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Basic Terminology
Gross Domestic Product (GDP):
❑ It is the value of all final goods and services produced within the boundary of a nation
during one year.
❑ In GDP the most important thing to understand is that fact that it refers primarily to a
geographical area.
❑ GDP is the total value of all final goods and services produced within the boundary of
a country during a given period of time, generally 1 year.
❑ Here the produce of both resident citizens and foreign nationals who reside within that
geographical boundary is considered.
GDP = Q x P;
Q = Total quantity of final goods and services produced in a country.
P = Prices of final good and services.
Important Aspect of GDP:
❑ In GDP calculations gain from resale of product are excluded.

❑ In GDP calculations services provided by an agent for that particular resale is added.

❑ In GDP calculations the value of only final good are included.

❑ In GDP calculations only newly produced good are counted.

❑ In GDP calculations considers only marketed goods.

Gross National Product( GNP):

❑ It refers to all the citizens of a nation, here the catch word is ‘National’.

❑ It is a measure of total value of total output or production of final goods and services
produced by the nationals of a country during a given period of time, generally 1 year.

❑ GDP and GNP are related, In GNP what foreigners produce in the country is subtracted
from what Indian produce abroad or vice versa i.e. Net foreign Income

Net National Product (NNP)

❑ Net National Product (NNP) of an economy is the GNP after deducting the loss due to
‘depreciation’.

❑ Depreciation: It means wear and tear of good produced.

NNP = GNP – Depreciation

or,
NNP = GDP + Income from Abroad – Depreciation.
Net Domestic Product(NDP):
Net domestic product (NDP) is an annual measure of the economic output of a nation that
is adjusted to account for depreciation and is calculated by subtracting depreciation from
the gross domestic product (GDP).

NDP=GDP−Depreciation

An increase in NDP would indicate growing economic stagnation, while a decrease would
indicate ongoing economic health.
National Income(NI):
❑ The National Income is the total amount of goods and services produced within the
nation during a given period. It is the total of factor income that is wages, interest, rain,

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received by a factor of production that is labour, capital, land and entrepreneurship of a

nation.

❑ National Income is calculated by subtracting indirect taxes from NNP and adding the
subsidies to the NNP.

Nominal GDP:
❑ Nominal Gross Domestic Product is GDP evaluated at current prices. Nominal GDP
include changes in prices due to inflation.

Real GDP: Real Gross Domestic Product is an inflation adjusted measure that reflects the
value of all goods and services produced by an economy in a given year and is often
referred as constant price, inflation corrected GDP.
❑ It measures total economic output, adjusted for price changes.

❑ It is Real GDP which is used for calculation of economic growth.

❑ India, the growth rate is measured in terms of real GDP.

❑ Does to measure growth rate of an economy, we would need to know the real GDP of
current year as well as the previous year.

Real GDP= Nominal GDP at Constant Price wrt BY

Real GDP= Nominal GDP- Inflation wrt BY

Growth Rate= Real GDP( CY)- Real GDP(PY)/Real GDP(PY)*100.

GDP Deflator:
❑ The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It
is calculated by dividing nominal GDP by real GDP and then multiplying by 100.

❑ GDP Deflator = Nominal GDP/ Real GDP x 100

Gross Value Added ( GVA):

❑ Since 2011-12, India measures its growth, also in terms of gross value added GVA,
which is nothing, but GDP calculated at market cost minus the effect of indirect taxes and
subsidies.

Basic Terminology II
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).
❑ The higher the repo rate, the more costly are the funds for banks and hence, higher
will be the rate that banks pass on to customers.

❑ High rate signals that access to money is expensive for banks; lesser credit will flow
into the system, and that helps bring down liquidity in the economy.

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.
❑ An increase in the reverse repo rate will decrease the money supply and vice-versa,
other things remaining constant.

❑ An increase in reverse repo rate means that commercial banks will get more incentives
to park their funds with the RBI, thereby decreasing the supply of money in the market.

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Liquidity Adjustment Facility (LAF): The LAF consists of overnight as well as term repo
auctions. The RBI introduced the LAF as a result of the Narasimham Committee on Banking
Sector Reforms (1998).
❑ The RBI can use the liquidity adjustment facility to manage high levels of inflation.

❑ It does so by increasing the repo rate, which reduces investment and money supply in
India's economy.

❑ Conversely, if the RBI wants to boost the economy after a time of sluggish economic
growth, the repo rate may be lowered to allow companies to borrow, thereby increasing
the supply of money.

Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills of
exchange or other commercial papers. 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.
❑ When RBI raises the bank rate, it increases the borrowing cost, and thereby
discourages borrowing. Because of this, credit formation process and money flow reduce,
and vice versa.

Reserve Ratios (SLR, CRR)

SLR (Statutory Liquidity Ratio): All commercial banks in the country are required to
keep a given percentage of their Net demand and time liabilities (NDTL) as liquid assets
such as unencumbered government securities, cash and gold in their vault itself.
❑ It prevents the bank from lending all its deposits which is too risky.

❑ Changes in SLR often influence the availability of resources in the banking system for
lending to the private sector.

❑ The lesser the amount of SLR, the more banks would lend outside; thus, increasing
the money supply.

Cash Reserve Ratio (CRR): The Cash Reserve Ratio is the amount of funds that the
banks are bound to keep with Reserve Bank of India as a certain percentage of their Net
Demand and Time Liabilities (NDTL). Bank cannot lend it to anyone. Bank earns no interest
rate or profit on this.
❑ When CRR is reduced, this means banks required to keep fewer funds with RBI and
resource available to banks for lending will go up.

❑ Thus, a lower CRR would increase the money supply and vice versa.

Open Market Operations (OMOs): These include both, outright purchase and sale of
government securities, for injection and absorption of durable liquidity, respectively.
❑ If RBI wants to induce liquidity or more funds into the economy, it will buy government
securities, and

❑ If RBI wants to curb the amount of money out there, it will sell the securities to banks,
thereby reducing the amount of cash that banks have.

Monetary Policy Transmission

Monetary policy transmission is the process by which RBI's policy actions achieve its
effective final goal of addressing inflation and growth concerns. There are many monetary
policy signals given by the RBI; the most significant one is the repo rate.
To improve the transmission of the monetary policy to the bank lending rates, the RBI
over the years has taken many measures which include transitioning from the prime
lending rate (PLR) system (1994) to the benchmark prime lending rate (BPLR) system
(2003), the base rate system (2010), and the marginal cost of funds-based lending rate
(MCLR) system (2016).

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RBI has now mandated all banks to link their floating rate loans to an external benchmark
instead of the marginal cost-based lending rate (MCLR).
Money Supply:
Money Supply as a term indicates the total value of monetary assets available in an
economy at a given point of time. It Includes:
❑ Currency + Coins in circulation

❑ Demand & time deposits in banks

❑ Post office deposits and such related instruments.

Monetary Aggregates:
The RBI defines the monetary aggregates as the measure of amount of money in
circulation within the country. RBI a adopt four of them :

❑ M1(Narrow Money)= currency with the public(C)+ demand deposit with the banking
system( Current+ Saving Account)+ Other deposits with the RBI(Deposits from foreign
central Banks).

❑ M2= M1+ deposit of the post office savings account.

❑ M3(Broad Money)= M1+ Time deposit with banking system.

❑ M4= M3+ all deposit with post office.

Flexible Inflation Targeting Framework

The amended RBI Act 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 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.
Market Stabilization scheme (MSS)
It is a monetary policy intervention by the RBI to withdraw excess liquidity (or money
supply) by selling government securities in the economy.
❑ The MSS was introduced in April 2004. Main thing about MSS is that it is used to
withdraw excess liquidity or money from the system by selling government bonds.

❑ MSS is used when there is high liquidity in the system.

❑ The issued securities are government bonds and they are called as Market Stabilisation
Bonds (MSBs). Thus, the bonds issued under MSS are called MSBs. These securities are
owned by the government though they are issued by the RBI. It is to be remembered that
government is the owner of the securities. Usually, government’s securities
(bonds/treasury bills) are sold or issued by the RBI as the central bank is the banker to
the government.

❑ The securities or bonds/t-bills issued under MSS are purchased by financial institutions.
They will get an interest for purchasing the securities.

Priority sector lending

Priority sector refers to those sectors of the economy which may not get timely and
adequate credit in the absence of this special dispensation. Typically, these are small value
loans to farmers for agriculture and allied activities, micro and small enterprises, poor
people for housing, students for education and other low income groups and weaker
sections.
Priority Sector includes the following categories:
❖ Agriculture

❖ Micro and Small enterprises

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❖ Education

❖ Housing

❖ Export Credit

❖ Others

Total target for banks is to lend 40% of their total lending to priority sector. Out of this
40, 18% should be in agriculture and 10% to weaker sections.
Non-Performing Assets:
When the borrower stops paying interest or principal on a loan, the lender will lose money.
Such a loan is known as Non-Performing Asset (NPA). Indian Banking industry is seriously
affected by Non-Performing Assets.
❑ Based on different parameters the Non-Performing Assets are classified into different
types.

Classification of Non-Performing Assets (NPA):

1. Substandard Assets: These are the assets which have remained NPA for a period of
less than or equal to 12 months.

2. Doubtful Assets: If the asset is in the substandard category for a period of 12 months.

3. Loss Assets: These assets are of little value, it can no longer continue as a bankable
asset, there could be some recovery value.

CAR:
❑ It is known as Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk.

❑ CAR is decided by central banks and bank regulators to prevent commercial banks
from taking excess leverage and becoming insolvent in the process.

❑ The Basel III norms stipulated a capital to risk-weighted assets of 8%.

❑ In India, scheduled commercial banks are required to maintain a CAR of 9% while

Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms.

Financial Inclusion:
Financial inclusion may be defined as the process of ensuring access to financial services
and timely and adequate credit where needed by vulnerable groups such as weaker
sections and low income groups at an affordable cost.
In a diverse country like India, financial inclusion is a critical part of the development
process. Since independence, the combined efforts of successive governments, regulatory
institutions, and the civil society have helped in increasing the financial-inclusion net in
the country.
Jan Dhan-Aadhar-Mobile (JAM) Trinity
The combination of Aadhaar, PMJDY, and a surge in mobile communication has reshaped
the way citizens access government services.By significantly changing the concept of
individual identity, Aadhaar has not only brought about a secure and easily verifiable
system but also easy to obtain as well to help in the financial inclusion process.
National Bank for Agriculture and Rural Development (NABARD)
NABARD is an apex development bank in India having headquarters based in Mumbai
(Maharashtra) and other branches are all over the country.
Accredited with “matters concerning policy, planning and operations in the field of credit
for agriculture & other economic activities in rural areas in India”
NABARD was established on the recommendations of Shivaraman Committee on 12 July
1982 to implement
Balance of Payments (BoP)

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The International Monetary Fund (IMF) defines the Balance of Payments (BoP) as a
statistical statement that summarizes economic transactions between residents and non-
residents during a specific time period.
The BoP, thus, includes all transactions showing:
(a) Transactions in goods, services and income between an economy and the rest of the
world,
(b) Change of ownership and other changes in that economy’s monetary gold, special
drawing rights (SDRs), and financial claims on and liabilities to the rest of the world
(c) Unrequited transfers- transfer of money in which nothing is expected in return.
Example- Foreign aid, debt forgiveness etc.
These transactions are categorized into
(i) Current Account
(ii) Capital Account and Financial Account (capital account is redesignated as capital and
financial account)
The balance of payments is, basically, the record of all international financial transactions
made by a country's residents.
Foreign portfolio investment (FPI)
Foreign Portfolio investment represents passive holdings of securities such as foreign
stocks, bonds, or other financial assets, none of which entails active management
or control of the securities' issuer by the investor; where such control exists, it becomes
FDI.
In India, the term “Foreign Portfolio Investor” refers to FIIs or their sub-accounts, or
qualified foreign investors (QFIs) who are permitted to hold upto 10% stake in a company.
Foreign Institutional Investor (FII)
FII investment helps Indian companies to improve performance. Steps were taken to allow
foreign portfolio investments into the Indian stock market through the mechanism of
foreign institutional investors.
An institutional investor is an investment entity, one who proposed to invest their
proprietary funds or on behalf of "broad-based" funds or of foreign corporates and
individuals and belong to any of the under given categories can be registered for FII:
❖ Pension Funds

❖ Mutual Funds

❖ Investment Trust

❖ Insurance or reinsurance companies

❖ Endowment Funds

❖ Trustees

❖ Bank

Round Tripping
The term ‘round-tripping’ is self-explanatory. It denotes a trip where a person or thing
returns to the place from where the journey began. In the context of black money, it
leaves the country through various channels such as inflated invoices, payments to shell
companies overseas, the hawala route and so on. After cooling its heels overseas for a
while, this money returns in a freshly laundered form; thus completing a round-trip.
This route is far from simple or straightforward. Those indulging in this game are past
masters who make the money flow through multiple layers consisting of many entities and
companies. It could be invested in offshore funds that in turn invest in Indian assets. The
Global Depository Receipts (GDR) and Participatory Notes (P-Notes) are some of the other
routes that have been used in the past.
Double Tax Avoidance Agreement (DTAA)

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A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-
payers in these countries can avoid being taxed twice for the same income. A DTAA applies
in cases where a tax-payer resides in one country and earns income in another.
India has DTAAs with more than eighty countries, of which comprehensive agreements
include those with Australia, Canada, Germany, Mauritius, Singapore, UAE, the UK and
US.
DTAAs are intended to make a country an attractive investment destination by providing
relief on dual taxation. Such relief is provided by exempting income earned abroad from
tax in the resident country or providing credit to the extent taxes have already been paid
abroad. DTAAs also provide for concessional rates of tax in some cases.
But the problem is DTAAs can become an incentive for even legitimate investors to route
investments through low-tax regimes to sidestep taxation. This leads to loss of tax revenue
for the country.
Transfer Pricing Practices
Transfer price is the price at which related parties transact with each other, such as during
the trade of supplies or labor between departments. Transfer prices are used when
individual entities of a larger multi-entity firm are treated and measured as separately run
entities. It is common for multi-entity corporations to be consolidated on a financial
reporting basis; however, they may report each entity separately for tax purposes.
Demographic Dividends
It means to reap the benefits of the younger age population, i.e., the working age-group
population of the country which is on the rise. India is said to become one of the youngest
countries globally by 2040.

Wholesale Price Index (WPI) – WPI is Published by the Office of Economic Adviser,
Ministry of Commerce and Industry. The base year of All-India WPI has been revised from
2004-05 to 2011-12 in 2017. This tracks prices at wholesale level. WPI is an index that
measures and tracks changes in prices of goods; at the factory, mandi, and essentially at
various levels in the supply chain, before they reach the end consumer (retail level).This
inflation rate is often known as headline inflation.
Consumer Price Index (CPI) – CPI is compiled by the Labour Bureau in the Ministry of
Labour and Employment and National Statistical Organisation (CSO) in the Ministry of
Statistics and Programme Implementation. Base year is 2012. This tracks prices at
consumer level.
As the consumption basket of rural and urban areas are different, CPI inflation is calculated
separately for rural and urban areas. CPI (rural) and CPI (urban) both have the same 2012
base with slightly different weightage.