to reduce the population dependent on
agriculture and to increase the population employed in industry.
However, Sri Visvesvaraya’s plan was more on the lines followed in the U.S.A. and
Turkey; its basic policy was to avoid ‘communistic tendencies’ and to encourage
collective effort without interfering with individual initiative. In short, his plan was
drawn within the framework of a capitalist economy.
First of all the idea of planned economy was crystallized in 1930s when our national
leaders came under the influence of socialist philosophy. India’s Five year plans were
very much impressed by the rapid strides achieved by the USSR through five years plans.
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In 1934, Sir M. Visvesvaraya had published a book titled “Planned Economy in India”, in
which he presented a constructive draft of the development of India in next ten years. His
core idea was to lay out a plan to shift labor from agriculture to industries and double up
National income in ten years. This was the first concrete scholarly work towards planning.
The economic perspective of India’s freedom movement was formulated during the
thirties between the 1931 Karachi session of Indian National Congress, 1936 Faizpur
session of India National Congress.
The Visvesvaraya Plan: M. Visvesvaraya, popular civil engineer & ex-Dewan of
Mysore (his birthday 15th September is celebrated Engineers day in India) proposed first
blue print of Planning in India in his book “The Planned Economy of India” published in
1934(The first systematic attempt of economic planning in India was made in the year).
Ideas:Democratic capitalism(USA model) with emphasis on industrialization – shift of
labour from agrarian to industries thereby doubling national income in a decade. No
followup by British led to urge of national planning amongst educated mass
National Planning Committee
The first attempt to develop a national plan for India came up in 1938. In that year,
Congress President Subhash Chandra Bose had set up a National Planning Committee
with Jawaharlal Nehru as its president. However the reports of the committee could not
be prepared and only for the first time in 1948 -49 some papers came out.
2.3 Ficci Plan

In 1934, a serious need of national planning was recommended by the Federation of
Indian Chambers of Commerce and Industry (FICCI), the leading organisation of Indian
capitalists. Its President N.R. Sarkar proclaimed that the days of undiluted laissez-faire
were gone forever and for a backward country like India, a comprehensive plan for
economic development covering the whole gamut of economic activities was a necessity.
Voicing the view of the leadership of the capitalist class he further called for a high
powered ‘National Planning Commission’ to coordinate the whole process of planning so
that the country could make a structural break with the past and achieve its full growth
potential.
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By the late nineteenth century, the economic thinking of the nationalists (such as M.G.
Ranade and Dadabhai Naroji) was in favour of a dominant role of state in the economy
and doubted the prudence of the ‘market mechanism’. This thinking was further
reinforced by the Keynesian ideas in the wake of the Great Depression, the New Deal in
the USA and the Soviet experiment in national planning. Thus the Indian capitalist class
were also influenced by these events which were voiced in the FICCI articulation for the
planning.
2.4 Bombay Plan
In 1944 Eight Industrialists of Bombay viz. Mr. JRD Tata, GD Birla, Purshottamdas
Thakurdas, Lala Shriram, Kasturbhai Lalbhai, AD Shroff , Ardeshir Dalal, & John
Mathai working together prepared “A Brief Memorandum Outlining a Plan of Economic
Development for India”. This is known as “Bombay Plan”. This plan envisaged doubling
the per capita income in 15 years and tripling the national income during this period.
Nehru did not officially accept the plan, yet many of the ideas of the plan were inculcated
in other plans which came later.
2.5 Nehru Mahalnobis Model Of Economic Growth

Actually this model draws heavily from Feldman–Mahalanobis model which is a Neo
Marxian model of economic development, created independently by Soviet economist G.
Feldman in 1928, and indianised by Indian statistician PC Mahalnobis in 1953.
Essence of the model is a shift in the pattern of industrial investment towards building up
a domestic consumption goods sector. Thus the strategy suggests in order to reach a high
standard in consumption, investment in building a capacity in the production of capital
goods is firstly needed. It created analytical framework for India’s Second Five Year Plan.
The drafting of second five-year plan was given to Prasanta Chnadra Mahalanobis, a
Cambridge trained physicist and statistician.
Mahalanobis Model outlinedthese objectives for the second five-year plan.
Some of the notable mentions are:
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to attain rapid growth of Indian economy by increasing the importance of public

sector.(24% Expenditure
to give more emphasis on basic heavy industries and mineral for economic
independence.Great emphasis on transportation and communication(28%
Expenditureproduction of consumer goods by both the factory and household sectors.
25 % Growth rate in 5 years
Growth Rate 4.5 % (Achivement 4.1%
2.6 Rolling Plan (1978–1983)

The Janata Party government rejected the Fifth Five-Year Plan and introduced a new
Sixth Five-Year Plan (1978–1980). This plan was again rejected by the Indian National
Congress government in 1980 and a new Sixth Plan was made. The Rolling Plan
consisted of three kinds of plans that were proposed.
The First Plan was for the present year which comprised the annual budget and the
Second was a plan for a fixed number of years, which may be 3, 4 or 5 years. The Second
Plan kept changing as per the requirements of the Indian economy.
The Third Plan was a perspective plan for long terms i.e. for 10, 15 or 20 years.
Hence there was no fixation of dates for the commencement and termination of the plan
in the rolling plans. The main advantage of the rolling plans was that they were flexible
and were able to overcome the rigidity of fixed Five-Year Plans by mending targets, the
object of the exercise, projections and allocations as per the changing conditions in the
country's economy.
The main disadvantage of this plan was that if the targets were revised each year, it
became difficult to achieve the targets laid down in the five-year period and it turned out
to be a complex plan. Also, the frequent revisions resulted in the lack of stability in the
economy.
2.7 Rao Manmohan Singh Model Of Economic Growth
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Economic reforms since 1991 are based on the Rao Manmohan model. Mr Narsimha Rao,
was the PM in 1991 and Finance Minister was Dr Manmohan Singh. The Model has the
following consents:
-Re-orinet th role of State in economic manegemenet. State should refocus on social and
infrastructural development primarily.
-Dismantle selectively controls and permits in order to permit private sector to invest
liberally
-Open up the economy and create competition for PREs-for better productivity and
profitability
-Extrenal serctor liberalization in order to intergrate Indian Econoimy with Global
economy to benefit from the resourse flows and competition.
-Forex reserves accumulated thus alleviating BOP pressures and the foreign flows-FDI
and FII increased. Indian economy became competitive. Exports started to pick up.
2.8 Gandhian Plan

This plan was drafted by Sriman Nayaran in 1944 , principal of Wardha Commercial
College. It emphasized the economic decentralization with primacy to rural development
by developing the cottage industries.
formulated by Sriman Narayan Agarwal, 1944. More emphasis to agriculture, promoting
industries like cottage and village instead of heavy industries as proposed by NPC and
Bombay Plan.
2.9 People’s Plan

People’s plan was drafted by MN Roy. This plan was for ten years period and gave
greatest priority to Agriculture. Nationalization of all agriculture and production was the
main feature of this plan. This plan was based on Marxist socialism and drafted by M N
Roy on behalf of the Indian federation of Lahore.
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In 1945 by radical humanist leader M.N. Roy, Chairman of Post War Reconstruction
committee of Indian Trade Union. Plan based on Marxist socialism–providing people
with basic necessities of life. Agri and Industry equally highlighted. Followed by
Common Minimum Program of United Front and that of the Mid 90’s and that of UPA
2004 inspired~~ “Economic Reform with the human face”
2.10 Sarvodaya Plan

Sarvodaya Plan (1950) was drafted by Jaiprakash Narayan. This plan itself was inspired
by Gandhian Plan and Sarvodaya Idea of Vinoba Bhave. This plan emphasized on
agriculture and small & cottage industries. It also suggested the freedom from foreign
technology and stressed upon land reforms and decentralized participatory planning.
Socialist leader Jaiprakash Narayan published in 1950. Majority form Gandhian
techniques of constructive work as well as Sarvodaya concept of Acharya Vinoba Bave.
Decentralised partcipatory form of planning , agriculture, small &cottage industries, self
reliance(all Gandhi wala concept
Planning and Development Department

In August 1944, The British India government set up “Planning and Development
Department” under the charge of Ardeshir Dalal. But this department was abolished in
1946.
Planning Advisory Board
In October 1946, a planning advisory board was set up by Interim Government to review
the plans and future projects and make recommendations upon them.
Planning Commission
Immediately after independence in 1947, the Economic Programme Committee (EPC)
was formed by All India Congress Committee with Nehru as its chairman. This
committee was to make a plan to balance private and public partnership and urban and
rural economies. In 1948, this committee recommended forming of a planning
commission. In March 1950, in pursuance of declared objectives of the Government to
promote a rapid rise in the standard of living of the people by efficient exploitation of the
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resources of the country, increasing production and offering opportunities to all for
employment in the service of the community, the Planning Commission was set up by a
Resolution of the Government of India as an advisory and specialized institution.
Planning Commission was an extra-constitutional body, charged with the responsibility
of making assessment of all resources of the country, augmenting deficient resources,
formulating plans for the most effective and balanced utilization of resources and
determining priorities. Jawaharlal Nehru was the first Chairman of the Planning
Commission.
National Development Council
Government of India could take the initiative to set up the planning commission only by
virtue of provision in the constitution which made Economic & Social planning an item
in Concurrent list. The Resolution to set up a planning commission was actually based
upon the assumption that the roots of Centre- State cooperation should be deeper. Later,
in 1952, the setting up of the National Development Council was in fact a consequence of
this provision.
Planning in India
The Congress Plan: Under the initiative of the INC president Netaji SC Bose ->
“National Planning Committee” was set up in October 1938 under the chairmanship of
J.L. Nehru to work out concrete programmes for development encompassing all major
areas of the economy. NPC was set up in a conference of Minister of Industries of the
Congress ruled states(other stats also invited) , M. Visvesvaraya, J. R. D Tata, G. D. Birla
and Lala Sri Ram etc were present which ultimately produced 29 volumes of
recommendations. 1940-45 2nd World war, Quit India Movement: many members
including chairman were arrested. Final report of NPC published in 1949
Post War Reconstruction committee: Early in June 1941, the GoI formed PWRC to
consider various plans for reconstruction of economy
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Consultative Committee of Economist: under the chairmanship of Ramaswamy

Muralidhar setup in 1941
Planning and Development Department: set up in 1944 under a separate member of the
Viceroy’s Executive Council for organising and co-ordinating it. Ardeshir Dalal was
appointed as one of its acting member.Dept abolished in 1946.
Advisory Planning Board: October 1946 GoI appointed the committee to review the
planning that had already been done by the British Government.
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Unit-3
NITI Aayog
Introduction
The NITI Aayog ( National Institution for Transforming India) 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. Its initiatives
include "15-year road map", "7-year vision, strategy, and action plan", AMRUT, Digital
India, Atal Innovation Mission, Medical Education Reform, agriculture reforms (Model
Land Leasing Law, Reforms of the Agricultural Produce Marketing Committee Act,
Agricultural Marketing and Farmer Friendly Reforms Index for ranking states), Indices
Measuring States’ Performance in Health, Education and Water Management, Sub-Group
of Chief Ministers on Rationalization of Centrally Sponsored Schemes, Sub-Group of
Chief Ministers on Swachh Bharat Abhiyan, Sub-Group of Chief Ministers on Skill
Development, Task Forces on Agriculture and up of Poverty, and Transforming India
Lecture Series.
It was established in 2015, by the NDA government, to replace the Planning Commission
which followed a top-down model. The NITI Aayog council comprises all the state Chief
Ministers, along with the Chief Ministers of Delhi and Puducherry, the Lieutenant
Governor of the Andaman and Nicobar Islands, and a vice-chairman nominated by the
Prime Minister. In addition, temporary members are selected from leading universities
and research institutions. These members include a chief executive officer, four ex-
official members, and two part-time members.
Aim and Objectives and Functions

To evolve a shared vision of national development priorities, sectors and
strategies with the active involvement of States.
To foster cooperative federalism through structured support initiatives and
mechanisms with the States on a continuous basis, recognizing that strong States
make a strong nation.
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To develop mechanisms to formulate credible plans at the village level and

aggregate these progressively at higher levels of government.
To ensure, on areas that are specifically referred to it, that the interests of national
security are incorporated in economic strategy and policy.
To pay special attention to the sections of our society that may be at risk of not
benefiting adequately from economic progress.
To design strategic and long term policy and programme frameworks and
initiatives, and monitor their progress and their efficacy. The lessons learnt
through monitoring and feedback will be used for making innovative
improvements, including necessary mid-course corrections.
To provide advice and encourage partnerships between key stakeholders and
national and international like-minded Think tanks, as well as educational and
policy research institutions.
To create a knowledge, innovation and entrepreneurial support system through a
collaborative community of national and international experts, practitioners and
other partners.
To offer a platform for resolution of inter-sectoral and inter departmental issues in
order to accelerate the implementation of the development agenda.
To maintain a state-of-the-art Resource Centre, be a repository of research on
good governance and best practices in sustainable and equitable development as
well as help their dissemination to stake-holders.
To actively monitor and evaluate the implementation of programmes and
initiatives, including the identification of the needed resources so as to strengthen
the probability of success and scope of delivery.
To focus on technology upgradation and capacity building for implementation of
programmes and initiatives.
To undertake other activities as may be necessary in order to further the execution
of the national development agenda, and the objectives mentioned above.
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Aayog is developing itself as a State-of-the-art Resource Centre, with the necessary

resources, knowledge and skills, that will enable it to act with speed, promote research
and innovation, provide strategic policy vision for the government, and deal with
contingent issues.
NITI Aayog’s entire gamut of activities can be divided into four main heads:
Design Policy & Programme Framework
Foster Cooperative Federalism

Monitoring & Evaluation
Think Tank and Knowledge & Innovation Hub
The different verticals of NITI provide the requisite coordination and support
framework for NITI to carry out its mandate.
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The list of verticals is as below:
Agriculture
Health
Women & Child Development
Governance & Research
HRD,Skill Development & Employment
Rural DevelopmentSustainable Development Goals
EnergyManaging Urbanization,
Industry, Infrastructure,
Financial Resources,
Natural Resources & EnvironmentScience & Tech
State Coordination & Decentralized Planning (SC&DP)

Social Justice & Empowerment
Land & Water Resources
Data management & Analysis
Public-Private Partnerships
Project Appraisal and Management Division (PAMD)
Development Monitoring and Evaluation Office
National Institute of Labour Economics Research and Development (NILERD
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Constitution of NITI Aayog
Chairperson-Shri Narendra Modi, Hon'ble Prime Minister

Vice Chairperson-Dr. Rajiv Kumar
CEO- Amitabh Kant
Full-Time Members
1.Shri V.K. Saraswat, 2.Prof. Ramesh Chand, 3.Dr. V. K. Paul
Ex-officio Members-
Shri Raj Nath Singh, (Minister of Defence

Shri Amit Shah, (Minister of Home Affairs
Smt. Nirmala Sitharaman, Minister of Finance and Minister of Corporate Affairs
Shri Narendra Singh Tomar, Minister of Agriculture and Farmers Welfare;Minister of
Rural Development; Minister of Panchayati Raj
Special Invitees
Shri Nitin Jairam Gadkari, Minister of Road Transport and Highways; Minister of Micro,
Small and Medium Enterprises
Shri Thaawar Chand Gehlot, Minister of Social Justice and Empowerment.
Shri Piyush Goyal, Minister of Railways; and Minister of Commerce and Industry
Shri Rao Inderjit Singh, Minister of State (Independent Charge) of the Ministry of
Statistics and Programme Implementation and Minister of State(Independent Charge) of
Ministry of Planning.
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Unit-4
Fiscal Policy
Definition
Fiscal policy is the use of government spending and taxation to influence the economy.
Governments typically use fiscal policy to promote strong and sustainable growth and
reduce poverty. The role and objectives of fiscal policy gained prominence during the
recent global economic crisis, when governments stepped in to support financial systems,
jump-start growth, and mitigate the impact of the crisis on vulnerable groups.
Fiscal policy in India is the guiding force that helps the government decide how much
money it should spend to support the economic activity, and how much revenue it must
earn from the system, to keep the wheels of the economy running smoothly. In recent
times, the importance of fiscal policy has been increasing to achieve economic growth
swiftly, both in India and across the world. Attaining rapid economic growth is one of the
key goals of fiscal policy formulated by the Government of India. Fiscal policy, along
with monetary policy, plays a crucial role in managing a country’s economy.
Ojectives
1. Full employment
2. Price Stability 3. Accelerating the rate of economic development
4. Optimum allocation of resources
5. Equitable distribution of income and wealth
6. Economic stability
7. Capital formation and growth
8. Encouraging investment
Deficit and Types
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Revenue Deficit
Fiscal Deficit
Primary Deficit
1.Revenue Deficit-
The revenue deficit mentions to the surplus of government’s revenue expenditure over
the revenue receipts.
Revenue deficit = Revenue expenditure – Revenue Receipts
This deficit only incorporates current income and current expenses. A high degree of
deficit symbolises that the government should reduce its expends. The government may
raise its revenue receipts by rising income tax. Disinvestment is selling off assets is
another corrective measure to minimise revenue deficit.
Fiscal Deficit
Fiscal deficit is the distinction between the government’s total expenditure and its total
receipts, and this excludes borrowing.
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital
receipts)
The fiscal deficit has to be financed by borrowing. Hence, it manifests the total
borrowing necessities of the government from all the possible sources. From the
financing part –
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from
abroad
The target of Fiscal deficit at 6.8% of GDP in 2021-22.
As per the latest target of the FRBM Act:
Government is required to limit the fiscal deficit to 3% of the GDP by March 31, 2021.
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Government is required to limit debt of the central government to 40% of the GDP by the
year 2024-25.
Primary Deficit
A primary deficit is the amount of money that the government requires to borrow apart
from the interest payments on the formerly borrowed loans.We must make a note that the
borrowing necessity of the government comprises interest responsibilities on the
collected amount of debt. The aim of quantifying the primary deficit is to concentrate on
current fiscal imbalances. To attain an approximate of borrowing on account of current
expends overreaching revenues, we need to compute what has been known as the primary
deficit. It is the fiscal deficit – the interest payments.
Gross primary deficit = Gross fiscal deficit – Net interest liabilities
The Fiscal Responsibility and Budget Management Act (FRBM Act), 2003
Enactment-The FRBM Bill was introduced by the then finance minister, Yashwant Sinha,
in 2000. The Bill, approved by the Union Cabinet in 2003, became effective from July 5,
2004.
The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced in the
parliament of India in the year 2000 by Atal Bihari Vajpayee Government for providing
legal backing to the fiscal discipline to be institutionalized in the country. Subsequently,
the FRBM Act was passed in the year 2003. It is an act of the parliament that set targets
for the Government of India to establish financial discipline, improve the management of
public funds, strengthen fiscal prudence, and reduce its fiscal deficits
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Objectives
The primary objective was the elimination of revenue deficit and bringing down the fiscal
deficit.
The other objectives of the act were:
to introduce transparent fiscal management systems in the country

to introduce a more equitable and manageable distribution of the country's debts over the
years
to aim for fiscal stability for India in the long run
Key features of the FRBM Act
1. Medium Term Fiscal Policy Statement
2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy Statement
The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total
outstanding liabilities be projected as a percentage of gross domestic product (GDP) in
the medium-term fiscal policy statement.
FRBM Act exemptions
On grounds of national security, calamity, etc, the set targets of fiscal deficits and
revenue could be exceeded.
N.K.Singh Committee Recommendations
The committee submitted its report in January 2017 and it was made public in April that
year. The major recommendations of the N.K.Singh Committee are discussed below.
It proposed to replace the FRBM Act, 2003 with a Debt Management and Fiscal
Responsibility Bill, 2017.
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Debt to GDP Ratio

The debt to GDP ratio should be 38.7% for the central government, 20% for the state
governments together by the FY 2022 – 23.
Fiscal deficit
By FY 2022 – 23, the fiscal deficit should be 2.5% of GDP.
The committee recommended achieving the above targets by a ‘glide path’, that is, a
steady progress towards them, by achieving annual targets until 2023.
Fiscal Council
It recommended the setting up of an autonomous Fiscal Council, whose role would be:
To prepare multi-year fiscal forecasts.
To improve fiscal data quality.
To suggest changes to the fiscal strategy.
To advise the government on fiscal matters.
The committee recommended that the government could deviate from the targets in the
following scenarios:
National calamity, war, in considerations of national security, agricultural collapse
affecting incomes and outputs.
Structural reforms in the economy having fiscal implications.
A decline in real output growth of at least 3% below the average of the previous four
quarters.
The 15th Finance Commission should recommend the debt trajectory for each state based
on their track record of fiscal health and prudence.
The centre should borrow from the Reserve Bank of India only when:
It has to meet a temporary shortfall in receipts.
RBI subscribes to g-secs to fund any deviation from the prescribed targets.
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RBI buys g-secs from the secondary market.

Compatibility of monetary and fiscal policies
The committee recommended that both the monetary and fiscal policies must ensure
macroeconomic stability and growth in a complementary manner.
To this end, the inflation targeting regime and fiscal rules have to interact with each other.
4.5 Zero-based budgeting
As the name says “Zero-based budgeting” is an approach to plan and prepare the budget
from the scratch. Zero-based budgeting starts from zero, rather than a traditional budget
that is based on previous budgets.
With this budgeting approach, you need to justify each and every expense before adding
it to the actual budget. The primary objective of zero-based budgeting is the reduction of
unnecessary cost by looking at where costs can be cut.
To create a zero base budget involvement of the employees is required. You can ask your
employees what kind of expenses the business will have to bear and figure out where you
can control such expenses. If a particular expense fails to benefit the business, the same
should be axed from the budget.
Differences between Traditional Budgeting and Zero Base Budgeting
In traditional Budgeting, the previous year’s budget is taken as a base for the preparation
of a budget. Whereas, each time the budget under zero-based budgeting is created, the
activities are re-evaluated and thus started from scratch.
The emphasis of the traditional budgeting is on the previous expenditure level. On the
contrary, zero-based budgeting focuses on forming a new economic proposal, whenever
the budget is set.
Traditional Budgeting works on cost accounting principle, thereby, it is more accounting

oriented. Whereas the zero-based budgeting is decision oriented.
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In the traditional budgeting, justification of the line items and expenses are not at all
required. On the other hand, in zero-based budgeting, proper justification is required,
taking into account the cost and benefit.
In traditional budgeting, the top management take decisions regarding any amount that
will be spent on a particular product. In contrast, in zero-based budgeting, the decision
regarding the spending a specific sum on a particular product is on the managers.
Zero-based budgeting is better than traditional budgeting when it comes to clarity and
responsiveness.
Traditional budgeting follows a monotonous approach. On the contrary, zero-based

budgeting follows a straightforward approach.
What are the steps to create a Zero based budget?
Identifying the decision units that need a justification for every line item of expenditure
in the proposed budget.
Preparing Decision Packages*. Each decision package is an identifiable and separate

activity. These decision packages are connected with the objectives of the company.
The next step in ZBB is to rank the decision packages. This ranking is done on the basis
of cost-benefit analysis.
Finally, funds are allocated on the basis of the above findings by following a pyramid
ranking system to ensure maximum results.
*Decision packages mean self-contained proposals or module seeking funds. Each

decision package comprises the explanation of the activity, the amount involved, the need
for the item, the benefit arising from the implementation of the proposal, the expected
loss that may be incurred if it is not done and much more..
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Zero Based Budgeting Advantages
Efficiency: Zero-based Budgeting helps a business in the allocation of resources

efficiently (department-wise) as it does not look at the previous budget numbers, instead
looks at the actual numbers
Accuracy: Against the traditional budgeting method that involves mere some arbitrary
changes to the earlier budget, this budgeting approach makes all departments relook
every item of the cash flow and compute their operation costs. This methodology helps in
cost reduction to a certain extent as it gives a true picture of costs against the desired
performance.
Budget inflation: As mentioned above every expense is to be justified. Zero-based budget

compensates the weakness of incremental budgeting of budget inflation.
Coordination and Communication: Zero-based budgeting provides better coordination

and communication within the department and motivation to employees by involving
them in decision-making.
Reduction in redundant activities: This approach leads to identify optimum opportunities

and more cost-efficient ways of doing things by eliminating all the redundant or
unproductive activities
Although this concept is a lucrative method of budgeting, it is also important to know the
disadvantages as listed below:
Zero Based Budgeting Disadvantages
High Manpower Turnover: The foundation of zero-based budgeting itself is a zero.

Budget under this concept is planned and prepared from the scratch and require the
involvement of a large number of employees. Many departments may not have adequate
human resource and time for the same.
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Time-Consuming: This Zero-based budgeting approach is a highly time-intensive for a

company to do annually as against incremental budgeting approach, which is a far easier
method.
Lack of Expertise: Providing an explanation for every line item and every cost is a
problematic task and requires training for the managers.
Little Costly
In order to understand zero-based budgeting, the first thing one should understand is the
various parts of a typical business budget.
Here are 3 primary things that a budget must meet:
 Expenses determination: How much will you spend?

 Revenue from the project: How much will you earn?
 Profit prediction: The target profit you will require after all expenses?
4.6 Crowding Out

One of the most common forms of crowding out takes place when a large government,
such as that of the U.S., increases its borrowing and sets in motion a chain of events that
results in the curtailing of private sector spending. The sheer scale of this type of
borrowing can lead to substantial rises in the real interest rate, which has the effect of
absorbing the economy's lending capacity and of discouraging businesses from making
capital investments.
Companies often fund such projects in part or entirely through financing, and are now
discouraged from doing so because the opportunity cost of borrowing money has risen,
making traditionally profitable projects funded through loans cost-prohibitive.
Large governments increasing borrowing is the most common form of crowding out, as
it forces interest rates higher.
The crowding out effect has been discussed for over a hundred years in various forms.
During much of this time, people thought of capital as being finite and confined to
individual countries, which was largely the case due to lower volumes of international
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trade compared to the present day. In that context, increased taxation for public works
projects and public spending could be directly linked to a reduction in the capacity for
private spending within a given country, as less money was available.
The Crowding Out Effect vs. Crowding In

On the other hand, macroeconomic theories such as Chartalism and Post-Keynesian posit
that government borrowing, in a modern economy operating significantly below capacity,
can actually increase demand by generating employment, there by stimulating private
spending as well. This process is often referred to as "crowding in."
The crowding in theory has gained some currency among economists in recent years after
it was noted that, during the Great Recession of 2007–2009, massive spending on the part
of the federal government on bonds and other securities actually had the effect of
reducing interest rates.1
Types of Crowding Out Effects
Economies
Reductions in capital spending can partially offset benefits brought about through
government borrowing, such as those of economic stimulus, though this is only likely
when the economy is operating at capacity. In this respect, government stimulus is
theoretically more effective when the economy is below capacity.
If this is the case, however, an economic downswing may occur, reducing revenues the
government collects through taxes and spurring it to borrow even more money, which can
theoretically lead to a vicious cycle of borrowing and crowding out.
Social Welfare
Crowding out may also take place because of social welfare, albeit indirectly. When
governments raise taxes in order to introduce or expand welfare programs, individuals
and businesses are left with less discretionary income, which can reduce charitable
contributions. In this respect, public sector expenditures for social welfare can reduce
private-sector giving for social welfare, offsetting the government's spending on those
same causes.
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Similarly, the creation or expansion of public health insurance programs such as

Medicaid can prompt those covered by private insurance to switch to the public option.
Left with fewer customers and a smaller risk pool, private health insurance companies
may have to raise premiums, leading to further reductions in private coverage.
Infrastructure
Another form of crowding out can occur because of government-funded infrastructure
development projects, which can discourage private enterprise from taking place in the
same area of the market by making it undesirable or even unprofitable. This often occurs
with bridges and other roads, as government-funded development deters companies from
building toll roads or from engaging in other similar projects.
Crowding Out Effect Example
Suppose a firm has been planning a capital project, with an estimated cost of $5 million
and a return of $6 million, assuming the interest rate on its loans is 3%. The firm
anticipates earning $1 million in net income (NI). Due to the shaky state of the economy,
however, the government announces a stimulus package that will help businesses in need
but will also raise the interest rate on the firm's new loans to 4%.
Because the interest rate the firm had factored into its accounting has increased by 33.3%,
its profit model shifts wildly and the firm estimates that it will now need to spend $5.75
million on the project in order to make the same $6 million in returns. Its projected
earnings have now dropped by 75% to $250,000, so the company decides that it would be
better off pursuing other options.
Economic Stimulus
Economic stimulus refers to attempts by governments or government agencies to
financially kickstart growth during a difficult economic period. more
Fiscal Policy
Fiscal policy uses government spending and tax policies to influence macroeconomic
conditions, including aggregate demand, employment, and inflation. more
Austerity
Austerity is defined as a state of reduced spending and increased frugality. more
Stimulus Package
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A stimulus package is a package of economic measures put together by a government to

stimulate a struggling economy. more
Modern Monetary Theory (MMT) Definition
Modern Monetary Theory (MMT) is a macroeconomic theory that says government
spending in countries with complete control over their own fiat currency should not be
restrained by fears of rising debt. more
Deficit Spending
Deficit spending occurs whenever a government's expenditures exceed its revenues over
a fiscal period. This is often done intentionally to stimulate the economy
4.7 Budget Reforms
Budget Presentation Prepond since 2017-18
Railway Budget merged from 2017-18
Plan and Non Plan Expenditure Removed
Shankaracharya Committee recommendation on Calendar for budget
4.8 Masala Bonds
Masala Bonds were introduced in India in 2014 by International Finance Corporation

(IFC).
First Bank Introduced Masala Bonds- HDFC Bank
The IFC issued the first masala bonds in India to fundinfrastructure projects. Indian
entities or companies issue masala bonds outside India to raise money. The issue of these
bonds is in Indian currency rather than local currency. Thus, if the rupee rate falls, the
investor will bear the loss.
IFC Estb.-20 July 1956
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Characteristics Of Masala Bonds
Masala Bonds are rupee-denominated bonds issued outside India by Indian entities. They
are debt instruments which help to raise money in local currency from foreign investors.
Both the government and private entities can issue these bonds. Investors outside India
who would like to invest in assets in India can subscribe to these bonds.
Any resident of that country can subscribe to these bonds which are members of the
Financial Action Task Force. The investors who subscribe should be whose securities
market regulator is a member of the International Organisation of Securities Commission.
Multilateral and Regional Financial Institutions which India is a member country can also
subscribe to these bonds.
According to RBI, the maturity period is three years for the bonds raised to the rupee
equivalent of 50 million dollars in a financial year. The maturity period is five years for
the bonds raised above the rupee equivalent of 50 million dollars in a financial year. The
conversion of these bonds happens at market rate on the date of settlement of transactions
undertaken for issue and servicing of interest of the bonds.
Where Can The Proceeds From These Bonds Be Used
The proceeds raised from these bonds can be used -
In refinancing of rupee loan and non-convertible debentures.
For the development of integrated townships and affordable housing projects.
Working capital to corporate.
RBI mandates the proceeds raised from these bonds cannot be used -
In real estate activities, not including the development of integrated townships and
affordable housing projects.
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Activities prohibited according to Foreign Direct Investment guidelines.
Investing in capital markets and usage of the proceeds for equity investment
domestically.
Purchase of land.
On-lending to other entities for any of the above purposes.
Benefits Of Masala Bonds
Masala bonds have various benefits. Both the investors and borrowers get benefits from
subscribing and issuing of these bonds.
The benefits for the investors are -
It offers higher interest rates and thus benefits the investor.
It helps in building up foreign investors’ confidence in the Indian economy.
It helps strengthen the foreign investments in the country as it facilitates foreign

investors’ confidence in Indian currency.
The capital gains arising from rupee denomination are exempted from tax.
If the rupee appreciates at the time of maturity, it benefits the investor.
The benefits for the borrowers are -
It benefits the borrower as there is no currency risk. It saves the borrower from currency
fluctuations.
Borrowers need not worry about rupee depreciation as the issuance of these bonds is in
Indian currency rather than foreign currency.
The borrower can mobilise a huge amount of funds.
It helps the Indian entity issuing these bonds to diversify their portfolio.
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It aids borrowers to cut down their cost as they are issued outside India below 7% interest
rate.
As these bonds issuing are in the offshore market, it helps borrowers to tap a large
number of investors.
4.9 NRI Bonds

The Promise of Bonds for NRIJoin DBS Treasures
Non-Resident Indians around the world are constantly on the lookout for good
investment options in India. While most of them invest in mutual funds, direct equity and
real estate, many of them are keen to invest in the debt markets as well, particularly
government bonds. And the good news is that they can now invest without restrictions or
ceilings in specified securities issued by the Indian government. But before that, let's
know more about NRI Bonds.
Opportunity to NRIs to Invest in India
NRI Bonds were an option earlier specifically for NRIs. These were securities issued by
the Indian government to raise foreign exchange from Indians lives abroad by offering
reasonable returns with a sovereign guarantee. However, the last NRI Bond issue was in
2013.
Even though there have been no issues of NRI Bonds for a while now, you can still invest
in government bonds through the Fully Accessible Route.
How NRIs can invest in Indian bonds
The Government of India issues tradable securities that carry an interest or coupon
rate. These securities (treasury bills and bonds) have varying maturities from 90 days to
many years. G-Secs, short for government securities, are considered safe investments
because the government guarantees the interest and principal amount.
Till April 2020, government-issued bonds were not fully opened for NRIs. This changed
after the RBI created a separate channel known as the 'Fully Accessible Route' (FAR)
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through which NRIs can invest in specified government securities without any ceiling or
restrictions1
In which securities can NRIs invest?
NRIs can invest in all 5-year, 10-year and 30-year bonds issued by the GoI from FY20-21.
The RBI will designate new tenures and issues from time to time for NRIs to invest.
NRI Bonds: Capital Gains
NRIs can invest in capital gains bonds issued by REC and NHAI under Section 54EC to
claim deductions on capital gains. These bonds have a three-year lock-in.
Another type of bonds NRIs can invest in are infrastructure bonds.
NRIs and Bharat Bonds
If you are an NRI looking to invest in Indian securities that are relatively safe and yet
offer attractive interest rates, then issues like the Bharat Bond FOF and Bharat Bond ETF
are a good option. The underlying papers in Bharat Bond ETF & FOF are debt papers of
CPSE (Central Public Sector Enterprise) and PSE (Public Sector Enterprise) companies.
Why NRIs should invest in bonds?
 Low risk
While bonds do carry credit and interest rate risk, G-Secs generally have lower
credit or default risk.
 Repatriable
Repatriation is often a cause of concern for most NRIs. Most NRIs prefer to
invest in schemes in which their earnings can be repatriated. In the case of bonds,
the returns are freely repatriable.
Debt mutual funds

NRIs may also invest in Indian Bonds through debt mutual funds. This alternate route is
much more hassle-free and enables you to monitor your debt portfolio frequently. In case
of NRI investments in debt mutual funds, the investment amount can be debited directly
from your NRE or NRO account. When you exit the fund or redeem your investment, the
amount is again credited back to the source account. NRIs can invest in mutual funds
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after submitting their FATCA declaration (Foreign Account Tax Compliance

Act). Please check with the fund house if they allow investments by NRIs before
deciding on the investment options.
4.10 Debt-to-GDP Ratio
The debt-to-GDP ratio compares a country's sovereign debt to its total economic output
for the year. Its output is measured by gross domestic product (GDP).
What Is the Debt-to-GDP Ratio?
1.The debt-to-GDP ratio is a simple way of comparing a nation's economic output (as
measured by gross domestic output) to its debt levels.
2. This ratio tells analysts how much money the country earns every year, and how that
compares to the money that country owes.
3.The debt is expressed as a percentage of GDP.
How Do You Calculate the Debt-to-GDP Ratio?
The formula for debt-to-GDP is simple, just divide a nation's debt by its GDP.
Formula-: Deb-to-GDP Ratio= National Debt/ National GDP
How Does the Debt-to-GDP Ratio Works?/Objectives
1.The debt-to-GDP ratio indicates how strong a country's economy
2.How likely it is that it will pay off its debt.
3.Specifically, it's used to compare debt between countries, and to determine whether the
country is headed for economic turmoil(crisis).
4.The debt-to-GDP ratio is a useful tool for investors, leaders, and economists.
5.It allows them to gauge a country's ability to pay off its debt.
6.A high ratio means a country isn't producing enough to pay off its debt.
7.A low ratio means there is plenty of economic output to make the payments.
If a country were a household, GDP is like its income. Banks will give you a bigger loan
if you make more money. In the same way, investors will be happy to take on a country's
debt if it has a relatively higher level of economic output. Once investors begin to worry
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about repayment, they will perceive a higher risk of default, which means they will
demand more interest rate return for their investment. That increases the country's cost of
debt. When the cost of debt gets out of hand, it can quickly become a debt crisis.
In the fourth quarter of 2020, the U.S. debt-to-GDP ratio was 129%. That's the $27.7
trillion U.S. debt as of Dec. 30, 2020, divided by the $21.5 trillion nominal GDP
according to the Bureau of Economic Analysis' fourth quarter advance estimate. 23
The economy contracted in the first half of 2020 because of the COVID-19 pandemic.
Businesses shut down and consumers sheltered-in-place, slowing consumption.
What Is the Tipping Point?
A 2013 study by the World Bank found that if the debt-to-GDP ratio exceeds 77% for an
extended period, it slows economic growth. Every percentage point of debt above this
level costs the country 0.017 percentage points in economic growth.
Emerging markets are even more sensitive to debt-to-GDP ratios. In such markets, each
additional percentage point of debt above 64% will slow growth by 0.02 percentage
points each year.
Compare Debt between Countries
The debt-to-GDP ratio allows investors in government bonds to compare debt levels
between countries. For example, Germany's public debt is many times larger than that of
Greece. But Germany's 2017 GDP was $4.2 trillion, much more than Greece's $299
billion. That's why Germany, the largest country in the EU, had to bail out Greece, and
not the other way around. The debt-to-GDP ratio for Germany was less than 64%, while
Greece's was nearly 182%.
The debt-to-GDP ratio isn't always a good predictor of whether a country will default or
not.
Japan's debt-to-GDP ratio was nearly 238% in 2017. However, Japan is in the unique
situation of having most of its debt held domestically, and it holds a large number of
foreign assets, and both of these facts could mean that it's less at risk of default.The
Greek debt crisis occurred because foreign governments and banks held a lot of Greece's
debt. As Greece's banknotes became due, its debt was downgraded by rating agencies like
Standard & Poor's, which made interest rates rise. Greece had to find a way to raise more
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revenue. It agreed to cut spending and raise taxes to do so. This action further slowed its
economy, reducing revenue and its ability to pay down its debt.
The Debt-to-GDP Ratio Can Signal a Recession

As a country's debt-to-GDP ratio rises, it often signals that a recession is underway. A
country's GDP decreases in a recession. It causes taxes (federal revenue) to decline at the
same time the government spends more to stimulate its economy. In an ideal scenario,
economic stimulus spending is successful, and the recession lifts. The stimulus creates
more economic activity, which increases taxes and federal revenues, which helps put the
debt-to-GDP ratio back in balance.
The best determinant of investors' faith in a government's solvency is the yield on its debt.
When yields are low, that means there is a lot of demand for its debt. It doesn't have to
pay as high a return. The United States has been fortunate in that regard, and it can offer
bonds with relatively low yields.During the 2020 recession, investors have fled to U.S.
debt. It is considered ultra-safe.
When the global economy improves, investors will be comfortable with higher risk
because they want higher returns. Yields on U.S. debt will rise as demand falls.
Limitations of the Debt-to-GDP Ratio
To figure the debt-to-GDP ratio, you've got to know two things: the country's debt level
and the country's economic output. This calculation seems pretty straightforward until
you find out that debt is measured in two ways.
Many analysts, like the Central Intelligence Agency's World Factbook, only look at
public debt. That is the total of all government borrowings less repayments.
The U.S. debt consists of public debt plus another category. According to the U.S.
Department of the Treasury, debt held by the public consists of Treasury notes or U.S.
savings bonds owned by individual investors, companies, and foreign
governments.Public debt in the U.S. is also owned by pension funds, mutual funds, and
local governments.
The Treasury also reports on another category called Intragovernmental Holdings. This
category is not reported by the CIA World Factbook because it's debt the federal
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government owes to itself, not to outside lenders. However, many analysts may still find
it useful for calculating the U.S. debt as accurately as possible.
Key Features
 1. The debt-to-GDP ratio is a formula that compares a country's total debt to its
economic productivity.
 2.To get the debt-to-GDP ratio, simply divide a nation's debt by its gross domestic
product.
 3.When a country has a manageable debt-to-GDP ratio, investors are more eager
to invest, and it doesn't have to offer as high of yields on its bonds.
4.11 Fiscal Drag
Definition of Fiscal Drag-Fiscal drag is a concept where inflation and earnings growth
may push more taxpayers into higher tax brackets.
Fiscal drag has the effect of raising government tax revenue without explicitly raising tax
rates.
This fiscal drag has the effect of reducing (or limiting increase) in Aggregate Demand
and becomes an example of a mild deflationary fiscal policy.
It could also be viewed as an automatic fiscal stabiliser because higher earnings growth
will lead to higher tax and therefore moderate inflationary pressure in the economy.
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Bracket Creep and Fiscal Drag-If the higher tax rate band is 40% for income over
£30,000. Then rising average earnings will mean a higher % of the working population
will end up paying the higher rate of income tax.
Fiscal drag could work in the opposite direction. If there is deflation and falling wages,
fewer workers would be in the higher tax bracket. However, deflation has not been
common since pre-1939.
Fiscal Drag could be overcome by indexing tax bands to earnings or inflation. However,
this is not usually done.
Real Fiscal Drag. If tax brackets are increased in line with inflation, earnings may be
growing faster. This means a higher % of earnings will fall in higher tax brackets.
4.12 Fiscal Cliff
One of the most talked about issues in US politics is the US fiscal cliff.
The fiscal cliff refers to the situation at the end of 2012, where a series of tax increases
and spending cuts (worth $600bn) are due to come into force automatically. This
amounts to This will reduce the budget deficit, but cause lower growth. The alternative is
to reject these planned budget cuts and allow the deficit to continue to grow. This will
allow stronger economic growth, but leave the debt issue unchallenged.
A complicating factor for US politics is the debt ceiling. This is the legal amount by how
much the government can borrow. The debt ceiling can be raised, but it has to go through
the Senate to be voted on. This gives scope for political wrangling and efforts to push for
some favoured spending cuts in return for allowing debt ceiling to be raised.
The debt ceiling was raised on January 30, 2012, to a new high of $16.394 trillion.
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The Budget Control Act of 2011 stated that at the end of 2012, if agreement hadn’t been
reached on the way to reduce the deficit, there would be an automatic increase in taxes
and spending cuts. This includes
 End of last year’s temporary payroll tax cuts (resulting in a 2% tax

increase for workers),
 The end of certain tax breaks for businesses,
 shifts in the alternative minimum tax that would take a larger bite,
 the end of the tax cuts from 2001-2003,
 taxes related to President Obama’s health care law.
 Over 1,000 government programs – including the defense budget and
Medicare are in line for “deep, automatic cuts.
If these policies are enacted at the end of 2012, there would be a substantial reduction in
the budget deficit over the next few years. The budget deficit would fall from 8.5% of
GDP in 2011 to 1.2% by 2021.
However, implementing these deflationary fiscal policy would seriously impact on the
rate of economic growth. Higher taxes and deep spending cuts, would push the US
economy back into a double dip recession. The CBO forecast that if the budget cuts come
into effect, there will be negative growth of -0.5% in 2013. Without the budget cuts, there
will be growth of 1.7% and unemployment much lower.Alternative Scenarios
 Allow tax increases and spending cuts to come into force

 Ignore budget changes and continue with existing policies
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Unit 5
Monetory Policy
OVERVIEW
Monetary policy refers to the policy of the central bank with regard to the use of
monetary instruments under its control to achieve the goals specified in the Act.
The Reserve Bank of India (RBI) is vested with the responsibility of conducting
monetary policy. This responsibility is explicitly mandated under the Reserve Bank of
India Act, 1934.
The goal(s) of monetary policy
The primary objective of monetary policy is to maintain price stability while keeping in
mind the objective of growth. Price stability is a necessary precondition to sustainable
growth.
In May 2016, the Reserve Bank of India (RBI) Act, 1934 was amended to provide a
statutory basis for the implementation of the flexible inflation targeting framework.
The amended RBI Act also provides for the inflation target to be set by the Government
of India, in consultation with the Reserve Bank, once in every five years. Accordingly,
the Central Government has notified in the Official Gazette 4 per cent Consumer Price
Index (CPI) inflation as the target for the period from August 5, 2016 to March 31, 2021
with the upper tolerance limit of 6 per cent and the lower tolerance limit of 2 per cent.
The Central Government notified the following as factors that constitute failure to
achieve the inflation target:(a) the average inflation is more than the upper tolerance level
of the inflation target for any three consecutive quarters; or (b) the average inflation is
less than the lower tolerance level for any three consecutive quarters
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Prior to the amendment in the RBI Act in May 2016, the flexible inflation targeting
framework was governed by an Agreement on Monetary Policy Framework between
the Government and the Reserve Bank of India of February 20, 2015.
The Monetary Policy Framework
The amended RBI Act explicitly provides the legislative mandate to the Reserve Bank to
operate the monetary policy framework of the country.
The framework aims at setting the policy (repo) rate based on an assessment of the
current and evolving macroeconomic situation; and modulation of liquidity conditions to
anchor money market rates at or around the repo rate. Repo rate changes transmit through
the money market to the entire the financial system, which, in turn, influences aggregate
demand – a key determinant of inflation and growth.
Once the repo rate is announced, the operating framework designed by the Reserve
Bank envisages liquidity management on a day-to-day basis through appropriate actions,
which aim at anchoring the operating target – the weighted average call rate (WACR) –
around the repo rate.
The operating framework is fine-tuned and revised depending on the evolving financial
market and monetary conditions, while ensuring consistency with the monetary policy
stance. The liquidity management framework was last revised significantly in April 2016.
The Monetary Policy Process
Section 45ZB of the amended RBI Act, 1934 also provides for an empowered six-
member monetary policy committee (MPC) to be constituted by the Central Government
by notification in the Official Gazette. The first such MPC was constituted on September
29, 2016. The present MPC members, as notified by the Central Government in the
Official Gazette of October 5, 2020.
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The MPC determines the policy interest rate required to achieve the inflation target. The
first meeting of the MPC was held on October 3 and 4, 2016 in the run up to the Fourth
Bi-monthly Monetary Policy Statement, 2016-17.
The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in
formulating the monetary policy. Views of key stakeholders in the economy,
and analytical work of the Reserve Bank contribute to the process for arriving at
the decision on the policy repo rate.
The Financial Markets Operations Department (FMOD) operationalises the
monetary policy, mainly through day-to-day liquidity management operations.
The Financial Markets Committee (FMC) meets daily to review the liquidity
conditions so as to ensure that the operating target of the weighted average call
money rate (WACR) is aligned with the repo rate.
Before the constitution of the MPC, a Technical Advisory Committee (TAC) on
monetary policy with experts from monetary economics, central banking,
financial markets and public finance advised the Reserve Bank on the stance of
monetary policy. However, its role was only advisory in nature. With the
formation of MPC, the TAC on Monetary Policy ceased to exist.
Instruments of Monetary Policy
Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight
liquidity to banks against the collateral of government and other approved securities
under the liquidity adjustment facility (LAF)
Reverse Repo Rate: The (fixed) interest rate at which the Reserve Bank absorbs liquidity,
on an overnight basis, from banks against the collateral of eligible government securities
under the LAF.
Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term
repo auctions. Progressively, the Reserve Bank has increased the proportion of liquidity
injected under fine-tuning variable rate repo auctions of range of tenors. The aim of
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term repo is to help develop the inter-bank term money market, which in turn can set
market based benchmarks for pricing of loans and deposits, and hence improve
transmission of monetary policy. The Reserve Bank also conducts variable interest rate
reverse repo auctions, as necessitated under the market conditions.
Marginal Standing Facility (MSF): A facility under which scheduled commercial banks
can borrow additional amount of overnight money from the Reserve Bankby dipping
into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of
interest. This provides a safety valve against unanticipated liquidity shocks to the
banking system.
Corridor: The MSF rate and reverse repo rate determine the corridor for the daily
movement in the weighted average call money rate.
Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of
exchange or other commercial papers. The Bank Rate is published under Section 49 of
the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and,
therefore, changes automatically as and when the MSF rate changes alongside policy
repo rate changes.
Cash Reserve Ratio (CRR): The average daily balance that a bank is required to
maintain with the Reserve Bank as a share of such per cent of its Net demand and time
liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of
India.
Statutory Liquidity Ratio (SLR): The share of NDTL that a bank is required to maintain
in safe and liquid assets, such as, unencumbered government securities, cash and gold.
Changes in SLR often influence the availability of resources in the banking system for
lending to the private sector.
Open Market Operations (OMOs): These include both, outright purchase and sale of
government securities, for injection and absorption of durable liquidity, respectively.
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Market Stabilisation Scheme (MSS): This instrument for monetary management was
introduced in 2004. Surplus liquidity of a more enduring nature arising from large
capital inflows is absorbed through sale of short-dated government securities and
treasury bills. The cash so mobilised is held in a separate government account with the
Reserve Bank.
Open and Transparent Monetary Policy Making
Under the amended RBI Act, the monetary policy making is as under:
The MPC is required to meet at least four times in a year.
The quorum for the meeting of the MPC is four members.
Each member of the MPC has one vote, and in the event of an equality of votes, the
Governor has a second or casting vote.
The resolution adopted by the MPC is published after conclusion of every meeting of the
MPC in accordance with the provisions of Chapter III F of the Reserve Bank of India
Act, 1934.
On the 14th day, the minutes of the proceedings of the MPC are published which include:
a. the resolution adopted by the MPC;
b. the vote of each member on the resolution, ascribed to such member; and
c. the statement of each member on the resolution adopted.
Once in every six months, the Reserve Bank is required to publish a document called the
Monetary Policy Report to explain:
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a. the sources of inflation; and

b. the forecast of inflation for 6-18 months ahead.
5.1.Definition
Definition: Monetary policy is the macroeconomic policy laid down by the central bank.
It involves management of money supply and interest rate and is the demand side
economic policy used by the government of a country to achieve macroeconomic
objectives like inflation, consumption, growth and liquidity.
Description: In India, monetary policy of the Reserve Bank of India is aimed at

managing the quantity of money in order to meet the requirements of different sectors of
the economy and to increase the pace of economic growth.
The RBI implements the monetary policy through open market operations, bank rate
policy, reserve system, credit control policy, moral persuasion and through many other
instruments. Using any of these instruments will lead to changes in the interest rate, or
the money supply in the economy. Monetary policy can be expansionary and
contractionary in nature. Increasing money supply and reducing interest rates indicate an
expansionary policy. The reverse of this is a contractionary monetary policy.
For instance, liquidity is important for an economy to spur growth. To maintain liquidity,
the RBI is dependent on monetary policy. By purchasing bonds through open market
operations, the RBI introduces money in the system and reduces the interest rate.
5.2.LAF- Liquidity Adjustment Facility
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A liquidity adjustment facility (LAF) is a tool used in monetary policy, mainly by the
Reserve Bank of India (RBI), which enables banks to borrow money through repurchase
agreements (reposals) or banks to lend to the RBI using reverse repo contracts.
This arrangement manages liquidity pressures and ensures basic financial-market stability.
The Reserve Bank of India transacts repositories and reverse repos within its open market
operations in India.
Basic of a Liquidity Adjustment Facility
Facilities for liquidity adjustment are used to help banks overcome any short-term cash
shortages during periods of economic uncertainty or any other stress caused by
circumstances beyond their control. Different banks use eligible securities as collateral
through a repo agreement and utilize the funds to ease their short-term requirements, thus
remaining constant.
The facilities are introduced on a daily basis as banks and other financial institutions
make sure they have sufficient capital on the overnight market.
The transaction of liquidity adjustment facilities takes place at a set time of the day,
through an auction. A company that wants to raise capital to accomplish a shortfall is
engaged in repo agreements, while one with excess capital is doing the opposite –
executing a reverse repo agreement.
Liquidity Adjustment Facility and the Economy
The RBI may use the facility for adjusting liquidity to manage high levels of inflation. It
does this by raising the repo rate, which increases the cost of debt servicing. This, in turn,
reduces the supply of investment and money within the economy of India.
Alternatively, if the RBI tries to boost the economy after a period of slow economic
growth, the repo rate can be lowered to encourage businesses to borrow, thus increasing
the supply of money.
For instance, analysts predict RBI to cut the repo rate in April 2019 by 25 basis points
due to weak economic activity, low inflation, and slower global growth. However, as
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growth accelerates and inflation picks up, analysts expect repo rates to resume rising by
2020.
Related Terms
Labour Productivity
Labour productivity is a measure of labour output.
Freudian Motivation Theory

Freudian motivation theory exhibits unconscious psychological forces mould an
individual's behaviour affecting his purchasing patterns.
Scarcity
Scarcity refers to the limited availability of a resource in comparison to the limitless
wants.
Reasonable Doubt
Beyond a reasonable doubt is a substantive standard of proof which is required to justify
a criminal conviction in most adversarial justice systems.
Supranational
A supranational entity is an international group or alliance in which member states' power
and influence transcend national boundaries or interests to engage in decision-making
and to vote on collective body matters.
Business Economics
Business economics is an applied economics field that studies corporations' financial,
organisational, market-related, and environmental issues.
Recent Terms
Labour Market
The labour market, also known as the job market, relates to the supply and labour
demand in which the supply is provided by the workers and demand by the employers.
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Consumer Surplus
Consumer surplus is an economic indicator of the benefits to the product.
Labour Productivity
Labour productivity is a measure of labour output.
3. 'Marginal Standing Facility'

Definition: Marginal standing facility (MSF) is a window for banks to borrow from the
Reserve Bank of India in an emergency situation when inter-bank liquidity dries up
completely.
Description: Banks borrow from the central bank by pledging government securities at a
rate higher than the repo rate under liquidity adjustment facility or LAF in short. The
MSF rate is pegged 100 basis points or a percentage point above the repo rate. Under
MSF, banks can borrow funds up to one percentage of their net demand and time
liabilities (NDTL).
5.4. 'Bank Rate'- Bank rate is the rate charged by the central bank for lending funds to
commercial banks.
Description: Bank rates influence lending rates of commercial banks. Higher bank rate
will translate to higher lending rates by the banks. In order to curb liquidity, the central
bank can resort to raising the bank rate and vice versa.
5.5. 'Base Rate'
Definition: Base rate is the minimum rate set by the Reserve Bank of India below which
banks are not allowed to lend to its customers.
Description: Base rate is decided in order to enhance transparency in the credit market
and ensure that banks pass on the lower cost of fund to their customers. Loan pricing will
be done by adding base rate and a suitable spread depending on the credit risk premium.
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The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that
a bank can lend at.
MCLR is determined internally by the bank depending on the period left for the
repayment of a loan.
The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016.
It replaced the base rate structure, which had been in place since July 2010.
It is calculated based on four components:
The marginal cost of funds is the cost which one has to bear to raise new (incremental)
fund. Suppose I have funds of average interest rate of 10% per annum. I raise some new
fund bearing interest rate of 8% per annum then marginal cost of my fund is 8%.
The tenor premium is not borrower-specific and is uniform for all types of loans.
Operational expenses include the cost of raising funds, barring the costs recovered
separately through service charges. It is, therefore, connected to providing the loan
product as such.
Negative carry on the CRR (Cash Reserve Ratio) takes place when the return on the CRR
balance is zero. Negative carry arises when the actual return is less than the cost of the
funds. This will impact the mandatory Statutory Liquidity Ratio Balance (SLR) – reserve
every commercial bank must maintain.
Under the MCLR regime, banks are free to offer all categories of loans on fixed or
floating interest rates.
After the implementation of MCLR, the interest rates are determined as per the relative
risk factor of individual customers. Previously, when RBI reduced the repo rate, banks
took a long time to reflect it in the lending rates for the borrowers. Under the MCLR
regime, banks must adjust their interest rates as soon as the repo rate changes.
How is MCLR different from Base Rate?
MCLR is an improved version of the base rate. It is a risk-based approach to determine

the final lending rate for borrowers. It considers unique factors like the marginal cost of
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funds instead of the overall cost of funds. The marginal cost takes into account the repo
rate, which did not form part of the base rate.
When calculating the MCLR, banks are required to incorporate all kinds of interest rates
which they incur in mobilizing the funds. Earlier, the loan tenure was not taken into
account when determining the base rate. In the case of MCLR, the banks are now
required to include a tenor premium. This will allow banks to charge a higher rate of
interest for loans with long-term horizons.
5.6.Reserve requirement
The reserve requirement (or cash reserve ratio) is a central bank regulation that sets the
minimum amount of reserves that must be held by a commercial bank. The minimum
reserve is generally determined by the central bank to be no less than a specified
percentage of the amount of deposit liabilities the commercial bank owes to its customers.
The commercial bank's reserves normally consist of cash owned by the bank and stored
physically in the bank vault (vault cash), plus the amount of the commercial bank's
balance in that bank's account with the central bank.
The required reserve ratio is sometimes used as a tool in monetary policy, influencing the
country's borrowing and interest rates by changing the amount of funds available for
banks to make loans with.[1] Western central banks rarely increase the reserve
requirements because it would cause immediate liquidity problems for banks with low
excess reserves; they generally prefer to use open market operations (buying and selling
government-issued bonds) to implement their monetary policy. The People's Bank of
China uses changes in reserve requirements as an inflation-fighting tool, and raised the
reserve requirement ten times in 2007 and eleven times since the beginning of 2010.
An institution that holds reserves in excess of the required amount is said to hold excess
reserves.
5.7.LCR-liquidity coverage ratio
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Reserve Bank of India has provided some benefits to banks like maintaining lower
liquidity coverage ratio, but at the same time has asked them to raise provisions against
accounts which are showing stress.
The central bank has reduced the liquidity coverage ratio (LCR) requirement for banks to
80 per cent from 100 per cent with immediate effect as a relief to these lenders.
This means, banks should have a stock of high-quality liquid assets (HQLA) -- such as
short-term government.
5.8.Cash Reserve Ratio ( CRR )
Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated
by the Reserve Bank of India (RBI) to be maintained with the latter in the form of liquid
cash.
Objectives of Cash Reserve Ratio

The Cash Reserve Ratio acts as one of the reference rates when determining the base rate.
Base rate means the minimum lending rate below which a bank is not allowed to lend
funds. The base rate is determined by the Reserve Bank of India (RBI). The rate is fixed
and ensures transparency with respect to borrowing and lending in the credit market. The
Base Rate also helps the banks to cut down on their cost of lending to be able to extend
affordable loans.
Apart from this, there are two main objectives of the Cash Reserve Ratio:
Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central Bank and
is hence, secure.
Another objective of CRR is to keep inflation under control. During high inflation in the
economy, RBI raises the CRR to lower the bank’s loanable funds.
How does Cash Reserve Ratio work?
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When the RBI decides to increase the Cash Reserve Ratio, the amount of money that is
available with the banks reduces. This is the RBI’s way of controlling the excess flow of
money in the economy. The cash balance that is to be maintained by scheduled banks
with the RBI should not be less than 4% of the total NDTL, which is the Net Demand and
Time Liabilities. This is done on a fortnightly basis.
NDTL refers to the total demand and time liabilities (deposits) that are held by the banks.
It includes deposits of the general public and the balances held by the bank with other
banks. Demand deposits consist of all liabilities which the bank needs to pay on demand
like current deposits, demand drafts, balances in overdue fixed deposits and demand
liabilities portion of savings bank deposits.
Time deposits consist of deposits that need to be repaid on maturity and where the
depositor can’t withdraw money immediately. Instead, he is required to wait for a certain
time period to gain access to the funds. This includes fixed deposits, time liabilities
portion of savings bank deposits and staff security deposits. The liabilities of a bank
include call money market borrowings, certificate of deposits and investment in deposits
other banks.
In short, the higher the Cash Reserve Ratio, the lesser is the amount of money available
to banks for lending and investing.
NDTL = Demand and time liabilities (deposits) with public and other banks – deposits
with other banks (liabilities)
How does CRR affect the economy?
Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary policy,
which is used to regulate the money supply, level of inflation and liquidity in the country.
The higher the CRR, the lower is the liquidity with the banks and vice-versa.
During high levels of inflation, attempts are made to reduce the flow of money in the
economy. For this, RBI increases the CRR, lowering the loanable funds available with
the banks. This, in turn, slows down investment and reduces the supply of money in the
economy. As a result, the growth of the economy is negatively impacted. However, this
also helps bring down inflation.
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On the other hand, when the RBI needs to pump funds into the system, it lowers CRR.
which increases the loanable funds with the banks. The banks thus extend a large number
of loans to businesses and industry for different investment purposes. It also increases the
overall supply of money in the economy. This ultimately boosts the growth rate of the
economy.
Difference between CRR & SLR
Both CRR & SLR are the components of the monetary policy. However, there are a few
differences between them. The following table gives a glimpse into the dissimilarities:
Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)
In the case of SLR, banks are asked to have The CRR requires banks to have
reserves of liquid assets, which include both cash only cash reserves with the RBI
and gold.
Banks earn returns on money parked as SLR Banks don’t earn returns on money
parked as CRR
SLR is used to control the bank’s leverage for The Central Bank controls the
credit expansion. liquidity in the Banking system
with CRR.
In the case of SLR, the securities are kept with the In CRR, the cash reserve is
banks themselves, which they need to maintain in maintained by the banks with the
the form of liquid assets. Reserve Bank of India.
Why is Cash Reserve Ratio changed regularly?
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As per the RBI guidelines, every bank is required to maintain a ratio of their total
deposits that can also be held with currency chests. This is considered to be the same as it
is kept with the RBI. The RBI can change this ratio from time to time in regular intervals.
When this ratio is changed, it impacts the economy.
For banks, profits are made by lending. In pursuit of this goal, banks may lend out to the
max to make higher profits and have very less cash with them. An unexpected rush by
customers to withdraw their deposits will lead to banks being unable to meet all the
repayment needs. Therefore, CRR is vital to ensure that there is always a certain fraction
of all the deposits in every bank, kept safe with them. RBI curbs these issues with the
help of the CRR.
While ensuring liquidity against deposits is the prime function of the CRR, it has an
equally important role in controlling interest rates in the economy. The RBI controls the
short-term volatility in the interest rates by adjusting the amount of liquidity available in
the system. Too much availability of cash leads to the fall in rates while the scarcity of it
leads to a sudden rise in rates, both of which are unhealthy for the economy.
Thus, as a depositor, it is good for you to know of the CRR prevailing in the market that
ensures that regardless of the performance of the bank, a certain percentage of your cash
is safe with the RBI.
5.9 Standing Deposit Facility
The Standing Deposit Facility, proposed by the RBI and under examination by the Centre,
is viewed as a strong tool to suck out the surplus liquidity.
What is it?
This concept, first recommended by the Urjit Patel committee report in 2014, may
soon become part of the central bank’s toolkit to manage liquidity.
Standing deposit facility is a remunerated facility that will not require the provision of
collateral for liquidity absorption.
Banks, at different points in time, may be short of funds or flush with money.
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When they need money for the short-term, they borrow from the RBI (Repo Rate) for
which they pledge government securities.
When banks have excess funds they lend it to the RBI at the reverse repo rate that is
lower than the repo rate. Here too, government securities act as collateral.
Why the facility is introduced now?
The demonetisation exercise has left banks flush with funds.

The past two months, banks have been lending left, right and centre to the RBI under the
reverse repo window.
And with the RBI increasing the reverse repo rate by 25 basis points to 6 per cent in the
April policy, banks now earn more on these funds.
The worry is there may be only so much (limited) collateral to go around.
Collateral may become a constraining factor if the central bank runs out of securities
to absorb liquidity under the reverse repo window.
Enter the Standing Deposit Facility. This will allow the RBI to absorb surplus funds
from banks without collateral.
Banks too continue to earn interest (though possibly lower than the existing reverse repo
rate). In effect, it will empower the RBI to suck out as much liquidity as needed.
Why is it important?
Liquidity plays a key role in transmission of policy rates.

In a falling rate cycle, pass-through of rate cuts will happen quickly if there is sufficient
liquidity, as banks will be able to lower deposit rates comfortably.
The reverse holds true now. Excess liquidity has led to short-term market rates slipping
below the RBI’s policy repo rate.
Now, RBI would want to keep a tight leash on rates. The RBI would want its key policy
rate i.e., the repo rate, to be the operational rate.
The RBI’s management of rates impacts the rates on your deposits and loans.
The immediate fallout of excess liquidity in the past few months has been the sharp cuts
in bank deposit rates.
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If the RBI curbs excess liquidity and halts the fall in short-term rates, then the depositors
can breathe a sigh of relief.
5.11 Quantitative Instruments or General Tools
The Quantitative Instruments are also known as the General Tools of monetary policy.
These tools are related to the Quantity or Volume of the money. The Quantitative Tools
of credit control are also called as General Tools for credit control. They are designed to
regulate or control the total volume of bank credit in the economy. These tools are
indirect in nature and are employed for influencing the quantity of credit in the country.
The general tool of credit control comprises of following instruments.
1. Bank Rate Policy (BRP)

The Bank Rate Policy (BRP) is a very important technique used in the monetary policy
for influencing the volume or the quantity of the credit in a country. The bank rate refers
to rate at which the central bank (i.e RBI) rediscounts bills and prepares of commercial
banks or provides advance to commercial banks against approved securities. It is "the
standard rate at which the bank is prepared to buy or rediscount bills of exchange or other
commercial paper eligible for purchase under the RBI Act". The Bank Rate affects the
actual availability and the cost of the credit. Any change in the bank rate necessarily
brings out a resultant change in the cost of credit available to commercial banks. If the
RBI increases the bank rate than it reduce the volume of commercial banks borrowing
from the RBI. It deters banks from further credit expansion as it becomes a more costly
affair. Even with increased bank rate the actual interest rates for a short term lending go
up checking the credit expansion. On the other hand, if the RBI reduces the bank rate,
borrowing for commercial banks will be easy and cheaper. This will boost the credit
creation. Thus any change in the bank rate is normally associated with the resulting
changes in the lending rate and in the market rate of interest. However, the efficiency of
the bank rate as a tool of monetary policy depends on existing banking network, interest
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elasticity of investment demand, size and strength of the money market, international
flow of funds, etc.
2. Open Market Operation (OMO)

The open market operation refers to the purchase and/or sale of short term and long term
securities by the RBI in the open market. This is very effective and popular instrument of
the monetary policy. The OMO is used to wipe out shortage of money in the money
market, to influence the term and structure of the interest rate and to stabilize the market
for government securities, etc. It is important to understand the working of the OMO. If
the RBI sells securities in an open market, commercial banks and private individuals buy
it. This reduces the existing money supply as money gets transferred from commercial
banks to the RBI. Contrary to this when the RBI buys the securities from commercial
banks in the open market, commercial banks sell it and get back the money they had
invested in them. Obviously the stock of money in the economy increases. This way
when the RBI enters in the OMO transactions, the actual stock of money gets changed.
Normally during the inflation period in order to reduce the purchasing power, the RBI
sells securities and during the recession or depression phase she buys securities and
makes more money available in the economy through the banking system. Thus under
OMO there is continuous buying and selling of securities taking place leading to changes
in the availability of credit in an economy.
However there are certain limitations that affect OMO viz; underdeveloped securities
market, excess reserves with commercial banks, indebtedness of commercial banks, etc.
3. Variation in the Reserve Ratios (VRR)
The Commercial Banks have to keep a certain proportion of their total assets in the form
of Cash Reserves. Some part of these cash reserves are their total assets in the form of
cash. Apart of these cash reserves are also to be kept with the RBI for the purpose of
maintaining liquidity and controlling credit in an economy. These reserve ratios are
named as Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). The CRR
refers to some percentage of commercial bank's net demand and time liabilities which
commercial banks have to maintain with the central bank and SLR refers to some percent
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of reserves to be maintained in the form of gold or foreign securities. In India the CRR by
law remains in between 3-15 percent while the SLR remains in between 25-40 percent of
bank reserves. Any change in the VRR (i.e. CRR + SLR) brings out a change in
commercial banks reserves positions. Thus by varying VRR commercial banks lending
capacity can be affected. Changes in the VRR helps in bringing changes in the cash
reserves of commercial banks and thus it can affect the banks credit creation multiplier.
RBI increases VRR during the inflation to reduce the purchasing power and credit
creation. But during the recession or depression it lowers the VRR making more cash
reserves available for credit expansion.
5.12 Qualitative Instruments or Selective Tools
The Qualitative Instruments are also known as the Selective Tools of monetary policy.
These tools are not directed towards the quality of credit or the use of the credit. They are
used for discriminating between different uses of credit. It can be discrimination favoring
export over import or essential over non-essential credit supply. This method can have
influence over the lender and borrower of the credit. The Selective Tools of credit control
comprises of following instruments.
1. Fixing Margin Requirements

The margin refers to the "proportion of the loan amount which is not financed by the
bank". Or in other words, it is that part of a loan which a borrower has to raise in order to
get finance for his purpose. A change in a margin implies a change in the loan size. This
method is used to encourage credit supply for the needy sector and discourage it for other
non-necessary sectors. This can be done by increasing margin for the non-necessary
sectors and by reducing it for other needy sectors. Example:- If the RBI feels that more
credit supply should be allocated to agriculture sector, then it will reduce the margin and
even 85-90 percent loan can be given.
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2. Consumer Credit Regulation

Under this method, consumer credit supply is regulated through hire-purchase and
installment sale of consumer goods. Under this method the down payment, installment
amount, loan duration, etc is fixed in advance. This can help in checking the credit use
and then inflation in a country.
3. Publicity
This is yet another method of selective credit control. Through it Central Bank (RBI)
publishes various reports stating what is good and what is bad in the system. This
published information can help commercial banks to direct credit supply in the desired
sectors. Through its weekly and monthly bulletins, the information is made public and
banks can use it for attaining goals of monetary policy.
4. Credit Rationing
Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount
available for each commercial bank. This method controls even bill rediscounting. For
certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit.
This can help in lowering banks credit expoursure to unwanted sectors.
5. Moral Suasion
It implies to pressure exerted by the RBI on the indian banking system without any strict
action for compliance of the rules. It is a suggestion to banks. It helps in restraining credit
during inflationary periods. Commercial banks are informed about the expectations of the
central bank through a monetary policy. Under moral suasion central banks can issue
directives, guidelines and suggestions for commercial banks regarding reducing credit
supply for speculative purposes.
6. Control Through Directives

Under this method the central bank issue frequent directives to commercial banks. These
directives guide commercial banks in framing their lending policy. Through a directive
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the central bank can influence credit structures, supply of credit to certain limit for a
specific purpose. The RBI issues directives to commercial banks for not lending loans to
speculative sector such as securities, etc beyond a certain limit.
7. Direct Action
Under this method the RBI can impose an action against a bank. If certain banks are not
adhering to the RBI's directives, the RBI may refuse to rediscount their bills and
securities. Secondly, RBI may refuse credit supply to those banks whose borrowings are
in excess to their capital. Central bank can penalize a bank by changing some rates. At
last it can even put a ban on a particular bank if it dose not follow its directives and work
against the objectives of the monetary policy.
These are various selective instruments of the monetary policy. However the success of
these tools is limited by the availability of alternative sources of credit in economy,
working of the Non-Banking Financial Institutions (NBFIs), profit motive of commercial
banks and undemocratic nature off these tools. But a right mix of both the general and
selective tools of monetary policy can give the desired results
RBI-CURRENT RATES
Policy Rates
Policy Repo Rate : 4.00%
Reverse Repo Rate : 3.35%
Marginal Standing Facility Rate : 4.25%
Bank Rate : 4.25
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Reserve Ratios
Cash Reserve Ratio : 3%
Statutory Liqidity Ratio : 18.00%
Lending / Deposit Rates
Base Rate : 7.30% - 8.80%
MCLR (Overnight) : 6.55% - 7.05%
Savings Deposit Rate : 2.70% - 3.00%
Term Deposit Rate > 1 Year : 4.90% - 5.50%
5.15 Demonetization
Demonetization is an economic process in which a country’s currency unit is no longer
legal tender. A currency unit is what we would commonly refer to as physical money,
such as banknotes and coins. When demonetization occurs, the country’s currency unit is
essentially worthless, as it can no longer be used to purchase goods and services.
Demonetization can occur for several reasons, from a change in national currency to the
retirement of older forms of money. Over time, several countries have implemented
currency demonetization measures, albeit with varying degrees of success.
Summary
Demonetization is an economic process in which a country’s currency unit is no longer
legal tender.
After a currency has been discontinued, it is no longer legal tender and contains no
monetary value.
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At times, countries may also decide to reinstate discontinued currency as legal tender
through a process known as remonetization.
The Demonetization Process

Demonetization is a form of economic intervention, where a country moves to replace
one form of currency with another. At the beginning of the demonetization process, the
old currency is discontinued and pulled from circulation to be replaced with new forms of
money.
During the process, people are given time to exchange their existing banknotes and coins
for the new currency before it is officially discontinued. After a currency has been
discontinued, it is no longer legal tender and contains no monetary value.
The demonetization process can occur in many different forms – a country can introduce
new banknotes or coins or implement a completely new form of currency altogether.
However, demonetization is a drastic measure that occurs rarely and can disrupt society if
implemented improperly. At times, countries may also decide to reinstate discontinued
currency as legal tender through a process known as remonetization.
Reasons for Demonetization

Although demonetization is rare, countries around the world have conducted
demonetization measures for various reasons.
Governments may choose to undergo demonetization if the currency gets out of control,
due to problems like hyperinflation.
Demonetization can also be used to prevent criminal actions, such as counterfeiting,
terrorism, or tax evasion.
In other cases, demonetization occurs to implement a new currency standard. For
example, in 2002, the European Union introduced the euro, a central currency that would
replace the existing currencies of several nations. In adopting the common currency,
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countries across Europe discontinued their currencies and introduced the euro as the
standard across the European Union.
Advantages of Demonetization(Pros.
Through the demonetization of currency, a country can receive benefits ranging from
crime prevention to greater currency standardization.
1. Reduces various criminal activities

One of the benefits of demonetization is the reduction of various forms of criminal
activity. Through the demonetization process, old banknotes and coins are discontinued
and taken out of circulation, and effectively become worthless. For groups conducting
criminal activities, such as terrorism, their supply of money effectively becomes
worthless, as the currency is no longer legal tender.
For those engaged in counterfeiting, the banks will evaluate whether old banknotes are
counterfeit before exchanging them, therefore allowing the government to remove
counterfeit currency from the system.
2. Prevents tax evasion

Demonetization of currency can also prevent tax evasion, as those that are evading taxes
must exchange their existing currency or risk their money becoming worthless. In the
currency exchange process, the government can catch those who have evaded taxes and
retroactive tax their unreported earnings.
3. Promotes a cashless economy

Demonetization can also further the push towards a cashless economy, as the government
can slow the circulation of physical currency and move towards more digital options.
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Disadvantages of Demonetization(Cons
On the other hand, some disadvantages can arise from the demonetization process,
including:
1. Incurs costs from printing new banknotes and minting of coins

One of the initial drawbacks is the costs involved with the printing of new banknotes and
the minting of coins, as well as the discontinuation of existing currency.
2. May not entirely reduce criminal activity
In addition, demonetization may not reduce criminal activity, as criminals may keep their
assets in other forms, such as gold or real estate.
3. Can trigger chaos among citizens
Finally, if the demonetization process isn’t implemented successfully, it can result in
chaos among the population, as people scramble to exchange their currency before
discontinuation.
Real-World Examples
1. India (2016)
A recent example of demonetization was India in 2016 when the government announced
the discontinuation of all ₹500 and ₹1,000 banknotes. It was done to reduce the presence
of counterfeit cash to fund criminal activity.
When the demonetization was announced, there were shortages of cash across the
country, as people scrambled to exchange their existing banknotes. It led to disruptions to
the economy, reducing India’s industrial production and hindering its GDP growth rate.
2. Eurozone (2002)
Another example of demonetization was the European transition to the euro in 2002. To
facilitate the process, the European Central Bank needed to ensure that there was enough
currency to be circulated and began printing banknotes and minting coins as early as
1998.
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When the euro was introduced, the central bank ensured that all citizens were able to
access to the new currency and began providing banks with the new banknotes and coins
several months in advance.
5.16 The recommendations of the Urjit Patel Commitee
The Choice of Nominal Anchor

(1) Inflation should be the nominal anchor for the monetary policy framework. This
nominal anchor should be set by the Reserve Bank as its predominant objective of
monetary policy in its policy statements. The nominal anchor should be communicated
without ambiguity, so as to ensure a monetary policy regime shift away from the
current approach to one that is centered around the nominal anchor. Subject to the
establishment and achievement of the nominal anchor, monetary policy conduct should
be consistent with a sustainable growth trajectory and financial stability (Para No: II.25).
The Choice of Inflation Metric
(2) The RBI should adopt the new CPI (combined) as the measure of the nominal
anchor for policy communication. The nominal anchor should be defined in terms of
headline CPI inflation, which closely reflects the cost of living and influences inflation
expectations relative to other available metrics (Para No: II.36).
Numerical Target and Precision
(3) The nominal anchor or the target for inflation should be set at 4 per cent with a band
of +/- 2 per cent around it (a) in view of the vulnerability of the Indian economy to
supply/external shocks and the relatively large weight of food in the CPI; and (b) the
need to avoid a deflation bias in the conduct of monetary policy. This target should be
set in the frame of a two-year horizon that is consistent with the need to balance the
output costs of disinflation against the speed of entrenchment of credibility in policy
commitment (Para No: II.42).
Time Horizon for Attaining Price Stability
(4) In view of the elevated level of current CPI inflation and hardened inflation
expectations, supply constraints and weak output performance, the transition path to the
target zone should be graduated to bringing down inflation from the current level of 10
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per cent to 8 per cent over a period not exceeding the next 12 months and to 6 per cent
over a period not exceeding the next 24 month period before formally adopting the
recommended target of 4 per cent inflation with a band of +/- 2 per cent. The
Committee is also of the view that this transition path should be clearly communicated
to the public (Para No: II.43).
(5) Since food and fuel account for more than 57 per cent of the CPI on which the direct
influence of monetary policy is limited, the commitment to the nominal anchor would
need to be demonstrated by timely monetary policy response to risks from second round
effects and inflation expectations in response to shocks to food and fuel (Para No: II.44).
Institutional Requirements
(6) Consistent with the Fiscal Responsibility and Budget Management (Amendment)
Rules, 2013, the Central Government needs to ensure that its fiscal deficit as a ratio to
GDP is brought down to 3.0 per cent by 2016-17 (Para No: II.47).
(7) Administered setting of prices, wages and interest rates are significant
impediments to monetary policy transmission and achievement of the price stability
objective, requiring a commitment from the Government towards their elimination (Para
No: II.48).
Organisational Structure for Monetary Policy Decisions
(8) Monetary policy decision-making should be vested in a monetary policy

committee (MPC) (Para No: III.22).
Monetary Policy Committee: Composition & Tasks
(9) The Governor of the RBI will be the Chairman of the MPC, the Deputy Governor
in charge of monetary policy will be the Vice Chairman and the Executive Director in
charge of monetary policy will be a member. Two other members will be external, to be
decided by the Chairman and Vice Chairman on the basis of demonstrated expertise and
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experience in monetary economics, macroeconomics, central banking, financial markets,

public finance and related areas (Para No: III.23).
(10) External members will be full time with access to information/analysis generated
within the Reserve Bank and cannot hold any office of profit, or undertake any activity
that is seen as amounting to conflict of interest with the working of the MPC. The term of
office of the MPC will ordinarily be three years, without prospect of renewal (Para No:
III.24).
(11) Each member of the MPC will have one vote with the outcome determined by
majority voting, which has to be exercised without abstaining. Minutes of the
proceedings of the MPC will be released with a lag of two weeks from the date of the
meeting (Para No: III.25).
(12) In view of the frequency of data availability and the process of revisions in
provisional data, the MPC will ordinarily meet once every two months, although it should
retain the discretion to meet and recommend policy decisions outside the policy review
cycle (Para No: III.26).
(13) The RBI will also place a bi-annual inflation report in the public domain, drawing on
the experience gained with the publication of the document on Macroeconomic and
Monetary Developments. The Inflation Report will essentially review the analysis
presented to the MPC to inform its deliberations (Para No: III.27).
(14) The Chairman, or in his absence the Vice Chairman, shall exercise a casting vote in
situations arising on account of unforeseen exigencies necessitating the absence of a
member for the MPC meeting in which voting is equally divided (Para No: III.28).
Accountability of MPC
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(15) The MPC will be accountable for failure to establish and achieve the nominal anchor.
Failure is defined as the inability to achieve the inflation target of 4 per cent (+/- 2 per
cent) for three successive quarters. Such failure will require the MPC to issue a public
statement, signed by each member, stating the reason(s) for failure, remedial actions
proposed and the likely period of time over which inflation will return to the centre of the
inflation target zone (Para No: III.29).
(16) With the establishment of the MPC, there would be a need to upgrade and expand
analytical inputs into the decision making process through pre-policy briefs for MPC
members, structured presentations on key macroeconomic variables and forecasts,
simulations of suites of macroeconometric models as described in Chapter II, forward
looking surveys and a dedicated secretariat. This will require restructuring and scaling-up
of the monetary policy department (MPD) in terms of skills, technology and management
information systems, and its reorganization (Para No: III.30).
The Operating Framework of Monetary Policy
(17) As an overarching prerequisite, the operating framework has to subserve stance

and objectives of monetary policy. Accordingly, it must be redesigned around the
central premise of a policy rule. While several variants are available in the literature and
in country practice, the Committee is of the view that a simple rule defined in terms of a
real policy rate (that is easily communicated and understood), is suitable to Indian
conditions and is consistent with the nominal anchor recommended in Chapter II. When
inflation is above the nominal anchor, the real policy rate is expected, on average, to be
positive. The MPC could decide the extent to which it is positive, with due consideration
to the state of the output gap (actual output growth relative to trend/potential) and to
financial stability (Para No: III.59).
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(18) A phased refinement of the operating framework is necessary to make it consistent

with the conduct of monetary policy geared towards the establishment and achievement
of the nominal anchor (Para No: III.60).
Phase-I
(19) In the first or transitional phase, the weighted average call rate will remain the
operating target, and the overnight LAF repo rate will continue as the single policy rate.
The reverse repo rate and the MSF rate will be calibrated off the repo rate with a spread
of (+/-) 100 basis points, setting the corridor around the repo rate. The repo rate will be
decided by the MPC through voting. The MPC may change the spread, which however
should be as infrequent as possible to avoid policy induced uncertainty for markets (Para
No: III.61).
Liquidity Management
(20) Provision of liquidity by the RBI at the overnight repo rate will, however, be
restricted to a specified ratio of bank-wise net demand and time liabilities (NDTL), that is
consistent with the objective of price stability. As the 14-day term repo rate stabilizes,
central bank liquidity should be increasingly provided at the 14-day term repo rate and
through the introduction of 28-day, 56-day and 84-day variable rate auctioned term repos
by further calibrating the availability of liquidity at the overnight repo rate as necessary
(Para No: III.62).
(21) The objective should be to develop a spectrum of term repos of varying maturities
with the 14-day term repo as the anchor. As the term yield curve develops, it will provide
external benchmarks for pricing various types of financial products, particularly bank
deposits, thereby enabling more efficient transmission of policy impulses across markets
(Para No: III.63).
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(22) During this phase, the RBI should fine-tune and sharpen its liquidity assessment with
a view to be in a position to set out its own assessment of banks’ reserves. This will
warrant a juxtaposition of topdown approaches that estimate banks’ reserves demand
consistent with macroeconomic and financial conditions appropriate for establishing the
nominal anchor, and bottom-up approaches that aggregate bank-wise assessments of
liquidity needs submitted by banks themselves to the RBI on a daily basis. As these
liquidity assessments become robust, they should be announced for market participants
prior to the commencement of market operations every day and could be subjected to
review and revision during the day for fine-tuning them with monetary and liquidity
conditions. It is envisaged that the RBI will expand capabilities to conduct liquidity
operations on an intra-day basis if needed, including by scaling up trading on the NDS-
OM platform (Para No: III.64).
(23) Consistent with the repo rate set by the MPC, the RBI will manage liquidity and
meet the demand for liquidity of the banking system using a mix of term repos, overnight
repos, outright operations and the MSF(Para No: III.65).
Phase-II
(24) As term repos for managing liquidity in the transition phase gain acceptance, the
“policy rate” voted on by the MPC will be a target rate for the short end of the money
market, to be achieved through active liquidity management. The 14-day term repo rate is
superior to the overnight policy rate since it allows market participants to hold central
bank liquidity for a relatively longer period, thereby enabling them to on lend/repo term
money in the inter-bank market and develop market segments and yields for term
transactions. More importantly, term repos can wean away market participants from the
passive dependence on the RBI for cash/treasury management. Overnight repos under the
LAF have effectively converted the discretionary liquidity facility into a standing facility
that could be accessed as the first resort, and precludes the development of markets that
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price and hedge risk. Improved transmission of monetary policy thus becomes the prime
objective for setting the 14-day term repo rate as the operating target (Para No: III.66).
(25) Based on its assessment of liquidity, the RBI will announce the quantity of liquidity
to be supplied through variable rate auctions for the 14-day term repos alongside
relatively fixed amounts of liquidity provided through longer-term repos (Para No: III.67).
(26) The RBI will aim at keeping 14-day term repo auction cut-off rates at or close to the
target policy rate by supplementing its main policy operation (14-day term repos) with (i)
two-way outright open market operations through both auctions and trading on the NDS-
OM platform; (ii) fine tuning operations involving overnight repos/reverse repos (with a
fine spread between the repo and reverse repo rate) and (iii) discretionary changes in the
CRR that calibrate bank reserves to shifts in the policy stance (Para No: III.68).
(27) The MSF rate should be set in a manner that makes it a truly penal rate to be
accessed only under exceptional circumstances (Para No: III.69).
(28) An accurate assessment of borrowed and non-borrowed reserves and forward

looking projections of liquidity demand would assume critical importance in the
framework. So far, the government’s cash balances have been the prime volatile
autonomous driver of liquidity, making accurate liquidity projections a difficult task.
Therefore, continuing with reforms in the Government securities market, which envisage
that the debt management function should be with the Government, the cash management
function should concomitantly also be with the Government (Para No: III.70).
New Instruments
(29) To support the operating framework, the Committee recommends that some new
instruments be added to the toolkit of monetary policy. Firstly, to provide a floor for the
new operating framework for absorption of surplus liquidity from the system but without
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the need for providing collateral in exchange, a (low) remunerated standing deposit
facility may be introduced, with the discretion to set the interest rate without reference to
the policy target rate. The introduction of the standing deposit facility (analogous to the
marginal standing facility for lending purposes) will require amendment to the RBI Act
for which the transitional phase may be utilised. The standing deposit facility will also be
used for sterilization operations, as set out in Chapter 5, with the advantage that it will not
require the provision of collateral for absorption – which had turned out to be a binding
constraint on the reverse repo facility in the face of surges in capital flows during 2005-
08 (Para No: III.71).
(30) Secondly, term repos of longer tenor may also be conducted since term repo market
segments could help in establishing market based benchmarks for a variety of money
market instruments and shorterterm deposits/loans (Para No: III.72).
(31) Thirdly, dependence on market stabilisation scheme (MSS) and cash management
bills (CMBs) may be phased out, consistent with Government debt and cash management
being taken over by the Government’s Debt Management Office (DMO) (Para No:
III.73).
(32) Fourthly, all sector specific refinance should be phased out (Para No: III.74).
Addressing Impediments to Transmission of Monetary Policy
Statutory Liquidity Ratio
(33) Consistent with the time path of fiscal consolidation mentioned in Chapter 2, SLR
should be reduced to a level in consonance with the requirements of liquidity coverage
ratio (LCR) prescribed under the Basel III framework. [Para No: IV.22 (a)].
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(34) Government should eschew suasion and directives to banks on interest rates that run
counter to monetary policy actions [Para No: IV.22 (b)].
Small Savings Schemes
(35) More frequent intra-year resets of interest rates on small saving instruments, with
built-in automaticity linked to benchmark G-sec yields, need to be brought in. Also, the
benchmark should be based on the average of the previous six months or even shorter
intervals so as to better capture changes in interest rate cycles within a year [Para No:
IV.22 (c)].
Taxation
(36) All fixed income financial products should be treated on par with bank depositsfor
the purposes of taxation and TDS. Furthermore, the tax treatment of FMPs and bank
deposits should also be harmonized [Para No: IV.22 (d)].
Subventions
(37) With a sharp rise in the ratio of agricultural credit to agricultural GDP, the need for
subventions on interest rate for lending to certain sectors would need to be re-visited
[Para No: IV.22 (e)].
Financial Markets Pricing Benchmarks
(38) Unless the cost of banks’ liabilities moves in line with the policy rates as do interest
rates in money market and debt market segments, it will be difficult to persuade banks to
price their loans in response to policy rate changes. Hence, it is necessary to develop a
culture of establishing external benchmarks for setting interest rates out of which
financial products can be priced. Ideally, these benchmarks should emerge from market
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practices. The Reserve Bank could explore whether it can play a more active supportive
role in its emergence (Para No: IV.28).
(39) The RBI’s liquidity management operations should strive to ensure consistency with
the stance of monetary policy. Accordingly, an increase in the policy rate to convey an
anti-inflation policy stance should be accompanied by tightening of liquidity conditions
through liquidity management operations, whereas an easing of the policy stance should
be associated with accommodative liquidity conditions (Para No: IV.29).
(40) There should be close coordination between the settings of monetary policy and
macro-prudential policies, since variations in macro-prudential instruments such as
capital buffers, provisions, loanto- value ratios and the like alter the cost structures and
lendable resources of banks, thereby impacting monetary transmission (Para No: IV.30).
Open Market Operations (OMOs)
(41) OMOs have to be detached from fiscal operations and instead linked solely to
liquidity management. OMOs should not be used for managing yields on government
securities (Para No: IV.35).
Conduct of Monetary Policy in a Globalised Environment
Managing Surges in Capital Inflows/ Sudden Outflows
(42) In view of the cross country and Indian experience with global spillovers driving
episodes of large and volatile capital inflows as well as outflows, a flexible setting of
monetary policy by the RBI in the short-run is warranted. This presages readiness to use a
range of instruments at its command, allowing flexibility in the determination of the
exchange rate while managing volatility through capital flow management (CFM) and
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macro-prudential measures (including sector specific reserve requirements) (Para No:

V.25).
(43) With regard to inflows that are excessive in relation to external financing
requirements and the need for sterilized intervention: (a) the RBI should build a
sterilization reserve out of its existing and evolving portfolio of GoI securities across the
range of maturities, but accentuated towards a ‘strike capability’ to rapidly intervene at
the short end; and (b) the RBI should introduce a remunerated standing deposit facility,
as recommended in Chapter-III, which will effectively empower it with unlimited
sterilization capability (Para No: V.26).
(44) As a buffer against outflows, the RBI’s strategy should be to build an adequate level
of foreign exchange reserves, adequacy being determined not only in terms of its existing
metrics but also in terms of intervention requirements set by past experience with
external shocks and a detailed assessment of tail events that materialised in the country
experiences. As a second line of defence, swap arrangements, including with regional
financing initiatives, should be actively pursued. While retaining the flexibility to
undertake unconventional monetary policy measures as demonstrated in response to
announcement effects of QE taper but with clarity in communication and better co-
ordination, the Committee recommends that the RBI should respond primarily through
conventional policy measures so as to ensure common set of shared expectations between
the markets and the RBI, and to avoid the risk of ‘falling behind the curve’ subsequently
when the exceptional measures are unwound (Para No: V.27).
(45) In addition to the above, the RBI should engage proactively in the development of
vibrant financial market segments, including those that are missing in the spectrum, with
regulatory initiatives that create depth and instruments, so that risks are priced, hedged,
and managed onshore (Para No: V.28).
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Unit -6
Inflation
6.1 Definition-Inflation is the decline of purchasing power of a given currency over time.
A quantitative estimate of the rate at which the decline in purchasing power occurs can be
reflected in the increase of an average price level of a basket of selected goods and
services in an economy over some period of time. The rise in the general level of prices,
often expressed as a percentage means that a unit of currency effectively buys less than it
did in prior periods.
Inflation can be contrasted with deflation, which occurs when the purchasing power of
money increases and prices decline.
KEY TAKEAWAYS
Inflation is the rate at which the the value of a currency is falling and consequently the
general level of prices for goods and services is rising.
Inflation is sometimes classified into three types: 1.Demand-Pull inflation, 2.Cost-Push
inflation, and 3.Built-In inflation.
Most commonly used inflation indexes/measures are the Consumer Price Index (CPI) and
the Wholesale Price Index (WPI).
Inflation can be viewed positively or negatively depending on the individual viewpoint
and rate of change.
Those with tangible assets, like property or stocked commodities, may like to see some
inflation as that raises the value of their assets.
People holding cash may not like inflation, as it erodes the value of their cash holdings.
Ideally, an optimum level of inflation is required to promote spending to a certain extent
instead of saving, thereby nurturing economic growth.
The Formula for Measuring Inflation
The above-mentioned variants of price indexes can be used to calculate the value of
inflation between two particular months (or years). While a lot of ready-made inflation
calculators are already available on various financial portal and websites, it is always
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better to be aware of the underlying methodology to ensure accuracy with a clear

understanding of the calculations. Mathematically,
Percent Inflation Rate = (Final CPI Index Value/Initial CPI Value)*100

Say you wish to know how the purchasing power of $10,000 changed between Sept. 1975
and Sept. 2018. One can find price index data on various portals in a tabular form. From
that table, pick up the corresponding CPI figures for the given two months. For Sept.
1975, it was 54.6 (Initial CPI value) and for Sept. 2018, it was 252.439 (Final CPI
value). Plugging in the formula yields:
Percent Inflation Rate = (252.439/54.6)*100 = (4.6234)*100 = 462.34%

Since you wish to know how much $10,000 of Sept. 1975 would worth be in Sept. 2018,
multiply the percent inflation rate with the amount to get the changed dollar value:
Change in dollar value = 4.6234 * $10,000 = $46,234.25

This means that $10,000 in Sept. 1975 will be worth $46,234.25. Essentially, if you
purchased a basket of goods and services (as included in the CPI definition) worth
$10,000 in 1975, the same basket would cost you $46,234.25 in Sept. 2018.
6.2 Types of Inflation

Creeping Inflations
Creeping or mild inflation is when prices rise 3% a year or less. According to the Federal
Reserve, when prices increase 2% or less, it benefits economic growth. This kind of mild
inflation makes consumers expect that prices will keep going up. That boosts demand.
Consumers buy now to beat higher future prices. That's how mild inflation drives
economic expansion. For that reason, the Fed sets 2% as its target inflation rate.
Walking Inflation
This strong, or destructive, inflation is between 3-10% a year. It is harmful to the
economy because it heats-up economic growth too fast. People start to buy more than
they need to avoid tomorrow's much higher prices. This increased buying drives demand
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even further so that suppliers can't keep up. More important, neither can wages. As a
result, common goods and services are priced out of the reach of most people.
Galloping Inflation
When inflation rises to 10% or more, it wreaks absolute havoc on the economy. Money
loses value so fast that business and employee income can't keep up with costs and prices.
Foreign investors avoid the country, depriving it of needed capital. The economy
becomes unstable, and government leaders lose credibility. Galloping inflation must be
prevented at all costs.
Hyperinflation
Hyperinflation is when prices skyrocket more than 50% a month. It is very rare. In fact,
most examples of hyperinflation occur when governments print money to pay for wars.
Examples of hyperinflation include Germany in the 1920s, Zimbabwe in the 2000s, and
Venezuela in the 2010s. The last time America experienced hyperinflation was during its
civil war.
Stagflation
Stagflation is when economic growth is stagnant, but there still is price inflation.This
combination seems contradictory, if not impossible. Why would prices go up when there
isn't enough demand to stoke economic growth?
It happened in the 1970s when the United States abandoned the gold standard. Once the
dollar's value was no longer tied to gold, it plummeted. At the same time, the price of
gold skyrocketed.
Stagflation didn't end until Federal Reserve Chairman Paul Volcker raised the fed funds
rate to the double-digits. He kept it there long enough to dispel expectations of further
inflation. Because it was such an unusual situation, stagflation probably won't happen
again.
Core Inflation
The core inflation rate measures rising prices in everything except food and energy.
That's because gas prices tend to escalate every summer. Families use more gas to go on
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vacation. Higher gas costs increase the price of food and anything else that has high
transportation costs.
The Federal Reserve uses the core inflation rate to guide it in setting monetary policy.
The Fed doesn't want to adjust interest rates every time gas prices go up.
Deflation
Deflation is the opposite of inflation. It's when prices fall. It's caused when an asset
bubble bursts.
That's what happened in housing in 2006. Deflation in housing prices trapped those who
bought their homes in 2005. In fact, the Fed was worried about the overall deflation
during the recession. That's because deflation can turn a recession into a depression.
During the Great Depression of 1929, prices dropped 10% a year. Once deflation starts, it
is harder to stop than inflation.
6.3 GDP Deflator-

GDP Deflator or GDP price deflator measures the difference between real GDP and
nominal GDP. Nominal GDP differs from real GDP as the former doesn’t include
inflation, while the latter does.
As a result, nominal GDP will most often be higher than real GDP in an expanding
economy.
The formula to find the GDP price deflator:
GDP price deflator = (nominal GDP ÷ real GDP) x 100
Real GDP Compared to Nominal GDP
When you hear reports of a country’s GDP that don’t specify the type of GDP, it is likely
to be nominal GDP. Nominal GDP includes both prices and growth, while real GDP is
pure growth. It’s what nominal GDP would have been if there were no price changes
from the base year. As a result, the nominal GDP is higher
WPI, CPI
A consumer price index (CPI) measures changes over time in the general level of prices
of goods and services that households acquire for the purpose of consumption.
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However, since CPI is based only a basket of select goods and is calculated on prices
included in it, it does not capture inflation across the economy as a whole.
The wholesale price index basket has no representation of the services sector and all the
constituents are only goods whose prices are captured at the wholesale/producer level.
Changes in consumption patterns or introduction of goods and services are automatically
reflected in the GDP deflator. This allows the GDP deflator to absorb changes to an
economy’s consumption or investment patterns. Often, the trends of the GDP deflator
will be similar to that of the CPI.
Specifically, for the GDP deflator, the ‘basket’ in each year is the set of all goods that
were produced domestically, weighted by the market value of the total consumption of
each good.
Therefore, new expenditure patterns are allowed to show up in the deflator as people
respond to changing prices. The theory behind this approach is that the GDP deflator
reflects up-to-date expenditure patterns.
Reliability of GDP deflator
Both the WPI and CPI capture changes in prices at varying stages of the economic cycle.
While WPI is seen as a defacto Producer Price Index, CPI considers inflation at the retail
end. But since only goods and services directly consumed by households — food
products, clothing, petrol, health, education and recreation — are considered, the CPI
does not tell us what is happening to prices of cement, steel or polyester yarn. While
retail inflation is important, policymakers cannot ignore the prices that producers of
consumer and intermediate and capital goods are receiving. However, GDP deflator is
available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data
are released every month.
6.4 Producer Price Index

The Producer Price Index or PPI is an index that measures the average price change of
goods and services. It can be calculated either when the goods leave the place of
production or as they enter the production process.
In the case where the goods leave the production place, it is known as Output PPI.
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Similarly, Input PPI is when goods enter the production process.
The PPI measures price movements from the seller’s point of view. Conversely, the
consumer price index (CPI), measures cost changes from the viewpoint of the consumer.
In other words, this index tracks changes to the cost of production.
The producer price index is a family of indexes that measures the average
change in selling prices received by domestic producers of intermediate goods and
services over time. The PPI measures price changes from the perspective of the seller and
differs from the CPI which measures price changes from the perspective of the buyer.
In all such variants, it is possible that the rise in the price of one component (say oil)
cancels out the price decline in another (say wheat) to a certain extent. Overall, each
index represents the average weighted price change for the given constituents which may
apply at the overall economy, sector, or commodity level.
6.5 The Consumer Price Index
The CPI is a measure that examines the weighted average of prices of a basket of goods
and services which are of primary consumer needs. They include transportation, food,
and medical care. CPI is calculated by taking price changes for each item in the
predetermined basket of goods and averaging them based on their relative weight in the
whole basket. The prices in consideration are the retail prices of each item, as available
for purchase by the individual citizens. Changes in the CPI are used to assess price
changes associated with the cost of living, making it one of the most frequently used
statistics for identifying periods of inflation or deflation. In the U.S., the Bureau of Labor
Statistics reports the CPI on a monthly basis and has calculated it as far back as 1913.
6.6 The Wholesale Price Index
The WPI is another popular measure of inflation, which measures and tracks the changes
in the price of goods in the stages before the retail level. While WPI items vary from one
country to other, they mostly include items at the producer or wholesale level. For
example, it includes cotton prices for raw cotton, cotton yarn, cotton gray goods, and
cotton clothing. Although many countries and organizations use WPI, many other
countries, including the U.S., use a similar variant called the producer price index (PPI).
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6.7 Residex-NHB Residex from the National Housing Bank, designed by a technical
advisory committee comprising Government representatives, lenders and property market
players, is a set of benchmarks that aims to track housing price indicators across Indian
cities.
Originally flagged off in July 2007, the index was discontinued in 2015 and was
refurbished and re-introduced earlier this month. It now sports enhanced city coverage
(rising from 26 to 50, to be eventually raised to 100), a new base year (2012-13) and new
data sources (with data from banks and home finance companies and market surveys).
The NHB Residex currently offers two sets of quarterly Housing Price Indices (HPIs)
across the cities it tracks. List prices of under-construction property, collated through a
survey of developers, are captured in the‘Market HPI’. Data reported by banks and
finance companies that extend home loans, is collated into the‘Assessment HPI’. While
these two datasets have been released for 50 cities from 2013 to 2017, indices on resale
homes, rental values, land prices and building materials are awaited.
Pros and Cons of Inflation

Inflation can be construed as either a good or a bad thing, depending upon which side one
takes, and how rapidly the change occurs.
For example, individuals with tangible assets that are priced in currency, like property or
stocked commodities, may like to see some inflation as that raises the price of their assets
which they can sell at a higher rate. However, the buyers of such assets may not be happy
with inflation, as they will be required to shell out more money. Inflation-indexed bonds
are another popular option for investors to profit from inflation.
On the other hand people holding assets denominated in currency, such as cash or bonds,
may also not like inflation, as it erodes the real value of their holdings. Investors looking
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to protect their portfolios from inflation should consider inflation-hedged asset classes,
such as gold, commodities, and Real Estate Investment Trusts (REITs).
Inflation promotes speculation, both by businesses in risky projects and by individuals in

stocks of companies, as they expect better returns than inflation. An optimum level of
inflation is often promoted to encourage spending to a certain extent instead of saving. If
the purchasing power of money falls over time the, then there may be a greater incentive
to spend now instead of saving and spending later. It may increase spending, which may
boost economic activities in a country. A balanced approach is thought to keep the
inflation value in an optimum and desirable range.
High and variable rates of inflation can impose major costs on an economy. Businesses,
workers, and consumers must all account for the effects of generally rising prices in their
buying, selling, and planning decisions. This introduces an additional source of
uncertainty into the economy, because they may guess wrong about the rate of future
inflation. Time and resources expended on researching, estimating, and adjusting
economic behavior around expected rise in the general level of prices, rather than real
economic fundamentals, inevitably represents a cost to the economy as a whole.
Even a low, stable, and easily predictable rate of inflation, which some consider
otherwise optimal, may lead to serious problems in the economy, because of how, where,
and when the new money enters the economy. Whenever new money and credit enters
the economy it is always into the hands of specific individuals or business firms, and the
process of price level adjustment to the new money supply proceeds as they then spend
the new money and it circulates from hand to hand and account to account through the
economy.
Along the way, it drives up some prices first and later drives up other prices. This
sequential change in purchasing power and prices (known as the Cantillon effect) means
that the process of inflation not only increases the general price level over time, but it
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also distorts relative prices, wages, and rates of return along the way. Economists in
general understand that distortions of relative prices away from their economic
equilibrium is not good for the economy, and Austrian economists even believe this
process to be a major driver of cycles of recession in the the economy.
6.8 Measures to Control Inflation

A country’s financial regulator shoulders the important responsibility of keeping inflation
in check. It is done by implementing measures through monetary policy, which refers to
the actions of a central bank or other committees that determine the size and rate of
growth of the money supply.
In the U.S., the Fed's monetary policy goals include moderate long-term interest rates,
price stability, and maximum employment, and each of these goals is intended to promote
a stable financial environment. The Federal Reserve clearly communicates long-term
inflation goals in order to keep a steady long-term rate of inflation, which is thought to be
beneficial to the economy.
Price stability—or a relatively constant level of inflation—allows businesses to plan for

the future since they know what to expect. The Fed believes that this will promote
maximum employment, which is determined by non-monetary factors that fluctuate over
time and are therefore subject to change. For this reason, the Fed doesn't set a specific
goal for maximum employment, and it is largely determined by employers' assessments.
Maximum employment does not mean zero unemployment, as at any given time there is
a certain level of volatility as people vacate and start new jobs.
Monetary authorities also take exceptional measures in extreme conditions of the

economy. For instance, following the 2008 financial crisis, the U.S. Fed has kept the
interest rates near zero and pursued a bond-buying program called quantitative easing.
Some critics of the program alleged it would cause a spike in inflation in the U.S. dollar,
but inflation peaked in 2007 and declined steadily over the next eight years. There are
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many complex reasons why QE didn't lead to inflation or hyperinflation, though the
simplest explanation is that the recession itself was a very prominent deflationary
environment, and quantitative easing supported its effects.
Consequently, the U.S. policymakers have attempted to keep inflation steady at around
2% per year.5 The European Central Bank has also pursued aggressive quantitative easing
to counter deflation in the eurozone, and some places have experienced negative interest
rates, due to fears that deflation could take hold in the euro zone and lead to economic
stagnation. Moreover, countries that are experiencing higher rates of growth can absorb
higher rates of inflation. India's target is around 4%, while Brazil aims for 4.25%.
Hyperinflation is often described as a period of inflation of 50% or more per month.
Effects of inflation
Inflation can affect the economy in several ways. For example, if inflation causes a
nation’s currency to decline, this can benefit exporters by making their goods more
affordable when priced in the currency of foreign nations. On the other hand, this could
harm importers by making foreign-made goods more expensive. Higher inflation can also
encourage spending, as consumers will aim to purchase goods quickly before their prices
rise further. Savers, on the other hand, could see the real value of their savings erode,
limiting their ability to spend or invest in the future.
6.9 Deflation
Deflation is the opposite of inflation. It's when prices fall. It's caused when an asset
bubble bursts.
That's what happened in housing in 2006. Deflation in housing prices trapped those who
bought their homes in 2005. In fact, the Fed was worried about the overall deflation
during the recession. That's because deflation can turn a recession into a depression.
During the Great Depression of 1929, prices dropped 10% a year. Once deflation starts, it
is harder to stop than inflation.
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6.10 Disinflation?
Disinflation is a temporary slowing of the pace of price inflation and is used to describe
instances when the inflation rate has reduced marginally over the short term.
Key Points
Disinflation is a temporary slowing of the pace of price inflation and is used to describe
instances when the inflation rate has reduced marginally over the short term.
Unlike inflation and deflation, which refer to the direction of prices, disinflation refers to
the rate of change in the rate of inflation.
A healthy amount of disinflation is necessary, since it represents economic contraction
and prevents the economy from overheating.
The danger that disinflation presents is when the rate of inflation falls near to zero,
as it did in 2015, raising the specter of deflation.
Understanding Disinflation
Disinflation is commonly used by the Federal Reserve to describe a period of slowing
inflation and should not be confused with deflation, which can be harmful to the
economy. Unlike inflation and deflation, which refer to the direction of prices,
disinflation refers to the rate of change in the rate of inflation.
Although sometimes confused with deflation, disinflation is not considered problematic
because prices do not actually drop, and disinflation does not usually signal the onset of a
slowing economy.
Deflation is represented as a negative growth rate, such as -1%, while disinflation is
shown as a change in the inflation rate from 3% one year to 2% the next. Disinflation is
considered the opposite of reflation, which occurs when a government stimulates an
economy by increasing money supply.
A healthy amount of disinflation is necessary, since it represents economic contraction
and prevents the economy from overheating. As such, instances of disinflation are not
uncommon and are viewed as normal during healthy economic times. Disinflation
benefits certain segments of a population, such as people who are inclined to save their
earnings.
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Several reasons can cause an economy to experience disinflation. If a central bank

decides to impose a tighter monetary policy and the government starts to sell off some of
its securities, it could reduce the supply of money in the economy, causing a
disinflationary effect. Similarly, a contraction in the business cycle or a recession can
also cause disinflation. For example, businesses may choose not to increase prices to gain
greater market share, leading to disinflation.
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Unit-7
7.1 Taxation
The taxation system in India is such that the taxes are levied by the Central Government
and the State Governments. Some minor taxes are also levied by the local authorities
such as the Municipality and the Local Governments.
To run the government and manage the affairs of a state, money is required. So the
government imposes taxes in many forms on the incomes of individuals and companies.
Classification of Taxes
Broadly taxes are divided into two categories:
1. Direct Taxes
2. Indirect Taxes
Direct Taxes
A direct tax can be defined as a tax that is paid directly by an individual or organization
to the imposing entity (generally government). A direct tax cannot be shifted to another
individual or entity. The individual or organization upon which the tax is levied is
responsible for the fulfillment of the tax payment.
The Central Board of Direct Taxes deals with matters related to levying and collecting
Direct Taxes and formulation of various policies related to direct taxes.
A taxpayer pays a direct tax to a government for different purposes, including real
property tax, personal property tax, income tax or taxes on assets, FBT, Gift Tax, Capital
Gains Tax, etc.
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Indirect Taxes
The term indirect tax has more than one meaning. In the colloquial sense, an indirect tax
such as sales tax, a specific tax, value-added tax (VAT), or goods and services tax (GST)
is a tax collected by an intermediary (such as a retail store) from the person who bears the
ultimate economic burden of the tax (such as the consumer).
The intermediary later files a tax return and forwards the tax proceeds to the government
with the return. In this sense, the term indirect tax is contrasted with a direct tax which is
collected directly by the government from the persons (legal or natural) on which it is
imposed.
Some of the important Direct taxes:-
Fringe Benefit Tax
To reduce the profit on booked entry, many companies started providing various benefits
to their employees and maintain them under their input cost. Thus reducing the profit
which in turn leads to less taxation by the government.
Therefore government-imposed Fringe Benefits Tax (FBT) which is fundamentally a tax

that an employer has to pay instead of the benefits that are given to his/her employees. It
was an attempt to comprehensively levy a tax on those benefits, which evaded the tax.
The list of benefits encompassed a wide range of privileges, services, facilities, or

amenities which were directly or indirectly given by an employer to current or former
employees, be it something simple like telephone reimbursements, free or concessional
tickets, or even contributions by the employer to a superannuation fund.
FBT was introduced as a part of the Finance Bill of 2005 and was set at 30% of the cost
of the benefits given by the company. This tax needed to be paid by the employer in
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addition to the income tax, irrespective of whether the company had an income-tax
liability or not.
The fringe benefits tax was abolished in the 2009 Union budget of India.
Minimum Alternate Tax
The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system
to make sure that companies having large profits and declaring substantial dividends to
shareholders but who were not contributing to the Government by way of corporate tax,
by taking advantage of the various incentives and exemptions provided in the Income-tax
Act, pay a fixed percentage of book profit as minimum alternate tax.
As per the Income Tax Act, if a company’s taxable income is less than a certain
percentage of the booked profits, then by default, that much of the book profits will be
considered as taxable income and tax has to be paid on that.
It is called MAT and is a direct tax. It was introduced to deter some companies who
managed their account in such a way that they end up paying zero or no tax to the
government.
Alternate Minimum Tax
Under the existing provisions of the Income-tax Act, Minimum Alternate Tax (MAT) and
Alternate Minimum Tax (AMT) are levied on companies and limited liability
partnerships (LLPs) respectively.
That means what is MAT to the companies, AMT is to the LLPs. However, no such tax is
levied on the other form of business organizations such as partnership firms, sole
proprietorship, an association of persons, etc.
To widen the tax base vis-à-vis profit linked deductions, it is proposed to amend
provisions regarding AMT contained in the Income-tax Act to provide that a person other
than a company, who has claimed deduction under any section (other than section 80P),
shall be liable to pay AMT.
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Under the proposed amendments, where the regular income-tax payable for a previous
year by a person (other than a company) is less than the alternate minimum tax payable
for such previous year, the adjusted total income shall be deemed to be the total income
of such person and he shall be liable to pay income-tax on such total income at the rate of
eighteen and one-half percent.
Indirect Taxes in India
Indirect taxes in India can be broadly classified into:
 Production of goods: Excise or CenVAT

 Distribution of goods: Sales Tax
 Production and Distribution of services (because they can’t be separated):
 Service Tax
In India, generally, taxes on production or manufacturing (Excise) is levied by the centre,

and taxes on sales (Sales Tax) is levied by the states.
Excise duties
Excise duty (Central VAT) is a tax on the manufacture of goods within the country.
Excise duties are levied under the Central Excise and Salt Act, 1944, the Excise Tariff
Act, 1985, and the Modified Value Added Tax (MODVAT) scheme or CENVAT.
The rates of excise duty levied vary depending inter alia on the nature of the item
manufactured, the nature of the manufacturing concern, and the place of ultimate sale.
The duty rates are either ad valorem (i.e. a fixed percentage of the cost of production),
specified (a fixed rate depending on the nature of the manufactured item, for example,
length of product or count of product), or a combination of both.
The MODVAT scheme, introduced in 1986, on the recommendation of the L K Jha

Committee, applies to certain specific items.
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The objective of this scheme is to limit the cascading effect of duty incidence on several
goods subject to excise which are further used as inputs for other excisable goods.
Under the scheme, MODVAT credit can be claimed on the purchase of raw materials on
which excise has been paid.
This MODVAT credit can be used to set off excise duty payable on subsequent
manufacture of goods.
Sales tax
Sales tax is levied on the sale of a commodity that is produced or imported and sold for
the first time.
If the product is sold subsequently without being processed further, it is exempt from
sales tax. Sales tax is levied by either the Central or the State Government, Central Sales
tax, or 4% is generally levied on all inter-State sales.
State sales taxes that apply to sales made within a State have rates that range from 4 to
15%. However, exports and services are exempt from sales tax.
Service tax
Service tax is a part of Central Excise in India. It is a tax levied on services provided in
India, except the State of Jammu and Kashmir.
The responsibility of collecting the tax lies with the Central Board of Excise and Customs
(CBEC)
7.2 Tax reforms in India-
Year wise Tax Evolution-
1.Land Revenue Tax-1777
2.Income Tax-1860
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3.Motor Vehicle Tax-1914
4.Entertainment Tax-1922
Sales Tax-1956
6.Expenditure Tax, Wealth Tax, Capital Gain-1956
7.Gift Tax-1958
8.Corporation Tax-1961
9.Income Tax1961
10.MANVAT-1977
11.MODVAT-1986
12.Service Tax 1994
13 CENVAT-2001
14.VAT2003
15.FBT-2005
16 GST-2017
Tax Reforms Committee/Commissions
1.Taxation Enquiry Commission-1953-54- Progressive Tax Structure
2.Indian Tax Reform Commission-1956- Kaldor Committee,
Focus on Direct Taxation, Wealth Tax, Capital Gains, Gift Tax, Personal Expenditure
Tax
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3. Tax Committee for Rationalization and simplification of direct taxation-1968
4.Direct Tax Inquiry Committee / Wanchoo Committee-19701-71- Focus on Black

Money
5.K.N.Raj Committee on tax reforms on agriculture wealth and income-1972
6. Indirect Tax enquiry committee/ L.K.Jha Committee 1972- Focus on – Union Exise
Duty and MANVAT
7.Chokshi Committee-1977-78- Focus on Income Tax, Wealth Tax, Gift Tax, Surcharge
Tax
8. Chelliah Committee-1991- DT and IDT
9.Rekhi Committee-1993-Focus on IDT
10.Vijay Kelkar Committee-2002-Simplification and rationalization of direct and indirect

taxes
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7.3 What Is the Tax-To-GDP Ratio?
A tax-to-GDP ratio is a gauge of a nation's tax revenue relative to the size of its economy
as measured by gross domestic product (GDP). The ratio provides a useful look at a
country's tax revenue because it reveals potential taxation relative to the economy. It also
enables a view of the overall direction of a nation's tax policy as well as international
comparisons.
KEY Points
 The tax-to-GDP ratio is a measure of a nation's tax revenue relative to the size of
its economy.
 This ratio is used with other metrics to determine how well a nation's government
directs its economic resources via taxation.
 Developed nations typically have higher tax-to-GDP ratios than developing
nations.
Understanding the Tax-To-GDP Ratio
Taxes are a critical measure of a nation’s development and governance, and the tax-to-
GDP ratio is used to determine how well a nation's government directs its economic
resources. Higher tax revenues mean a country is able to spend more to improve
infrastructure, health, and education—keys to the long-term prospects for a country’s
economy and people.
What is tax-to-GDP ratio?
Tax-to-GDP ratio represents the size of a country's tax kitty relative to its GDP. It is a
representation of the size of the government's tax revenue expressed as a percentage of
the GDP.Higher the tax to GDP ratio the better financial position the country will be in.
The ratio represents that the government is able to finance its expenditure. A higher tax to
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GDP ratio means that the government is able to cast its fiscal net wide. It reduces a
government's dependence on borrowings.
Why is it important?
A higher tax to GDP ratio means that an economy's tax buoyancy is strong as the share of
tax revenue rises in sync with the rise in the country's GDP. India, despite seeing higher
growth rates, has struggled to widen the tax base. Lower tax-to-GDP ratio constrains the
government to spend on infrastructure and puts pressure on the government to meet its
fiscal deficit targets.
Where does India stand among global peers?

Although India has improved its tax-to-GDP ratio in the last six years, it is still far lower
than the average OECD ratio which is 34 per cent. India's tax-to-GDP ratio is lower than
some of its peers in the developing world. Developed countries tend to have higher tax-
to-GDP ratio.
How can it be improved?
The most important measure for improving tax to GDP ratio is ensuring the citizens pay
their taxes. The introduction of Direct Tax Code can help in greater compliance in this
regard. Rationalisation of GST and moving towards a two-rate structure can also help in
increasing compliance and putting an end to tax evasion.While measures to improve tax
compliance and widen the tax base will yield higher tax revenue, the importance of
higher economic growth cannot be ignored. The onus to bring back the Indian economy
back on a higher-growth trajectory will be on the upcoming Budget
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7.4 Inverted duty structure (IDS)
Inverted duty structure (IDS) is a situation where the rate of tax on inputs used is higher
than the rate of tax on the finished good.
Take an imaginary situation of the tyre industry, the tax rate on natural rubber (input)
purchased is 10% whereas the tax rate on rubber tyre is 5%. Here since the tax rate on
input is higher than that on the finished good, there is an inverted tax structure.
The normal situation is that tax on inputs used is lower than the tax rate of the finished
goods. Inverted duty structure is usually prevalent in the case of customs duty (import
duty).
Inverted duty structure is a situation where import duty on finished goods is low
compared to the import duty on raw materials that are used in the production of such
finished goods. For example, suppose the tariff (import tax) on the import of tyres is
10% and the tariff on the imports of natural rubber which is used in the production of
tyres is 20%; this is a case of inverted duty structure.
7.5 Tax Havens

In 1998, the Organization for Economic Cooperation and Development (OECD) gave a
number of factors to identify tax havens. Some of the most common factors are given
below:
 No, or nominal, tax on relevant income

 Lack of effective exchange of information
 Lack of transparency
 No substantial activities
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How Governments Earn Money From Tax Havens
 Tax havens are not completely tax-free. They charge a lower tax rate than other
countries. Low tax jurisdictions generally charge high customs or import duties to
cover the losses in tax revenues.
 Tax havens may charge a fee for new registration of companies and renewal
charges to be paid every year. Additional fees may also be charged such as license
fees. Such fees and charges would add up to a recurring fixed income for the tax
havens.
 By attracting foreign individuals or businesses, even if they are only charged a
nominal tax rate, the country may earn substantially more in tax revenues than it
would otherwise. Also, the country may benefit from corporate investments in
business operations that offer jobs to the country’s residents.
Benefits to a Tax Haven
 Tax Haven Countries benefit by way of attracting capital to their banks and
financial institutions, which can then be used to build a thriving financial sector.
 Individuals or Businesses benefit by saving tax, which in tax haven countries
may range from zero to low single digits compared to high taxes in their country
of citizenship or domicile
Top Tax Havens in the World
 Bermuda – Declared the world’s worst (or best if you’re looking to avoid
taxation) corporate tax haven in 2016 by Oxfam with a zero percent tax rate and
no personal income tax.
 Netherlands – Most popular tax haven among the world’s Fortune 500. The
government uses tax incentives to attract businesses to invest in their country.
One such tax incentive cost an estimated 1.2 billion euros in 2016 to the
Netherlands.
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 Luxembourg – It gives benefits such as tax incentives and zero percent

withholding taxes.
 Cayman Islands – No personal income taxes, no capital gains taxes, no payroll
taxes, no corporate taxes, and the country does not withhold taxes on foreign
entities.
 Singapore – Charges reasonable nominal corporate taxes. Reasonable corporate
tax rates are provided through tax incentives, lack of withholding taxes, and what
appears to be substantial profit shifting.
 The Channel Islands – No capital gains taxes, no council taxes, and no value-
added taxes.
 Isle of Man – No capital gains tax, turnover tax, or capital transfer tax. It also
imposes a low income tax, with the highest rates at 20%.
 Mauritius – Low corporate tax rate and no withholding tax.
 Switzerland – Full or partial tax exemptions, depending on the bank used.
 Ireland – Referred to as a tax haven despite officials asserting that it is not. Apple
discovered that two of the company’s Irish subsidiaries were not classified as tax
residents in the United States or Ireland, despite being incorporated in the latter
country.
Top Companies That Benefit From Tax Havens
1. Apple – The amount booked offshore is $214.9 billion. It uses Ireland as a tax
haven. Apple would have owed the U.S. government $65.4 billion in taxes if tax
haven benefits were not used.
2. Nike – It holds $10.7 billion offshore. It uses Bermuda as a tax haven. It would
have paid $3.6 billion for taxes if tax haven benefits were not used. This implies
Nike pays a mere 1.4% tax rate to foreign governments on those offshore profits,
indicating that nearly all of the money is officially held by subsidiaries in tax
havens.
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3. Goldman Sachs – It holds $28.6 billion offshore and uses Bermuda as a tax
haven.
4. Some of the 50 biggest U.S. companies that have stashed approximately $1.6
trillion offshore include Microsoft, IBM, General Electric, Pfizer, Exxon Mobil,
Chevron, Walmart. These 50 companies earned over $4.2 trillion in profits
globally, but they used offshore tax havens to lower their effective overall tax rate
to just 25.9%, which was well below the U.S. statutory rate of 35% and even
lower than the average levels paid in other developed countries.
The Panama Papers
 The leak of 11.5 million files from the database of the world’s fourth-biggest
offshore law firm, Mossack Fonseca.
 The Panama Papers revealed the ways in which the rich could exploit secretive
offshore tax regimes.
 The following are the types of files contained in Panama Papers:
 Owning an offshore company is not illegal, but the Panama Papers revealed that
concealing the identities of the true company owners was the primary aim of the
majority of the offshore companies.
 The Panama Papers revealed the names of various well-known international banks
that helped their clients establish a business in offshore jurisdictions as a part of
wealth management services.
Tax Implications in Valuation and Financial Modeling
When performing a company valuation, the calculation of taxes can have a material
impact on cash flow. A financial analyst is tasked with building a forecast of what they
expect revenue, expenses (including taxes), and other financial items to be in the future.
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This process of forecasting items into the future is known as financial modeling and is
performed in Excel.
7.6 Base Erosion and Profit Shifting (BEPS) has emerged as one of the most important
challenges for governments all over the world. The Liberalization, Privatization and
Globalization (LPG) has resulted;
 Free movement of Capital and Labour;

 Shift of manufacturing base from high cost to lower cost locations;
 Gradual removal of the trade barriers, and
 Rise of digital economy.
The digital economy has boosted trade and foreign investments in many countries,
thereby supporting generation of employment, growth, innovation and removal of
poverty. The LPG also helps in creation of multinational organisations all over the world.
There in past the fear of double taxation restricts multinational companies to spread
outside their country. It was recognised that the interaction of the foreign companies with
domestic tax system in host country might lead to double taxation, which might result in
adverse impacts on growth and global prosperity.
The governments to eliminate double taxation started entering into Double Tax Avoiding
Treaties. The bilateral treaties are effective in preventing double taxation, but they often
fail to prevent double non-taxation that results from interactions among more than two
countries. This led increased a number of sophisticated tax planners, who are expert in
finding loopholes in these
Double Tax Avoidance Agreements and helping MNCs to do aggressive treaty

shopping and go for Base Erosion and Profit Shifting to reduce their Tax Burden.
DEFINITION;
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Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used
by multinationals to “shift” profits from higher–tax jurisdictions to lower–tax
jurisdictions, thus “eroding” the “tax–base” of the higher–tax jurisdictions.
The Organization for Economic Co-operation and Development (OECD) define BEPS
strategies as also: “exploiting gaps and mismatches in tax rules”;
The BEPS is a term used to described “ tax planning strategies” that rely on mismatches
and gaps that exist between the tax rules of different jurisdictions , to minimise the
corporation tax that is payable overall, by either making tax profits “ disappear” or shift
profits to low tax operations where their little or no genuine activity.
BEPS generally refers to those instances, where gaps between different taxation regimes
leads to tax avoidance and loss to the concerned governments. The MNCs by taking
advantage of gaps in taxation rules and regulations of two countries, shift their profit
from higher taxation state to lower taxation state, causing tax loss to former. The BEPS
refers to;
 Due to gap in application of the bilateral tax treaties, cross border activities may
go untaxed in any of two countries;
 No or low tax is paid by shifting profits to low jurisdictions and shifting losses
and high expenditure to high tax jurisdictions.
In generally BEPS activities are not illegal because these MNCs are exploiting the
taxation gaps between two countries to avoid payment of tax in higher taxation country to
lower taxation country.
The base erosion constitutes a serious risk to tax sovereignty, tax fairness and tax
revenues for both developed and developing countries alike.
The Double Taxation Avoidance Agreement between two countries will be made on
assumption that the same transaction should not be taxed in both countries. But due to tax
planning and gaps available the MNCs plan their transaction in such a way that their
transaction does not taxed any where in two countries.
TO UNDERSTAND THE PROCESS LETS’ CONSIDER TWO CASES;
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1. APPLE INC. -the US base and world leader MNE, used a verity of offshore
structures, arrangements and transactions to shift billions of dollars of profit away
from US and into Ireland, where Apple has negotiated a Special Corporate Tax
less than 2%. On of Apple’s unusual tactics has been to establish and direct
substantial funds to offshore entities in Ireland, while claiming that they are not
residents of any jurisdiction. Apple has also transferred its economic rights to its
intellectual property through cost sharing agreements with its own offshore
affiliates, and thereby able to shift billions of dollars to low tax jurisdiction to
avoid taxation in US.
2. GOOGLE INC.- carried out aggressively expansion of its operations in 2011, its
revenue reached nearly $38 billion and its profit $10 billion. Effective tax rate was 2.4%
in that year, while the statutory tax rate in USE was 35%. The IT giant resorted to setting
up of a subsidiary Ireland Holdings Limited and shifted intellectual property rights to
Ireland through cost sharing agreement, since agreeable tax rate was 12.5% and there was
an availability of appropriate personnel. IHL acquired rights to exploit Google IP’s rights
for Europe, Middle East and Africa through CSA. The Google has also entered into APA
through which the profits generated by exploiting of IP rights in these countries were
taxed in Ireland and not in US.
In January 2017 OECD report estimates that BEPS tools are responsible for tax losses of
circa $100–240 billion per annum. In June 2018 report by tax academic Gabriel Zucman ,
estimated that the figure is closer to $200 billion per annum. The Tax Justice Network
estimated that profits of $660 billion were “shifted” in 2015 (due to Apple’s Q1 2015
leprechaun economics restructuring, the largest individual BEPS transaction in history.
The effect of BEPS tools is most felt in developing economies, who are denied the tax
revenues needed to build infrastructure.
Most BEPS activity is associated with industries with intellectual property (“IP”), namely
Technology (e.g. Apple, Google, Microsoft, Oracle), and Life Sciences (e.g. Allergan,
Medtronic, Pfizer and Merck & Co) . IP is described as the raw materials of tax
avoidance, and IP–based BEPS tools are responsible for the largest global BEPS income
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flows. Corporate tax havens have some of the most advanced IP tax legislation in their
statute books.
Most BEPS activity is also most associated with U.S. multinationals, and is attributed to
the historical U.S. “worldwide” corporate taxation system. Pre the Tax Cuts and Jobs Act
of 2017 (“TCJA”), the U.S. was one of only eight jurisdictions to operate a “worldwide”
tax system. Most global jurisdictions operate a “territorial” corporate tax system with
lower tax rates for foreign sourced income, thus avoiding the need to “shift” profits (i.e.
IP can be charged directly from the home country at preferential rates and/or terms.
7.7 DTAA
Double Taxation Avoidance Agreements (DTAA) is a treaty signed between two or

more countries and is applicable in cases where a taxpayer residing in one country has to
earn his/her income from another country. India has signed Double Taxation Avoidance
Agreements or DTAAs with 88 countries, out of which 85 have become effective. It is an
important topic under the GS-II Indian
What is DTAA?
Double Taxation Avoidance Agreements is a treaty signed between two countries, which,
through the elimination of international double taxation, promotes the exchange of goods,
services, and investment of capital between the two countries.
This implies that there are consented tax rates and jurisdiction on specified kinds of
incomes arising in one country to a tax resident of another nation. The taxpayers in these
88 countries can avoid being taxed twice for the same income.
Double taxation is an issue related to the taxation of income that crosses

boundaries. DTAA can either cover all types of income or can target a specific type of
income depending upon the types of businesses/holdings of citizens of one country in
another. The following categories are covered under the Double Taxation Avoidance
Agreements (DTAA):
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 services
 salary
 property
 capital gains
 savings/fixed deposit accounts
Benefits of Double Taxation Avoidance Agreements
Sections 90 and 91 under the Income Tax Act 1961 offers specific relief to taxpayers to
avoid double taxation. Section 90 deals with those provisions involving taxpayers who
have paid tax to another country with which India has a DTAA. Section 91 is for those
countries with which India does not have a DTAA. In effect, India provides relief to both
types of taxpayers.
Some of the major benefits of Double Taxation Avoidance Agreements (DTAA) are
mentioned below:
 The countries under the DTAA are provided relief from double taxation. Relief on
double taxation is provided by the exemption of incomes earned abroad from tax
in the resident country or by providing credit to the extent taxes that have been
already been paid abroad.
 In some cases, the DTAA also provide concessional rates of tax.
 DTAA can become an incentive for even legitimate investors to route investments
through low-tax regimes to sidestep taxation. This leads to a loss of tax revenue
for the country.
 DTAA also provides tax certainty to the various investors and businesses of both
the countries through the clear allocation of taxing rights between the contracting
states by Agreement.
India and DTAA
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India has signed the Double Taxation Avoidance Agreements or DTAA with 88
countries. Foreign companies that are resident in the countries that India has a DTAA
with, can claim more beneficial provisions and rates between the IT Act and the DTAA.
Recently, the Government of the Republic of India and the Government of the People’s
Republic of China had signed the Double Taxation Avoidance Agreement (DTAA) on
26/11/2018. This agreement was signed for providing relief on double taxation along
with preventing fiscal evasion concerning taxes on income.
To know more about India-China relations, refer to the linked page.
Revised DTAA (India-Kenya)
The Double Taxation Avoidance Agreements (DTAA) between India and Kenya that was
initially signed in 1985 was renegotiated and revised by both countries. The revised
DTAA was later signed on 11th July 2016 between India and Kenya. Some of the major
highlights of the revised DTAA are mentioned below:
Some of the key features of the revised DTAA are highlighted as under:
1. A reduction in the withholding tax rates is provided by the revised DTAA. The
revised tax rates range from 15% to 10% on dividends, 20% to 10% for the
royalties, and 17.5% to 10% for management and professional services fees.
2. The revised DTAA provides for a new Article on Limitation of Benefits to allow
treaty benefits to bonafide residents of both countries, to combat treaty abuse by
third-country residents, and to allow the application of domestic law to prevent
tax avoidance or evasion.
3. The revised treaty also provides a new Article on Assistance in Collection of
Taxes which will assist in the collection of tax revenue claims between both the
countries.
Documents required to avail the benefits under DTAA
To benefits from the provisions laid under DTAA, an NRI individual will have to provide
the following documents in a timely fashion to the concerned deductor.
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 Self-declaration cum indemnity format

 Self-attested PAN card copy
 Self-attested visa and passport copy
 PIO proof copy (if applicable)
 Tax Residency Certificate (TRC)
According to the Finance Act 2013, an individual will not be entitled to claim any benefit
of relief under the Double Taxation Avoidance Agreement unless he or she provides a
Tax Residency Certificate to the deductor.
To receive a Tax Residency Certificate, an application has to be made in Form 10FA to

the income tax authorities. Once the application is successfully processed, the certificate
will be issued in Form 10FB.
Double Taxation Avoidance Agreements (DTAA) is an important topic to cover for the
Civil Service Exam. It is included under the GS-II section of the UPSC syllabus.
7.8 General Anti-Avoidance Rule (GAAR)
The General Anti-Avoidance Rule (GAAR) is an anti-tax avoidance law in India to

curb tax evasion and avoid tax leaks.
It came into effect on 1st April 2017.
The GAAR provisions come under the Income Tax Act, 1961.
GAAR is a tool for checking aggressive tax planning especially that transaction or
business arrangement which is/are entered into with the objective of avoiding tax.
It is specifically aimed at cutting revenue losses that happen to the government due to
aggressive tax avoidance measures practiced by companies. The Vodafone case, the
biggest sensation of Indian Taxation history is one of the main reasons for the framework
of GAAR.
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GAAR is effective from assessment year 208-19. It is meant to be applied to transactions

which are prima facie legal but result in tax reduction. Broadly tax reduction can be of
following three categories:
> Tax Mitigation
> Tax Evasion
> Tax Avoidance
We have explained these further to understand which type of tax reduction invoke
GAAR.
Concept of Tax Evasion, Tax Avoidance and Tax mitigation
Tax mitigation is a ‘positive’ term in the context of a situation where taxpayers take
advantage of a fiscal incentive provided to them by a tax legislation by complying with
its conditions and taking cognisance of the economic consequences of their actions. Tax
mitigation is permitted under the Act. This tax reduction is acceptable even after
GAAR has come into force.
Tax evasion is when a person or entity does not pay the taxes that is due to the
government. This is illegal and liable to prosecution. Illegality, wilful suppression of
facts, misrepresentation and fraud—all constitute tax evasion, which is prohibited under
law. This is also not covered by GAAR as the existing jurisprudence is sufficient to
cover tax evasion/Sham transactions.
Tax avoidance includes actions taken by a taxpayer, none of which are illegal or
forbidden by the law. However, although these are not prohibited by the law, they are
considered undesirable and inequitable, since they undermine the objective of effective
collection of revenue. GAAR is specifically against transactions where the sole intention
is to avoid tax. In this the taxpayers used legal steps which results in tax reduction, which
steps would not have been undertaken if there was no tax reduction. This kind of tax
avoidance planning is sought to be covered by GAAR.
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With GAAR there is no difference between tax avoidance and tax evasion. All
transactions which have the implication of avoiding tax can come under the scanner of
GAAR.
Now let’s see when can GAAR apply and in which cases GAAR is exempt in the
forgoing paragraphs.
When can GAAR Apply?
As per the provision of the Income Tax Act, GAAR would apply to an arrangement
entered into by the tax payer which may be declared to be an impermissible avoidance
agreement (IAA). This provision starts with a non-obstante clause. Thus, it has an
overriding applicability.
7.8 Goodsand Services Tax (GST)
GST is an indirect tax (or consumption tax) used in India on the supply of goods and
services. It is a comprehensive, multistage, destination-based tax: comprehensive because
it has subsumed almost all the indirect taxes except a few state taxes. Multi-staged as it is,
the GST is imposed at every step in the production process, but is meant to be refunded to
all parties in the various stages of production other than the final consumer and as a
destination-based tax, it is collected from point of consumption and not point of origin
like previous taxes.
Goods and services are divided into five different tax slabs for collection of tax - 0%, 5%,
12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity are
not taxed under GST and instead are taxed separately by the individual state
governments, as per the previous tax system.
There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on
gold. In addition a cess of 22% or other rates on top of 28% GST applies on few items
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like aerated drinks, luxury cars and tobacco products. Pre-GST, the statutory tax rate for
most goods was about 26.5%, Post-GST, most goods are expected to be in the 18% tax
range.
The tax came into effect from 1 July 2017 through the implementation of the One
Hundred and First Amendment of the Constitution of India by the Indian government.
The GST replaced existing multiple taxes levied by the central and state governments.
The tax rates, rules and regulations are governed by the GST Council which consists of
the finance ministers of the central government and all the states. The GST is meant to
replace a slew of indirect taxes with a federated tax and is therefore expected to reshape
the country's 2.4 trillion dollar economy, but its implementation has received criticism.
Positive outcomes of the GST includes the travel time in interstate movement, which
dropped by 20%, because of disbanding of interstate check posts.
7.9 GST Council
GST Council is the governing body of GST having 33 members, out of which 2 members
are of centre and 31 members are from 28 state and 3 Union territories with legislation.
The council contains the following members
(a) Union Finance Minister (as chairperson)
(b) Union Minister of States in charge of revenue or finance (as member)
(c) the ministers of states in charge of finance or taxation or other ministers as nominated
by each states government (as member). GST Council is an apex member committee to
modify, reconcile or to procure any law or regulation based on the context of goods and
services tax in India. The council is headed by the union finance minister Nirmala
Sitharaman assisted with the finance minister of all the states of India. The GST council
is responsible for any revision or enactment of rule or any rate changes of the goods and
services in India.
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7.10Goods and services are divided into five different tax slabs for collection of tax - 0%,
5%, 12%, 18% and 28%. However, petroleum products, alcoholic drinks, and electricity
are not taxed under GST and instead are taxed separately by the individual state
governments, as per the previous tax system.
There is a special rate of 0.25% on rough precious and semi-precious stones and 3% on
gold. In addition a cess of 22% or other rates on top of 28% GST applies on few items
like aerated drinks, luxury cars and tobacco products. Pre-GST, the statutory tax rate for
most goods was about 26.5%, Post-GST, most goods are expected to be in the 18% tax
range.
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Unit-8
Generations of Economic Reforms in India
Economy - Economic Reforms
The economic reforms were initiated in 1991.

Economic reforms denote the process in which a government prescribes declining role for
the state and expanding role for the private sector in an economy.
It is safer to see economic reform as a policy shift in an economy from one to another or
‘alternative development strategies’.
Need for Economic Reforms
Poor Performance of the Industrial Sector

Adverse Balance of Payments
Rise in Fiscal Deficit
Inflation
The Gulf War
Examples of Economic Reforms
Liberalisation
Privatisation
Globalisation
Why were Economic reforms introduced in India?

Economic reforms were introduced in India because of the following reasons:
Poor performance of the public sector
Public sector was given a role important in development policies during 1951-1990.
However the performance of the majority of public enterprises was disappointing.
They were incurring huge losses because of inefficient management.
Adverse BoP Or Imports exceeded exports
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Imports grew at a very high rate without matching the growth of exports.
Government could not restrict imports even after imposing heavy tariffs and fixing quotas.
On the other hand, Exports was very less due to the low quality and high prices of our
goods as compared to foreign goods.
Fall in foreign exchange reserves
Foreign exchange (foreign currencies) reserves, which the government generally

maintains to import petrol and other important items, dropped to levels that were not
sufficient for even a fortnight.
The government was not able to repay its borrowings from abroad.
Huge debts on government
Government expenditure on various developmental works was more than its revenue
from taxation etc.
As a result, the government borrowed money from banks, public and international
financial institutions like IMF etc.
Inflationary pressure
There was a consistent rise in the general price level of essential goods in the economy.
To control inflation, a new set of policies were required.
Terms and conditions of world bank and IMF
India received financial help of $7 billion from the World Bank and IMF on an
agreement to announce its New Economic Policy.
Economic reforms In India
On July 23, 1991, India launched a process of economic reforms in response to a fiscal
and balance-of-payment (BoP) crisis.
The reforms were historic and were going to change the very face and the nature of the
economy in the coming times.
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The reforms and the related programmes are still going on with changing emphasis and
dimensions.
Back in the mid-1980s, the governments had taken its first steps to economic reforms.
While the reforms of the 1980s witnessed rather limited deregulation and ‘partial
liberalization of only a few aspects of the existing control regime, the reforms started in
early 1990s in the fields of industries, trade, investment and later to include
agriculture, were much ‘wider and deeper’.
Though liberal policies were announced by the governments during the reforms of the
1980s itself, with the slogan of ‘economic reforms’, it was only launched with full
conviction in the early 1990s.
But the reforms of the 1980s, which were under the influence of the famous
‘Washington Consensus’ ideology had a crippling impact on the economy.
The whole Seventh Plan (1985–90) promoted further relaxation of market regulations
with heavy external borrowings to increase exports (as the thrust of the policy reform).
By now as the benefits of the reforms have accrued to many, the criticism has somewhat
calmed down, but still the reform process is considered as ‘anti-poor’ and ‘pro-rich’.
The need of the hour is to go for ‘distributive growth’, though the reform has led the
economy to a higher growth path.
Reform measures
The economic reform programme, that India launched, consisted of two categories of
measures:
1. Macroeconomic Stabilization Measures
It includes all those economic policies which intend to boost the aggregate demand in the
economy—be it domestic or external.
For the enhanced domestic demand, the focus has to be on increasing the purchasing
power of the masses, which entails an emphasis on the creation of gainful and quality
employment opportunities.
2. Structural Reform Measures
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It includes all the policy reforms which have been initiated by the government to boost
the aggregate supply of goods and services in the economy.
It naturally entails unshackling the economy so that it may search for its own potential of
enhanced productivity.
For the purchasing capacity of the people to be increased, the economy needs increased
income, which comes from increased levels of activities.
Income so increased is later distributed among the people whose purchasing power has to
be increased
This will take place by properly initiating a suitable set of macroeconomic policies.
The LPG
The process of reforms in India has to be completed via three other processes namely,
liberalization, privatization and globalization, known popularly by their short-form,
the LPG.
These three processes specify the characteristics of the reform process India initiated.
Precisely seen, liberalization shows the direction of reform,
Privatization shows the path of reform and globalization shows the ultimate goal of
the reform.
Liberalization
The ideology was the product of the breakdown of feudalism and the growth of a
market or capitalist society in its place, which became popular in economics via the
writings of Adam Smith and got identified as a principle of laissez-faire.
Pro-market or pro-capitalistic inclination in the economic policies of an economy is the
process of liberalization.
The most suitable example of this process could be China of the mid-1980s when it
announced its ‘open door policy’.
The process of decreasing traits of a state economy and increasing traits of a market
economy is liberalization.
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In the Indian case the term liberalisation is used to show the direction of the economic
reforms—with decreasing influence of the state or the planned or the command economy
and increasing influence of free market or the capitalistic economy.
It is a move towards capitalism. India is attempting to strike its own balance of the
‘state-market mix’.
It means, even if the economic reforms have the direction towards marketeconomy it can
never be branded a blind run to capitalism.
Privatization
The policies through which the ‘roll back’ of the state was done included deregulation,
privatization and introduction of market reforms in public services.
Privatization was used as a process under which the state assets were transferred to the
private sector.
The root of the term privatization goes to this period which got more and more currency
around the world once the East European nations and later the developing democratic
nations went for it.
But during the period several connotations and meanings of the term ‘privatization’ have
developed. Some of them are described below:
Privatization in its purest sense and lexically means de-nationalization, i.e., transfer of
the state ownership of the assets to the private sector to the tune of 100 per cent. This
route of privatization has been avoided by almost all democratic systems.
The sense in which privatization has been used is the process of disinvestment all over
the world. This process includes selling of the shares of the state owned enterprises to
the private sector. Disinvestment is de-nationalization of less than 100 per cent
ownership transfer from the state to the private sector. If an asset has been sold out
by the government to the tune of only 49 per cent the ownership remains with the
statethough it is considered privatization. If the sale of shares of the state-owned assets
has been to the tune of 51 per cent, the ownership is really transferred to the private
sector even then it is termed as privatization.
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The third and the last sense in which the term privatization has been used around the
world, is very wide. Basically, all the economic policies which directly or indirectly
seem to promote the expansion of the private sector or the market (economy) have
been termed by experts and the governments as the process of privatization.
Globalization
The process of Globalization has always been used in economic terms though it has
always taken the political and cultural dimensions.
Globalization is generally termed as ‘an increase in economic integration among
nations’.
The concept was popularised by the Organisation of Economic Cooperation and
Development (OECD) in the mid-1980s.
In its earlier deliberalization, the organisation had defined globalisation in a very narrow
and business-like sense—‘any crossborder investment by an OECD company outside
its country of origin for its benefit is globalisation’.
The official meaning of globalisation for the WTO is movement of the economies of the
world towards “unrestricted cross border movements of goods and services, capital
and the labour force”.
It simply means that the economies who are signatories to the process of globalization
(i.e., signatories to the WTO) for them there will be nothing like foreign or indigenous
goods and services, capital and labour. The world becoming a flat and level-playing field
emerging in the due process of time
For many political scientists, globalization is the emergence of a situation when our lives
are increasingly shaped by the events that occur at a great distance from us about which
the decisions are not taken by our conscious self.
India became one of the founding members of the WTO and was obliged to promote the
process of globalization, though its economic reforms started with no such obligations.
It is a different thing that India started the process of globalization right after the reforms
1991.
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It should be noted here that the Indian idea of globalization is deeply and frequently
inclined towards the concept of welfare state, which keeps coming in the day to day
public policy as an emphatic reference.
Generations of Economic Reforms

Though there were no such announcements or proposals while India launched its reforms
in 1991, in the coming times, many ‘generations’ of reforms were announced by the
governments.A total of three generations of reforms have been announced till date, while
experts have gone to suggest the fourth generation, too.
First Generation reforms (1991–2000)
The reforms initiated during 1991 to 2000 were termed as First Generation Reforms. The
broad coordinates of the First Generation of reforms may be seen as under:
(i) Promotion to Private Sector
This included various important and liberalising policy decisions, i.e., ‘de-reservation’
and ‘delicencing’ of the industries, abolition of the MRTP limit, abolition of the
compulsion of the phased-production and conversion of loans into shares, simplifying
environmental laws for the establishment of industries, etc.
(ii) Public Sector Reforms
The steps taken to make the public sector undertakings profitable and efficient, their
disinvestment (token), their corporatization, etc., were the major parts of it.
(iii) External Sector Reforms-
They consisted of policies like, abolishing quantitative restrictions on import, switching

to the floating exchange rate, full current account convertibility, reforms in the capital
account, permission to foreign investment (direct as well as indirect), promulgation of a
liberal Foreign Exchange Management Act (the FEMA replacing the FERA), etc.
(iv) Financial Sector Reforms
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Several reform initiatives were taken up in areas such as banking, capital market,
insurance, mutual funds, etc.
(v) Tax Reforms
This consisted of all the policy initiatives directed towards simplifying, broadbasing,
modernising, checking evasion,etc.
A major re-direction was ensued by this generation of reforms in the economy—the
‘command’ type of the economy moved strongly towards a market-driven economy,
private sector (domestic as well as foreign) to have greater participation in the
future.
Second Generation reforms (2000–01 onwards)

The government launched the second generation of reforms in 2000-01. Basically, the
reforms India launched in the early 1990s were not taking place as desired and a need for
another set of reforms was felt by the governments, which were initiated with the title of
the Second Generation of economic reforms. These reforms were not only deeper and
delicate, but required a higher political will power from the governments. The major
components of the reform are as given below:
(i) Factor Market Reforms
Considered as the ‘backbone’ for the success of the reform process in India, it consists of
dismantling of the Administered Price Mechanism (APM).
There were many products in the economy whose prices were fixed /regulated by the
government, viz., petroleum, sugar, fertilizers, drugs, etc.
Though a major section of the products under the APM were produced by the private
sector, they were not sold on market principles which hindered the profitability of the
manufacturers as well as the sellers and ultimately the expansion of the concerned
industries leading to a demand supply gap.
Under market reforms these products were to be brought into the market fold.
But we cannot say that the Factor Market Reforms (FMRs) are complete in India. It is
still going on.
Cutting down subsidies on essential goods is a socio-political question in India.
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Till market-based purchasing power is not delivered to all the consumers, it would not be
possible to complete the FMRs.
(ii) Public Sector Reforms
The second generation of reforms in the public sector especially emphasizes on areas like
greater functional autonomy, freer leverage to the capital market, international tie-ups
and Greenfield ventures, disinvestment.
(iii) Reforms in Government and Public Institutions
This involves all those moves which really go to convert the role of the government
from the ‘controller’ to the ‘facilitator’ or the administrative reform, as it may be
called.
(iv) Legal Sector Reforms
Though reforms in the legal sector were started in the first generation itself, now it was to
be deepened and newer areas were to be included, such as, abolishing outdated and
contradictory laws, reforms in the Indian Penal Code (IPC) and Code of Criminal
Procedure (CrPC), Labour Laws, Company Laws and enacting suitable legal provisions
for new areas like Cyber Law, etc.
(v) Reforms in Critical Areas
The second generation reforms also commit to suitable reforms in the infrastructure
sector (i.e., power, roads, especially as the telecom sector has been encouraging),
agriculture, agricultural extension, education and healthcare, etc. These areas have been
called by the government as ‘critical areas’.
Third Generation reforms
Announcement of the third generation of reforms were made on the margins of the
launching of the Tenth Plan (2002–07).
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This generation of reforms commits to the cause of a fully functional Panchayati Raj
Institution (PRIs), so that the benefits of economic reforms, in general, can reach to the
grassroots.
Though the constitutional arrangements for a decentralized developmental process were
already effected in the early 1990s, it was in the early 2000s that the government gets
convinced of the need of ‘inclusive growth and development’.
Till the masses are not involved in the process of development, the development will lack
the ‘inclusion’ factor; it was concluded by the government of the time.
Fourth Generation reforms
This is not an official ‘generation’ of reform in India. Basically, in early 2002, some
experts coined this generation of reforms which entail a fully ‘information technology-
enabled’
They hypothesized a ‘two-way’ connection between the economic reforms and the
information technology (IT), with each one reinforcing the other.
India’s reform process which commenced in 1991 has been termed by experts as
gradualist in nature with traits of occasional reversals, and without any big ideological
U-turns. It reflects the compulsions of India’s highly pluralist and participative
democratic policy-making process. Though such an approach helped the country to
avoid sociopolitical upheavals/instability, it did not allow the desired economic
outcome could have accrue from the reforms. The first generation of economic
reforms could not bring the expected results due to lack of some other set of reforms for
which India goes after almost over a decade—the second generation of economic reforms.
Similarly, the economic benefits (whatever accrued) remained non-inclusive, in absence
of an active public policy aimed at inclusion (commencing via the third generation of
economic reforms). This created a kind of disillusionment about the prospects of reforms
and failed the governments to muster enough public support in favour of reforms.
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Unit-9
Globalization and its impact on Indian Economy
Globalization (or globalization) describes a process by which regional economies,

societies, and cultures have become integrated through a global network of
communication, transportation, and trade. The term is sometimes used to refer
specifically to economic globalization: the integration of national economies into the
international economy through trade, foreign direct investment, capital flows, migration,
and the spread of technology. Globalization as a spatial integration in the sphere of social
relations when he said “Globalization can be defined as the intensification of worldwide
social relations which link distant locations in such a way that local happenings are
shaped by events occurring many miles away and vice – versa.” Globalization generally
means integrating economy of our nation with the world economy. The economic
changes initiated have had a dramatic effect on the overall growth of the economy. It also
heralded the integration of the Indian economy into the global economy. The Indian
economy was in major crisis in 1991 when foreign currency reserves went down to $1
billion. Globalization had its impact on various sectors including Agricultural, Industrial,
Financial, Health sector and many others. It was only after the LPG policy i.e.
Liberalization, Privatization and Globalization launched by the then Finance Minister
Man Mohan Singh that India saw its development in various sectors.
Advent of New Economic Policy -

After suffering a huge financial and economic crisis Dr. Man Mohan Singh brought a
new policy which is known as Liberalization, Privatization and Globalization Policy
(LPG Policy) also known as New Economic Policy,1991 as it was a measure to come out
of the crisis that was going on at that time.
The following measures were taken to liberalize and globalize the economy:
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1. Devaluation: To solve the balance of payment problem Indian currency were

devaluated by 18 to 19%.
2. Disinvestment: To make the LPG model smooth many of the public sectors were sold
to the private sector.
3. Allowing Foreign Direct Investment (FDI): FDI was allowed in a wide range of sectors
such as Insurance (26%), defense industries (26%) etc.
4. NRI Scheme: The facilities which were available to foreign investors were also given
to NRI's.
The New Economic Policy (NEP-1991) introduced changes in the areas of trade policies,
monetary & financial policies, fiscal & budgetary policies, and pricing & institutional
reforms. The salient features of NEP-1991 are (i) liberalization (internal and external), (ii)
extending privatization, (iii) redirecting scarce Public Sector Resources to Areas where
the private sector is unlikely to enter, (iv) globalization of economy, and (v) market
friendly state.
Consequences of Globalization:
The implications of globalisation for a national economy are many. Globalisation has
intensified interdependence and competition between economies in the world market.
This is reflected in Interdependence in regard to trading in goods and services and in
movement of capital. As a result domestic economic developments are not determined
entirely by domestic policies and market conditions. Rather, they are influenced by both
domestic and international policies and economic conditions. It is thus clear that a
globalising economy, while formulating and evaluating its domestic policy cannot afford
to ignore the possible actions and reactions of policies and developments in the rest of the
world. This constrained the policy option available to the government which implies loss
of policy autonomy to some extent, in decision-making at the national level.
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Now for Further analysis we take up Impact of Globalization on various sector of Indian
Economy.
Impact of Globalization on Agricultural Sector:

Agricultural Sector is the mainstay of the rural Indian economy around which socio-
economic privileges and deprivations revolve and any change in its structure is likely to
have a corresponding impact on the existing pattern of Social equity. The liberalization of
India’s economy was adopted by India in 1991. Facing a severe economic crisis, India
approached the IMF for a loan, and the IMF granted what is called a ‘structural
adjustment’ loan, which is a loan with certain conditions attached which relate to a
structural change in the economy. Essentially, the reforms sought to gradually phase out
government control of the market (liberalization), privatize public sector organizations
(privatization), and reduce export subsidies and import barriers to enable free trade
(globalization). Globalization has helped in:
• Raising living standards,

• Alleviating poverty,
• Assuring food security,
• Generating buoyant market for expansion of industry and services, and
• Making substantial contribution to the national economic growth.
Impact of Globalization on Industrial Sector:

Effects of Globalization on Indian Industry started when the government opened the
country's markets to foreign investments in the early 1990s. Globalization of the Indian
Industry took place in its various sectors such as steel, pharmaceutical, petroleum,
chemical, textile, cement, retail, and BPO.
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Globalization means the dismantling of trade barriers between nations and the integration
of the nations economies through financial flow, trade in goods and services, and
corporate investments between nations. Globalization has increased across the world in
recent years due to the fast progress that has been made in the field of technology
especially in communications and transport. The government of India made changes in its
economic policy in 1991 by which it allowed direct foreign investments in the country.
The benefits of the effects of globalization in the Indian Industry are that many foreign
companies set up industries in India, especially in the pharmaceutical, BPO, petroleum,
manufacturing, and chemical sectors and this helped to provide employment to many
people in the country. This helped reduce the level of unemployment and poverty in the
country. Also the benefit of the Effects of Globalization on Indian Industry are that the
foreign companies brought in highly advanced technology with them and this helped to
make the Indian Industry more technologically advanced.
The negative Effects of Globalization on Indian Industry are that with the coming of
technology the number of labor required decreased and this resulted in many people
being removed from their jobs. This happened mainly in the pharmaceutical, chemical,
manufacturing, and cement industries.
Impact on Financial Sector:

Reforms of the financial sector constitute the most important component of India’s
programme towards economic liberalization. The recent economic liberalization
measures have opened the door to foreign competitors to enter into our domestic market.
Innovation has become a must for survival. Financial intermediaries have come out of
their traditional approach and they are ready to assume more credit risks. As a
consequence, many innovations have taken place in the global financial sectors which
have its own impact on the domestic sector also. The emergences of various financial
institutions and regulatory bodies have transformed the financial services sector from
being a conservative industry to a very dynamic one. In this process this sector is facing a
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number of challenges. In this changed context, the financial services industry in India has
to play a very positive and dynamic role in the years to come by offering many
innovative products to suit the varied requirements of the millions of prospective
investors spread throughout the country. Reforms of the financial sector constitute the
most important component of India’s programme towards economic liberalization.
Growth in financial services (comprising banking, insurance, real estate and business
services), after dipping to 5.6% in 2003-04 bounced back to 8.7% in 2004-05 and 10.9%
in 2005-06. The momentum has been maintained with a growth of 11.1% in 2006-07.
Because of Globalization, the financial services industry is in a period of transition.
Market shifts, competition, and technological developments are ushering in
unprecedented changes in the global financial services industry.
Impact on Export and Import:

India's Export and Import in the year 2001-02 was to the extent of 32,572 and 38,362
million respectively. Many Indian companies have started becoming respectable players
in the International scene. Agriculture exports account for about 13 to 18% of total
annual of annual export of the country. In 2000-01 Agricultural products valued at more
than US $ 6million were exported from the country 23% of which was contributed by the
marine products alone. Marine products in recent years have emerged as the single largest
contributor to the total agricultural export from the country accounting for over one fifth
of the total agricultural exports. Cereals (mostly basmati rice and non-basmati rice), oil
seeds, tea and coffee are the other prominent products each of which accounts fro nearly
5 to 10% of the countries total agricultural exports.
Advantages of Globalization:
• There is an International market for companies and for consumers there is a wider range
of products to choose from.
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• Increase in flow of investments from developed countries to developing countries,

which can be used for economic reconstruction.
• Greater and faster flow of information between countries and greater cultural interaction
has helped to overcome cultural barriers.
• Technological development has resulted in reverse brain drain in developing countries.
Demerits of Globalization (Challenges):

• The outsourcing of jobs to developing countries has resulted in loss of jobs in developed
countries.
• There is a greater threat of spread of communicable diseases.
• There is an underlying threat of multinational corporations with immense power ruling
the globe.
• For smaller developing nations at the receiving end, it could indirectly lead to a subtle
form of colonization.
· The number of rural landless families increased from 35 %in 1987 to 45 % in 1999,
further to 55% in 2005. The farmers are destined to die of starvation or suicide.
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Unit 10
The Micro, Small and Medium Enterprises
The Micro, Small and Medium Enterprises Development (MSMED) Act was notified in
2006 to address policy issues affecting MSMEs as well as the coverage and investment
ceiling of the sector. The Act seeks to facilitate the development of these enterprises and
enhance their competitiveness.
The highlights of the Act are enumerated as follows:
The Act contains 32 Sections divided into VI Chapters
Chapter I (Sec 1 – 2)
 It is the Preliminary part of the act and it contains the Short Title, Commencement
& Definitions (Sec 1)
 It is to be noted that different dates may be appointed for different provisions
Important Definitions
√ 2 (b) “appointed day” means the day following immediately after the expiry of the
period of fifteen days from the day of acceptance or the day of deemed acceptance of any
goods or any services by a buyer from a supplier.
Explanation:-
“the day of acceptance” means-
(a) the day of the actual delivery of goods or the rendering of services;
(b) where any objection is made in writing by the buyer regarding acceptance of goods or
services within fifteen days from the day of the delivery of goods or the rendering of
services, the day on which such objection is removed by the supplier;
the day of deemed acceptance” means, where no objection is made in writing by the
buyer regarding acceptance of goods or services within fifteen days from the day of the
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delivery of goods or the rendering of services, the day of the actual delivery of goods or
the rendering of services;
Chapter II
 National Board for micro, small and medium enterprises (Sections 3-6)
√ Constitution (Sec 3)
-Head Office at Delhi, 48 Members
-Containing Ministers, MPs, Persons representing Indian Bank Association, RBI,

association of Micro, Small & Medium enterprises, Central Govt. etc.
-Term (2yrs) and Procedure would be as may be prescribed
-No act or proceeding on the ground of vacancy, defect , irregularity in procedure etc
-Meeting once in three months
-Board has the power to associate with any person, association for the compliance of the
provisions of the Act.
√ Removal of members by Central Govt if he/she adjudged as insolvent, become

unsound mind, refuses to act as member, convicted of offence involving moral turpitude,
abused the position (Sec 4)
√ Board’s functions for subject to the Central govt directions (Sec 5):- Promotion and
development of micro, small and medium enterprise and enhancing competitiveness of
them, make recommendation and advise Central Govt
√ Such other powers as may be prescribed (Sec 6)
NBMSME, Rules were notified on 26th September 2006 (G.S.R. 596 (E).
Insolvency laws in India:-
 Individual insolvency
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o Provincial Insolvency Act, 1920

o Presidency Towns Insolvency Act, 1909
 Corporate insolvency
o Companies Act, 1956
o Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
o Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (SARFAESI), Securitisation Act
o Recovery of Debts due to Banks and Financial Institutions Act, 1993
(RDB Act)Moral turpitude is a conduct that is considered contrary to
community standards of justice, honesty or good morals.
Chapter III
 Classification of Enterprises, Advisory Committee and Memorandum of

Micro, Small and Medium Enterprises (Sections 7-8)
√ Classification on the basis of investment in plant & machinery for manufacturing and
equipments for service sector (Sec 7)
Two types of industries:-
1. Manufacturing/ production- goods pertaining to industry specified in the first schedule

to the Industrial (Development & Regulation) Act, 1951
2. Enterprises engaged in Service
 Micro Enterprise
o Manufacturing:- Rs. 25 Lakh
o Service:- Rs. 10 Lakh
 Small Enterprise
o Manufacturing:- above Rs. 25 lakh up to Rs. 5 Crore
o Service:- above Rs. 10 Lakh up to Rs. 2 Crore
 Medium Enterprise
o Manufacturing:- above Rs. 5 Crore up to Rs. 10 Crore
o Service:- above Rs. 2 Crore up to Rs. 5 Crore
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Explanation 1:- cost of pollution control, research and development, industrial safety
devices and such other items as may be specified, by notification, shall be excluded
Explanation 2:- Section 29B of the Industries (Development & Regulation) Act, 1951
shall be applicable to Micro and Small manufacturing enterprises
 Advisory committee shall be formed containing the Secretary of Govt of India,

not more than three members of the State govt, one representative of each Micro,
Small and Medium enterprise, Member Secretary of the Board
 Advisory committee may furnish its recommendation to the Central or State govt
on the various matters as per the section of this act
√ Filing of Memorandum with authorities as may be prescribed (Section8)
 Compulsory for Medium manufacturing enterprise

 For other it is optional
 Form, procedure may be prescribed by CG
 Authority for filing of Memorandum for Medium will be prescribed by the CG
and for Micro and Small by SG
Advisory Committee Notification:- S.O. 1622 (E) 27th September, 2006
Chapter IV
Measures for Promotion, Development and enhancement of competitiveness (Sec 9-13)
 The by notification CG may programmes, guidelines or instructions as it may

deem fit (Sec 9)
 Policies and practices in respect of credit shall be progressive and as may be
specified in the instructions or guidelines or instructions by RBI. (Sec 10)
 CG/ SG may notify procurement preference policies (Sec 11)
 There shall be constitution of funds and grants will be credited to it (Sec 12)
 CG may credit funds by way of grants (Sec 13)
 CG shall have power to administer and utilize the funds.
Few of the schemes and incentives:-
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 Guidelines of Scheme for Assistance to Training Institutions

 Marketing Assistance Scheme
 National Manufacturing Competitiveness Programme (NMCP) Schemes Under
XI Plan
 Credit Linked Capital Subsidy Scheme for Technology Upgradation
Chapter V
Delayed payments to Micro and Small enterprises
 Liability of buyer to make payment within 45 days (Sec 15)

 Payment of interest on delayed payment from appointed day/ agreed day at three
times of the bank rate notified by the RBI (Sec16)
 Buyer shall be liable to pay interest as specified in Sec 16 (Sec 17)
 Any party may refer the dispute to Micro and Small enterprises Facilitation
Council, Council shall either itself conduct conciliation or seek assistance of any
institution Sec 65-81of Arbitration and Conciliation Act, 1996 shall apply, if
conciliation not successful then reference to institution providing alternate dispute
resolution system and such reference shall be decided within 90 days (Sec 18)
 Application for setting aside decree, award or order can be made to a Court by the
buyer after depositing 75% of the amount in terms of the decree in the manner
directed by the Court (Sec 19)
 State govt shall establishes such councils (Sec 20)
 Council would consist of 3-5 members consisting of Director of industries,
representative of association of MSM enterprises, banks, financial institutions
lending MSMEs, person having special knowledge in the field of industry,
finance, trade or commerce, procedures may be prescribed by CG (Sec 21)
 Requirement to specify unpaid amount with interest in the annual statements
of accounts (sec 22)
√ Buyer who require to get accounts audited under any law shall furnish the following
additional information:-
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– the Principal amount and the interest due thereon (to be shown separately) remaining
unpaid to any supplier at the end of each accounting year;
– the amount of interest paid by the buyer in terms of Section 16, along with the amount
of the payment made to the supplier beyond the appointed day during each accounting
year;
– the amount of interest due and payable for the period of delay in making payment
(which have been paid but beyond the appointed day during the year) but without adding
the interest specified under this Act;
– the amount of interest accrued and remaining unpaid at the end of each accounting
year; and
– the amount of further interest remaining due and payable even in the succeeding years,
until such date when the interest dues as above are actually paid to the small enterprise,
for the purpose of disallowance as a deductible under section 23.
 Interest not to be allowed as deduction from income under IT Act, 1961 (Sec
23)
 Overriding effect of Section 15-23 over any other law (sec 24)
 CG may specify any scheme for closure of MSME not applicable to a Company
(Sec 25)
Alternate dispute resolution is a process for the parties to come to an agreement without
litigations through negotiation, mediation, conciliation, arbitration etc. Some of such
associations are Internal Center for alternate Dispute resolution, India International ADR
Association etc.
Chapter VI
Miscellaneous
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 CG/SG may appoint officers and other employees having powers to ask
information (Sec 26)
 Penalty for contravention of section 8, 26 (2) contravention- first conviction- Rs.
1,000/- second conviction- above Rs. 1,000/- to Rs. 10,000/- and where buyer
contravene Sec 22 fine not less than Rs. 10,000/- (Sec 27)
 Jurisdiction of courts- No court inferior to that of Metropolitan or Magistrate of
first class (Sec 28)
 CG may make rules to be placed before each house of parliament for a total of 30
days (Sec 29)
 SG may make rules to be placed before each house of state legislature (Sec 30)
 CG may remove any difficulty (Sec 31)
 The Act- The Interest on Delayed Payments to Small Scale and Ancillary
Industrial Undertakings Act, 1993 is repealed. (Sec 32)
ANNUAL COMPLIANCE
A annul Return needs to be filed with the DIC in ELP form by the Enterprises who has
filed IEM and got the IEM No.
BENEFITS TO THE MSME ENTERPRISES
Following immediate benefits can be availed by the MSMEs on filing the IEM with the
DIC:-
1. Payment from the buyer within 45 days for the goods or services supplied to the buyer
as per section 15
2. Provision payment of interest by the buyer as per section 16
3. IEM no is necessary for applying other benefits envisaged in various schemes
BOTHER BENEFITS
Apart from various incentives, export promotion, marketing assistance, MSMEs can avail
the benefits under various policies as under
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1. National Manufacturing Competitiveness Programme (NMCP) Schemes under XI plan
2. Micro & Small Enterprises Cluster Development Programme Credit Guarantee

Scheme
3. Credit Linked Capital Subsidy Scheme for technology up-gradation
4. Credit Guarantee Scheme
5. ISO 9000/14001 Certification Fee Reimbursement Scheme
6. MSME MDA
7. Scheme of Micro Finance Programme
8. Scheme of National award
9. TREAD Scheme (http://www.dcmsme.gov.in/schemes/sidoscheme.htm)
10. Other schemes- please refer the following link-

http://msme.gov.in/mob/SchemeNew.aspx
10.2 MSME SAMADHAAN- Delayed Payments to Micro and Small Enterprises

under Micro, Small and Medium Enterprise Development (MSMED) Act, 2006
Related Provision
The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains
provisions of Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24).
State Governments to establish Micro and Small Enterprise Facilitation Council
(MSEFC) for settlement of disputes on getting references/filing on Delayed payments.
(Section 20 and 21)
Nature of assistance
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MSEFC of the State after examining the case filed by MSE unit will issue directions to
the buyer unit for payment of due amount along with interest as per the provisions under
the MSMED Act 2006.
Who can apply
Any Micro or small enterprise having valid Udyog Aadhar(UAM) can apply.
Salient Features
The buyer is liable to pay compound interest with the monthly rests to the supplier on the
amount at the three times of the bank rate notified by RBI in case he does not make
payment to the supplier for his supplies of goods or services within 45 days of the
acceptance of the goods/service rendered. (Section 16)
State Governments to notify (i) Authority for filing Entrepreneur Memorandum (ii) Rules
of MSEFC and (iii) Constitution of MSEFC.
All States/UTs have notified Authority for Filing Entrepreneur's Memorandum, 33

States/UTs (i.e. except Arunachal Pradesh, Assam and Manipur) have Notified rules of
MSEFC and all the 36 States/UTs have constituted MSEFCs, as per provisions laid down
under MSMED Act 2006.
Every reference made to MSEFC shall be decided within a period of ninety days from the
date of making such a reference as per provisions laid in the Act.
If the Appellant (not being the supplier) wants to file an appeal, no application for setting
aside any decree or award by the MSEFC shall be entertained by any court unless the
appellant (not being supplier) has deposited with it, the 75% of the award amount.
(Section 19)
Implementation
The provisions under the Act are implemented by MSEFC chaired by Director of
Industries of the State /UT having administrative control of the MSE units. State
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Government/UTs are requested to ensure that the MSE Facilitation Council hold
meetings regularly and delayed payment cases are decided by the Councils within a
period of 90 days as stipulated in the MSMED Act, 2006.
MSME Samadhaan Portal - Ease of filing application under MSEFC, an Initiative

from Ministry of MSME, Govt. of India
Ministry of MSME has taken an initiative for filing online application by the supplier
MSE unit against the buyer of goods/services before the concerned MSEFC of his/her
State/UT. These will be viewed by MSEFC Council for their actions. These will be also
visible to Concerned Central Ministries, Departments, CPSEs, State Government, etc for
pro-active actions.
(10.3)MSME SAMBANDH is a Public Procurement Policy Monitoring Portal, sharing

factsheets about public procurement by Central Public Sector Enterprises (CPSEs), and
facilitating officer login to publish such factsheets
1. What is MSME SAMBANDH?
The MSME SAMBANDH is the Public Procurement Portal launched by Central

Government for the MSME. The main objective to launch this portal is to monitor the
implementation of the Public Procurement from MSEs by Central Public Sector
Enterprises (sambandh.msme.gov.in).
The Ministry of MSME came with the Public Procurement Policy for Micro and Small
Enterprises (MSE) Order, 2012 on 26th March 2012 which has mandated that every
Central Ministry/Department/PSU shall set an annual goal for procurement from the
MSE sector at the beginning of the year, with the objective of achieving an overall
procurement goal of minimum 20% of the total annual purchases from the products or
services produced or rendered by MSEs
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The following amendments were made by the Ministry in the Public Procurement Policy
for the Micro and Small Enterprises (MSEs) Order, 2012 on 9th November, 2018:
 The word “20%”, wherever they occur, the figures and word “25%” shall be
substituted; and
 Special provision for Micro and Small Enterprise owned by women. Out of the
total annual procurement from Micro and Small Enterprises, 3% from within the
25% target shall be earmarked for procurement from Micro and Small Enterprises
owned by women
(10.4)MSME-Sampark
 The MSME Sampark portal is a digital platform, wherein, jobseekers (passed out
trainees / students of 18 MSME Technology Centres) and recruiters (various
reputed national & multinational companies) register themselves for getting
employment and getting right kind of manpower respectively.
 MSME Technology Centres have been one of the key contributors to the
Make in India initiative by contributing in various verticals such as Aerospace,
Automobile, Electronics, Glass, Footwear, Sports goods, Fragrance & Flavour,
etc. These Centres are providing training to around 1.5 lakh students annually and
most of them are being absorbed by industry within the country as well as
abroad.
 Skill Development is only one half of the challenge, finding the right
employment opportunity for these skilled youth, is yet another. While major
corporates have well-defined recruitment processes with a national reach, the
challenge remains for small businesses and entrepreneurs to find the right person
for the job with relevant experience and skill-set. On the other hand, the job
seekers struggle to match their skill sets with the role, position, required
experience, monetary expectation, location & industry verticals leaves with
too many parameters to be matched in a limited opportunity map. To bridge this
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gap between the Recruiters and Job Seekers, The Ministry of MSME has
launched - MSME SAMPARK.
How It Works ?
Recruiters Point of View

 One has to register in the portal with basic minimal information and need to
update profile post registration, which will help them to have better reach to
trainees of MSME TCs (Job seekers).
 In case of any issue, they may contact the centre to expedite registration. The
existing recruiters of TCs and contact centre will exchange their user credentials
to their contact person. You will be asked to change your password after your first
login.
 Recruiters may approach contact centre for their job postings without self
registration and necessary assistance will be provided in registration and job
posting
 Recruiters can do a candidate search without registration also, however to contact
the candidate registration is must.
Candidates Point of View
 One has to register in the portal with basic minimal information and need to
update profile post registration which will help the candidate to have better reach
to recruiters.
 Candidate need to provide name, institute name & date of birth for registration.
 Candidates with incorrect credentials / data feeding would not be allowed to
further register themselves on the portal and access will be denied.
 Candidates may carry out job search without registration, however, cannot contact
the employer without registration in portal.
Email : sampark-msme(at)gov(dot)in
Toll free No : 18001237376
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(10.5)Entrepreneurship and Skill Development Programs
Entrepreneurship Skill Development Programme (ESDP)
Related Schem-Entrepreneurship Skill Development Programme (ESDP)
Description-Entrepreneurship promotion and development Programmes are being

organized regularly to nurture the talent of youth by enlightening them on various aspects
of industrial/business activity required for setting up MSEs. These Programmes are
conducted for youth and other people interested to set up their own industrial/self-
employment venture. Such activities are also organized in ITIs, Polytechnics and other
technical institutions/business schools, where skill/talent is available to motivate them
towards self-employment.
Nature of assistance-The following activities are conducted under the ESDP Scheme
1. Industrial Motivational Campaign (IMC) – Two days
2. Entrepreneurship Awareness Programme (EAP) – Two Weeks
3. Entrepreneurship-cum-Skill Development Programme (E-SDP) – Six Weeks
4. Management Development Programme (MDP) – One Week
Above mentioned activities/programmes will be conducted through Implementing

Agencies (lAs) i.e. MSME-DIs & MSME-TCs under the Office of Development
Commissioner(MSME); Ministries, Departments, organizations/, Corporations, PSUs,
agencies under the administrative control of Central/State Governments, as approved by
the Empowered Committee headed by AS & DC(MSME) from time to time. Respective
lAs (other that MSME-Dls) will be responsible for submitting utilization certificates for
grants/funds issued to them by the end of financial year. Overall 40% of the targeted
beneficiaries of EAPs and E-SDPs should be Women.
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Who can apply? Youth and other people interested to set up their own
industrial/business/self-employment venture. The qualification of the participants and
structure of the fees will be decided by the Implementing Agencies. The age of the
participants will be 18 years and above.
How to apply? Please contact nearby MSME Development Institute, MSME-Technology

Centre. Addresses and contact details of these organizations are available on Web Portal:
Download The file ( bytes) htm Icon
(10.6)Infrastructure Development Program
Micro & Small Enterprises Cluster Development (MSE-CDP)
Related Scheme-Micro & Small Enterprises Cluster Development (MSE-CDP)
Description-The Ministry of MSME has adopted cluster development approach for

enhancing productivity and competitiveness as well as capacity building of MSEs. The
Scheme supports financial assistance for establishment of Common Facility Centres
(CFCs) for testing, training centres, R&D, Effluent Treatment, raw material depot,
complementing production processes etc. and to create/upgrade infrastructural facilities
(IDs) in the new/existing industrial areas/clusters of MSE’s such as power distribution
network, water, telecommunication, drainage and pollution control facilities, roads,
banks, raw materials, storage and marketing outlets, common service facilities and
technological backup services for MSEs in the new/ existing industrial estates/areas.
Nature of assistance-Hard interventions, i.e., setting up of CFCs with maximum eligible

project cost of Rs 15.00 cr with GoI contribution of 70% (90% for special category States
and for clusters with more than 50% women/micro/village/ SC/ST units). Infrastructure
development in the new/ existing industrial estates/areas in which the maximum eligible
project cost is Rs 10.00 cr, with GoI contribution amounting to 60% of project cost (80%
for special category States and for clusters with more than 50% women/micro/SC/ST
units).
Who can apply?-Clusters, Industrial associations/Consortia
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How to apply? -Online applications can be filled at https://cluster.dcmsme.gov.in ,

Hardcopy of applications need to be sent through State Governments or their autonomous
bodies or field institutes of the Ministry of MSME i.e., MSME- DIs. The proposals are to
be approved by the Steering Committee of MSE-CDP.
10.7PMEGP (Prime Minister Employment Generation Programme) Portal online

Application, Login, Apply Loan, Eligibility, Apply Second Loan at
https://www.kviconline.gov.in.
PMEGP
PMEGP is the portal that the banks provide loans to the entrepreneurs as financial
support to their projects. Prime Minister Employment Generation Programme (PMEGP)
e-Portal was launched by the Ministry of Micro, Small and Medium Enterprises.
Currently, the scheme is implemented by KVIC (Khadi and Village Industries
Commission).
If you are trying to apply for a loan then we are here to share with you all the details
regarding the Scheme. Just follow the simple process given in this article.
PMEGP Login
Name of Scheme Prime Minister Employment Generation Programme

(PMEGP)
Launched by Government of India
State All states of India
Scheme type Central Government
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Objective To provide loan for projects and employment
Beneficiary Citizens of India
Official Website https://www.kviconline.gov.in
Application mode Online
Scheme Launched on 20th October 2020
Prime Minister Employment Generation Programme (PMEGP)
PMEGPRequired Documents
The following are the important documents that the applicant needs to attach along with
the application form:
 Aadhaar card
 Caste certificate
 PAN Card
 Income Certificate
 Education Qualification Certificate
 Passport size photo
 Residential proof documents
 Domicile Certificate
 Mobile Number
PMEGP Scheme Application Form Online Process For Individual
1. Firstly, visit the official portal of Scheme Prime Minister Employment

Generation Programme i.e. www.kviconline.gov.in.
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2. From the homepage, click on the PMEGP link located on Menu.

3. Now, select the PMEGP PORTAL link and open it in another tab.
4. You will be redirected to the Official portal, here, click on the “Online
Application form for Individual” option.
5. The application form will appear on your screen.
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6. Fill in all your details including Aadhaar card number, Qualification, Address,
Taluk, Mobile Number, eMail, PAN No, Type of Activity, etc…
7. Also, provide the applicant’s bank details i.e. Account number and IFSC Code.
8. Check all given details once before submitting the application.

9. Click on the Save Applicant Data button.
10. Attach the required documents to the application.
11. Finally, click on the Submit button to finalize the application.
The application ID/User ID and password will be sent to applicant registered email or
mobile number.
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PMEGP Loan
1. Go to the official website of PMEGP i.e. https://www.kviconline.gov.in.

2. Click on the portal link or click on the following direct link given.
https://www.kviconline.gov.in/pmegpeportal/pmegphome/index.jsp
3. On the Homepage, navigate and click on the “Apply Online (For Second
Loan)” link.
4. Select the Online Application option.
5. Now, you will be redirected to the application form page.

6. Here, choose the given details as per the first loan.
7. Enter application ID, Aadhaar no, PAN No, and click on Next.
8. On the next application form, the applicant needs to fill in all the details given
along with the proofs.
9. Upload the required documents along with the application.
10. Recheck the application and click on Submit to finalize the application.
PMEGP Scheme Application Form Online Process For Non-Individual
1. Firstly, visit the official portal of Scheme Prime Minister Employment

Generation Programme. www.kviconline.gov.in.
2. From the homepage, click on the PMEGP link located on Menu.
3. Now, select the PMEGP PORTAL link and open it in another tab.
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4. You will be redirected to the Official PMEGP portal, here, click on the
“Online Application form for Non-Individual” option.
5. Choose an organization from the list i.e. Self Help Groups (SHGS), Trust,
Redg. Institutions, Co-Operative Societies.
6. Fill in the application with all the group information and bank account
details.
7. Click on Save Applicant Data.
8. Now, attach the required documents to the application form.
9. Re-check the application and click on the Submit to submit the application.
Eligible Caste or Category applicants
 SC
 ST (Scheduled Tribes)
 Disabled people
 OBC (Other Backward Classes)
 North eastern state people
 Minority category
 Former serviceman
Helpline Number
Phone Number: 022-26711017
Address:
State Director, KVIC
Address available at http://www.kviconline.gov.in
Dy. CEO KVIC, Mumbai
PMEGP (Prime Minister Employment Generation Programme) Portal
10.8 UDYAM REGISTRATION PORTAL
Except this portal of Government of India and Government's Single Window Systems, no
other private online or offline system, service, agency or person is authorized or entitled
to do MSME Registration or undertake any of the activity related with the process.
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Important to Know
An enterprise shall be classified as a micro, small or medium enterprise on the basis of the
following criteria, namely: --
 (i) a micro enterprise, where the investment in plant and machinery or equipment
does not exceed one crore rupees and turnover does not exceed five crore rupees;
 (ii) a small enterprise, where the investment in plant and machinery or equipment
does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
and
 (iii) a medium enterprise, where the investment in plant and machinery or
equipment does not exceed fifty crore rupees and turnover does not exceed two
hundred and fifty crore rupees.
For the detailed legal framework for classification of MSMEs and Procedure for their
Registration
Must Know
Government has organised a full system of Facilitation for Registration Process

 An enterprise for the purpose of this process will be known as Udyam and its
Registration Process will be known as 'Udyam Registration'
 A permanent registration number will be given after registration.
 After completion of the process of registration, a certificate will be issued online.
 This certificate will have a dynamic QR Code from which the web page on our
Portal and details about the enterprise can be accessed.
 There will be no need for renewal of Registration.
 Our single window systems at Champions Control Rooms and at DICs will help
you in the process.
 Registration Process is totally free. No Costs or Fees are to be paid to anyone.
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Must Follow
MSME Registration is free, paperless and based on self- declaration

 MSME registration process is fully online, paperless and based on self-declaration.
 No documents or proof are required to be uploaded for registering an MSME.
 Only Adhaar Number will be enough for registration.
 PAN & GST linked details on investment and turnover of enterprises will be taken
automatically from Government data bases.
 Our online system will be fully integrated with Income Tax and GSTIN systems.
 Having PAN & GST number is mandatory from 01.04.2021.
 Those who have EM-II or UAM registration or any other registration issued by any
authority under the Ministry of MSME, will have to re-register themselves.
 No enterprise shall file more than one Udyam Registration. However, any number
of activities including manufacturing or service or both may be specified or added in
one Registration.
10.9 MSME Databank -When running a business, time is of the essence and as the
business flourishes, mergers, acquisitions are bound to happen for many firms. Even
minor delays in financing can result in missing out on a lucrative market opportunity.
This would require a substantial amount of investment and funding for the business.
Small business finance can also be helpful in such cases. Business owners can use loan
funds to expand and further grow their business. The Ministry of MSME has constantly
uplifted and facilitated MSMEs by transforming them into a digitally empowered
community. With the introduction of the MSME Databank web portal, it is now easier to
get an online Census of the MSMEs in India.
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What is MSME Databank?
The MSME Databank will contain a detailed database of all MSME units in India. With
this information the Ministry of MSME will have the Census data online. It will also help
MSMEs to participate in the procurement process under the Public Procurement Policy of
the Government of India. This detailed database will contain all the information and
requirements related to Joint Venture, technology transfer, import-export of machinery
within the business. The MSME Databank also enables to monitor various loan schemes
and policies structured specifically for MSMEs so that the government can pass on the
benefits directly to small business owners.
Who can Apply for MSME Databank?
 Small Business Units

 Industry associations such as CII, DICCI
 Organization associated with MSME development organizations such as DC
MSME, NSIC, KVIC, Coir Board, etc.
 Existing and new SC/ST entrepreneurs
Eligibility Criteria for MSME Databank
 Promoters and entities with Aadhaar are eligible

 Promoter’s Udyog Aadhaar Number for the business and PAN.
 MSME Units which are getting benefits from the government
 MSME Development (Furnishing of Information) Rules, 2009 requires all MSME
enterprises to provide information relating to their business to the government of
India.
Features of MSME Databank
 Web-based secured online application

 Accessible 24/7
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 Helps the government to buy their procurements from MSMEs

 Registered MSMEs will be eligible for becoming suppliers of Government
 Aadhaar and Udyog aadhar enabled enrolment
 Enrolment on self-certification basis
 Easy updation by MSME units as and when required
 Exclusive access to government departments and PSUs users provided to search
MSME units for their procurement needs.
 Real-time MIS Dashboard for monitoring and updation
 Mapping of products with HS/NPC codes for easy classification
10.10 About SFURTI
 SFURTI is Scheme of Fund for Regeneration of Traditional Industries.

 Ministry of Micro Small and Medium Enterprises (MSME), Govt. of India has
launched this scheme in the year 2005 with the view to promote Cluster
development.
 As per the revised guidelines, the following schemes are being merged into
SFURTI:
o The Scheme for r Enhancing Productivity and Competitiveness of Khadi
Industry and Artisans
o The Scheme for Product Development, Design Intervention and Packaging
(PRODIP)
o The Scheme for Rural Industries Service Center (RISC) and
o Other small interventions like Ready Warp Units, Ready to Wear Mission,
etc.
Objectives of Scheme
 To organize the traditional industries and artisans into clusters to make them
competitive and provide support for their long term sustainability and economy of
scale;
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 To provide sustained employment for traditional industry artisans and rural

entrepreneurs;
 To enhance marketability of products of such clusters by providing sup port for
new products, design intervention and improved packaging and also the
improvement of marketing infrastructure;
 To equip traditional artisans of the associated clusters with the improved skills
and capabilities through training and exposure visits;
 To make provision for common facilities and improved tools and equipment for
artisans to promote optimum utilization of infrastructure facilities;
 To strengthen the cluster governance systems with the active participation of the
stakeholders, so that they are able to gauge the emerging challenges and
opportunities and respond to them in a coherent manner;
 To build up innovated and traditional skills, improved technologies, advanced
processes, market intelligence and new models of public - private partnership s, so
as to gradually replicate similar models of cluster - based regenerated traditional
industries
 To look for setting up of multi-product cluster with integrated value chain and a
strong market driven approach for viability and long term sustainability of the
cluster;
 To ensure convergence from the design stage with each activity of the cluster
formation and operations thereof.
 To identify and understand cluster‟s target customers, understand their needs and
aspirations and develop and present product lines to meet the requirement.
Substantial focus should be on the buyer segment that places a premium on
natural, eco-friendly, ethically sourced and the uniqueness of the Khadi and VI
products.
 To develop specific product lines out of the currently offered diversified basket of
heterogeneous products based on the understanding of the target consumer
segment. A brand unification exercise also needs to be done to maximize the
value.
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 To make a paradigm shift from a supply driven selling model to a market drive n
model with the right branding, focus product mix and correct positioning and
right pricing to make the offering holistic and optimal for each of the focus
categories.
 To tap the E-Commerce as a major marketing channel given the outreach and the
growing market penetration of E-Commerce, the re is a need to devise a quick
strategy to make its presence felt in the E - Retail space.
 To make substantial investment in the area of product design and quality
improvement. There is a need to standardise the quality of inputs and processes so
that the products meet the quality benchmarks. Research need to be done to
develop new textures and finishes to cater to the prevailing market trends.
Target Sectors and Potential Beneficiaries
The target sectors and potential beneficiaries will include:

 Artisans, workers, machinery makers, raw material providers, entrepreneurs,
institutional and private business development service (BDS) providers.
 Artisan guilds, cooperatives, consortiums, networks of enterprises, self-help
groups (SHGs), enterprise associations, etc.
 Implementing agencies, field functionaries of Government
institutions/organisations and policy makers, directly engaged in traditional
industries.
Criteria for Selection of Clusters
The selection of clusters will be based on their geographical concentration which should
be around 500 beneficiary families of artisans/micro enterprises, suppliers of raw
materials, traders, service providers, etc., located within one or two revenue sub-divisions
in a District (or in contiguous Districts). The clusters would be from khadi, coir and
village industries, including leather and pottery. The potential for growth in production
and generation of employment opportunities will also be considered in selecting clusters
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under SFURTI. The geographical distribution of the clusters throughout the country, with
at least 10 per cent located in the North Eastern region, will also be kept in view while
selecting clusters.
Project Interventions
The Scheme cover s three types of interventions namely "soft interventions‟, 'hard
interventions' and 'thematic interventions‟.
 Soft interventions - General awareness, counselling, motivation and trust building;
Skill development and capacity building; Institution development; iv. Exposure
visits; v. Market promotion initiatives; vi. Design and product development; vii.
Participation in seminars, workshops and training programmes on technology up-
gradation, etc.
 Hard Interventions - Creation of facilities such as Multiple facilities for multiple
products and packaging wherever needed; Common facility centres (CFCs); Raw
material banks (RMBs); Up-gradation of production infrastructure; Tools and
technological up-gradation; Warehousing facility; Training center; Value addition
and processing center
 Thematic interventions - cross - cutting thematic interventions at the sector level
including several clusters in the same sector with emphasis on both domestic and
international markets . These will primarily include : Brand building and
promotion campaign; New media marketing; e-Commerce initiative; Innovation
Financial Assistance
The financial assistance provided for any specific project shall be subject to a maximum
of Rs 8 (eight ) crore.
Type of clusters Per Cluster Budget Limit
Heritage Clusters (1000 - 2500 artisans) Rs 8.00 crore
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Major Clusters (500 - 1000 artisans) Rs 3.00 crore
Mini - Clusters (Upto 500 artisans) Rs 1.50 crore
For NER/ J&K and Hill States, there will be 50% reduction in the number of artisans per
Cluster.
Scheme Steering Committee (SSC)
The Ministry of Micro, Small and Medium Enterprises (MSME) will be the coordinating
Ministry providing overall policy, coordination and management support to the Scheme.
A Scheme Steering Committee (SSC) will be constituted under the chairmanship of
Secretary (MSME).
Nodal Agencies (NAs)
The following agencies shall be designated as the Nodal Agencies for the Scheme:
1. Khadi and Village Industries Commission - for Khadi and Village Industry
clusters
2. Coir Board - Coir based clusters
Technical Agencies (TAs)
Established national - level institutions, with proven expertise in artisanal and small
enterprise cluster development shall be engaged as Technical Agencies (TAs) to provide
close handholding and implementation support to the SFURTI clusters.
Implementing Agencies (IAs)
Implementing Agencies (IAs) would be non-Government organizations (NGOs),

institutions of the Central and State Governments and semi - Government institutions,
field functionaries of State and Central Govt., Panchayati Raj institutions (PRIs), etc.
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with suitable expertise to undertake cluster development. One IA will be assigned for
only one cluster (unless it is an agency with State - wide coverage). The selection of IAs,
based on their regional reputation and experience of working at the grass - roots level,
will be done by the Nodal Agencies (NAs), on the basis of transparent criteria.
10.11 Aspire - A Scheme for Promotion of Innovation, Rural Industries and

Entrepreneurship
Govt. Of India, Ministry of MSME

ASPIRE- was launched to set up a network of technology centres and to set up incubation
centres to accelarate enterpreneurship and also to promote startups for innovation in agro
industry
Objective Of The Scheme
The main objectives of the scheme are
to:
1.Create new jobs and
reduceunemployment 2.
Promote entrepreneurship culture in
India 3.G
rassroots economic development at district
level 4.
Facilitate innovative business solution for un-met social
needs 5.
Promote innovation to further strengthen the competitiveness of MSME sector.
Nature Of Assistance
80 Livelihood business incubators (2014-2016) to be set up by NSIC, KVIC or Coir Board or
any other Institution/agency of GoI/State Govt. on its own or by any of the agency/Scheme for
promotion of Innovation, Entrepreneurship and Agro-Industry organisation of the M/o MSME,
one-time grant of 100% of cost of Plant & Machinery other than the land and infrastructure or
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an amount up to Rs.100 lakhs whichever is less to

beprovided
In case of incubation centres to be set up under PPP mode with NSIC, KVIC or Coir Board or
any other Institution/agency of GoI/State Govt., one- time grant of 50% of cost of Plant &
Machinery other than the land and infrastructure or Rs.50.00 lakhs, whichever is less to be
provided
Assistance towards the training cost of incubates will be met out of the ATI scheme of the
Ministry as far as possible for both
centres
Total budget plan is Rs.62.50 crore for 2014-2016.

Who Can Apply
Implement the IncubationandCommercialisation of Business Ideas Programme through
technical/research institutes including those in the field of agro based industry.
These would be designated as Knowledge Partners and would incubate new/existing
technologies for their commercialisation. To provide funds for the incubator/incubation and
create necessary synergy between this scheme and the Livelihood Business
Incubators/Technology Business Incubators and Incubation schemes of
MSME/NSIC/KVIC/Coir Board/ Other Ministries/Departments as well as Private incubators.
How To Apply
Application can be sent to Aspire Scheme Steering Committee of Ministry of MSME.
Scheme Steering Committee will be responsible for overall policy, coordination, and
management support. The Council will be chaired by Secretary, Ministry of MSME
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Saraswati IAS PCS, Ranchi, JharkhandInstitute of UPSC/ IAS, JPSC, BPSC and Others State

PCSMail ID- saraswatiiaspcs@gmail.com Website- saraswatiiaspcs.com Contact No-

BPSC Project Manager

Thanks for your support and Regards

Compiled, Edited, Published and Distributed by

Dr. Kanchan Goswami

According to BPSC Project Manager PT Syllabus

Topic wise Notes Notes

Prepared by Experience Teacher

1 Introduction to Economy 3-8

2. Indian Economics and Planning 9-18

5. Monetory Policy 46-81

8. Economic Reforms 121-130

9. Globalization and Its impact on Indian Economy 131-136

11. Bihar Industrial Investment Promotion Policy,2016 Annexue I

12. Bihar Industrial Investment Promotion Act,2016 Anexure II

13. Tetative Questions Annexure III

14. References Annexure IV

BPSC Project Manager

Though GDP is typically calculated on an annual basis, it is sometimes calculated on

GDP Formula = C + G + I + NX (where C=consumption; G=government spending;

Understanding Gross Domestic Product (GDP)

1.2 Gross National Product'

Where C - Consumption, I - investment, G - Government, X is net exports, and Z is net

In calculation, GNP adds government expenditure, personal consumption expenditure,

1.3 Potencial GDP

Potential GDP provides an important benchmark for regulators and policymakers to

1.4 Per Capita Income

5.Purchasing power parity is used to measure GDP and is used as an alternative to

2.Indian Economics and Planning

2.1 Economy is normally categorized into three sectors namely −

2.2 Visvesvaraya’s Plan:

2.3 Ficci Plan

2.5 Nehru Mahalnobis Model Of Economic Growth

to attain rapid growth of Indian economy by increasing the importance of public

2.6 Rolling Plan (1978–1983)

2.7 Rao Manmohan Singh Model Of Economic Growth

2.8 Gandhian Plan

2.9 People’s Plan

2.10 Sarvodaya Plan

Planning and Development Department

Consultative Committee of Economist: under the chairmanship of Ramaswamy

Aim and Objectives and Functions

To develop mechanisms to formulate credible plans at the village level and

Aayog is developing itself as a State-of-the-art Resource Centre, with the necessary

Design Policy & Programme Framework

Foster Cooperative Federalism

The list of verticals is as below:

Women & Child Development

Governance & Research

HRD,Skill Development & Employment

Rural DevelopmentSustainable Development Goals

Natural Resources & EnvironmentScience & Tech

State Coordination & Decentralized Planning (SC&DP)

Constitution of NITI Aayog

Chairperson-Shri Narendra Modi, Hon'ble Prime Minister

Shri Raj Nath Singh, (Minister of Defence

2. Price Stability 3. Accelerating the rate of economic development

4. Optimum allocation of resources

5. Equitable distribution of income and wealth

7. Capital formation and growth

Deficit and Types