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Content
ECONOMY
• Basic Concepts Of Economics 3
• The Classification Of Economic System 7
• Calculation Of National Income 10
• Money 21
• Inflation 27
• Banking 35
• Indian Financial Market 58
• Capital Market 61
• Budget 70
• Fiscal Policy – Revenue 81
• Planning In India 93
• Poverty 105
• Unemployment 108
• Demographic Dividend 115
Economy
BASIC CONCEPTS OF ECONOMICS

What is Economics?
Economics is the Social Science that analyzes the production, distribution and
consumption of goods and services. Broadly, Economics is a social science that studies
human activities aimed at satisfying needs and wants. It encompasses production,
distribution, trade and consumption of goods and services.
Economics is usually divided into two main branches:
• Microeconomics – which examines the economic behavior of individual actors such as
consumer, business, households etc. to understand how decisions are made in the face
of scarcity and what effects they have on larger economy.
• Macroeconomics – which studies the economy and its features like National Income,
Employment, Poverty, Balance of Payments and Inflation.
What is Macroeconomics?
• Macroeconomics is a branch of economics which studies the economy as a whole. It
deals with the performance, structure and behavior of economy at national or regional
level.
• It studies about aggregated indicators such as GDP, Unemployment Rates and Price
Indices to understand how the whole economy functions.
• It develops models that explain the relationship between such factors as National Income,
Output, Consumption, Unemployment, Inflation, Savings, Investment, International Trade
and International Finance.
Vital Process of an Economy
By Vital Process we mean process without which an economy cannot exist. There are
three vital process of an economy:
1. Production 2. Consumption
A. Production
• In economy the word production includes not only the making of various goods but also
the services. For all of us services are also as essential as the goods. In fact, some of the
goods cannot be used unless the services are not provided such as Television or Radio
cannot be used unless the services of artists or technicians are provided. Thus production
includes the goods made and the services provided in an economy.
• There are some services which are provided by family members to themselves or to one
another like cooking and washing clothes, cleaning the house, ironing clothes, polishing
shoes and so on.
Mobile Number:- 8700170483, 9953101176 Website:- www.ravindrainstitute.com

Economy
• Such services are also a part of production but when it comes to measurement of the
value of these services, problems arise about getting the required data of the quantity
and value of these services. As such, in practical estimates, these services are left out
of production.
• Similarly, all leisure time, activities such as growing fruits, flowers and vegetables in
garden are also excluded from production for the same reason.
B. Consumption
• It is defined as an activity concerned with using up of goods and services for direct
satisfaction of wants. In other words, consumption is an act of satisfying one’s wants.
• Consumption also includes consumption of both goods and services. For Example: we
consume food, clothes, furniture etc. We use services of tailors, barbers, washerman,
repairers, tutors ect.
• Consumption activity takes place as soon as we buy these goods and services. In other
words, by consumption we mean acquiring of goods and services for consumption.
• All purchases by households, with an exception of purchase of a house, are consumption
purchases.
C. Investment
• Whatever is produced during a year is not generally acquired for consumption in that
year and is kept for future use in order to acquire more monetary amount or benefits.
• Goods lying with production units as raw materials in the process of production to
satisfy the demands are also investment which will bear the result in future.
• Investment in fixed capitals by production units like machines, equipments, vehicles,
buildings etc. during the year which are also known as durable use goods. Such
components are meant to production of goods which may or may not be used in the
same year and are kept for future use are also known as investment.
• During a particular year the goods are exceeding the production because of investment
in various levels.
Production, consumption and investment processes are interrelated in the following
manner
• First, production is the source of consumption and investment. If there is no production
there would be no consumption and investment. Given production, if there is more
consumption less would be available for investment.
• Second, consumption provides motivation for production and investment. If there is no
need for consumption, there is no need to invest and produce.
• Third, investment determines the level of production. The more we invest, the more we
can produce. Fourth, saving is the major source of financing investment. More saving
means more investment which in turn means more production leading to more
consumption and investment.
There are two components responsible for the excess of goods (during a particular
year)
1. Stock Investment: Addition to the stock of raw material, semi-finished goods and
finished goods during a year is called stock investment or inventory investment. Such
a stock at the beginning of the year is called opening stock and at the end of the year
is known as closing stock.
– The excess of closing stock over the opening stock is called inventory investment.

Economy
– However, it is possible that during a particular year the production may be less
than consumption. It implies that the closing stock is less than the opening stock.
This is called negative investment or disinvestment.
2. Fixed Investment: Acquiring up of durable use producer goods by production units is
called fixed investment such as adding new machines and equipments etc.
– Total investment equals the sum of inventory investment and fixed investment.
The alternative name of investment is capital formation.
Consumption Expenditure and Saving
Wages, salaries, rents, interests and profits earned by an individual has two alternatives:
Consumption Expenditure and Saving.
1. Consumption Expenditure: It’s a part of the income is spent on acquiring goods and
services for satisfaction of wants.
2. Saving: The unspent part of income is called saving. Thus saving equals excess of
income over expenditure. The saving is in the form of money.
3. Saving = Income – Consumption Expenditure
4. Why do people do save?
a. For emergency expenses on illness, old age or any other unexpected expenditure.
b. The main motive is to earn interest income by lending these savings. It gives them
an additional source of income in future years.
c. Savings play an important role in production process. In fact saving is a major
source of financing investment. Higher the savings more the possibility of investment.
Investment means acquiring goods and services for production. Savings are used to
acquire investment goods. So, saving is the foundation of investment.
Other Basic Terminologies
A. Final Goods
• The commodity produced by an enterprise is being sold out to the consumers. In the
process the commodity goes under various transformations through productive processes
into other goods before being sold to the consumers for Final Use. Such an item that is
meant for final use and will not pass through any more stages of production or
transformation is called a Final Good.
Why Final Good? Once sold to the consumer, it passes out of the active economic flow
and will not undergo further transformation by the action of the ultimate purchaser.
Thus, it is not in the nature of the good but in the economic nature of its use that a good
becomes a final good.
• For example: A car sold to a Consumer is a final good; the components such as tyres
sold to the car manufacturer are not; they are intermediate goods used to make the final
goods. The same tyres, if sold to a consumer, would be final goods.
Final goods are divided into two parts: Consumption Goods and Capital Goods
a) Consumption Goods
• Tangible goods that are produced and subsequently purchased for direct consumption
to satisfy the current human needs or wants.
• Example: Food, Clothing, Cigarettes, Pen, TV Set, and Radio etc.
• Similarly, services rendered to consumers by hotels, retailers, barbers etc. are Consumer
Services as they satisfy the immediate needs of the consumers.
• Consumer Goods are divided into two categories: Durable Goods and Non-Durable
Goods

Economy
• Durable Goods: This can be used in consumption again and again over a considerable
period of time. e.g., chair, car, fridge, shoes, TV set etc.
• Non-Durable Goods: are like single use goods which are used up by consumers in a
single act of consumption, e.g., milk, fruits, matches, cigarettes, coal, etc.
b) Capital Goods
• Capital goods are fixed assets of producers which are repeatedly used in production of
other goods and services. Alternatively durable goods which are bought for producing
other goods but not for meeting immediate needs of the consumer are called capital
goods.
• These goods are of durable character.
• For Example: tools, implements, machinery, plants, tractors, buildings, transformers,
etc.
• Capital Goods are used for generating income by production units. While they make
production of other goods possible, they themselves do not get transformed (or merged)
in the production process. Capital Goods undergo wear and tear and need repairs or
replacement over time.
• Capital Goods are the backbone of production processes as they aid and enable production
to go on continuously.
• Capital goods are purchased by the business enterprises either for maintenance or
addition to their capital stock so as to maintain or expand the flow of their production.
A. Intermediate Goods
• Goods that are used by a business in the production of other goods or services. It is also
referred to as producer goods. Intermediate Goods are used to make Consumer Goods.
• For Example: Timber and steel rods are intermediate products because they are sold
by the timber merchant or the steel dealer to the builder who uses them to produce the
final product - a house or a building.
B. Depreciation
• Almost everything we see around us has a useful life because it is being used up little by
little every day or will become outdated as technology changes. This ‘using up’ is called
depreciation.
• In other words, ‘The monetary value of an asset decreases over the time due to use, wear
and tear or obsolescence. This decrease is measured as Depreciation.’
• When the value of asset(s) erodes completely the capital asset has to be either replaced
or repaired. Expenses incurred for replacing and repairing are called depreciation
expenditure.
• Therefore, Gross Investment = Net Investment + Depreciation
• Net Investment will increase the production capacity and output of a nation, but not by
depreciation expenditure. So we have, NNP = GNP – Depreciation.
• The governments of the economies decide and announce the rates by which assets
depreciate and a list is published, which is used by the different sections of the economy
to determine the real levels of depreciations in different assets.

Economy
THE CLASSIFICATION OF ECONOMIC SYSTEM

Organizing Economy
An economic system of a nation is defined as a continuous process of setting up of
institutional arrangements by which a nation can satisfy unlimited and multiple wants of its
people to the maximum with the optimal allocation and utilization of its limited resources by
taking its production, distribution and consumption decisions.
The nature of economic system can be described in terms of the system of consumption,
production, distribution and exchange transaction. From the standpoint of these factors,
the economic system can be broadly classified as
A. Capitalist Economy
• Economy where means of production are owned and controlled by individuals and
private institutions with the objective of earning profits. The decisions regarding
production, distribution and consumption are made by forces of demand and supply
without much intervention by the state.
• USA, Canada, Mexico, Germany, Sweden, etc. are the examples of Capitalist Economy.
B. Socialist Economy
• Also known as State Economy where the means of production are owned and controlled
by the state. Here, central planning plays an important role in the matters related with
production, distribution and consumption.
• Denmark, Finland, Norway, New Zealand, etc. are the examples of Socialist Economy.
C. Mixed Economy
• It combines both capitalism and socialism. Here, means of production are owned and
controlled by both the state as well as private players. The forces of demand and supply
and central planning plays an equally important role in the matters related with
production, distribution and consumption.
• Mixed economy has emerged as the dominant economic system in several countries like
Australia, Iceland, United Kingdom, Japan, and Italy including India.
Sectors of the Economy

Any Economy includes contribution of different sectors like primary sector (mostly agriculture),
Secondary sector (industrial) and tertiary sectors (services), large, medium, small and tiny
sectors to the economy, and their linkages, integration with the world economy.
Human activities which generate income are known as economic activities. Economic
activities under the three sectors are broadly grouped into primary, secondary, tertiary
activities respectively. Also higher services under tertiary activities are again classified into
Quaternary and Quinary activities.

Economy
A. Primary Sectors
• Also known as Agricultural Sectors which includes exploitation of Natural Resources
such as land, water, vegetation, building materials and minerals.
• It thus includes hunting and gathering, pastoral activities, fishing, forestry, agriculture,
mining and quarrying etc.
• People engaged in primary activities are called red-collar workers due to the outdoor
nature of their work.
B. Secondary Sector
• Also known as Manufacturing Sector which adds value to the Natural Resources (obtained
by Primary activity) by transforming raw materials into valuable products.
• Secondary activities, therefore, are concerned with manufacturing, processing and
construction (infrastructure) industries.
People engaged in secondary activities are called blue collar workers.
A. Tertiary Sector
• Also known as Service Sector which
includes both production and exchange.
• The production involves the ‘provision’ of
services that are ‘consumed. Exchange,
involve s trade , transport and
communication facilities that are used to
overcome distance.
• People involved in tertiary sector are
known as White Collar Workers.
Tertiary Activities are further categorized
as:
a) Quaternary Activities: It’s the knowledge sector which demands a separate classification.
Personnel working in office buildings, elementary schools and university classrooms,
hospitals and doctors’ offices, theatres, accounting and brokerage firms all belong to
this category of services.
b) Quinary Activities: Services that focus on the creation, re-arrangement and
interpretation of new and existing ideas; data interpretation and the use and evaluation
of new technologies.
Often referred to as ‘gold collar’ professions, they represent another subdivision of the
tertiary sector representing special and highly paid skills of senior business executives,
government officials, research scientists, financial and legal consultants, etc.
The highest levels of decision makers or policy makers perform quinary activities.
Sectors of Economy
A. Agrarian Economy
• Also known as Agronomics is an applied field of economics concerned with the application
of economic theory in optimizing the production and distribution of food and fiber.
• It focused on maximizing the crop yield while maintaining a good soil ecosystem.
• It is centered upon the production, consumption, trade, and sale of agricultural
commodities, including plants and livestock.

Economy
• In the field of environmental economics, agricultural economists have contributed in

three main areas.
• Designing incentives to control environmental externalities (such as water pollution due
to agricultural production),
• Estimating the value of non-market benefits from natural resources and environmental
amenities (such as an appealing rural landscape), and
• The complex interrelationship between economic activities and environmental
consequences.
B. Industrial Economy
• It is the study of firms, industries, and markets. It looks at firms of all sizes – from
local corner shops to multinational giants such as Wal-Mart or Tesco. And it considers
a whole range of industries, such as electricity generation, car production, and
restaurants.
• Industrial Economics also gives insights into how firms organize their activities, as well
as considering their motivation.
• One of the key issues in industrial economics is assessing whether a market is competitive.
Competitive markets are normally good for consumers (although they might not always
be feasible) so most industrial economics courses include analysis of how to measure
the extent of competition in markets.
C. Service Economy
• It depends on selling services such as
banking, transport, information
technology and tourism etc.
• It refers to a financial concept that says
that services are becoming more and
more important in product offerings. The
service economy in developing countries
is mostly concentrated in financial
services, hospitality, retail, health,
human services, information technology
and education.
• Products today have a higher service component than in previous decades. In the
management literature this is referred to as the servitization of products or a
product-service system.
• Virtually every product today has a service component to it. For Example: Manufacturers
of computer hardware and software, as well as software application developers, now
consider service to be an integral part of their product offering. These companies
commonly promote their “solutions,” which consist of both products and services that
cannot be separated.

Economy
CALCULATION OF NATIONAL INCOME

• National Income is the total value of all final goods and services produced by the country
in certain year. The growth of National Income helps to know the progress of the country.
• In other words, the total amount of income accruing to a country from economic activities
in a year’s time is known as national income. It includes payments made to all resources
in the form of wages, interest, rent and profits.
• From the modern point of view, national income is defined as “the net output of
commodities and services flowing during the year from the country’s productive system
in the hands of the ultimate consumers.”
National Income Accounting (NIA)

National Income Accounting is a method or technique used to measure the economic
activity in the national economy as a whole.
NIA is mainly done for:
• Policy Formulation: It helps in comparing the estimates of the past from the future and
also forecast the growth rates in future. For example, if a country has a GDP of Rs. 103
Lakh which is 3 Lakh rupees higher than the last year, it has a growth rate of 3 per
cent.
• Effective Decision Making: To estimate the contribution of each of the sectors of the
economy. It helps the business to plan for production.
International Economic Comparison: It helps in comparing the level of development of
countries and provides useful insight into how well an economy is functioning, and
where money is being generated and spent. One can compare the standard of living of
different nations and its growth rate.
There are various terms associated with measuring of National Income.
A. GDP (GROSS DOMESTIC PRODUCT)
• Here the catch word is ‘Domestic’ which refers to ‘Geographical Area’
• The total value of all final goods and services produced within the boundary of the
country during a given period of time (generally one year) is called as GDP.

Economy
GDP = Q-P
Q = total quantity of final goods and services produced in the country (both by Indians
and foreigners residing within Indian boundary).
P = price of the final goods and services.
In this case, the final produce of resident citizens as well as foreign nationals who reside
within that geographical boundary is considered.
Types of GDP: Real GDP and Nominal GDP

• Real GDP: Refers to the current year production of goods and services valued at base
year prices. Such base year prices are Constant Prices.
• Nominal GDP: Refers to current year production of final goods and services valued at
current year prices.
Which one is a better measure?
• Real GDP is a better measure to calculate the GDP because in a particular year GDP
may be inflated because of high rate of inflation in the economy.
• Concept of Base Year: It is the year used as the beginning or the reference year for
constructing an index, and which is usually assigned an arbitrary value of 100.
• The base year is also known as Rebasing as by every 10 years there is change which will
be minimum 4% rise in price of items which requires changing the base year.
• Economists use a Price Index to find the real GNP/GDP to make the calculation of
GNP/GDP easier. A Price index is a number showing the changes in the overall level of
prices. It shows a change in the general price level of an economy.
• Recently the Indian Government changed the base year for calculating GDP to 2011-
12 from 2004-2005. Base Year selection is made on the basis of:
• Stability of macroeconomic parameters. It has to be a normal year without large
fluctuations in production, trade and prices of goods and services.
• Data availability: Data available for the year should be reliable.
• Comparability- so that same parameters should be in use both the years. Therefore it
should be a recent year and not go long back into history.
• Real GDP therefore allows us to determine if production increased or decreased,
regardless of changes in the inflation and purchasing power of the currency.
Concept of Base Year: It is the year used as the beginning or the reference year for
constructing an index, and which is usually assigned an arbitrary value of 100.
The base year is also known as Rebasing as by every 10 years there is change which will be
minimum 4% rise in price of items which requires changing the base year.
Economists use a Price Index to find the real GNP/GDP to make the calculation of GNP/
GDP easier. A Price index is a number showing the changes in the overall level of prices. It
shows a change in the general price level of an economy.
Recently the Indian Government changed the base year for calculating GDP to 2011-12
from 2004-2005. Base Year selection is made on the basis of:
• Stability of macroeconomic parameters. It has to be a normal year without large
fluctuations in production, trade and prices of goods and services.
• Data availability: Data available for the year should be reliable.
Comparability- so that same parameters should be in use both the years. Therefore it
should be a recent year and not go long back into history.

Economy
A. GROSS NATIONAL PRODUCT (GNP)

• Here the catch word is ‘National’ which refers to all the citizens of a country.
• GNP is the total value of the total production or final goods and services produced by
the nationals of a country during a given period of time (generally one year).
• In this case, the income of all the resident and non-resident citizens (who resides in
abroad) of a country in included whereas, the income of foreigners who reside within
India is excluded.
• GNP = GDP + (X-M)
X = Export, M = Import
X-M is called the Net Factor Income from Abroad (NFIA)
So, GNP = GDP + Net Factor Income from Abroad
The GNP contains the income earned by Indian Nationals (both in Indian Territory and
Abroad) only.
GDP and GNP are measured on the basis of Market Price and Factor Cost.
a) Market Price
It refers to the actual transacted price which includes indirect taxes such as custom
duty, excise duty, sales tax, service tax etc. (impending Goods and Services Tax). These
taxes tend to raise the prices of the goods in an economy.
b) Factor Cost
It is the cost of factors of production i.e. rent for land interest for capital, wages for
labour and profit for entrepreneurship. This is equal to revenue price of the final goods
and services sold by the producers.
Revenue Price (or Factor Cost) = Market Price - Net Indirect Taxes Net Indirect
Taxes = Indirect Taxes - Subsidies
Hence, Factor Cost = Market Price - Indirect Taxes + Subsidies
B. Net National Product (NNP): NNP = GNP - Depreciation
• It is calculated by subtracting Depreciation from Gross National Product.
• Depreciation - Wear and Tear of goods produced.
• This deduction is done because a part of current produce goes to replace the depreciated
parts of the products already produced. This part does not add value to current year’s
total produce. It is used to keep the products already produced intact and hence it is
deducted.
C. Net Domestic Product (NDP): NDP = GDP - Depreciation
• It is the calculated GDP after adjusting the value of depreciation. This is basically, Net
form of GDP, i.e. GDP - total value of wear and tear.
NDP of an economy is always lower than its GDP, since their depreciation can never be
reduced to zero. The concept of NDP and NNP are not used to compare different economies
because the method of calculating depreciation varies from country to country.
The difference between Net Domestic Product and Net National Product:
• “Domestic” means that it includes everything produced within country (domestically)
and it doesn’t matter who have produced it - foreigners or residents.
• “National” means that it includes everything that are produced by residents only (or by

Economy
capital belonging to residents) - and it doesn’t matter if it is produced domestically or

internationally (for instance if one goes to work into another country then my work
should be included in national but not in domestic product).
“Net” means that depreciation used in production capital (consumed capital) is deducted
from Gross (for both domestic and national).
A. National Income at Factor Cost (NIFC):
• It is the sum of all factors of income earned by the residents of a country (Indian) both
from within the country as well as abroad.
• National Income at Factor Cost = NNP at Market Price - Indirect Taxes + Subsidies
• In India, and many developing countries across the world, National Income is measured
at factor cost instead of market prices. Some of the reasons for the same are lack of
uniformity in taxes, goods not being printed with their prices, etc.
B. Transfer Payments
• A payment made by the government to individuals for whom there is no economic
activity is produced in return. For example: Old Age Pensions, Scholarship etc.
C. Personal Income
• It refers to all of the income collectively received by all of the individuals or households
in a country.
• It includes compensation from a number of sources including salaries, wages and bonuses
received from employment or self employment; dividends and distributions received
from investments; rental receipt from real estate investments and profit sharing from
businesses.
• In National Income Accounting, some income is attributed to individuals, which they do
not actually receive. For Example: Undistributed Profits, Employees’ contribution for
social security, corporate income taxes etc. which needs to be deducted from National
Income to estimate the Personal Income.
• PI = NI + Transfer Payments - Corporate Retained Earnings, Income Taxes,
Social Security Taxes. H. Disposable Personal Income
• It is the amount left with the individuals after paying Personal Taxes such as Income
Tax, Property Tax, and Professional Tax etc. to spend as they like.
• DPI = PI - Taxes (Income Tax i.e. Personal Taxes)
• DPI results into Savings and Expenditure i.e. (Spend and Save). This concept is very
useful for studying and understanding the consumption and saving behaviour of the
individuals.
WHAT ARE THE FACTORS THAT AFFECT NATIONAL INCOME?
Several factors affect the national income of a country. Some of them have been listed below:
1. Factors of Production
Normally, the more efficient and richer the resources, higher will be the level of National
Income or GNP
(a) Land: Resources like coal, iron and timber are essential for heavy industries so that
they must be available and accessible. In other words, the geographical location of
these natural resources affects the level of GNP.
(b) Capital: Capital is generally determined by investment. Investment in turn depends
on other factors like profitability, political stability etc.

Economy
(c) Labour: The quality or productivity of human resources is more important than
quantity. Manpower planning and education affect the productivity and production
capacity of an economy.
(d) Entrepreneur
(e) Technology: This factor is more important for Nations with fewer natural resources.
The development in technology is affected by the level of invention and innovation
in production.
(f) Government: Government can help to provide a favourable business environment
for investment. It provides law and order, regulations.
(g) Political Stability: A stable economy and political system helps in appropriate
allocation of resources. Wars, strikes and social unrests will discourage investment
and business activities.
Methods of National Income Calculation
There are three approaches and methods of measuring National Income:
A. Income Method
• By this National Income is calculated compiling income of factors of production viz.,
land, labour, capital and entrepreneur.
• National Income = Total Wage + Total Rent + Total Interest + Total Profit
• In Indian context, since 1993 as per the System of National Accounts (SNA), National
Income is total of the following:
• GDP = Compensation of Employees + Consumption of Fixed Capital + (Other Taxes
on Production
- Subsidies of Production) + Gross Operating Surplus
• Compensation of employees: (Wage) salaries paid in cash and kind and other benefits
provided to employees.
• Consumption of Fixed Capital: wear and tear of machinery which are replaced by new
parts.
Other Taxes on Production minus Subsidies: Net tax on production.
• There is a difference between tax on products and tax on production. Tax on products
includes taxes like sales tax and excise duty. Tax on production is tax imposed
irrespective of production like license fees and land tax.
• Gross Operating Surplus: balance of value added after deducting the above three
components. It goes to pay rent of land and interest of capital.
A. Product Method (or Value Added Method, Output Method)
• It is used by economists to calculate GDP at market prices, which are the total values of
outputs produced at different stages of production.
Some of the goods and services included in production are:
• Goods and services actually sold in the market.
• Goods and services not sold but supplied free of cost. (No Charge/Complementary)
Some of the goods and services not included in production are:
• Second hand items and purchase and sale of the same. Sale and purchase of second
cars, for example, are not a part of GDP calculation as no new production takes place in
the economy.

Economy
• Production due to unwarranted/ illegal activities.

• Non-economic goods or natural goods such as air and water.
• Transfer Payments such as scholarships, pensions etc. are excluded as there is income
received, but no good or service is produced in return.
• Imputed rental for owner-occupied housing is also excluded.
• Here the Gross Value of final goods and services produced in a country in certain year is
calculated.
• GDP is a concept of value added; it is the sum of gross value added of all resident
producer units (institutional sectors, or industries) plus that part of taxes (total) less
subsidies, on products which is not included in the valuation of output.
• Gross Value Added = Output of Final Goods and Services - Intermediate Consumption
• National Income = Gross Value Added + Indirect Taxes - Subsidies
B. Expenditure Method
• It measures all spending on currently-produced final goods and services only in an
economy.
• In an economy, there are three main agencies which buy goods and services: Households,
Firms and the Government.
This final expenditure is made up of the sum of 4 expenditure items, namely;
• Consumption (C): Personal Consumption made by households, the payment of which
is paid by households directly to the firms which produced the goods and services desired
by the households.
• Investment Expenditure (I): Investment is an addition to capital stock of an economy
in a given time period. This includes investments by firms as well as governments
sectors.
• Notes
Government Expenditure (G): This category includes the value of goods and service
purchased by Government. Government expenditure on pension schemes, scholarships,
unemployment allowances etc. are not included in this as all of them come under
transfer payments.
• Net Exports (X-IM): Expenditures on foreign made products (Imports) are expenditure
that escapes the system, and must be subtracted from total expenditures. In turn,
goods produced by domestic firms which are demanded by foreign economies involve
expenditure by other economies on our production (Exports), and are included in total
expenditure. The combination of the two gives us Net Exports.
• National Income = Consumption (C) + Investment Expenditure (I) + Government
Expenditure (G) + Net Exports (X-IM)
NEW METHODOLOGY FOR CALCULATION OF GDP IN INDIA
• Earlier domestic GDP was calculated at factor or basic cost, which took into account
prices of products received by producers.
• The new formula takes into account market prices paid by consumers. It is calculated
by adding GDP at factor price and indirect taxes (minus subsidies). It is in line with
international practice and is expected to better capture the changing structure of the
Indian economy.

Economy
• The government has also changed the base year for estimating GDP from 2004-05 to
2011-12. This has been done to incorporate the changing structure of the economy,
especially rural India.
• Data for the new GDP series will now be collected from 5 lakh companies (against 2,500
companies earlier. Under-represented and informal sectors as well as items such as
smartphones and LED television sets will now be taken into account to calculate the
gross domestic product.
• The revision in GDP does not alter the size of India’s economy ($1.8 trillion) nor will it
alter key ratios such as fiscal deficit, CAD etc. (as percentage of GDP) for 2013-14.
• The GDP at the aggregate and sector level has significantly changed. The average share
of the industrial sector has moved up by 5.6 percentage points from 26.1 per cent in
the old series to 31.7 per cent under the new series, for 2011-12 to 2013-14.
• Calculating GDP (National Income) is extremely important as the performance of the
economy is fixed by means of this method. The results would help the country to
forecast the economic progress, determine the demand and supply, understand the
buying power of the people, the per capita income, the position of the economy in the
global arena. The Indian GDP is calculated by the expenditure method.
NEW METHODOLOGY FOR CALCULATION OF GDP IN INDIA

Earlier domestic GDP was calculated at factor or basic cost, which took into account prices
of products received by producers.
The new formula takes into account market prices paid by consumers. It is calculated by
adding GDP at factor price and indirect taxes (minus subsidies). It is in line with international
practice and is expected to better capture the changing structure of the Indian economy.
The government has also changed the base year for estimating GDP from 2004-05 to 2011-
12. This has been done to incorporate the changing structure of the economy, especially
rural India.
Data for the new GDP series will now be collected from 5 lakh companies (against 2,500
companies earlier. Under-represented and informal sectors as well as items such as
smartphones and LED television sets will now be taken into account to calculate the gross
domestic product.
The revision in GDP does not alter the size of India’s economy ($1.8 trillion) nor will it alter
key ratios such as fiscal deficit, CAD etc. (as percentage of GDP) for 2013-14.
The GDP at the aggregate and sector level has significantly changed. The average share of
the industrial sector has moved up by 5.6 percentage points from 26.1 per cent in the old
series to 31.7 per cent under the new series, for 2011-12 to 2013-14.

Economy
OTHER CONCEPTS ASSOCIATED WITH NATIONAL INCOME

Per Capita Income
• Per Capita Income is obtained by dividing the total number of population from the
National Income i.e. the GDP of a country.
• PCI = National Income / Population of country
• Earlier Human Development (HDI) was measured on the basis of Per Capita Income
(PCI) as PCI helps to fulfill all basic needs of human. In this context, if the PCI is high
the HDI is also high and vice versa.
• The above context treats rich and poor on the same ground which brings faulty
measurement in HDI.
Human Development Index (HDI)
• The Human Development Index (HDI) is a summary measure of average achievement in
key dimensions of human development: a long and healthy life, being knowledgeable
and have a decent standard of living. The HDI is the geometric mean of normalized
indices for each of the three dimensions.
• It measures the average achievements in a country in three basic dimensions of human
development:
1. A long and healthy life
2. Access to knowledge
3. Decent standard of living
• The index was developed by Mahbub-ul-Haque along with Amartya Sen which is used
by the United Nations Development Programme (UNDP) in their annual report since
1990. This method was followed till 2009 and by 2010 new method (20th anniversary
edition) is adopted with a slight change in it by introducing three new indices viz, Gender
Inequality Index, Multi-dimensional Poverty Index and Inequality adjusted HDI.
• Its goal was to place people at the centre of the development process in terms of economic
debate, policy and advocacy. “People are the real wealth of a nation,” was the opening
line of the first report in 1990. This report ranks the countries on the basis of the
Human Development Index.
Green GDP
An index of economic growth with the environmental consequences of that growth factored
in. From the final value of goods and services produced, the cost of ecological degradation is
deducted to arrive at Green GDP.
• Green GDP calculations have been developed for countries as diverse as Australia,
Canada, China, Costa Rica, Indonesia, Mexico, Papua New Guinea, and the US, although
none of these efforts have resulted in regular reporting of the results.

Economy
Gross National Happiness: ‘Happiness matters, not Money’

• With many of the world’s countries about as unhappy as they can get because of their
dwindling GDP figures, the tiny nation of Bhutan has gone in the opposite direction.
Officials in Bhutan came up with a different indicator, called gross national happiness
(GNH).
• The country’s beloved former king, Jigme Singye Wangchuck, envisaged the concept of
gross national happiness since 1972, and the country adopted it as a formal economic
indicator in 2008.
• Beginning in November 2008, all the economic factors started measuring gross domestic
product analyzed for their impact on Bhutan’s residents’ happiness.
• The factors of production are still there such as unemployment, agriculture, retail sales
but GNH represents a paradigm shift in what’s most valued by Bhutanese society
compared to the rest of the world.
Following parameters are used in the GNH:
1. Higher real per capita income
2. Good Governance
3. Environmental Protection
4. Cultural Promotion
Human Poverty Index (HPI)
• It is developed by UN which focuses solely on amount of poverty in a country.
• Deprivations in longevity are measured by the probability at birth of not surviving to age
40;
• Deprivations in knowledge are measured by the percentage of adults who are illiterate;
• Deprivations in a decent standard of living are measured by two variables:
– The percentage of people not having sustainable access to an improved water source
and
– The percentage of children below the age of five who are underweight.
• HPI focuses attention on the most deprived people and deprivations in basic human
capabilities in a country, not on average national achievement.
• The human poverty indices focus directly on the number of people living in deprivation
presenting a very different picture from average national achievement. It also moves the
focus of poverty debates away from concern about income poverty alone.
Genuine Progress Indicator (GPI)
• While GDP is a measure of current income, GPI is designed to measure the sustainability
of that income.
• GPI uses the same personal consumption data as GDP but makes deduction to account
for income inequality and costs of crime, environmental degradation, and loss of leisure
and additions to account for the services from consumer durables and public
infrastructure as well as the benefits of volunteering and housework.
• By differentiating between economic activity that diminishes both natural and social
capital and activity that enhances such capital, the GPI and its variants are designed
to measure sustainable economic welfare rather than economic activity alone.

Economy
• Proponents of the GPI see it as a better measure of the sustainability of an economy

when compared to the GDP measure. Since 1995 the GPI indicator has grown in stature
and is used in Canada and the United States.
GDP Deflator - (Implicit price deflator for GDP)
• It is a measure of the level of prices of all domestically produced final goods and services
in an economy in a year. This is calculated to find the overall rise in the level of price.
GDP Deflator = Nominal GDP/Real GDP × 100
• GDP deflator is published on a quarterly basis since 1996 with a lag of two months. It is
because of this very reason that economists prefer the use of WPI or CPI for deflating
nominal price estimates to derive real price estimates
• Unlike the WPI and the CPI, GDP deflator is not based on a fixed basket of goods and
services, it covers the whole economy. One of the other advantages of GDP deflator is
that changes in consumption patterns or the introduction of new goods and services
are automatically reflected in the deflator, such a feature is missing in WPI/CPI.
Universal Basic Income (UBI)
• Also referred to as Guaranteed Income or the Basic Income Guarantee: “A simpler way
to ensure that everyone made enough to survive.”
• In order to ensure that all citizens can afford to meet their basic needs, the government
provides every citizen with a set amount of money on a regular basis, enough to lift
them above the poverty line.
• This cash income would be universal and unconditional, meaning that every citizen
would receive it no matter what - no work requirements, no means-testing and no
restrictions on how the money is used.
Purchasing Power Parity (PPP)
• Purchasing Power Parity (PPP) is an economic theory that compares different countries’
currencies through a market “basket of goods” approach. According to this concept, two
currencies are in equilibrium or at par when a market basket of goods (taking into
account the exchange rate) is priced the same in both countries.
• This is how the relative version of PPP is calculated:
P
S = 1/P2
• “S” represents exchange rate of currency 1 to currency 2
• “P1” represents the cost of good
“x” in currency 1
• “P2” represents the cost of good
“x” in currency 2
Lorenz Curve
• It is the graphical representation of
wealth distribution developed by
American economist Max Lorenz in
1905. On the graph, a straight
diagonal line represents perfect
equality of wealth distribution; the
Lorenz curve lies beneath it, showing

Economy
the reality of wealth distribution.

• The difference between the straight line and the curved line is the amount of inequality
of wealth distribution, a figure described by the Gini coefficient.
Gini Coefficient
• The Gini index is a measurement of the income distribution of a country’s residents.
This number, which ranges between 0 and 1 and is based on residents’ net income,
helps define the gap between the rich and the poor, with 0 representing perfect equality
and 1 representing perfect inequality.
• It is typically expressed as a percentage, referred to as the Gini coefficient.
Phillips Curve
• It is an economic concept developed by A. W. Phillips showing that inflation and
unemployment have a stable and inverse relationship.
• The theory states that with economic growth comes inflation, which in turn should lead
to more jobs and less unemployment.
• However, the original concept has been somewhat disproven empirically due to the occurrence
of stagflation in the 1970s, when there were high levels of both inflation and unemployment.

Economy
MONEY
Money is “anything” that is generally acceptable as a means of exchange and which at
the same time acts as a measure and store of value. “Anything” - implies a thing to be used
as money which need not be necessarily composed of any precious metal. The only
necessary condition is that, it should be universally accepted by people as a medium of
exchange which is guaranteed by the Government of the country.
FUNCTION OF MONEY
Money performs five important functions
1. Medium of exchange
• For transaction in any economy, money is used in the form or currency or checks as a
medium of exchange. The use of money as a medium of exchange promotes economic
efficiency by minimizing the time spent in exchanging goods and services (barter
system).
2. Measure of value/Unit of Account
• Money is used to measure units in economy. We measure the value of goods and
services in terms of money, just as we measure weight in terms of kilos or distance in
terms of meters.
3. Store of value
• Money functions as a repository of purchasing power over time. This function of money
is useful, because most of us do not want to spend our income immediately upon receiving
it, but rather prefer to wait until we have the time or the desire to shop.
4. Standard or Deferred Payment
• Money facilitates not only the current transactions of goods and services but also their
credit transactions. It facilitates credit transactions when present goods are exchanged
against future payments. In the modem world, the bulk of deferred payments are
stipulated in money terms only.
5. Transfer of value
• It involves the transferring of value of any asset to another or to any institution or to any
place by transferring money. This transfer can take place irrespective of places, time
and circumstances. Transfer of purchasing power, which is necessary in commerce
and other transaction, has become available because of money.
CLASSIFICATION OF MONEY
Actual Money - Money which actually circulates in the economy in terms of which all
payments are made and general purchasing power is held as a medium of exchange. In
Pakistan, notes and coins of all denominations are actual money.
Money of Account - In terms of which prices are expressed and accounts are maintained.
Normally, actual money and money of account are the same but sometimes they are
different. For example: Paisa is a money of account in Pakistan but it is not actual money.
Now a day, it is no more in circulation.
Metallic Money - It’s made of metal such as gold and silver. Coins of all denomination
circulating in economy are examples of metallic money. Metallic money is classified into two
categories:
• Full bodied money: If the face value of money is equal to its value as a commodity, it is
called full bodied money. If a gold coin of face value Rs. 100/- contains gold worth of Rs.
Economy
100/- it will be called full bodied money or sometimes standard money.

• Token Money: If the face value of money is more than its value as commodity or
intrinsic value it is known as token money.
Paper Money - Money made of paper is called paper money. It includes different
denomination. Paper money is further classified into following forms.
• Representative Paper Money: If paper is issued by keeping hundred percent gold reserve
of full bodied coins or gold bullion, it will be called representative money.
• Convertible Paper Money: If paper money can be converted into gold coins or gold
bullion on demand it is referred to as convertible money. This type of money is issued
by keeping metallic reserve of equal amount behind it.
• Fiat or In-convertible Paper Money: which cannot be converted into full bodied coins
or gold bullion on demand. It is usually issued without keeping metallic reserve behind
it.
Legal Tender Money - Money which has a legal approval behind it and people are
bound by law to accept it in all payments. Nobody can refuse to accept it. Legal Tender
Money can be classified into:
• Limited Legal Tender: which can be given in payments only upto a certain limit. The
payee can refuse to accept it beyond that limit. In many Asians countries 25 paisa
coin and coins of low denominations are limited legal tender. These coins can be given
as payments up to 50 rupees only.
• Unlimited Legal Tender: Unlimited legal tender means that money which can be
given in payments up to any limit.
Optional Money - That form of money which is used as a medium of exchange but it
has no legal force behind it. It includes credit instruments like cheques, bills or exchange
and CDRs etc. which are generally acceptable in payments.
Hot Money- Money that moves regularly and quickly between financial markets so that
investors could ensure they are getting the highest short-term interest rates available. Hot
money continuously shifts from countries with low interest rates to those with higher
interest rates affecting the exchange rate (if there is a high sum) and also has the potentiality
to impact a country’s balance of payments.
Commodity Money - Its value is derived from the commodity out of which it is made.
The commodity itself represents money, and the money is the commodity. For instance,
commodities that have been used as a medium of exchange include gold, silver, copper,
salt, peppercorns, rice, large stones etc.
Commercial Bank Money - These are the demand deposits which are claims against
financial institutions which can be used for purchasing goods and services.
POSITION OF INDIAN RUPEE
The Indian Rupee is a mixture of the standard money and the token money. Like standard
money, it is unlimited legal tender, and like the token money, its face value is greater than
is intrinsic value. The Indian rupee is said to be a note printed on silver (now Nickel).
MONEY SUPPLY IN INDIA
• It refers to total supply of money in circulation in a given country’s economy at a given
time. Money supply is considered as an important instrument for controlling inflation
by some of the economists.

Economy
• Economists analyze the money supply and develop policies revolving around it through
controlling interest rates and increasing or decreasing the amount of money flowing in
the economy.
• Money supply data is collected, recorded and published periodically by the RBI. These
are also known as Reserve Money.
RESERVE MONEY
M0
• (M0) = Currency in circulation + Bankers’ deposits with the RBI + Other deposits
with the RBI = Net RBI Credit to the Government + RBI credit to the commercial
sector + RBI’s claims on banks + RBI’s net is foreign assets + Government’s currency
liabilities to the public – RBI’s net non-monetary liabilities.
• In other words, it is the most liquid measure of the money supply. It only includes cash
or assets that could quickly be converted into currency. This measure is known as
narrow money because it is the smallest measure of the money supply.
M1
• M1 (also called as the Narrow Money) = Currency with public (coins, currency notes
etc.) + demand deposits of the public.
• In other words, Narrow money is a category of money supply that includes all physical
money like coins and currency along with demand deposits and other liquid assets held
by the central bank.
M2
• M2 = M1 +Post office saving deposits. M3
• M3 (also called as the Broad Money or Money aggregates) = M1 + Time deposits of
public with the banks.
M4
• M4 = M3 + Total Post office deposits (includes fixed deposits with the post offices)
MONEY MULTIPLIER
Monetary multiplier represents the maximum extent to which the money supply is affected
by any change in the amount of deposits. It equals ratio of increase or decrease in
money supply to the corresponding increase and decrease in deposits.
Money Multiplier = 1/Required Reserve Ratio
Required Reserve Ratio is the fraction of deposits which a bank is required to hold in
hand. It can lend out an amount equals to excess reserves which equals 1 – required
reserves.
• Higher the required reserve ratio, lesser the excess reserves, lesser the banks can lend
as loans, and lower the money multiplier.
• Lower the required reserve ratio, higher the excess reserves, more the banks can lend,
and higher is the money multiplier.
• In the above relationship it is assumed that there is no currency drainage, i.e. the
borrowers keep 100% of the amount received in banks.
LIQUIDITY
• It describes the degree to which an asset or security can be quickly bought or sold in the
market without affecting the asset’s price.

Economy
• Liquidity might be our emergency savings account or the cash lying with us that we
can access in case of any unforeseen happening or any financial setback. Liquidity also
plays an important role as it allows us to seize opportunities.
• Market Liquidity refers to the extent to which a market, such as a country’s stock
market or a city’s real estate market, allows assets to be bought and sold at stable
prices. Cash is the most liquid asset, while real estate, fine art and collections are all
relatively illiquid.
The importance of Liquidity
• An investor may need both liquid and illiquid assets. We need liquid assets to deal with
any unexpected short-term crisis. But illiquid assets may offer greater chance for capital
gains and higher yield.
Liquidity ratio
• A liquidity ratio refers to the amount of liquid assets to overall assets. If a firm is
highly liquid – it has a high proportion of assets that can easily be converted to cash
to pay off any obligations.
Cash reserve ratio
• A bank may be required to keep a certain percentage of its assets in the form of liquid
assets. It is the fraction of customer deposits held in cash reserves.
• Cash reserves are not profitable. If a bank lends deposits to other customers, it can
charge interest and make more profit. But bank loans are highly illiquid because the
bank cannot immediately ask for the loan back.
FLOW OF MONEY
• A technical indicator calculated by multiplying a change in share price by the number of
shares traded. Money flow is positive when a stock rises and negative when it declines.
The indicator is used to investigate the momentum behind a price trend.
The importance of Money Flow:
• Money Flow is an important indicator of volume, a way to represent the inflow and
outflow of investor’s money for security.
• Positive money flow means that investor interest is increasing, raising the demand for a
security and, ostensibly, its price. Negative money flow shows the opposite: Investors
are either capturing gains or losing faith in the value of the security or index, likely
leading to declining prices.
• A common strategy stock traders implement with the money flow indicator is to enter or
exit trades according to the overbought or oversold readings provided by the indicator.
DIGITIZATION OF MONEY
• The advent of the web and digitization has changed the way we work, shop, bunk,
travel, educate, govern, manage our health and enjoy life by automatizing it.
• The technologies of digitization enable the conversion of traditional forms of information
storage such as paper and photographs into the binary code (ones and zeros) of computer
storage.
• A sub-set is the process of converting analog signals into digital signals. But much
larger than the translation of any type of media into bits and bytes is the digital
transformation of economic transactions and human interactions.

Economy
• With the passing of time the need has been felt in the banking sector and various other
transactions due to increase in the volume and amount of banking transaction and
rapidly increasing customers.
• To increase the cost of the product and generate more revenue it was realized that
digitization and automation is need of the time especially for Banking Sector.
• Now, some of the banks are moving towards automated cash receipt/payment through
recyclers, account opening through online with Aadhar validation, cheque sorting and
processing for clearing and so many.
PLASTIC MONEY
Plastic money is a term that is used predominantly in reference to the hard plastic
cards we use every day in place of actual bank notes. They can come in many different forms
such as cash cards, credit cards, debit cards, pre-paid cash cards and store cards.
5 different kinds of plastic money
A. Credit card
1. Cashless payment with a set spending limit
2. Payment takes place after the purchase
3. Great flexibility because of installment facility
4. Most well-known credit cards: American Express, MasterCard, Visa
B. Charge cards
1. Cashless payment without a set spending limit
2. Payment takes place after the purchase
3. No credit or installment facility
4. Most well-known charge cards: American Express, Diners Club
C. Debit card
1. Card is directly linked to the cardholder’s bank account
2. Transaction is debited immediately from bank account
Most well-known debit cards: Maestro, Postcard
D. Customer card/store card (PLCC)
1. Card with payment and credit function
2. Can only be used at specific retailers
3. Well-known customer cards: myOne, Globus, Media Markt etc.
E. Prepaid card/gift card
1. Card is topped up with credit before use
3. Open system (American Express, Visa, MasterCard) or closed system (can only be
used at specific retailers)
The recent demonetization by the Government of India targeted towards killing three
birds with one stone – black money, political opponents and subtly hard cash transaction.
LESS CASH ECONOMY: VISION 2018
• Reserve Bank of India (RBI) on Ju ne 2016, u nveiled ‘Payment and Settlement System
in India: Vision

Economy
– 2018’ aimed at building best of class payment and settlement system for a ‘Less
Cash’ India.
• Vision 2018 revolves around 5Cs: Coverage, Convenience, Confidence, Convergence
and Cost.
• To achieve these, Vision 2018 will focus on four strategic initiatives such as responsive
regulation, robust infrastructure, effective supervision and customer centricity.
• The regulatory framework, based on consultative approach, aims at achieving enhanced
coverage of the payment systems coupled with convenience for end-users.
• A key objective would be to ensure a robust payments infrastructure in the country to
increase accessibility, availability, interoperability and security.
• The oversight and supervisory framework would focus on strengthening the resilience of
both large value and retail payment systems in the country.
• With increasing use of technology-based innovative payment products, the strategic
initiatives under Vision-2018 are expected to reduce paper-based instruments
significantly and lead to accelerated growth in mobile banking and other modes of
electronic payments.
• To promote mobile phones as access channel to payment and banking services, the
guidelines will be reviewed to address issues related to customer registration for mobile
banking, safety and security of transactions, risk mitigation and customer grievance
redressal measures.
• The White Label ATM Guidelines will accordingly be examined holistically and targets
realigned to meet present conditions as the same has not resulted in the much needed
growth in ATM infrastructure in the desired geographical segments of the country i.e.
Rural and Semi-Urban areas.
Cashless Economy: From Barter System to Cash System and then Less Cash Economy
• A cashless economy is one in which all the transaction are done using cards or digital
means. The circulation of physical currency is minimal.
• Money in liquid form (in hand cash) guaranteed by the Central Bank and backed by the
Government of India is a promise made to citizen to complete the transactions by using
various denominations.
• By drawing out liquidity from the market RBI promotes the use of plastic money in the
form of cash cards, credit cards, debit cards, pre-paid cash cards and store cards etc.
• India uses too much cash for transactions. The ratio of cash to gross domestic product
is one of the highest in the world – 12.42% in 2014 compared with 9.47% in China or
4% in Brazil.
• Less than 5% of all payments happen electronically in India which is very less.
Steps taken by RBI and Government to discourage use of cash:
• Promotion of Mobile Wallet which will allow users to send/receive money, pay bills,
recharge mobiles, book movie tickets, send physical and e-gifts both online and offline.
• No new license will be given to payment banks.
• India is liberalizing the FDI norms in order to promote E-commerce.
• Government has also launched Unified Payment Interface (UPI) in order to make electronic
transfer much faster and simpler.

Economy
INFLATION
Inflation refers to gradual rise in the general price level in the economy and a fall in
purchasing power of money over a period of time. In simple words, inflation is nothing but
a rise in average price level of all the goods and services in an economy. Inflation occurs
when too much money chases a few goods, that is, even though money supply increases the
supply of goods and services does not increase commensurately.
Types of Inflation
On the basis of rate of Inflation, it is categorized into four types

• Creeping Inflation: When the rise in prices is very slow (less than 3% Per annum) like
that of snail or creeper. Such inflation is safe and necessary for economic growth.
• Walking or Trotting Inflation: When prices rise moderately and the annual inflation
rate is of a single digit (3 – 10%). Such inflation is a warning signal for the government
to control it before it turns into running inflation.
• Running Inflation: When prices rise rapidly like the running of a horse at a rate of
speed of 10 – 20% per annum. Such inflation requires strong monetary and fiscal
measures to control otherwise will lead to Hyper-inflation.
• Galloping or Hyper-Inflation: When price rise is in between 20 – 100% per annum or
even more. Such inflation brings total collapse of the monetary system because of the
continuous fall in the purchasing power of money.
On the basis of Cause-Based Inflation it is of Five Types
• Demand Pull Inflation: When aggregate demand is rising while the available supply of
goods is less. This kind of inflation can be described by ‘too much money chasing a few
goods’. One of the reasons for demand pull inflation can be the increase in money
supply.
• Cost Push Inflation: Also referred to as supply shock inflation occurs due to reduced
supplies due to increased prices of inputs. For example, an increase in price of
international crude oil adversely affects the inputs of almost all the items in a country
like India, which neither has alternatives to oil for energy needs nor has significant
amount of domestic oil production.
• Comprehensive and Sporadic Inflation: When the prices of all the commodities rises
its known as Comprehensive Inflation. It is also referred as Bottleneck Inflation. On
the other hand, Sporadic Inflation is a sectoral inflation in which the prices of a few

Economy
commodities rise because of certain physical bottlenecks which may impede any attempt
to increase their production.
• Open and Suppressed Inflation: It is said to be open when the Government takes no
steps to control the rise in the price level. It is caused due to uninterrupted operation of
the market mechanism. On the other hand, Suppressed Inflation when the Government
actively intervenes to check the rise in the price level.
• Mark-up Inflation: It causes due to the peculiar method of pricing adopted by the big
business organisations. When the big business organizations calculate their production
costs first and then add to these costs a certain mark-up to yield the targeted rate of
profit.
What causes Inflation?
Inflation can arise from internal as well as external events
• Some inflationary pressures direct from the domestic economy, for example the
decisions of utility businesses providing electricity or gas or water on their tariffs for
the year ahead, or the pricing strategies of the food retailers based on the strength of
demand and competitive pressure in their markets. A rise in the rate of VAT would also
be a cause of increased domestic inflation in the short term because it increases a
firm’s production costs.
• Inflation can also come from external sources, for example a sustained rise in the price
of crude oil or other imported commodities, foodstuffs and beverages. Fluctuations in
the exchange rate can also affect inflation – for example a fall in the value of the Rupees
against other currencies might cause higher import prices for items such as foodstuffs
from Western Europe or technology supplies from the United States – which feeds through
directly or indirectly into the consumer price index.
Due to Demand Pull Factors Inflation can occur such as
• Increase in Government Expenditure: this increase results in increased demand for
goods and services and consequent increase in prices. This is because increased
government expenditure results in putting large money in the hands of public, thereby
putting to affect too much money chasing too few goods.
• Rising Population: It acts as an important factor in pushing up prices because of
increased demand especially when the supply is unable to meet the demand.
• Black Money: A large part of the black money is used in buying and selling of real estate
in urban areas, extensive hoarding and black marketing in essential wage goods, such
as cereals, pulses, etc. Black money, therefore, fuels demands and leads to rise in prices.
• Changing Consumption Patterns: Increase income bring more demands for food items
that people eat more frequently. For example: Increased consumption of protein rich
foods such as pulses, eggs, fish and poultry were apparently driving up their prices in
the economy.
Due to Cost Push Factors Inflation can occur such as
• Rise in wages: At times rise in wages, if greater than rise in productivity, increases the
costs therefore increasing the prices too.
• Tax increase: Increase in indirect taxes also leads to cost side inflation. Taxes such as
custom and excise duty raise the cost of production as these taxes are levied on
commodities.

Economy
• Increase in administered prices: such as the MSP (Minimum Support Price) for the
food grains, petroleum products etc. also leads to inflation as they have a huge share in
budget of common citizens.
• Infrastructural bottlenecks: Infrastructural bottlenecks such as the lack of proper
roads, electricity, water etc. raises per unit cost of production. This is one of the prime
reasons for inflation in the context of Indian economy.
• Fluctuation due to seasonal and cyclical reasons: Owing to events such as failed
monsoons there is a drop in agricultural productivity, which inevitably results in inflation
at times.
Measuring Inflation
• There are several ways to measure inflation among which India uses Wholesale Price
Index and Consumer Price Index.
• Based on the Population Coverage the inflation indices are developed to understand the
levels of inflation for certain sets of population such as Consumer Price Index (CPI),
Producer Price Index (PPI), and Wholesale Price Index (WPI) etc.
• On the basis of items, the inflation indices are developed to understand the levels of
inflation for certain sets/basket of items.
• One feature common to all the price indices is the use of ‘Base Year’ which is a particular
year used as a reference to calculate the price rise in a particular year. For Example:
2012 is the base year for CPI and 2004-05 for WPI.
• In India, Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two major
indices for measuring inflation in comparison to USA where CPI and PPI (Producer Price
Index) are used to measure inflation.
• The Wholesale Price Index (WPI) was main index for measurement of inflation in India
till April 2014 when RBI adopted new Consumer Price Index (CPI) (combined) as the
key measure of inflation.
A. Wholesale Price Index: (Headline Inflation)
• Calculated and released on weekly basis for primary article and Fuel Group, by the
Office of the Economic Adviser in Ministry of Commerce and Industry, Government of
India. However, this has been discontinued since 2012 and now it is released on monthly
basis.
• The new WPI index is based on the recommendation of a working group set up under
the guidance of Abhijit Sen.
• WPI is an important statistical indicator, as various policy decisions of the Government
like inflation management, monitoring of prices of essential commodities etc. are based
on it.
• Due to two base year for WPI (2004-05) and CPI (2012), the difference in rate occurs for
WPI and CPI.
• There are total 676 items in WPI and inflation is computed taking 5482 Price Quotations.
These items are divided into three broad categories:
• Primary Articles
• Fuel and Power
• Manufactured Products

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• One of the major limitations of WPI is that it does not include services such as the
health, IT, Education, transport etc. Also it does not account for the products of the
unorganized sector in India, which constitutes about 35% of the manufactured output
of the Indian economy.
• We note here that WPI does not take into consideration the retail prices or prices of the
services.
Points to remember
• The decreasing order of three groups of items in terms of weightage is:
– “Manufactured Products >Primary Articles >Fuel and Power”
• Among manufactured products, the highest weightage is of chemicals and chemical
products.
B. Consumer Price Index
• India also measures inflation at the consumer level by the means of CPI. It is the measure
of change in retail prices of goods and services consumed by defined population group
in a given area with reference to a base year.
• Due to wide disparities in consumption basket for different segment of consumers,
India has not been able to evolve a single and comprehensive consumer price index.
The four CPIs adopted by India are:
1. Consumer Price Index for Industrial Workers (CPI-IW)
• Compiled by Labour Bureau, an attached office under Ministry of Labour & Employment.
It measures a change over time in prices of a fixed basket of goods and services consumed
by Industrial Workers.
• The target group is an average working class family belonging to any of the seven sectors
of the economy- factories, mines, plantation, motor transport, port, railways and electricity
generation and distribution.
• CPI (IW) is currently calculated at base 2001=100 for 78 centers and prices are collected
from 289 markets across these 78 centers.
• It contains 120–160 commodities in its basket. Basically, this index specifies the
government employees (other than banks’ and embassies’ personnel).
• The index has a time lag of one month and is released on the last working day of the
month. It is used for wage indexation and fixation of dearness allowance for government
employees which is announced twice a year.
• When the Pay Commissions recommend pay revisions, the base is the CPI (IW).
2. Consumer Price Index for Urban Non Manual Employees: (CPI-UNME):
• Having 1984-85 as the base year and 146-365 commodities in the basket for which
data is collected monthly with two weeks’ time lag.
• This price index has limited use which is basically used for determining dearness
allowances (DAs) of employees and some foreign companies operating in India (i.e. Airlines,
Communications, Banking, Insurance, embassies’, and other financial services).
3. Consumer Price Index for Agricultural Labours): (CPI AL)
• Having 1986-87 as its base year with 260 commodities in its basket. The Data is collected
in 600 villages with a monthly frequency and has three weeks time lag.
• The Index is used for revising minimum wages for agricultural labourers in different
states.

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4. Consumer Price Index for Rural Labourers/workers: (CPI RL):

• Having 1983 as the base year with 260 commodities in its basket for which data is
collected from 600 villages on monthly frequency with three weeks time lag.
• In 2011, the CSO brought a revised CPI, having CPI (Urban), CPI (Rural) and CPI (Urban
+ Rural) with 2010 as the base price. The combined one would take into account the
data from both the indices taking appropriate weights.
Points to remember
• The Reserve Bank of India (RBI) has started using CPI-combined as the sole inflation
measure for the purpose of monetary policy. As per the agreement on Monetary Policy
Framework between the Government and the RBI dated February 20, 2015 the sole of
objective of RBI is price stability and a target is set for inflation as measured by the
Consumer Price Index-Combined.
• While the CPI (IW) and CPI (AL/RL) are compiled and released by the Labour Bureau,
the CPI (Rural/Urban/Combined) is by Central Statistics Office (CSO) CPI has much
larger weightage in comparison to WPI in primary articles which is 57%.
C. Producer Price Indexes (PPI):

• These are indices that measure the average change over time in selling prices by producers
of goods and services. They measure price change from the point of view of the seller.
• Majority of OECD countries measure inflation based on Producer Price Index (PPI) while
only some uses WPI. Countries like Japan, Greece, Norway and Turkey use WPI.
D. Services Price Index (SPI):
• The contribution of the tertiary sector in India’s GDP has been strengthening for the
past 6 to 7 years and today it stands approximately at 54 per cent. The need for a service
price index (SPI) in India is warranted by the growing dominance of the sector in the
economy. There is no index, so far, to measure the price changes in the service sector.
• The present inflation (at the WPI) only shows the price movements of the commodity-
producing sector i.e. it includes only the primary and the secondary sectors-the tertiary
sector is not represented by it.
• At present, efforts are being made to develop service price indices for selected services
initially on an experimental basis (covering road transport, railways, airways, business,
trade, port, postal telecommunications, banking and insurance services only).
CORE INFLATION
• The concept is used to estimate the inflation by excluding food and energy prices form
the basket of goods and services that represents a typical households’ consumption.
Such a measure does not include the volatile items, which may distort the true picture
of inflation in the economy.
• In mid 2012, RBI Governor threw up the conundrum posed by this “Core” inflation by
saying “In our economy, where food constitutes nearly 50% of consumption basket
and fuel has a weight of 15%, can a measure of inflation that excludes them can be
called “Core”.
EFFECTS OF INFLATION
• As we know Inflation is the increase in the price of general goods and service. Thus,
food, commodities and other services become expensive for consumption. Inflation can

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cause both short-term and long-term damages to the economy; most importantly it
causes slow down in the economy.
• People start consuming or buying less of these goods and services as their income is
limited. This leads to slowdown not only in consumption but also production. This is
because manufactures will produce fewer goods due to high costs and anticipated
lower demand.
• Banks will increase interest rates as inflation increases otherwise real interest rate will
be negative. (Real interest = Nominal interest rate - inflation). This makes borrowing
costly for both consumers and corporate. Thus people will buy fewer automobiles, houses
and other goods. Industries will not borrow money from banks to invest in capacity
expansion because borrowing rates are high.
• Higher interest rates lead to slowdown in the economy. This leads to increase in
unemployment because companies start focusing on cost cutting and reduces hiring.
Remember Jet Airways lay off over 1000 employees to save cost.
• Rising inflation can prompt trade unions to demand higher wages, to keep up with
consumer prices. Rising wages in turn can help fuel inflation.
• Inflation affects the productivity of companies. They add inefficiencies in the market,
and make it difficult for companies to budget or plan long-term. Inflation can act as a
drag on productivity as companies are forced to shift resources away from products and
services in order to focus on profit and losses from currency inflation.
DEMONETIZATION AND IMPACT ON INFLATION
• The Demonetization has impacted the inflation negatively. Consumer spending activity
fell to a near halt. Consumers are refraining from making any purchases except essential
items from the consumer staples, healthcare, and energy segments.
• The real estate sector, which includes a lot of cash and undocumented transactions,
slowed down significantly as well as Metropolitan and Tier 1 cities reported a fall in
house prices up to a 30%.
• Food item inflation, measured by changes in the Consumer Food Price Index, accounts
for 47.3% of the overall CPI. Due to 86.4% of the value of the currency notes in circulation
going out of the financial system and re-monetization being slow, the supply and
demand of food items fell. It will exert more downward pressure on inflation.
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OTHER RELEVANT TERMS RELATED TO INFLATION

Deflation:
• It is a contraction in the supply of circulated money within an economy, and therefore
the opposite of inflation.
• A reduction in money supply or credit availability is the reason for deflation in most
cases. Reduced investment spending by government or individuals may also lead to this
situation. Deflation leads to a problem of increased unemployment due to slack in demand.
• Deflation is different from disinflation as the latter implies decrease in the level of
inflation whereas on the other hand deflation implies negative inflation.
Recession:
• It is a situation which is characterized by negative growth rate of GDP into successive
quarters. Some of the indicators of a recession include slowdown in the economy, fall
in investments, fall in the output of the economy etc.
Depression:
• It is an extreme form of recession and characterizes a situation in which the recession
may have gone on for too long resulting in depression of the economy.
• A common rule of thumb for recession is two quarters of negative GDP growth. The
corresponding rule of thumb for a depression is a 10 percent decline in gross domestic
product (GDP).
Inflation Spiral:
• An inflationary situation in an economy, which results out of a process of wage and
price interaction ‘when wages press prices up and prices pull wages up’, is known as
the inflationary spiral. It is also known as the wage-price spiral.
• This wage-price interaction was seen as a plausible cause of inflation in the year 1935 in
the US economy, for the first time.
Re-flation:
• It is a situation often deliberately brought by the government to reduce unemployment
and increase demand by going for higher levels of economic growth.
• Governments go for higher public expenditures, tax cuts, interest rate cuts, etc. Fiscal
deficit rises, extra money is generally printed at higher level of growth, wages increase
and there is almost no improvement in unemployment.
• Re-flation can also be understood from a different angle-when the economy is crossing
a cycle of recession (low inflation, high unemployment, low demand, etc.) and government
takes some economic policy decisions to revive the economy from recession, certain
goods see sudden and temporary increase in their prices, such price rise is also known
as re-flation.
Stagflation:
• It is a condition of slow economic growth and relatively high unemployment (economic
stagnation) accompanied by rising prices, or inflation and decline in GDP. It’s an economic
problem defined in equal parts by its rarity and by the lack of consensus among academics
on how exactly it comes to pass.
• Usually, when unemployment is high, spending declines, as do prices of goods. Stagflation
occur when the prices of goods rise while unemployment increases and spending declines.

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• Stagflation can prove to be a particularly tough problem for governments to deal with
due to the fact that most policies designed to lower inflation tend to make it tougher for
the unemployed, and policies designed to ease unemployment raise inflation.
Skewflation:
• It brings sustained price rise in some particular commodities only while at the same
time other commodities can show deflation (lowering price).
• For Example: In the beginning of year 2010-11 India had inflation in certain food
commodities such as food grains, pulses, and sugar. Later in the year prices of these
commodities stabilized but there was price spike in commodities such as onions, milk
etc. that is a condition of skewflation prevailed at that time.
Base Effect:
• It refers to the tendency of a small change from a low initial amount to the current
amount which is translated into a large percentage and appears as large.
• In other words, Inflation is calculated from a base year in which a price index is assigned
the number 100. For example, if the price index in 2010 was 100 and the price index
in 2011 rose to 110, the inflation rate would be 10%. If the price index rose to 115 in
2012, what would be the best way to assess inflation?
• On the one hand, prices have only risen 5% over the previous year, but they’ve risen
15% since 2010. The high inflation rate in 2011 makes the inflation rate in 2012 look
relatively small and doesn’t really provide an accurate picture of the level of price
increases consumers are experiencing. This distortion is the base effect.

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BANKING
UNIVERSAL BANK
It is financial supermarket where all financial products are sold under one roof.
• It is a system of banking where bank undertake a blanket of financial services like
investment banking, commercial banking, development banking, insurance and other
financial services including functions of merchant banking, mutual funds, factoring,
housing finance etc.
• As per the World Bank, the definition of the Universal Bank is as follows: In Universal
banking, the large banks operate extensive network of branches, provide many different
services, hold several claims on firms (including equity and debt) and participate
directly in the Corporate Governance of firms that rely on the banks for funding or as
insurance underwriters.
• The second Narasimham committee of 1998 gave an introductory remark on the concept
of the Universal banking, as a different concept than the Narrow Banking. Narsimham
Committee II suggested that Development Financial Institutions (DFIs) should convert
ultimately into either commercial banks or non- bank finance companies.
• However, the concept of Universal Banking conceptualized in India after the RH Khan
Committee recommended it as a different concept. The Khan Working Group held the
view that DFIs (Development Finance Institutions) should beallowed to become banks at
the earliest.
Advantages of Universal Banking
• Increased diversions and increased profitability.
• Better Resource Utilization.
• Brand name leverage.
• Existing clientele leverage.
• Value added services.
• ‘One-stop shopping’ saves a lot of transaction costs.
• Easy Marketing
• Profit Diversification
DEVELOPMENT BANK
• Development bank is essentially a multi-purpose financial institution with a broad
development outlook.
• A development bank may, thus, be defined as a financial institution concerned with
providing all type s of
financial assistance
(medium as well as long
term) to business units,
in the form of loans,
underwriting, investment
and guarantee operat-
ions, and promotio-nal
activities — economic
development in general,

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and industrial development, in particular.

Development banks in India are classified into following four groups:
• Industrial Development Banks: It includes, for example, Industrial Finance Corporation
of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries
Development Bank of India (SIDBI).
• Agricultural Development Banks: It includes, for example, National Bank for Agriculture
& Rural Development (NABARD).
• Export-Import Development Banks: It includes, for example, Export-Import Bank of
India (EXIM Bank).
• Housing Development Banks: It includes, for example, National Housing Bank (NHB).
NABARD
National Bank for Agriculture and Rural Development (NABARD) is an apex development
bank with a mandate for:
• Facilitating credit flow for promotion and development of agriculture, small-scale
industries, cottage and village industries, handicrafts and other rural crafts.
• Supporting all other allied economic activities in rural areas, promote integrated and
sustainable rural development and secure prosperity of rural areas.
• NABARD acts as a regulator for co-operative banks and Regional Rural Banks (RRBs).
• NABARD also helps incapacity building of partner agencies and development institutions.
• NABARD provide facilities for training, for dissemination of information and the promotion
of research including the undertaking of studies, researches, techno-economic and other
surveys in the field of rural banking, agriculture and rural development.
• It provides technical, legal, financial, marketing and administrative assistance to any
person engaged in agriculture and rural development activities.
LEAD BANK
• Introduced in 1969, based on the recommendations of the Gadgil Study Group on the
organizational framework for the implementation of social objectives.
Objectives of Lead Bank Scheme:
• Eradication of unemployment and under employment
• Appreciable rise in the standard of living for the poorest of the poor
• Provision of some of the basic needs of the people who belong to poor sections of the
society.
Area Approach
• The basic idea was to have an “area approach” for targeted and focused banking.
• The banker’s committee, headed by S. Nariman, concluded that districts would be the
units for area approach and each district could be allotted to a particular bank which
will perform the role of a Lead Bank.
• The Lead bank Scheme was not fully able to achieve its targets due to shift in policies,
complexities in operations, lack of cooperation among various financial institutions and
issues shifting to the Financial Inclusion.
• There was a strong need felt to revitalize the scheme with clear guidelines on respecting
the bankers’ commercial judgements even as they fulfill their sectoral targets.
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• The Government of India constituted a High-Power Committee headed byMrs.

UshaThorat, Deputy Governor of the RBI, to suggest reforms in the LBS. The task of
this penal was to recommend how to revitalize the LBS, given the challenges facing the
banking sector, especially in an era of increasing privatization and autonomy.
The following were the recommendation of Usha Thorat Committee on Lead Banks
• LBS should be continued to accelerate financial inclusion in the unbanked areas of the
country.
• Private sector banks should be given a greater role in LBS action plans, particularly in
areas of their presence.
• Enhance the business correspondent model, making banking services available in all
villages having a population of above 2,000 and relaxation in KYC (know your customer)
norms for small value accounts.
• There is a strong need to revamp and revitalise the Lead Bank Scheme so as to make it
an effective instrument for bringing about meaningful co-ordination among banks
operating in various part of the country.
PAYMENT BANK
• A payments bank is like any other bank, but operating on a smaller scale without involving
any credit risk.
• In simple words, it can carry out most banking operations but can’t advance loans
or issue credit cards.
• It can accept demand deposits (up to Rs 1 Lakh), offer remittance services, mobile
payments/transfers/ purchases and other banking services like ATM/debit cards, net
banking and third party fund transfers.
• The NachiketMor committee appointed by RBI to propose measures for achieving
financial inclusion and increased access to financial services in 2013.The committee
submitted its report suggesting creation of specialized bank or Payment Bank to cater
the lower income groups and small businesses so that by Jan 2016, each Indian resident
can have a global bank account.
Objectives of Payment Bank
• To widen the spread of payment and financial services to small businesses, low income
households, migrant labour workforce in secured technology driven environment.
• With payments banks, RBI seeks to increase the penetration level of financial services
to the remote areas of the country.
SMALL FINANCE BANK
• Small finance banks are a type of niche banks in India. The main purpose of the small
banks will be to provide a whole suite of basic banking products such as bank deposits
and supply of credit, but in a limited area of operation. The objective for these Small
Banks is to increase financial inclusion by provision of savings vehicles to under-
served and unserved sections of the population, supply of credit to small farmers, micro
and small industries, and other unorganized sector entities through high technology-
low cost operations.
RBI guidelines about small bank includes:
• The firms must have a capital of Indian Rupees 100 crore. Existing Non-Banking Financial
Companies (NBFC), Micro-Finance Institutions (MFI) and Local Area Banks (LAB) are
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allowed to set up small finance banks.

• The Corporate Promoter should have 10 years experience in banking and finance.
• The promoters stake in the paid-up equity capital will be 40% initially which must be
brought down to 26% in 12 years. Joint ventures are not permitted.
• Foreign share holding will be allowed in these banks as per the rules for Foreign Direct
Investment in private banks in India.
• The banks will not be restricted to any region. 75% of its net credits should be in
priority sector lending and 50% of the loans in its portfolio must in 25 lakh range.
• The bank shall primarily undertake basic banking activities of accepting deposits and
lending to small farmers, small businesses, micro and small industries, and unorganized
sector entities. It cannot set up subsidiaries to undertake non-banking financial services
activities. After the initial stabilization period of 5 years, and after a review, the RBI
may liberalize the scope of activities for Small Banks.
• Small Banks have to meet RBI’s norms and regulations regarding risk management.
They have to meet CRR, SLR, Repo rate and reverse repo rate requirements, like any
other commercial bank.
• The maximum loan size and investment limit exposure to single/group borrowers/issuers
would be restricted to 15% of capital funds.
• For the first 3 years, 25% of branches should be in unbanked rural areas.

Economy
CLASSIFICATION OF BANKS IN INDIA

BANKS
• Banks are the financial institutions that are licensed to deal with money and its
substitutes by accepting time and demand deposits, making loans, and investing in
securities. The bank generates profits from the difference in the interest rates charged
and paid.
• Banks are connecting link between the people, who have surplus money and the people
who are in need of money. In addition to this, banks undertake the risk arising out of
the possible default of the ultimate borrower.
• In other words, bank is an institution which accepts deposits from the public and in
turn advances loans by creating credit. The following functions of the bank explain the
need of the bank and its importance.
a. To provide the security to the savings of customers.
b. To control the supply of money and credit.
c. To encourage public confidence in the working of the financial system, increase
savings speedily and efficiently.
d. To avoid focus of financial powers in the hands of a few individuals and institutions.
e. To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
types of customers.
BANKING SYSTEM IN INDIA
• Banks are classified into Organized and Unorganized banking.
• Un-organized Banking: The part of Indian Banking System which does not fall under
the control of our central bank (i.e. Reserve Bank of India) is called as un-organized
banking. For example: Indigenous banks.
• Organized Banking: The scheduled banks are those which are entered in the second
schedule of RBI Act, 1939. Scheduled banks are those banks which have a paid up
capital and reserves of aggregate value of not less than Rs 5 lakhs and which satisfy
RBI guidelines.
• The Organized (Scheduled) Banking Sector can be categorized into three major
categories:
a) Central Bank of the Country (RBI)
b) Commercial Banks
c) Cooperative Banks
CENTRAL BANK – RBI
• RBI is an apex institution in the banking and financial structure of the country which
plays a crucial role in organizing, running, supervising, regulating and developing the
banking and financial structure of the economy. India’s Central Bank is known as the
Reserve Bank of India.
Historical Background of RBI
• In 1926, the Royal Commission on Indian Currency and Finance which is also known as
the Hilton-Young Commission recommended the creation of a central bank.
• The idea was twofold

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– To separate the control of currency and credit from the government.

– To augment banking facilities throughout the country.
• The Reserve Bank of India Act of 1934 established the Reserve Bank as the banker to
the central government and set in motion a series of actions culminating in the start of
operations on April 1, 1935.
• RBI was nationalizedin 1949.
• It has four Zonal offices at Delhi, Kolkata, Chennai and Mumbai for four regions: Northern,
Eastern, Southern and Western regions respectively. RBI has 19 offices, which are
located in state capitals and a few major cities in India. In addition, there are 9 sub-
offices of RBI.
Functions of Central Bank (RBI)
• Bank of Issue: It has a sole authority to issue currency notes and coins through the
issue department, which is solely responsible for the issue of notes and coins.
• Banker to Banks and Government: As the Banker’s bank, RBI acts as the custodian of
cash reserves of commercial and other Banks.
• Commercial banks are under statutory obligation to keep a part of their deposits as
reserves with the central bank.
• The central bank provides credit, mainly short-term credit, to the commercial banks. It
provides them guidance and direction and regulates their activities.
• Commercial banks are required to shape their policy in accordance with these directions
and guidance of the central bank.
• As the banker and financial adviser to the government the central bank receives the
deposits of cash, cheques, drafts etc. from the government.
• It provides cash to the government for paying salaries and wages and other cash
disbursements. It makes payments on behalf of the government.
• It gives short-period loans to the government. It buys and sells foreign currencies on
behalf of the government.
• Lender to Last Resort: RBI helps commercial banks when they have exhausted their
resources and are in financial need. In its capacity as the lender of the last resort, the
central bank provides, directly or indirectly all reasonable financial assistance to
commercial banks.
• Controller of Credit: RBI controls the credit creation by the commercial banks which
are regarded as the most important function of Central Bank.
• At present, Credit Money or Bank Money is the dominant form of money and essentially
requires the supply of credit to be regulated so as to ensure the smooth functioning of
the economy.
• For this, the central bank adopts quantitative and qualitative methods of credit control.
Quantitative methods aim at controlling the cost and availability of credit, while the
qualitative method influences the use and direction of credit.
How is Central Bank different from Commercial Banks?
• On the basis of Profit: A central bank does not aim at making profits like a commercial
bank and hence is not a profit making institution. It acts in the public interest so as to
control and regulate the banking and financial system of the country.

Economy
• On the basis of functions performed: A central bank does not perform ordinary
commercial banking functions such as accepting deposits from the general public of the
country.
• Ownership: A central bank is an organ of the government and, therefore, is owned by
the government and managed by the government officials. But a commercial bank is
generally maybe owned by both, private individuals as shareholders and by the
government.
• Issuer of Currency: A central bank has sole monopoly of note issue, but commercial
banks cannot issue notes.
COMMERCIAL BANKS
• Commercial Banks are created for profit motive.
• Scheduled Commercial Banks (SCBs) are grouped under following categories:
– Nationalized Banks
– Foreign Banks
– Regional Rural Banks
• Nationalized Banks
– State Bank of India and its associates along with the nationalized banks such as
the IDBI Banks, Indian Bank, Dena Bank etc. are all public sector banks.
– Other scheduled commercial banks include private banks such as ICICI, Axis, HDFC
bank etc. operating in the country.
• Foreign Banks
– Operating in the country include Deustche Bank, Bank of America, Citibank, HSBC,
and Royal Bank of Scotland etc.
• Regional Rural Banks
– Regional rural banks came into being in the 1970s with the objective of providing
deposit and credit facilities to the people in rural areas especially the small and
marginal farmers, agricultural labourers, and small entrepreneurs.
– Even though these banks count as the scheduled commercial banks but their focus
and reach is generally limited to a district or two.
– Some of the examples of Regional Rural Banks are Assam GraminVikash Bank,
Allahabad UP Gramin Bank, Baroda Gujarat Gramin Bank etc.
– At present there are 91 RRBs functioning in India.
CO-OPERATIVE BANKS
• It is an institution established on the basis of cooperative principles and dealing in
ordinary banking business with ‘No Profit No Loss Basis’.
• These banks are controlled, owned, managed and operated by cooperative societies and
came into existence under the Cooperative Societies Act in 1912.
• These banks are located in the urban as well in the rural areas. Although these banks
have the same functions as the commercial banks, but their rate of interest is low in
comparison to other banks.
• At present, there are 170 scheduled commercial banks in the country, which includes
91 Regional Rural Banks (RRBs), 19 Nationalized Banks, 8 Banks in State Bank of India
Group and the Industrial Development Bank of India Limited (IDBI Ltd).

Economy
There are three types of cooperative banks in India, namely

• Primary Credit Societies: These are formed in small locality like a small town or a
village. The members using this bank usually know each other and the chances of
committing fraud are minimal.
• Central Cooperative Banks: These banks have their members who belong to the same
district. They function as other commercial banks and provide loans to their members.
They act as a link between the state cooperative banks and the primary credit societies.
• State Cooperative Banks: these banks have a presence in all the states of the country
and have their presence throughout the state.
NON-SCHEDULED BANKS
• Banks not under 2nd Schedule of the Reserve Bank of India Act, 1934. These are also
known as Local Area Bank.
• Non-scheduled banks are also subject to the statutory cash reserve requirement. But
they are not required to keep them with the RBI; they may keep these balances with
themselves.
• They are not entitled to borrow from the RBI for normal banking purposes, though they
may approach the RBI for accommodation under abnormal circumstances.
There are 5 Non-Scheduled Urban Cooperative Banks in India
• AkhandAnand Co-Operative Bank Ltd.
• Alavi Co-Op Bank Ltd.
• Amarnath Co-operative Bank Ltd.
• AmodNagrikSahakari Bank Ltd.
• AmreliNagrikSahakari Bank Ltd.
Along with this 4 local area banks in India which, forms under non-scheduled list of
Banking as per RBI
• Coastal Local Area Bank Ltd.
• Capital Local Area Bank Ltd.
• Krishna BhimaSamruddhi Local Area Bank Ltd.
• Subhadra Local Area Bank Ltd.
FUNCTIONS OF SCHEDULED COMMERCIAL BANKS
• The primary business of any commercial bank is to accept deposits and give short term
loans. Apart from this, a scheduled commercial bank performs a number of other useful
functions to the society such as:
a. Collection of Deposits
b. Advancing Loans
c. Utility Services
d. Agency Services
• Collection of Deposits: Most important function of commercial bank. These deposits
can be of various forms:
• Fixed Deposits: These are the deposits for a fixed period to earn interest by the customers
of a bank. Such deposits have high interest rate than the other types of deposits. In case
the customer withdraws money before the end of stipulated term of deposit, s/he has to

Economy
pay penalty.
• Saving Bank Deposit: These are deposits made by persons out of their expenditure.
These banks function with the intention to culminate saving habits among people,
especially those who belong to low income groups or those who are salaried.
• The money these people deposit in the banks are invested in securities, bonds etc.
These days, many commercial banks perform the dual functions of savings bank. The
postal department is also in a way a saving bank.
• Current Account Deposits: Also known as demand deposit. The bank opens this account
on an initial deposit of Rs. 100 but certain conditions have to be met to prove credit
worthiness of the customer. There are no limitations on the amount of deposit and
number of withdrawals. Generally, no interest is paid on current deposits.
• Advancing loans: Commercial banks also play an important role in the economy by
providing loans to industries, individuals, businesses, agriculture etc. They also provide
loans for export and import trade.
• Utility services: Commercial banks perform various services useful to the customer.
Some of them have been listed below:
• Locker facility: Banks provide locker facility to customers to keep their valuables, such
as securities, jewellery, documents etc.
• Draft facilities: Banks issue drafts to customers and enable them to transfer funds
from place to place.
• Letters of credit: Banks issue letters of credit to their customers. These are useful to
traders to buy goods from foreign countries on credit.
• Agency Services: Commercial banks also perform several activities on behalf of their
customers.
• Collections: Commercial banks take up collection of promissory notes, cheques, bills,
dividends, subscriptions, rents, etc., on behalf of their customers as agents. The bank
charges ‘service charges’ for rendering these services to its customers.
• Payments: Banks also accept the responsibility to pay insurance premium, rents, taxes,
electricity bills, etc. periodically on behalf of its customers for whom they charge
commission.
• Sale and purchase of securities: Customers sometimes approach the bankers for
sale and purchase of their securities. For these services the banks charge commission.

Economy
TERMS RELATED TO BANKING SYSTEM

MONETARY POLICY
• Planned Economic Development adopted by India required an active monetary policy.
The two stated aims of this policy were:
- Boost economic development
- Control inflationary pressures
• The RBI is the main agency for implementing the monetary policy. RBI has defined its
monetary policy in terms of ‘adequate financing of economic growth and at the
same time ensuring reasonable price stability’. The instruments which RBI employs
to achieve a stable monetary policy include:
BANK RATE
• Rate at which the central bank lends to commercial banks. In other words, it is the rate
at which RBI rediscounts the bill of exchange.
• It thus acts as a signal to the economy on the direction of the monetary policy. RBI uses
changes in Bank Rate to regulate fluctuations in exchange rate and domestic inflation.
• Each bank is free to decide the Base Rate below which it will not lend to borrowers.
Banks should declare the benchmark based on which such Base Rates are decided.
One bank can have only one Base Rate.
• At present it is 6.75%.
CASH RESERVE RATIO (CRR)
• Every Commercial Bank is required to keep a certain percentage of its demand and time
liabilities (deposits) with the RBI (either as cash or book balance).
• The RBI varies this ratio as and when it perceives the need to increase or decrease
money supply. RBI is empowered to fix the CRR at a rate ranging between 3 per cent
and 15 per cent.
• RBI is using this method (increase of CRR rate), to drain out the excessive money from
the banks.
• At present the CRR is 4%.
STATUTORY LIQUIDITY RATIO (SLR)
• Commercial Banks are also required to keep (in addition to CRR) a certain percentage of
their net demand and time liabilities (NDTL) as liquid assets in the shape of cash, gold or
approved securities.
• As most of the SLR money is kept in treasury bills, government had, in the past, been
using SLR as a means to mobilize low cost resources. This abuse of SLR leads to distortion
in the interest rate and credit supply.
• In order to overcome this, Narasimhan Committee recommended that SLR should be
brought down to 25 per cent, which is the current rate since 1993-94.
• At present the SLR is 20.50%.
OPEN MARKET OPERATION
• This refers to the RBI buying and selling eligible securities to regulate money supply.
• Traditionally, RBI was not resorting to this method. However, after the large inflow of
foreign funds since 1991, RBI has had to step in to sterilize the flow to avoid excess
liquidity.
Economy
LIQUIDITY ADJUSTMENT FACILITY (LAF)

• Liquid Adjustment Facility is a monetary policy tool which allows banks to borrow money
through repurchase agreements. LAF is used to aid banks in adjusting the day to day
mismatches in liquidity. LAF consists of repo and reverse repo operations.
REPO RATE
• Repurchase Option (REPO) is the rate at which RBI lends to commercial banks. In
other words, it is the rate at which our banks borrow rupees from RBI.
• Whenever, the banks have any shortage of funds they can borrow it from RBI. A
reduction in the Repo Rate will help banks to get money at a cheaper rate.
• When the Repo Rate increases, borrowing from RBI becomes more expensive.
• At present the Repo Rate is 6.25%.
REVERSE REPO RATE
• The rate at which Reserve Bank of India (RBI) borrows money from banks and hence
exact opposite of Repo Rate.
• RBI uses this tool when it feels there too much money floating in the banking system.
Banks are always happy to lend money to RBI since their money is in safe hands with a
good interest.
• An increase in Reverse Repo Rate can cause the banks to transfer more funds to RBI
due its attractive interest.
• RBI resorts to the Repo Route to fine tune the liquidity position, without resorting to
major policy instruments such as changes in CRR and Bank Rate. However, markets
are bound to react to frequent changes in the Repo Rates and this will be reflected in
corresponding changes in the deposit and lending rates of commercial banks.
• At present the Reverse Repo Rate is 5.75%
PRIME LENDING RATE
• It is the interest rate charged by banks to their most creditworthy customers (usually
the most prominent and stable business customers).
• The rate is almost always the same amongst major banks.
• Some banks use the name “Reference Rate” or “Base Lending Rate” to refer to their
Prime Lending Rate.
MARGINAL STANDING FACILITY (MSF)
• Rates at which the Scheduled banks can borrow funds overnight from RBI against
government securities.
• It is a short term borrowing scheme for scheduled commercial banks in case the banks
are in severe cash shortage or acute shortage of liquidity.
• MSF has been introduced by RBI to reduce volatility in the overnight lending rates in
the inter-bank market and to enable smooth monetary transmission in the financial
system.
• At present the MSF rate is 6.75%.
SPECIAL DRAWING RIGHTS (SDR)
• It is an artificial currency created by the IMF in 1969. SDRs are allocated to member
countries and can be fully converted into international currencies so they serve as a
supplement to the official foreign reserves of member countries.

Economy
• Its value is based on a basket of key international currencies (U.S. dollar, euro, yen and
pound sterling).
NON-BANKING FINANCIAL COMPANY (NBFC)
• It is a company registered under the Companies Act, 1956 and is engaged in the business
of loans and advances; acquisition of shares/stock/bonds/debentures/securities issued
by government, but does not include any institution whose principal business is that of
agriculture activity, industrial activity, sale/ purchase/construction of immovable
property.
NBFCs are doing functions akin to that of banks; however there are a few differences:
• A NBFC cannot accept demand deposits (demand deposits are funds deposited at a
depository institution that are payable on demand — immediately or within a very short
period — like current or savings accounts).
• It is not a part of the payment and settlement system and as such cannot issue cheques
to its customers.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation
(DICGC) is not available for NBFC depositors unlike in case of banks.
WHITE LABEL ATMS
• Concepts of White label ATMs is adopted from Canada. Since 2006, some banks have
been pressing with RBI to introduce white label ATMs in India too.
• White Label ATM or White Label Automated Teller Machines in India will be owned and
operated by Non-Bank entities.
• From such White Label ATM customer from any bank will be able to withdraw money,
but will need to pay a fee for the services. These white label automated teller machines
(ATMs) will not display logo of any particular bank and are likely to be located in non-
traditional places.
• The white label automated teller machines are likely to benefit customers as well as
banks. With the expansion of ATM network, customers will be able to withdraw funds at
more locations, located near their home or place of work.
SHADOW BANKS
• After the subprime crisis of the US, the term Shadow Banks came into use in 2007.
• Shadow Banks refer to those organizations that function like banks but are outside the
banking regulation.
• They help in providing quick source of credit to the public but have been criticized
because they lead to a creation of a bubble and on the defaulting on loans by the
borrowers it leads to a crisis at one witnessed in the US.
• Economists express concern over the functioning of shadow banks for several reasons.
Shadow banks don’t enjoy powers under SARFAESI Act and therefore it is difficult for
them to recover money in case of loan defaults. There are also concerns over their
transparency and methods of functioning.
BHARTIYA MAHILA BANK
• Bharatiya Mahila Bank Ltd. is the first of its kind in the Banking Industry in India.
• One of the key objectives of the bank is to focus on the banking needs of women and
promote economic empowerment.

Economy
• It is being looked upon as the beginning of a unique new institution that will provide
financial services predominantly to women and women self-help groups to the small
businesswomen and from the working women to the high net worth individual.
• It has been merged with SBI.
Some salient features of the bank are:
• Bank will offer 4.5% interest on saving deposits.
• It will not insist on collateral since most title deeds are in name of male family members.
• It will lend to micro businesses like catering, crèches & for upgrading kitchens in
households.
• The bank aims to have Rs. 60,000 crore business and 775 branches by 2020.
• It will provide loans primarily to women, and will give low-cost education loans for girls.
• Key positions, including treasury head and security head, held by women.
BANKING OMBUDSMAN
• Banking Ombudsman is a quasi-judicial authority functioning under India’s Banking
Ombudsman Scheme 2006, and the authority was created pursuant to a decision by
the Government of India to enable resolution of complaints of customers of banks
relating to certain services rendered by the banks.
• The Reserve Bank of India in 2006 announced the revised Banking Ombudsman Scheme
with enlarged scope to include customer complaints on certain new areas, such as,
credit card complaints, deficiencies in providing the promised services even by banks’
sales agents, levying service charges without prior notice to the customer and non-
adherence to the fair practices code as adopted by individual banks.
• Applicable to all commercial banks, regional rural banks and scheduled primary
cooperative banks having business in India, the revised scheme came into effect from
January 1, 2006.
PRIORITY SECTOR LENDING (PSL)
• Introduced by Dr. K S KrishnaswamyCommitteein 1972, aimed to provide institutional
credit to those sectors and segments for whom it is difficult to get credit.
• According to this, SCB have to give 40% of loans (measured in terms of Adjusted Net
Bank Credit or ANBC) to the identified priority sectors in accordance with the RBI
Regulations.
Objective of Priority Sector Targets
• The overall objective of priority sector lending programme is to ensure that adequate
institutional credit flows into some of the vulnerable sectors of the economy, which may
not be attractive for the banks from the point of view of profitability.
• If these targets are not realized, banks have to finance the development programme
implemented by the government for the concerned sectors.
New PSL Norms:
• New PSL rules have been laid down by the RBI following the recommendations of internal
working group in 2015.
Categories under PSL
• Agriculture 18%: Within the 18 percent target for agriculture, a target of 8 percent of
ANBC is prescribed for Small and Marginal Farmers.

Economy
• Micro, Small and Medium Enterprises 7.5 percent.

• Export Credit: Incremental export credit up to 2 percent for domestic banks and foreign
banks with 20 branches and above.
• Education: Loans to individuals for educational purposes including vocational courses
upto Rs 10 lakh.
• Housing: Loans to individuals up to Rs 28 lakh in metropolitan centres (with population
of ten lakh and above) and loans up to Rs 20 lakh in other centres for purchase/
construction of a dwelling unit per family.
• Social Infrastructure: Bank loans up to a limit of Rs 5 crore per borrower for building
social infrastructure for activities namely schools, health care facilities, drinking water
facilities and sanitation facilities in Tier II to Tier VI centres.
• Renewable Energy: Bank loans up to a limit of Rs 15 crore to borrowers (individual
households- Rs 10 lakh) including for public utilities viz. street lighting systems, and
remote village electrification.
• Others: SHG, JLG etc.
• The new regulation also stipulates that banks should give 10% of their loans to the
• Weaker sections which include Small Marginal Farmers, Artisans, village and cottage
industries with a credit limit uptoRs 1 lakh
• Beneficiary of certain govt. sponsored schemes,
• SCs/STs,
• SHGs.
• Person with disabilities etc.
• Foreign Banks with 20 branches and above already have priority sector targets of 40%
and sub-targets for Agriculture and Weaker Sections. These targets are to be achieved
by March 31, 2018 as per the action plans approved by RBI.
• Foreign banks with less than 20 branches will move to total Priority Sector target of 40
percent by 2019-20. The sub-target for MSME sector will be made in 2018.
NON-PERFORMING ASSETS (NPAs)
• An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank and is overdue for a period of 90 days.Banks are required to
classify NPAs further into
Substandard, Doubtful and Loss Assets.
• Substandard assets: Assets which has remained NPA for a period less than or equal to
12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months.
• Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted, although there may be some
salvage or recovery value.”
Status of NPAs in India
• Banks have been asked by the RBI to clean up their account statement and their asset
book by March 2017 following the huge NPAs pending with these banks.

Economy
• Resultantly this led to 29 public sector banks writing off Rs1.14 Lakh Crore of bad debts
between 2013 -2015, much more than what they had done in the preceding 9 years.
• The gross bad loans of 39 listed Indian banks, in absolute term, rose 92% in fiscal year
2016 to Rs.5.79 trillion even as after provisioning, the net bad loans more than doubled
to Rs.3.38 trillion.
• In percentage terms, the average gross non-performing assets (NPAs) of this group of
banks rose from 4.41% of loans in 2015 to 7.91% in 2016; net NPAs in the past one year
rose from 2.45% to 4.63%.
• Public sector banks, which have close to 70% market share of loans, are more affected
than their private sector peers. Two of them have over 15% gross NPAs and an additional
eight close to 10% and more.
Impact of NPAs on Banks:
• Rising of NPAs will lead to a crisis of confidence in the market.
• The price of loans, i.e. the interest rates will shoot up.
• Shooting of interest rates will directly impact the investors who wish to take loans for
setting up infrastructural, industrial projects etc.
• It will also impact the retail consumers like us, who will have to shell out a higher
interest rate for a loan.
• This will hurt the overall demand in the Indian economy which will lead to lower growth
rates and of course higher inflation because of the higher cost of capital.
• The trend may continue in a vicious circle and deepen the crisis.
Laws related to NPAs and Bankruptcy
• SARFAESI Act – It empowers Banks/Financial Institutions to recover their NPAs without
the intervention of the court, through acquiring and disposing secured assets in case
of outstanding amounts greater than 1 lakh. SARFAESI has been used only against the
small borrowers primarily from MSME sectors.
• Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act
provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate
Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for
recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and
above. DRTs are overburdened leading to slow disposal of cases.
• Lok Adalats: Section 89 of the Civil Procedure Code provides resolution of disputes
through ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation.
Lok Adalats mechanism offers expeditious, in-expensive and mutually acceptable way
of settlement of dispute.
• Under banking regulation act 1949, RBI is empowered to monitor the asset quality of
banks by inspecting record books.
BASEL NORMS: PRUDENTIAL NORMS AND CAPITAL ADEQUACY
• Implementing the Narsimham Committee recommendations, RBI prescribed that banks
should make 100 per cent provision for all loss assets or non-performing assets (NPAs)
over a period of 2 years, as prudential norms.
• Capital Adequacy Norms required the banks to achieve a capital to risk weighted asset
ratio of 8 per cent. A bank’s real capital is assessed after taking into account the
riskiness of its assets. Providing a cushion for the riskiness of the asset is necessary to
guarantee against insolvency.

Economy
• The international norm for Capital Adequacy Ratio was set by Basel Committee on
Banking Supervision under the aegis of the Bank of International Settlements (BIS)
Basle, Switzerland, after the failure of the German Bank Herstatt in 1974.
• It is a committee of Bank Supervisors consisting of members from each of the G10
countries. The committee is a forum for discussion of the handling of specific supervisory
problems.
• It came up with the first set of recommendations which are called Basel I. These included
a minimum capital adequacy of 8 per cent of the total risk weighted assets of a bank.
• Many Indian Banks had to go in for public issues to satisfy capital adequacy norms. It
was later realized that Basel I norms addressed only financial risk.
• Accordingly, a revised set of norms called Basel II was brought out in June 2004. These
are more complex norms and are based on the three pillars of Capital Requirement,
Supervisory Review and Market Discipline.
• Despite Basel II norms, the financial market crisis of 2008 revealed the need for further
stringency.
• Basel III was proposed in Dec 2010 in order to improve the banking sector’s ability to
absorb shocks arising from financial and economic stress.
• RBI has issued instructions for the adoption of Basel III norms from Jan 2013 in a
phased manner to be completed by March 31, 2018.
• This will require fresh infusion of capital for which dilution of PSU bank capital has been
decided without diluting govt. control.

Economy
BANKING SECTOR REFORMS

BANKING SECTOR DEVELOPMENT IN INDIA
• In 1921, all presidency banks were amalgamated to form the Imperial Bank of India
which was run by European Shareholders.
• After that the Reserve Bank of India was established in April 1935. At the time of first
phase the growth of banking sector was very slow.
• Between 1913 and 1948 there were approximately 1100 small banks in India. To
streamline the functioning and activities of commercial banks, the Government of India
came up with the Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No.23 of 1965).
• Reserve Bank of India was vested with extensive powers for the supervision of banking
in India as a Central Banking Authority.
• After Independence, in 1955, the Imperial Bank of India was nationalized (under State
Bank of India Act– 1955) and was given the name “State Bank of India”, to act as the
principal agent of RBI and to handle banking transactions all over the country.
• Seven banks forming subsidiary of State Bank of India was nationalized in 1960.
• On 19th July, 1969, major process of nationalization was carried out. At the same time
14 major Indian commercial banks of the country were nationalized.
• In 1980, another six banks were nationalized, and thus raising the number of nationalized
banks to 20.
• Seven more banks were nationalized with deposits over 200 Crores. Till the year 1980
approximately 80% of the banking segment in India was under government’s ownership.
• On the suggestions of Narsimham Committee, the Banking Regulation Act was amended
in 1993 and thus the gates for the new private sector banks were opened.
The following are the major steps taken by the Government of India to Regulate
Banking institutions in the country:
• 1949: Enactment of Banking Regulation Act.
• 1955: Nationalisation of State Bank of India.
• 1959: Nationalisation of SBI subsidiaries.
• 1961: Insurance cover extended to deposits.
• 1969: Nationalisation of 14 major Banks.
• 1971: Creation of credit guarantee corporation.
• 1975: Creation of regional rural banks.
• 1980: Nationalisation of seven banks with deposits over 200 Crores.
NATIONALIZATION OF BANKS IN INDIA
• It was observed that certain sectors of the economy such as the agriculture, small-scale
industries and weaker sections of the society were relatively ignored by the banking
system of the country. For example, the agricultural sector only received 2.1% of the
total credit as it stood in March 1967 compared to a humungous 64% for the industry.
• It was though by Government of India that it should impose some control over banks
with a view to preventing monopolistic trends, concentration of economic power and
misuse of economic resources.

Economy
• National Credit Control Council was set up on December 22, 1967 to assess periodically
the available resources of credit and to ensure its equitable and purposeful distribution
among the several sectors.
• Such a mechanism didn’t work out and eventually nationalization was brought about
through promulgation of an ordinance in 1969, which nationalized 14 leading commercial
bank of the country. Some of them were the Punjab National Bank, IOB, Dena Bank,
Syndicate Bank etc. In 1980 six more banks were nationalized.
Objectives of Bank Nationalisation
• To mobilize savings of people to the maximum possible and to utilize them for productive
purpose;
• To ensure that the banking operations are guided by a larger social purpose and are
subject to close public regulations;
• To ensure that the legitimate credit needs of private sector industry and trade, big and
small, are met;
• To ensure the needs of the productive sector and in particular, agriculture, small scale
industry, self- employed professionals are met;
• To actively foster the growth of the new and progressive class of entrepreneurs and
create fresh opportunities for hitherto neglected and backward areas in different parts
of the country;
• To curb the use of bank credit for speculative and for other unproductive purposes.
Reforms
• One of the sectors that has been subjected to reform as a part of the new economic
policy since 1991 consistently is the banking sector.
• Commercial Banks and their weaknesses by 1991: The major factors that contributed
to deteriorating bank performance upto the ends of eighties were:
• High SLR and CRR locking up funds
• Low interest rates charged on government bonds
• Directed and concessional lending for populist reasons
• Administered interest rates
• Lack of competition
Thus, the reforms were needed to set the above problems right such as:
• Floor and cap on SLR and CRR removed in 2006.
• Interest rates were deregulated to make banks respond dynamically to the market
conditions. Even Scheduled Banks rates were deregulated in 2011.
• Near level playing field for public, private and foreign banks in entry.
• Adoption of prudential norms – Reserve Bank of India issued guidelines for income
recognition, asset classification and provisioning to make banks safer.
• Basel Norms adopted for safe banking.
• VRS for better work culture and productivity.
• FDI up to 74% is permitted in private banks.
The objectives of Banking Sector Reforms have been
• To make them competitive and profitable.
• To strengthen the sector to face global challenges.

Economy
• To make banking Sound and safe.

• To help them technologically modernize for customer benefit.
• To make available global expertise and capital by relaxing FDI norms.
NARASIMHAM COMMITTEE
Banking Sector reforms in India were conducted on the basis of Narasimham Committee
reports I and II (1991 and 1998 respectively). This committee was appointed against the
backdrop of the Balance of Payment Crisis. It was set up to analyze all factors related to
financial system and give recommendation to improve its efficiency and productivity.
In 1991, the Narasimhan Committee recommended for:
• Creating a level playing field between the public sector, private sector and foreign sector
banks
• Selection of few banks like SBI for global operations
• Reducing Statutory Liquidity Ratio (SLR) as that will leave more resources with banks
for lending
• Reducing Cash Reserve Ratio (CRR) to increase lendable resource of banks
• Rationalizing and better targeting priority sector lending as a sizeable portion of it is
wasted and also much of it turning into non-performing asset
• Introducing prudential norms for better risk management and transparency in operations
• Deregulating interest rates
• Set up Asset Reconstruction Company (ARC) that can take over some of the bad debts of
the banks and financial institutions and collect them for a commission.
• Again in 1998, Finance Ministry of the GoI appointed a committee under the chairmanship
of Mr. M Narasimham to review the progress of the implementation of the banking
reforms since 1992 and further strengthening the financial institutions of India.
In 1998, the committee recommended for:
• Need for stronger banking system by merging some banks which will have a multiplier
effect on industry.
• Stricter norms for NPAs and the concept of narrow banking which allows the banks to
place their funds only in short term and risk free assets.
• Greater autonomy for the PSBs in order to make them function in accordance with their
international counterparts.
• Government of India equity in nationalized banks be reduced to 33% for increased
autonomy
• Review of functions of banks boards with a view to make them responsible for enhancing
shareholder value through formulation of corporate strategy and reduction of government
equity.
• Increasing Capital Adequacy norms to improve the risk absorption capacity of banks.
• The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by
2002. The Committee recommended penal provisions for banks that fail to meet these
requirements.
Implementations of Recommendations:
• In order to implement these (Narsimham Committee II) recommendations, The RBI in
Oct 1998, initiated the second phase of Financial Sector Reforms raising capital adequacy

Economy
ratio by 1% and tightened the prudential norms for provisioning and asset classification
in a phased manner.
• It also targeted to bring the capital adequacy ratio to 9% by March 2001.
• In October 1999 criteria for “autonomous status” was identified by March 1999 and 17
banks were considered eligible for autonomy.
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 (SARAFESI Act 2002) was introduced to curb NPAs like problems.
• During the 2008 economic crisis, performance of Indian banking sector was far better
than their international counterparts.
• This was credited to the successful implementation of the recommendations of the
Narasimham Committee- II with particular reference to the capital adequacy norms and
the recapitalization of the public sector banks.
• Impact of the two committees has been so significant that the financial-economic
sector professionals have been applauding there positive contribution.
NEW BANK LICENCE CRITERIA
The Reserve Bank of India (RBI) granted two preliminary licences to set up new banks in
a country where only one household in two has access to formal banking services.
The approval of licences for IDFC Ltd (IDFC.NS) and Bandhan Financial Services marks
the start of a cautious experiment for a sector dominated by lethargic state lenders, many
of which are reluctant to expand into rural areas or towns where banking penetration is
low. No new Indian bank has been formed since Yes Bank (YESB.NS) in 2004.
RBI has come up with guidelines for issuing new bank license.
Key features of the guidelines are:
(i) Eligible Promoters: Entities / groups in the private sector, entities in public sector and
Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank through a
wholly-owned Non-Operative Financial Holding Company (NOFHC).
(ii) ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound
credentials and integrity, be financially sound with a successful track record of 10
years. For this purpose, RBI may seek feedback from other regulators and enforcement
and investigative agencies.
(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter
/ Promoter Group. The NOFHC shall hold the bank as well as all the other financial
services entities of the group.
(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC:
The initial minimum paid-up voting equity capital for a bank shall be ‘5 billion. The
NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital
of the bank which shall be locked in for a period of five years and which shall be brought
down to 15 per cent within 12 years. The bank shall get its shares listed on the stock
exchanges within three years of the commencement of business by the bank.
(v) Regulatory framework: The bank will be governed by the provisions of the relevant
Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines/
Instructions issued by RBI and other regulators. The NOFHC shall be registered as a
non-banking finance company (NBFC) with the RBI and will be governed by a separate
set of directions issued by RBI.

Economy
(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the
new bank shall not exceed 49% for the first 5 years after which it will be as per the
extant policy.
(vii) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should
be independent directors. The corporate structure should not impede effective supervision
of the bank and the NOFHC on a consolidated basis by RBI.
(viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC
both on stand- alone as well as on a consolidated basis and the norms would be on
similar lines as that of the bank.
(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter
Group. The bank shall not invest in the equity / debt capital instruments of any financial
entities held by the NOFHC.
(x) Business Plan for the bank: The business plan should be realistic and viable and
should address how the bank proposes to achieve financial inclusion.
(xi) Other conditions for the bank:
– The Board of the bank should have a majority of independent Directors.
– The bank shall open at least 25 per cent of its branches in unbanked rural centres
(population upto 9,999 as per the latest census)
– The bank shall comply with the priority sector lending targets and sub-targets as
applicable to the existing domestic banks.
– Banks promoted by groups having 40 per cent or more assets/income from non-
financial business will require RBI’s prior approval for raising paid-up voting equity
capital beyond ‘10 billion for every block of ‘5 billion.
– Any non-compliance of terms and conditions will attract penal measures including
cancellation of licence of the bank.
(xii) Additional conditions for NBFCs promoting / converting into a bank: Existing NBFCs,
if considered eligible, may be permitted to promote a new bank or convert themselves
into banks.
OTHER RECENT COMMITTEES
A. Nachiket Mor Committee
• The “Committee on Comprehensive Financial Services for Small Businesses and Low
Income Households” was set up by the RBI under the chairmanship of Nachiket Mor.
• In its final report, the Committee has outlined six vision statements for full financial
inclusion and financial deepening in India:
1. Universal Electronic Bank Account (UEBA): Each Indian resident, above the age of
eighteen years, would have an individual, full-service, safe, and secure electronic bank
account.
2. Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges:
The Committee envisions that every resident in India would be within a fifteen minute
walking distance of a payment access point.
3. Sufficient Access to Affordable Formal Credit: Each low-income household and small-
business would have access to a formally regulated lender that is capable of assessing
and meeting their credit needs. Such a lender must also be able to offer them a full-
range of suitable credit products at an affordable price.

Economy
4. Universal Access to a Range of Deposit and Investment Products at Reasonable

Charges: Each low- income household and small-business would have access to
providers that can offer them suitable investment and deposit products. Such services
must be available to them at reasonable charges.
5. Universal Access to a Range of Insurance and Risk Management Products at
Reasonable Charges: Each low-income household and small business would have access
to providers that have the ability to offer them suitable insurance and risk management
products. These products must at minimum allow them to manage risks related to: (a)
commodity price movements; (b) longevity, disability, and death of human beings; (c)
death of livestock; (d) rainfall; and (e) damage to property.
6. Right to Suitability: Each low-income household and small-business would have a
legally protected right to be offered only suitable financial services. She will have the
right to seek legal redress if she feels that due process to establish Suitability was not
followed or that there was gross negligence.
The key recommendations are:
• Providing a universal bank account to all Indians above the age of 18 years by January
1, 2016. To achieve this, a vertically differentiated banking system with payments banks
for deposits and payments and wholesale banks for credit outreach. These banks need
to have Rs.50 crore by way of capital, which is a tenth of what is applicable for new
banks that are to be licensed.
• Aadhaar will be the prime driver towards rapid expansion in the number of bank accounts.
• Monitoring at the district level such as deposits and advances as a percentage of gross
domestic product (GDP).
• Adjusted 50 per cent priority sector lending target with adjustments for sectors and
regions based on difficulty in lending.
B.P.J. Nayak Committee
• It was constituted by the RBI for making recommendations regarding corporate
governance in PSU banks. Recommendations of the Nayak Committee are:
• Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBI(Subsidiary Banks)
Act.
• Conversion of PSBs into Companies as per the Companies Act.
• Formation of a Bank Investment Company/BIC under the Companies Act; transfer of
shares by the central government in PSBs to the BIC.
• BIC in turn would have over the controlling power to boards of PSBs.
• Government will only control earning return on investment.
• Fair return on investment to the Central government would be the responsibility of BIC.
• Appointments of CEOs, Inside Directors and top Executives of PSBs would be the
responsibility of the Bank Boards Bureau constituting three serving or retired bank
chairmans and the government would not be involved in this decision in any way.
• Nayak committee also recommends proportionate voting rights to all shareholders and
reduction of governmental shareholding to 40%.
Mission Indradhanush for revamping Public Sector Banks
• The mission includes the seven key reforms of appointments, board of bureau,
capitalisation, de-stressing, empowerment, framework of accountability and governance

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reforms.
The mission includes:
1. Appointments : Executives from the private sector have been hired to run state-owned
banks with the government.
2. Bank Board Bureau : The Bank Board Bureau will start functioning from the next
financial year and is the first step toward a full-fledged bank holding company, an
entity that will house the government’s stake in state run banks struggling with mounting
non-performing loans that have touched 6 per cent of gross advances.
3. Capitalization : The government will inject a total of Rs 25,000 crore of capital into
debt-laden state banks in this fiscal; Rs 20,000 crore would be injected in a month. Over
the next four years, the government plans to inject Rs 70,000 crore.
4. De-stressing : The government will concentrate on distressing the banks’ bad loans.
5. Empowerment : The government will strive to make it easier for PSBs to hire. The
government is looking at introducing Employee Stock Ownership Plan (ESOPs) for the
PSU bank managements.
6. Framework of Accountability : The government also announced a new framework of
key performance indicators for state-run lenders to boost efficiency in functioning while
assuring them of independence in decision making on purely commercial considerations.
7. Governance Reforms: The process of governance reforms started with “Gyan Sangam”
- a conclave of PSBs and FIs organized at the beginning of 2015 in Pune which was
attended by all stake-holders including Prime Minister, Finance Minister, MoS (Finance),
Governor, RBI and CMDs of all PSBs and FIs. There was focus group discussion on six
different topics which resulted in specific decisions on optimizing capital, digitizing
processes, strengthening risk management, improving managerial performance and
financial inclusion.

Economy
INDIAN FINANCIAL MARKET

FINANCIAL MARKET
Definition
A financial market is a broad term describing any marketplace where buyers and
sellersparticipate in the trade of assets such as equities, bonds, currencies and derivatives.
Financial markets are typically defined by having -
• Transparent pricing
• Basic regulations on trading, costs and fees
• Market forces determining the prices of securities that trade.
Functions of financial Markets
1. Mobilization of saving & channelize them into more productive uses
2. Facilitate price discovery
3. Provide liquidity to financial assets
4. Reduces the cost of transaction & save time & efforts A financial market consists
of two major segments:
(a) Money Market - the money market deals in short-term credit
(b) Capital Market - the capital market handles the medium term and long-term credit
MONEY MARKET
Definition
• The money market is that part of a financial market which deals in the borrowing and
lending of short term loans generally for a period of less than or equal to 365 days. It
meets the short term requirements of borrowers and provides liquidity or cash to the
lenders.
• It is a place where short term surplus investible funds at the disposal of financial
institutions and individuals are bid by borrowers, again comprising institutions and
individuals and also by the government.
• The Indian money market consists of Reserve Bank of India, Commercial banks, Co-
operative banks, and other specialized financial institutions. The Reserve Bank of India
is the leader of the money market in India.
• Money market does not refer to any specific market place. Rather it refers to the whole
networks of financial institutions dealing in short-term funds, which provides an outlet
to lenders and a source of supply for such funds to borrowers.
• It should be noted that money market does not deal in cash or money but simply provides
a market for credit instruments such as bills of exchange, promissory notes, commercial
paper, treasury bills, etc. These financial instruments are close substitute of money.
• Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC,
GIC, UTI, etc. also operate in the Indian money market.
Structure of Indian Money Market
Indian money market is characterized by two sectors –
• Organized sector- The organized sector is within the direct purview of RBI regulations.
• Unorganized sector - The unorganized sector consists of indigenous bankers, money
lenders, non-banking financial institutions, etc.

Economy
Major functions of money market

1. To maintain monetary equilibrium - It means to keep a balance between the demand
for and supply of money for short term monetary transactions.
2. To promote economic growth - Money market can do this by making funds available
to various units in the economy such as agriculture, small scale industries, etc.
3. To provide help to Trade and Industry - Money market provides adequate finance to
trade and industry. Similarly, it also provides facility of discounting bills of exchange for
trade and industry.
4. To help in implementing Monetary Policy - It provides a mechanism for an effective
implementation of the monetary policy.
5. Money market provides non-inflationary sources of finance to government. It is
possible by issuing treasury bills in order to raise short loans.
Instruments of Money Market
Call Money
• Call money is mainly used by the banks to meet their temporary requirement of cash.
It is also known as money at call and money at short notice.
• In this, market money is demanded for an extremely short period. The duration of such
transactions is from a few hours to 14 days. These transactions help stock brokers
and dealers to fulfill their financial requirements. The rate at which money is made
available is called as call rate. Rate is fixed by the market forces such as the demand
for and supply of money.
Treasury Bill
• It is a market for sale and purchase of short-term government securities.
• These securities are called as Treasury Bills, which are promissory notes or financial
bills issued by the RBI on behalf of the Government of India.
• There are two types of treasury bills:
i. Ordinary or Regular Treasury Bills
ii. Ad Hoc Treasury Bills.
• Treasury bills are highly liquid instruments. At any time the holder of treasury bills can
transfer or get it discounted from RBI.
• The maturity period of these securities range from as low as 14 days to as high as 364
days.
• They have become very popular due to high level of safety involved in them.
Cash Management Bills
• The Government of India, in consultation with the RBI, decided to issue a new short-
term instrument, known as Cash Management Bills (CMBs), to meet the temporary
mismatches in the cash flow of the Government.
• The CMBs have the generic character of T-bills but are issued for maturities less than
91
Certificate of Deposits (CDs)
• The certificate of deposits is issued by the Commercial Banks
• They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh

Economy
• The minimum subscription of CDs should be worth Rs. 1 Crore.

• The maturity period of CD is as low as 3 months and as high as 1 year.
• These are the transferable investment instrument in a money market.
• The government initiated a market of CDs in order to widen the range of instruments in
the money market and to provide a higher flexibility to investors for investing their short
term money.
Commercial Papers (CPs)
• Commercial paper (CP) is an investment instrument which can be issued by a listed
company having working capital more than or equal to Rs. 5 cr.
• The CPs can be issued in multiples of Rs. 25 Laths. However, the minimum subscription
should at least be Rs. 1 cr.
• The maturity period for the CP is a minimum of 3 months and maximum 6 months.
• Commercial paper (CP) is a popular instrument for financing working capital requirements
of companies.
• It can be issued for period ranging from 15 days to one year. Commercial papers are
transferable by endorsement and delivery.
Repurchase Agreements
• A repurchase agreement, also known as a repo, is the sale of securities together with
an agreement for the seller to buy back the securities at a later date.
• The repurchase price should be greater than the original sale price, the difference
effectively representing interest, sometimes called the repo rate.
• The party that originally buys the securities effectively acts as a lender. The original
seller is effectively acting as a borrower, using their security as collateral for a secured
cash loan at a fixed rate of interest
Short Term Loan
• It is a market where the short term loan requirements of corporate are met by the
Commercial banks
• Banks provide short term loans to corporates in the form of cash credit or in the form of
overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.

Economy
CAPITAL MARKET
DEFINITION
• Capital Market is a market dealing in medium and long-term funds. It is an institutional
arrangement for borrowing medium and long-term funds and which provides facilities
for marketing and trading of securities.
• So it constitutes all long-term borrowings from banks and financial institutions,
borrowings from foreign markets and raising capital by issuing various securities such
as shares, debentures, bonds, etc.
CLASSIFICATION
• Capital market can be classified into – Primary and Secondary Market
– Primary - The primary market is a market for new shares. The companies have to
follow well defined procedures when they are auctioning their shares for the first
time. This is called Initial Public Offer. At this stage, the investment banks are
involved in setting a price for the shares which the company is issuing. The
major players in the primary market are merchant bankers, mutual funds, financial
institutions, and individual investors.
– Secondary markets - The secondary market is a market for trading of existing
securities. The secondary market known as stock market or stock exchange
plays an equally important role in mobilizing long- term funds by providing the
necessary liquidity to holdings in shares and debentures. It is an organized market
where shares and debentures are traded regularly with high degree of transparency
and security.
FUNCTIONS OF THE CAPITAL MARKET
1. Mobilization of Savings: Capital market is an important source for mobilizing idle
savings from the economy. It activates the ideal monetary resources and puts them in
proper investments.
2. Capital Formation: Capital market helps in capital formation. Capital formation is net
addition to the existing stock of capital in the economy.
3. Speed up Economic Growth and Development: Capital market enhances production
and productivity in the national economy. As it makes funds available for a long period
of time, the financial requirements of business houses are met by the capital market.
4. Proper Regulation of Funds: Capital market also helps in proper allocation of these
resources. It can have regulation over the resources so that it can direct funds in a
qualitative manner.
5. Continuous Availability of Funds: Capital market is place where the investment avenue
is continuously available for long-term investment. This is a liquid market as it makes
funds available on continues basis. Both, buyers and sellers can easily buy and sell
securities.
STRUCTURE OF THE CAPITAL MARKET
The capital market can be divided into two constituents
1. Financial institutions - The financial institutions provide long term and medium term
loans.

Economy
Development Financial Institutions

• Development financial institutions were set up to meet the medium and long-term
requirements of industry, trade and agriculture.
• These are IFCI, ICICI, IDBI, SIDBI, IRBI, UTI, LIC, GIC etc.
• All these institutions have been called Public Sector Financial Institutions.
Financial Intermediaries
• Financial Intermediaries include Merchant banks, Mutual Fund, Leasing companies,
etc.
• They help in mobilizing savings and supplying funds to capital market.
2. Securities market – The securities market is divided into
a. Government Securities Market - The gilt edged market
b. Corporate or industrial securities market.
Government Securities Market - Gilt-Edged market
• The gilt-edged market is also known as the securities guaranteed (both principal and
interest) by the government apart from government securities. The government securities
are risk free because the government can’t default on its payment obligations and are
hence known as gilt-edged (which means ‘of the best quality’).
• The important characteristics of the government securities are:
– It is without risk and returns are guaranteed.
– Government securities market consists of the new issues market and the secondary
market
– R.B.I. is responsible for all the new issues of government loans, as it manages
entirely the public debt operations of both the central and state governments.
– The secondary market deals in old issues.
– Government securities are the most liquid debt instruments.
– The transactions in the government securities market are large.

Economy
Industrial Securities Market

• Securities issued by firms (i.e. shares, bonds and debentures) can be bought and sold
freely in corporate securities market. It comprises the new issues market (the primary
market) and the secondary market (stock exchanges).
• Primary Market
– The new issues market is concerned with the issue of new securities-bonds
debentures, shares and so on.
– Funds are often raised by the public limited companies from the primary market for
setting up or expanding their business. However, the company has to fulfill various
requirements and decide upon the appropriate timing and method of issue for selling
its securities.
– The various methods through which capital can be raised are: By Prospectus, By
Offer for Sale, By Private Placing, By offering Rights Issue
• Secondary Market/ Stock Exchange
– The stock exchange or the secondary market is a highly organized market for the
purchase and sale of second-hand quoted or listed securities.
– Quoting or listing of a particular security implies incorporating that security in the
register of the stock exchange so that it can be bought and sold there.
– A stock exchange is an association or a body of individuals, established for the
purpose of assisting, regulating and controlling business in buying, selling and
dealing in securities
SECURITY MARKET
Share Capital
The companies registered under the Companies Act, 2013 are of three types as follows:
1. Unlimited Company: The unlimited company is a company where there is no limit on
the liability of its members. This means that if the company suffers a loss and the
company’s property is not enough to pay off its debts, the private property of its
members is used to meet the claims of the creditors. This means that there is a huge
risk in such companies.
2. Company Limited by Guarantee: In such a company, the liability of the members is
limited to the extent of guarantee given by them in the event of winding up of the
company.
3. Company Limited by Shares: In this the liability of the members is strictly limited to
the extent of nominal value of shares held by each of them. If a member has already
paid the full amount of the shares, he shall not be liable to pay any amount. If a
member has partly paid the shares, he can be forced to pay the remaining amount
during the existence of the company as well as during the winding up. Such companies
are of two kinds, private and public.
a) Private Company: A private company is the one which has a minimum paid up share
capital of Rs.100000 or such higher capital as prescribed by the Companies Act. Its
Article of association mentions that the company -
• Restricts the right to transfer its shares.
• Limits the number of its members from 2 to 50.
• Cannot go for invitation from public to subscription to any of its shares.

Economy
• Cannot accept deposits from persons other than its members, directors and relatives.
b) Public Company: A public company means a company which is not a private company
and has minimum of 7 shareholders/subscribers. It has to have a minimum paid-up
share capital of 5 Lakh.
Types of Share Capital of the Company
There are various terms used in connection with the share capital of the company. They are
as follows:
• Authorized / Registered / Nominal Capital: This is the Maximum Capital which the
company can raise in its life time. This is mentioned in the Memorandum of the
Association of the Company. This is also called as Registered Capital or Nominal
Capital.
• Issued Capital: This is the part of the Authorized Capital which is issued to the public
for Subscription. The act of creating new issued shares is called issuance, allocation or
allotment. After allotment, a subscriber becomes a shareholder. The number of issued
shares is a subset of the total authorized shares and
[Shares authorized = Shares issued + Shares unissued]
• Subscribed Capital: The issued Capital may not be fully subscribed by the public.
Subscribed Capital is that part of issued Capital which has been taken off by the
public i.e. the capital for which applications are received from the public. So, it is a
part of the Issued Capital as follows
[Issued Capital = Subscribed Capital + Unsubscribed Capital]
• Once the shares have been issued and purchased by investors and are held by them,
they are called Shares Outstanding.
• These outstanding shares have rights and represent ownership in the corporation by
the person that holds the shares.
• Called - up Capital: The Company may not need to receive the entire amount of capital
at once. It may call up only part of the subscribed capital as and when needed in
installments. Thus, the called - up Capital is the part of “subscribed capital which the
company has actually called upon the shareholders to pay.
• Paid-up Capital: The Called-up Capital may not be fully paid. Some Shareholders may
pay only part of the amount required to be paid or may not pay at all. Paid-up Capital
is the part of called-up capital which is actually paid by the shareholders. The remaining
part indicates the default in payment of calls by some shareholders, known as Calls in
Arrears.
Paid-up Capital = Called-up Capital - Calls in Arrears
• Reserve Capital: As mentioned above, the company by special resolution may determine
that a portion of the uncalled capital shall not be called up, except in the event of the
winding up of the company. This part is called Reserved Capital. It is kept reserved for
the Creditors in case of the winding up of the company.
STOCK MARKETS
• A stock market or equity market is the aggregation of buyers and sellers of stocks and
shares
• A stock exchange is a place to trade stocks.
• Companies may want to get their stock listed on a stock exchange. Other stocks may be

Economy
traded “over the counter”, that is, through a dealer.

• To be able to trade a security on a certain stock exchange, it must be listed there.
• A large company will usually have its stock listed on many exchanges across the world.
Comparison between Bull Market and Bear Market
• There are two ways to describe the general conditions of the stock market. It can be a
bull market or a bear market.
• A bear market indicates the continuous downward movement of the stock market.
Conversely, a bull market indicates the constant upward movement of the stock market.
• A particular stock that seems to be increasing in value is described to be bullish while
a stock that seems to be decreasing in value is described to be bearish.
• A bear market is the stock market wherein the prices of the key stocks have fallen by
20% or more over a period of at least two months.
• Bull markets, being the opposite of bear markets, indicate a rise in the prices of the
key stocks over a certain period of time.
Stock Indices and Stock Exchanges
A. S&P BSE SENSEX
• The S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also called the
BSE 30 or simply the SENSEX, is a free-float market-weighted stock market index of 30
well-established and financially sound companies listed on Bombay Stock Exchange.
• The 30 component companies which are some of the largest and most actively traded
stocks are representative of various industrial sectors of the Indian economy.
• Published since 1 January 1986, the S&P BSE SENSEX is regarded as the pulse of the
domestic stock markets in India.
• The base value of the S&P BSE SENSEX is taken as 100 on 1st April 1979, and its base
year as 1978-79.
• On 25 July 2001 BSE launched DOLLEX-30, a dollar-linked version of S&P.
B. Nifty 50
• The CNX Nifty, also called the Nifty 50 or simply the Nifty, is National Stock Exchange
of India’s benchmark Index for Indian Equity market. ‘CNX’ in its name stands for
‘CRISIL NSE Index’.
• The CNX Nifty covers 22 sectors of the Indian economy.
• Credit Rating Information Services of India Limited (CRISIL) is a global analytical company
providing ratings, research, and risk and policy advisory services.
C. Carbon Index: The Bombay Stock Exchange (BSE) in collaboration with the UK
government has launched the first ever ‘Carbon Indexing Project’. The Carbon Indexing
Project will rate BSE-listed companies on the basis of their carbon emissions and
compare it to their performance on the stock exchange.
D. Over the Counter Exchange of India (OTCEI): The Over the Counter Exchange of
India (OTCEI), incorporated under the provisions of the Companies Act 1956, is a public
limited company. It allows listing of small and medium sized companies. OTCEI is
promoted by the Unit Trust of India, Industrial Development Bank of India, the Industrial
Finance Corporation of India and others and is a recognized stock exchange.

Economy
Instruments of stock market

1. Forward contracts- A customized contract between two parties to buy or sell an asset
at a specified price on a future date. A forward contract can be used for hedging or
speculation, although its non-standardized nature makes it particularly apt for hedging.
Unlike standard futures contracts, a forward contract can be customized to any
commodity, amount and delivery date.
2. Futures contracts- A contractual agreement, generally made on the trading floor of
a futures exchange, to buy or sell a particular commodity or financial instrument at a
pre-determined price in the future. Futures contracts detail the quality and quantity of
the underlying asset; they are standardized to facilitate trading on a futures exchange.
3. Options contracts- A contract that allows the holder to buy or sell an underlying security
at a given price, known as the strike price. The two most common types of options
contracts are put and call options, which give the holder-buyer the right to sell or buy
respectively, the underlying at the strike if the price of the underlying crosses the
strike. Typically each options contract is written on 100 shares of the underlying.
4. Debentures- Debentures are bonds that are not secured by specific property or collateral.
Instead, they are backed by the full faith and credit of the issuer, and bondholders
have a general claim on assets that are not pledged to other debt.
Stock Trading
Buying and selling of stocks is called stock trading. Mainly there are two ways of doing
stock trading.
• Online Stock Trading: Doing stock trading with help of computer, internet connection
and with trading/ demat account is called Online Stock Trading.
• Offline Stock Trading: Doing stock trading with the help of broker or through phone is
called Offline trading. In other words trading will be done by another person on your
behalf based on the instructions given by you, and then the other person can be a
broker. The broker will do buying and selling of stocks on your behalf depending on
the instructions given by you. If you want to do offline stock trading then you need to
open the dematerialization account.
Investment in Short term, Mid-term and Long term trading
1. Short-term Trading - Stock trading done from one week to couple of months is called
short term. Companies or sectors having some breaking news will be used for short
term trading.
2. Mid-term Trading - Stock trading done from one month to couple of months, say
six to eight months is called midterm trading. Companies’ announcements of quarterly
results or some big foreign acquisitions will be used for midterm trading.
3. Long-term Trading - Stock trading done form couple of months to couple of years is
called long term trading. Companies whose fundamentals are good and have good future
plans then the stocks of these companies are used for long term trading. Generally
traders having good capital go for long term trading.
Stock Market Regulator
SEBI
The Securities and Exchange Board of India is the regulator for the securities market in
India. It was established in the year 1988 and given statutory powers on 12 April 1992

Economy
through the SEBI Act, 1992. The SEBI is managed by its members, which consists of a
Chairman who is nominated by Union Government of India; two members who are officers
from Union Finance Ministry; one member from The Reserve Bank of India and the
remaining 5 members are nominated by Union Government of India, out of them at least 3
are whole- time members.
The role or functions of SEBI are discussed below:
• To protect the interests of investors through proper education and guidance as
regards their investment in securities.
• To regulate and control the business on stock exchanges and other security markets.
• To make registration and to regulate the functioning of intermediaries such as stock
brokers, sub-brokers, share transfer agents, merchant bankers and other intermediaries
operating on the securities market.
• To register and regulate the working of mutual funds including UTI (Unit Trust of India).
• To promote self-regulatory organization of intermediaries. SEBI is given wide statutory
powers. However, self-regulation is better than external regulation.
• To regulate mergers, takeovers and acquisitions of companies in order to protect the
interest of investors.
• To prohibit fraudulent and unfair practices of intermediaries operating on securities
markets.
• To issue guidelines to companies regarding capital issues. Separate guidelines are
prepared for first public issue of new companies, for public issue by existing listed
companies and for first public issue by existing private companies.
• To conduct inspection, inquiries & audits of stock exchanges, intermediaries and self-
regulating organizations and to take suitable remedial measures wherever necessary.
• To restrict insider trading activity through suitable measures.
Terminologies associated with capital market
1. Floating Rate Bonds: Floating Rate Bonds are securities which do not have a fixed
coupon rate. The coupon is re-set at pre-announced intervals (say, every six months
or one year) by adding a spread over a base rate. Floating Rate Bonds were first
issued in September 1995 in India.
2. State Development Loans: State Governments also raise loans from the market. SDLs
are dated securities issued through an auction similar to the auctions conducted for
dated securities issued by the Central Government. Interest is serviced at half-yearly
intervals and the principal is repaid on the maturity date. Like dated securities issued
by the Central Government, SDLs issued by the State Governments qualify for SLR.
They are also eligible as collaterals for borrowing through market repo as well as borrowing
by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF).
3. Equity: Equity is the money invested in a firm to finance its operations. It generally has
a lock-in period during which they are not traded on the stock exchange. When listed,
equity is in the form of shares and provides ownership of the company to the shareholder.
4. Debt: To finance its operations, the company can resort to either infusing equity or
raising debt. Debt is essentially borrowing from an institution or an individual which
necessarily has to be paid at a future date.

Economy
5. Mutual Funds: An investment vehicle that is made up of a pool of funds collected from
many investors for the purpose of investing in securities such as stocks, bonds,
money market instruments and similar assets. Mutual funds are operated by money
managers, who invest the fund’s capital and attempt to produce capital gains and
income for the fund’s investors.
6. Venture capital: It is the money provided by investors to startup firms and small
businesses with perceived long-term growth potential. This is a very important source of
funding for startups that do not have access to capital markets. It typically entails high
risk for the investor, but it has the potential for above-average returns. Most venture
capital comes from a group of wealthy investors, investment banks and other financial
institutions that pool such investments or partnerships..
7. Angel investors: An angel Investor or angel (also known as a business angel or informal
investor) is an affluent individual who provides capital for a business start-up, usually
in exchange for convertible debt or ownership equity.
8. External Commercial Borrowings: Any money that has been borrowed from foreign
sources for financing the commercial activities in India is called External Commercial
Borrowings.
9. Foreign Currency Convertible Bonds: FCCBs mean a bond issued by an Indian company
expressed in foreign currency, and the principal and interest in respect of which is
payable in foreign currency. The ECB policy is applicable to FCCBs..
10. American Depository Receipts: Introduced to the financial markets in 1927, an
American Depository Receipt (ADR) is a stock that trades in the United States but
represents a specified number of shares in a foreign corporation. ADRs are bought
and sold on American markets just like regular stocks, and are issued/sponsored in the
U.S. by a bank or brokerage.
11. Global Depository Receipts: In order to ensure that investors from different countries
and not one country alone may invest in a corporate entity, it was essential to make
available stocks on an international level. A Global Depository Receipt (GDR) is when a
bank issued certificate in more than one country for shares in a foreign company.
The shares are held by a foreign branch of an international branch.
12. Euro issues: Euro issues are simply means of raising finances in the international
market. It is a misnomer as initially they were aimed at European markets and were
located on the Luxemburg or London exchanges but now they have expanded to tap the
global market. They include ADRs, GDRs and FCCBs.
13. Buy-back of shares: The repurchase of outstanding shares by a company in order to
reduce the number of shares on the market. Companies will buy back shares either
to increase the value of shares still available (reducing supply), or to eliminate any
threats by shareholders who may be looking for a controlling stake.
14. Foreign Institutional Investors: FII is an investor or investment fund that is from or
registered in a country outside of the one in which it is currently investing. Institutional
investors include hedge funds, insurance companies, pension funds and mutual funds.
The term is used most commonly in India to refer to outside companies investing in the
financial markets of India. International institutional investors must register with the
Securities and Exchange Board of India to participate in the market.
The recent boom in the stock market was due to huge FII inflows because of a bullish

Economy
market. Due to their high volatility, FIIs are sometimes called as Hot Money. Such a
scenario was seen during the East Asian crisis in 1997 when FIIs withdrew investments
from ASEAN nations resulting in a financial crisis.
15. Qualified Foreign Investors: A QFI is an individual, group or association resident n a
foreign country that is compliant with the Financial Action Task Force standards. Till
2012, they were investing in India trough the FIIs registered with SEBI. From 2012,
they are allowed to invest directly for which SEBI and RBI have made the necessary
rules.
16. P-Notes: Participatory Notes — or P-Notes or PNs — are instruments issued by registered
foreign institutional investors to overseas investors, who wish to invest in the Indian
stock markets without registering themselves with the market regulator, the Securities
and Exchange Board of India. P-Notes are issued to the real investors on the basis of
stocks purchased by the FII. The registered FII looks after all the transactions, which
appear as proprietary trades in its books. It is not obligatory for the FIIs to disclose their
client details to the SEBI, unless asked specifically.
17. Hedge funds: Hedge funds, which invest through participatory notes, borrow money
cheaply from Western markets and invest these funds into stocks in emerging markets.
Financial instruments used by hedge funds that are not registered with Sebi to invest
in Indian securities.
18. Initial Public Offering: An initial public offering (IPO) is the first sale of stock by a
private company to the public. IPOs are often issued by smaller, younger companies
seeking the capital to expand, but can also be done by large privately owned companies
looking to become publicly traded.
19. Offer for Sale: OFS mechanism facilitates the promoters of an already listed company
to sell or dilute their existing shareholdings through an exchange based bidding
platform.
20. Follow on Public Offer: A follow on public offer (FPO) is an issuing of shares to investors
by a public company that is already listed on an exchange. An FPO is essentially a
stock issue of supplementary shares made by a company that is already publicly listed
and has gone through the IPO process.

Economy
BUDGET
Budget
• Budget is an Annual Financial Statement of yearly estimated receipts and expenditures
of the government in respect of every financial year.
• Budgeting is the process of estimating the availability of resources and then allocating
them to various activities according to a pre-determined priority.
• Budgets act as instruments of control and act as a benchmark to evaluate the progress
of various departments.
TYPES OF BUDGETING
Performance Budgeting
• A performance budget reflects the goal/objectives of the organization and spells out its
performance targets.
• These targets are sought to be achieved through a strategy. Unit costs are associated
with the strategy and allocations are accordingly made for achievement of the objectives.
• A Performance Budget gives an indication of how the funds spent are expected to give
outputs and ultimately the outcomes.
• However, performance budgeting has a limitation - it is not easy to arrive at standard
unit costs especially in social programmes, which require a multi-pronged approach.
Zero-based Budgeting
• The basic purpose of ZBB is phasing out of programmes/activities, which do not have
relevance anymore. ZBB is done to overhaul the functioning of the government
departments and PSUs so that productivity can be increased and wastage can be
minimized. Scarce government resources can be deployed efficiently. Therefore, Zero
Based Budgeting is followed for rationalization of expenditure.
• The concept of zero-based budgeting was introduced in the 1970s. As the name suggests,
in the process every budgeting cycle starts from scratch.
• Unlike the earlier systems, where only incremental changes were made in the allocation,
under zero-based budgeting every activity is evaluated each time a budget is made and
only if it is established that the activity is necessary, funds are allocated to it.
• Under the ZBB, a close and critical examination is made of the existing government
programmes, projects and other activities to ensure that funds are made available to
high priority items by eliminating outdated programmes and reducing funds to the low
priority items.
• Governmental programmes and projects are appraised every year as if they are new and
funding for the existing items is not continued merely because a part of the project cost
has already been incurred.
Programme Budgeting
• Programme budgeting aimed at a system in which expenditure would be planned and
controlled by the objective. The basic building block of the system was classification of
expenditure into programmes, which meant objective-oriented classification so that
programmes with common objectives are considered together.
Programme and Performance Budgeting System (PPBS)
• PPBS went much beyond the core elements of programme budgeting and was much

Economy
more than the budgeting system. It aimed at an integrated expenditure management

system, in which systematic policy and expenditure planning would be developed and
closely integrated with the budget. Thus, it was too ambitious in scope.
• Neither was adequate preparation time given nor was a stage-by-stage approach adopted.
Therefore, this attempt to introduce PPBS in the federal government in USA did not
succeed, although the concept of performance budgeting and programme budgeting
endured.
• Many governments today use the “programme budgeting” label for their performance
budgeting system. As pointed out by Marc Robertson, the contemporary influence of the
basic programme budgeting idea is much wider than the continuing use of the label. It
is defined in terms of its core elements as mentioned above. Programme budgeting is an
element of many contemporary budgeting systems which aim at linking funding and
results.
Outcome Budget
• The Outcome Budget is a progress card on what various ministries and departments
have done with the outlay announced in the annual budget.
• It is a performance measurement tool that helps in better service delivery; decision-
making; evaluating programme performance and results; communicating programme
goals; and improving programme effectiveness.
• The Outcome Budget is likely to comprise scheme- or project-wise outlays for all central
ministries, departments and organizations during 2005-06 listed against corresponding
outcomes (measurable physical targets) to be achieved during the year.
• It measures the development outcomes of all government programmes. The Outcome
Budget, however, will not necessarily include information of targets already achieved.
• This method of monitoring flow of funds, implementation of schemes and the actual
results of the usage of the money is followed by many countries.
Gender Budgeting
• The 2005-06 Budget introduced a statement highlighting the gender sensitivities of the
budgetary allocations.
• Gender budgeting is an exercise to translate the stated gender commitments of the
government into budgetary commitments, involving special initiatives for empowering
women and examination of the utilization of resources allocated for women and the
impact of public expenditure and policies of the government on women.
BALANCED AND UNBALANCED BUDGETS
A. Balanced Budgeting
1. A Balanced Budget is that budget in which Government receipts are equal to Government
expenditure.
Merits of the Balanced Budget
1. The Government does not indulge in wasteful expenditure.
2. Interference in economic functioning of the system is totally avoided by the government
generally.
3. Financial stability is ensured with balanced budget.
4. However, balanced budget is not an achievement of the government when economy is in

Economy
a state of depression for at that time, government is expected to increase its expenditure
with a view to increasing aggregate demand.
Demerits of a Balanced Budget
1. Balanced budget does not offer any solution to the problem of unemployment during
depression.
2. Balanced budget is not helpful to the growth and development programmes of the less
developed countries.
B. Unbalanced Budgeting
1. An unbalanced budget is that budget in which receipts and expenditure of the government
are not equal.
2. In this, two cases concerning surplus Budget and Deficit Budget arise.
3. In Surplus Budget, Government receipts are greater than Government expenditures.
While in the case of Deficit Budget, Government expenditures are greater than
Government receipts.
Merits of a Deficit Budget
(i) It helps in addressing the problem of unemployment during depressions.
(ii) It is conducive for growth and development in less developed countries
(iii) It works towards social welfare of the people.
Demerits of Deficit Budget
(i) It shows wasteful expenditure by the government.
(ii) It shows less revenue realization in comparison with the expenditure.
(iii) It increases debt burden of the government.

Economy
BUDGETING TERMS
Theory and Concept of Budget
• There is a constitutional requirement in India (Article 112) to present before the Parliament
a statement of estimated receipts and expenditures of the government in respect of
every financial year which runs from 1 April to 31 March.
• This ‘Annual Financial Statement’ constitutes the main budget document.
• Further, the budget must distinguish expenditure on the revenue account from other
expenditures.
• Therefore, the budget comprises of the
(a) Revenue Budget and the
(b) Capital Budget
Components of Government Budget

I. Revenue Budget
• The Revenue Budget shows the current receipts of the government and the expenditure
that can be met from these receipts.
Revenue Receipts
• Revenue receipts are divided into tax and non-tax revenues.
• Tax revenues consist of the proceeds of taxes and other duties levied by the central
government.
• Tax revenues, an important component of revenue receipts, comprise of
– Direct taxes – which fall directly on individuals (personal income tax) and firms
(corporation tax), and
– Indirect taxes like excise taxes (duties levied on goods produced within the country),
customs duties (taxes imposed on goods imported into and exported out of India)
and service tax.
• Non-tax revenue of the central government mainly consists of
– Interest receipts (on account of loans by the central government which constitutes
the single largest item of non-tax revenue)

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– Dividends and profits on investments made by the government

– Fees and other receipts for services rendered by the government.
– Cash grants-in-aid from foreign countries and international organizations are also
included.
• The estimates of revenue receipts take into account the effects of tax proposals made in
the Finance Bill. A Finance Bill, presented along with the Annual Financial Statement,
provides details of the imposition, abolition, remission, alteration or regulation of taxes
proposed in the Budget.
Revenue Expenditure
• Revenue expenditure consists of all those expenditures of the government which do not
result in creation of physical or financial assets.
• It relates to those expenses incurred for the normal functioning of the government
departments and various services, interest payments on debt incurred by the
government, and grants given to state governments and other parties (even though
some of the grants may be meant for creation of assets).
• Budget documents classify total revenue expenditure into Plan and Non-plan
expenditure
• Plan revenue expenditure relates to central Plans (the Five-Year Plans) and central
assistance for State and Union Territory Plans.
• Non-plan expenditure, the more important component of revenue expenditure, covers a
vast range of general, economic and social services of the government. The main items
of non-plan expenditure are interest payments, defence services, subsidies, salaries
and pensions. Interest payments on market loans, external loans and from various
reserve funds constitute the single largest component of non-plan revenue expenditure.
They used up 41.5 per cent of revenue receipts in 2004-05. Defence expenditure, the
second largest component of non-plan expenditure, is committed expenditure in the
sense that given the national security concerns, there exists a little scope for drastic
reduction.
• Subsidies are an important policy instrument which aim at increasing welfare. Apart
from providing implicit subsidies through under-pricing of public goods and services
like education and health, the government also extends subsidies explicitly on items
such as exports, interest on loans, food and fertilizers.
II. The Capital Account
• The Capital Budget is an account of the assets as well as liabilities of the central
government, which takes into consideration changes in capital. It consists of capital
receipts and capital expenditure of the government. This shows the capital requirements
of the government and the pattern of their financing.
Capital Receipts
• The main items of capital receipts are loans raised by the government from the public
which are called market borrowings, borrowing by the government from the Reserve
Bank and commercial banks and other financial institutions through the sale of treasury
bills, loans received from foreign governments and international organizations, and
recoveries of loans granted by the central government.
Economy
• Other items include small savings (Post-Office Savings Accounts, National Savings
Certificates, etc), provident funds and net receipts obtained from the sale of shares in
Public Sector Undertakings (PSUs).
Capital Expenditure
• This includes expenditure on the acquisition of land, building, machinery, equipment,
investment in shares, and loans and advances by the central government to state and
union territory governments, PSUs and other parties.
• Capital expenditure is also categorized as plan and non-plan in the budget documents.
• Plan capital expenditure, like its revenue counterpart, relates to central plan and central
assistance for state and union territory plans.
• Non-plan capital expenditure covers various general, social and economic services
provided by the government.
Summary
• The budget is not merely a statement of receipts and expenditures. Since Independence,
with the launching of the Five-Year Plans, it has also become a significant national
policy statement.
• The budget, it has been argued, reflects and shapes, and is, in turn, shaped by the
country’s economic life.
• Along with the budget, three policy statements are mandated by the Fiscal Responsibility
and Budget Management Act, 2003 (FRBMA).
• The Medium-term Fiscal Policy Statement sets a three-year rolling target for specific
fiscal indicators and examines whether revenue expenditure can be financed through
revenue receipts on a sustainable basis and how productively capital receipts including
market borrowings are being utilized.
• The Fiscal Policy Strategy Statement sets the priorities of the government in the fiscal
area, examining current policies and justifying any deviation in important fiscal measures.
The Macroeconomic Framework Statement assesses the prospects of the economy with
respect to the GDP growth rate, fiscal balance of the central government and external
balance.

Economy
DEFICITS
When a government spends more than it collects by way of revenue, it incurs a budget
deficit. There are various measures that capture government deficit and they have their
own implications for the economy.
Types of Deficits
Revenue Deficit
• The revenue deficit refers to the excess of government’s revenue expenditure over revenue
receipts.
• Revenue deficit = Revenue expenditure – Revenue receipts.
• The revenue deficit includes only such transactions that affect the current income and
expenditure of the government.
• When the government incurs a revenue deficit, it implies that the government is
dissaving and is using up the savings of the other sectors of the economy to finance a
part of its consumption expenditure.
• This will lead to a buildup of stock of debt and interest liabilities and force the
government, eventually, to cut expenditure. Since a major part of revenue expenditure
is committed expenditure, it cannot be reduced. Often the government reduces productive
capital expenditure or welfare expenditure. This would mean lower growth and adverse
welfare implications.
Fiscal Deficit
• Fiscal deficit is the difference between the government’s total expenditure and its total
receipts excluding borrowing.
• Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating
capital receipts)
• Non-debt creating capital receipts are those receipts which are not borrowings and,
therefore, do not give rise to debt. Examples are recovery of loans and the proceeds
from the sale of PSUs.
• The fiscal deficit will have to be financed through borrowings.
• Thus, it indicates the total borrowing requirements of the government from all sources.
From the financing side.
• Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing
from abroad
• Net borrowing at home includes that directly borrowed from the public through debt
instruments (for example, the various small savings schemes) and indirectly from
commercial banks through Statutory Liquidity Ratio (SLR).
Primary Deficit
• Primary deficit is simply the fiscal deficit minus the interest payments
• Gross primary deficit = Gross fiscal deficit – net interest liabilities
• Net interest liabilities consist of interest payments minus interest receipts by the
government on net domestic lending.
DEFICIT FINANCING
• Deficit Financing is the phrase used to describe “the financing of a deliberately created
gap between public revenue and public expenditure or a budgetary deficit, the method
of financing resorted to being borrowing from the RBI.”

Economy
• When the Government has to spend more than what it can raise through taxes, non-tax
and other sources, it borrows from the market.
• It cannot borrow above a certain amount from the market as it may push up interest
rates and crowd out private investment.
• Then it borrows from the RBI. In other words, when the resources from taxes, user
charges, public sector enterprises, public borrowings, small scale borrowings and others
are not enough, RBI is approached for loans. It is called deficit financing.
Managing Fiscal Deficit
• Reduction of fiscal deficit is important as Large and persistent fiscal deficits are a serious
cause of concern because it poses several risks.
– First, fiscal deficits may cause macroeconomic instability by inflating the economy
as money supply rises.
– Second, they negatively impact on savings rates, reducing investment and
jeopardizing the sustainability of high growth.
– Thirdly, private investment may be crowded out. Interest rates go up to make cost
of credit high for investment thus pulling down growth.
– Fourthly, the continuing large deficits, even if they do not spill over into
macroeconomic instability in the short run, will require higher taxes in the long
term to cover the heavy burden of internal debt.
– High tax rates will place India at a significant disadvantage to other fast-growing
countries. Also, as the FRBM Act says, inter generational parity is hurt if debt
mounts as future generations will have to pay higher taxes to help the government
repay the debt.
• However, the extent of reduction and the manner of reduction matter. More resources
should be raised on the revenue side (taxes etc). Expenditure control should not
involve cuts on social sector expenditure as it hurts the poor and demographic
dividend cannot be reaped.
• The level of FD should be determined keeping in consideration the following -
– whether the debt can be put to productive deployment
– the rate of return on the borrowed funds used
– the impact on private sector investment; interest rates etc
• Even more important is not to cut social spending in a move to reduce deficit. In other
words, while FD reduction is needed for macroeconomic stability and inter-generational
parity, what is even more important is to make sure that social sector items are taken
care of fully while reduction of expenditure is affected.
DEBT
• Budgetary deficits must be financed by taxation, borrowing or printing money.
• Governments have mostly relied on borrowing, giving rise to what is called government
debt.
• The concepts of deficits and debt are closely related. Deficits can be thought of as a flow
which adds to the stock of debt. If the government continues to borrow year after year,
it leads to the accumulation of debt and the government has to pay more and more by
way of interest. These interest payments themselves contribute to the debt.

Economy
Public debt
• Public Debt includes internal debt comprising borrowings inside the country like market
loans; borrowing from the RBI on the basis of treasury bills; and external debt comprising
loans from foreign countries, international financial institutions, etc.
• Public debt is justified as the government does not have adequate resources and taxation
cannot be done beyond a point. It should be for productive reasons and also welfare
reasons. The spiral of deficit and debt run the risk of undermining the country’s
creditworthiness, devaluing the currency and destabilizing the entire economy with grave
social consequences.
External Debt
1. External debt includes -
a. Long-term external debt which is the bulk part
b. NRI deposits and multilateral loans
c. Commercial borrowings
d. Bilateral loans and
e. Negligible amount from export credit.
f. External debt-to-GDP ratio has been on the decline since 1991
2. Government has been able to check the external debt through measures like raising
funds from least expensive sources, accelerating growth in export, prepaying high-cost
debts, maintaining vigil on build up of short-term debt and encouraging foreign direct
investments.
Internal Debt
1. Internal debt includes loans raised by the government in the open market through
treasury bills and government securities, special securities issued to the RBI, rupee
securities (non-interest bearing) issued to international institutions such as the IMF
and the World Bank and, most importantly, various bonds like the oil bonds,-fertilizer
bonds etc.
2. The money sucked in by the Market Stabilization Scheme (MSS) is also shown in the
government’s statement of liabilities. Introduced in April 2004, the scheme envisages
the issue of treasury bills and/ or dated securities to absorb excess liquidity arising
out of the excessive foreign exchange inflows.
Other Liabilities
1. The debt of the government also includes others like the outstanding against small-
savings schemes, provident funds, deposits under special deposit schemes etc. These
debts are shown under a separate head titled ‘other liabilities’.
FISCAL CONSOLIDATION
• Fiscal consolidation means improving government finances and maintaining the same.
• Fiscal consolidation is critical as it enables government to spend more on infrastructure
and social sectors.
• Tax reforms, disinvestment, better targeting of subsidies and so on are the hallmarks of
fiscal consolidation.
Fiscal Responsibility and Budget Management Act (FRBMA)
• Fiscal Responsibility and Budget Management Act (FRBMA) provides an institutional
framework and binds the government to adopt prudent fiscal policies.

Economy
• There is a need to involve states to effect overall fiscal consolidation and strengthen the
growth momentum with macro-economic stability.
• VAT is an important federal effort toward fiscal reforms and consolidation. An important
part of fiscal consolidation is to privatize loss-making state-run companies or to close
them.
• Fiscal consolidation is important for benign inflation and interest rates that will bring in
more private investment.
• Without fiscal consolidation, it is not possible to step up public investment, especially in
areas such as agriculture.
Fiscal consolidation in India includes -
1. Revenue reforms which include tax reforms on both direct and indirect tax front;
reduction/elimination of tax exemptions and treating the revenue forgone as tax
expenditure, improving efficiency of tax collection, including the arrears and stable
medium term tax rates avoiding annual changes.
2. Expenditure reforms which include cutting out non-essential and unproductive activities,
schemes and projects; allocation of resources to priority areas; reducing cost of services;
rationalizing subsidies; reduction of time and cost overruns on projects and getting
proper ‘outcome’ from output.
Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)
• In a multi-party parliamentary system, electoral concerns play an important role in
determining expenditure policies. A legislative provision that is applicable to all
governments – present and future – is likely to be effective in keeping deficits under
control.
• The enactment of the FRBMA, in August 2003, marked a turning point in fiscal reforms,
binding the government through an institutional framework to pursue a prudent fiscal
policy.
• The central government must ensure inter-generational equity, long-term macro-economic
stability by achieving sufficient revenue surplus, removing fiscal obstacles to monetary
policy and effective debt management by limiting deficits and borrowing.
Main Features of FRBMA
• The Act mandates the central government to take appropriate measures to reduce fiscal
deficit and revenue deficits so as to eliminate the revenue deficit by March 31, 2009
and thereafter build up adequate revenue surplus.
• It requires the reduction in fiscal deficit by 0.3 per cent of GDP each year and the
revenue deficit by 0.5 per cent. If this is not achieved through tax revenues, the
necessary adjustment has to come from a reduction in expenditure.
• The actual deficits may exceed the targets specified only on grounds of national security
or natural calamity or such other exceptional grounds as the central government may
specify.
• The central government shall not borrow from the Reserve Bank of India except by way
of advances to meet temporary excess of cash disbursements over cash receipts
• The Reserve Bank of India must not subscribe to the primary issues of central government
securities from the year 2006-07.

Economy
Measures to be taken to ensure greater transparency in fiscal operations

• The central government to lay before both Houses of Parliament three statements
– Medium-term Fiscal Policy Statement
– The Fiscal Policy Strategy Statement
– The Macroeconomic Framework Statement along with the Annual Financial
Statement.
• Quarterly review of the trends in receipts and expenditure in relation to the budget be
placed before both Houses of Parliament.
• The Act applies only to the central government. Though few states like Karnataka, Kerala,
Punjab, Tamil Nadu and Uttar Pradesh have enacted fiscal responsibility legislations,
the objective of fiscal consolidation, growth and macroeconomic stability will not be
achieved if all the states do not participate.
• However, though there has been an effort by the government to widen the tax net and
ensure better compliance, there have been fears that welfare expenditure may get
reduced to meet the targets mandated by the Act.
Terms Associated with Deficits and Fiscal Management
Pump-priming
• Deficit financing and spending by a government on public works in an attempt to revive
economy during recession is known as pump-priming. It is a countercyclical measure.
It can raise the purchasing power of the people and thus stimulate and revive economic
activity to the point that deficit spending will no longer be considered necessary to
maintain the desired economic activity.
Fiscal neutrality
• When the net effect of taxation and public spending is neutral neither stimulating nor
dampening demand, it is called fiscal neutrality. It is neutral, as total tax revenue
equals total public spending.
Fiscal Drag
• It is a situation where inflation pushes income into higher tax brackets. This results in
increase in income taxes but no increase in real purchasing power. This is a problem
during periods of high inflation. Government gains due to higher tax collections and the
economy suffers as growth is dragged down due to less demand. In high-growth and
high inflation economies (‘overheated’), fiscal drag acts as an automatic stabiliser, as it
acts naturally to keep demand stable.
Crowding Out
• Excessive government borrowing can lead to shrinkage of the liquidity in the market
and force the interest rates to go up. Private investment is crowed out, because, liquidity
availability is less and the interest rates are high. Investment suffers and growth
decelerates. Also the government may not spend the borrowed resources well to generate
returns. If the government deploys the funds well, it may have a crowding in effect: the
infrastructure built can have a multiplier effect on investment, tax collections and
growth.

Economy
FISCAL POLICY – REVENUE

FISCAL POLICY
• The government fiscal policy is used to stabilize the level of output and employment
through changes in its expenditure and taxes. The government attempts to increase
output and income and seeks to stabilize the ups and downs in the economy.
• In the process, fiscal policy creates a surplus (when total receipts exceed expenditure)
or a deficit budget (when total expenditure exceeds receipts) rather than a balanced
budget (when expenditure equals receipts).
• Fiscal policy deals with the revenue and expenditure decisions of the government.
• As far as fiscal resources are concerned, taxes, user charges (power, water, transport
charges etc); disinvestment proceeds; borrowings from internal and external sources
are the main channels.
• Fiscal policy can achieve important public policy goals like growth
– Equity
– Promotion of small scale industries
– Encouragement to agriculture
– Location of industries in rural areas
– Labour-intensive growth
– Export promotion
– Development of sound social and physical infrastructure etc.
Instruments of Fiscal Policy
The two main instruments of fiscal policy are:
(a) Government Expenditure
(b) Government Revenues
REVENUE AND ITS CLASSIFICATION
They are divided into
TAX REVENUES
• India has a well-developed tax structure with clearly demarcated authority between
Central and State Governments and local bodies.
Central Government levies taxes on
1. Income Tax (except tax on agricultural income, which the State Governments can
levy) - Tax on income of a person.
2. Customs Duties - Duties on import and export of goods.
3. Central Excise - Taxes on Manufacturing of dutiable goods.
4. Service Tax - Taxes on provision of services.
5. Corporate tax: Taxes on firms and corporations.
State Governments levies taxes on
1. Value Added Tax (VAT) - This is tax on sale of goods. While intra-state sale of goods
are covered by the VAT Law of that state, inter-state sale of goods is covered by the
Central Sales Tax Act. Even the revenue collected under Central Sales Tax Act is done
so by the State Governments themselves and actually the Central Government has no
role to play so.

Economy
2. Stamp duty - Since land is a matter on which only State Governments can govern,
thus the Stamp duties on transfer of immovable properties are levied by State
Governments
3. State excise - on Liquor and certain agricultural goods
4. Land revenue
5. Profession tax
Local bodies are empowered to levy tax on
1. Properties
2. Octroi and
3. For utilities like water supply, drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. The
tax rates have been rationalized and tax laws have been simplified resulting in better
compliance, ease of tax payment and better enforcement. The process of rationalization
of tax administration is still ongoing in India.
Tax revenues are further divided as:
A. DIRECT TAXES
• In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the
taxpayer.
• Under the Income Tax Act, 1961 The Central Government levies direct taxes on the
income of individuals and business entities as well as Non business entities also.
• The taxation level depends on the residential status of individuals.
• The thumb rule of residential status is that an individual becomes resident in India
if he has remained in India for more than 182 days in a particular residential year.
• If he becomes resident in India, then his global income i.e. income earned even
outside India is taxable in India.
Personal Income Tax
• Personal income tax is levied by Central Government and is administered by Central
Board of Direct taxes under Ministry of Finance in accordance with the provisions of
the Income Tax Act.
Income Tax - Regressive, Proportional, or Progressive Taxation
• Taxes can also be categorized as either regressive, proportional, or progressive, and the
distinction has to do with the behaviour of the tax as the taxable base (such as a
household’s income or a business profit) changes.
• Progressive tax—a tax that takes a larger percentage of income from high-income groups
than from low- income groups.
• Proportional tax—a tax that takes the same percentage of income from all income
groups.
• Regressive tax—a tax that takes a larger percentage of income from low-income groups
than from high- income groups.
Corporate taxes
• The taxability of a company’s income depends on its domicile. Indian companies are
taxable in India on their worldwide income. Foreign companies are taxable on income
that arises out of their Indian operations, or, in certain cases, income that is deemed to

Economy
arise in India. Royalty, interest, gains from sale of capital assets located in India
(including gains from sale of shares in an Indian company), dividends from Indian
companies and fees for technical services are all treated as income arising in India.
Current rates of corporate tax.
• Different kinds of taxes relating to a company
Minimum Alternate Tax (MAT)
• Normally, a company is liable to pay tax on the income computed in accordance with
the provisions of the income tax Act, but the profit and loss account of the company is
prepared as per provisions of the Companies Act. There were large number of companies
who had book profits as per their profit and loss account but were not paying any tax
because income computed as per provisions of the income tax act was either nil or
negative or insignificant.
• In such case, although the companies were showing book profits and declaring dividends
to the shareholders, they were not paying any income tax. These companies are popularly
known as Zero Tax companies. In order to bring such companies under the income tax
act net, section 115JA was introduced in the year 1997-98.
Fringe Benefit Tax (FBT)
• The Finance Act, 2005 introduced a new levy, namely Fringe Benefit Tax (FBT) contained
in Chapter XIIH of the Income Tax Act, 1961.
• Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value
of fringe benefits provided or deemed to have been provided to the employees. The FBT
is payable by an employer who is a company; a firm; an association of persons
excluding trusts/a body of individuals; a local authority; a sole trader, or an artificial
juridical person. This tax is payable even where employer does not otherwise have
taxable income. Fringe Benefits are defined as any privilege, service, facility or amenity
directly or indirectly provided by an employer to his employees (including former
employees) by reason of their employment and includes expenses or payments on certain
specified heads.
Dividend Distribution Tax (DDT)
• Under the Income Tax Act, any amount declared, distributed or paid by a domestic
company by way of dividend shall be chargeable to dividend tax. Only a domestic company
(not a foreign company) is liable for the tax.
• Tax on distributed profit is in addition to income tax chargeable in respect of total income.
It is applicable whether the dividend is interim or otherwise. Also, it is applicable whether
such dividend is paid out of current profits or accumulated profits.
Wealth Tax
• Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth tax is a tax on the
benefits derived from property ownership. The tax is to be paid year after year on the
same property on its market value, whether or not such property yields any income.
• Under the Act, the tax is charged in respect of the wealth held during the assessment
year by the following persons: -
– Individual
– Hindu Undivided Family (HUF)
– Company

Economy
B. INDIRECT TAXES
• In India, indirect taxes is a vast ocean as there are number of taxes to be paid on
manufacture, import, sale and even purchase in certain cases. Further the law is
governed less by the Acts and more by day to day notifications, circulars and orders by
the Governing bodies. So an explicit understanding is very much essential.
• Indirect taxes is based on the nature of Activity as follows:
– Provision of services
– Manufacture of Excisable Goods
– Import of Goods
– Sale of Goods
SALES TAX
Central Sales Tax (CST)
• Central Sales tax is generally payable on the sale of all goods by a dealer in the course of
inter-state trade or commerce or, outside a state or, in the course of import into or,
export from India.
Value Added Tax (VAT)
• VAT is a multi-stage tax on goods that is levied across various stages of production and
supply with credit given for tax paid at each stage of Value addition. Introduction of
state level VAT is the most significant tax reform measure at state level.
• The state level VAT has replaced the existing State Sales Tax. The decision to implement
State level VAT was taken in the meeting of the Empowered Committee (EC) of State
Finance Ministers held on June 18, 2004, where a broad consensus was arrived at to
introduce VAT from April 1, 2005. Accordingly, all states/UTs have implemented VAT.
Goods and Services Tax (GST)
• GST is one indirect tax for the whole nation, which will make India one unified common
market. The GST intends to subsume most indirect taxes under a single taxation regime.
GST is a single tax on the supply of goods and services, right from the manufacturer
to the consumer. Credits of input taxes paid at each stage will be available in the
subsequent stage of value addition, which makes GST essentially a tax only on value
addition at each stage. The final consumer will thus bear only the GST charged by the
last dealer in the supply chain, with set-off benefits at all the previous stages. This is
expected to help broaden the tax base, increase tax compliance, and reduce economic
distortions caused by inter-state variations in taxes.
Why GST has been proposed?
• Our Constitution empowers the Central Government to levy excise duty on manufacturing
and service tax on the supply of services. Further, it empowers the State Governments
to levy sales tax or value added tax (VAT) on the sale of goods. This exclusive division of
fiscal powers has led to a multiplicity of indirect taxes in the country. In addition, central
sales tax (CST) is levied on inter-State sale of goods by the Central Government, but
collected and retained by the exporting States. Further, many States levy an entry tax
on the entry of goods in local areas.
• This multiplicity of taxes at the State and Central levels has resulted in a complex
indirect tax structure in the country that is ridden with hidden costs for the trade and
industry.

Economy
• In order to simplify and rationalize indirect tax structures, Government of India attempted
various tax policy reforms at different points of time. A system of VAT on services at
the central government level was introduced in 2002. The states collect taxes through
state sales tax VAT, introduced in 2005, levied on intrastate trade and the CST on
interstate trade. Despite all the various changes the overall taxation system continues
to be complex and has various exemptions.
• This led to the idea of One nation One Tax and introduction of GST in Indian financial
system. This is simply very similar to VAT which is at present applicable in most of the
states and can be termed as National level VAT on Goods and Services with only one
difference that in this system not only goods but also services are involved and the
rate of tax on goods and services are generally the same.
Levy of GST
• The central government has the exclusive power to levy and collect GST in the course
of interstate trade or commerce, or imports. This will be known as IGST (Integrated
GST).
• A central law will prescribe the manner in which the IGST will be shared between the
centre and states, based on the recommendations of the GST Council.
• Both, Parliament and state legislatures will have the power to make laws on the taxation
of goods and services. A law made by Parliament in relation to GST will not override a
state law on GST.
Excise Duty
• Central Excise duty is an indirect tax levied on goods manufactured in India. Excisable
goods have been defined as those, which have been specified in the Central Excise
Tariff Act as being subjected to the duty of excise.
Customs Duty
• Custom or import duties are levied by the Central Government of India on the goods
imported into India. The rate at which customs duty is leviable on the goods depends on
the classification of the goods determined under the Customs Tariff. The Customs
Tariff is generally aligned with the Harmonised System of Nomenclature (HSL).
Service Tax
• Service tax was introduced in India way back in 1994 and started with mere 3 basic
services viz. general insurance, stock broking and telephone. Today the counter services
subject to tax have reached over 100. There has been a steady increase in the rate of
service tax. From a mere 5 per cent, service tax is now levied on specified taxable
services at the rate of 12 per cent of the gross value of taxable services. However, on
account of the imposition of education cess of 3 per cent, the effective rate of service tax
is at 12.36 per cent.
NON TAX REVENUE
Non-tax revenue mainly consists of:
1. Interest receipts on account of loans by the central government
2. Dividends and profits on investments made by the government
3. Fees and other receipts for services rendered by the government
4. Cash grants-in-aid from foreign countries and international organizations.

Economy
SUBSIDIES
Definition
• Subsidy has been defined as the “money granted by state, public body, etc., to keep
down the prices of commodities, etc.”
• A subsidy is a grant or other financial assistance given by one party for the support or
development of another.
• Subsidies affect the economy through the commodity market by lowering the relative
price of the subsidized commodity, thereby generating an increase in its demand.
• Taxes appear on the revenue side of government budgets, and subsidies appear on the
expenditure side.
• While taxes reduce disposable income, subsidies inject money into circulation.
• Subsidies have been advocated for redistributive objectives, especially to ensure
minimum level of food and nutrition to all sections of society.
• Subsidies are justified in the presence of positive externalities (social benefits above
private benefits), because in these cases consideration of social benefits would require
higher level of consumption than what would be obtained on the basis of private
benefits only.
• Primary education, preventive health care, and research and development are prime
examples of positive externalities. In these cases, private valuation of the benefits from
such goods or services is less than their true value to society.
Types of subsidies
1. Direct Subsidies - Direct subsidies are given in terms of cash grants, interest-free
loans and direct benefits. For example- Direct farm subsidies are the kinds of subsidies
in which direct cash incentives are paid to the farmers in order to make their products
more competitive in the global markets. Direct farm subsidies are helpful as they
provide a purchasing power to the farmer and can significantly help in raising the
standards of living of the rural poor.
2. Indirect subsidies - Indirect subsidies are provided in terms of tax breaks, insurance,
low-interest loans, depreciation write-offs, rent rebates. For example- Indirect farm
subsidies: These are the farm subsidies which are provided in the form of cheaper
credit facilities, farm loan waivers, reduction in irrigation and electricity bills, fertilizers,
seeds and pesticides subsidy as well as the investments in agricultural research,
environmental assistance, farmer training etc.
The benefits of subsidy as a policy are:
1. Inducing higher consumption/production.
2. Achievement of social policy objectives including redistribution of income, population
control etc.
3. It helps in controlling the prices to maintain stability.
4. Especially in case of agriculture where food is basic right of all, you cannot leave everything
to market.
5. Offsetting market imperfections including internalization of externalities.
SUBSIDIES TO AGRICULTURE SECTOR
(1) Input Subsidies: Subsidies can be granted through distribution of inputs at prices that
are less than the standard market price for these inputs. The magnitude of subsidies

Economy
will therefore be equal to the difference between the two prices for per unit of input
distributed. Naturally several varieties of subsidies can be named in this category
(a) Fertilizer Subsidy:
• It includes Distribution of cheap chemical or non-chemical fertilizers among the farmers.
It amounts to the difference between price paid to manufacturer of fertilizer (domestic
or foreign) and price, received from farmers.
• This subsidy ensures:
– Cheap inputs to farmers,
– Reasonable returns to manufacturer,
– Stability in fertilizer prices, and
– Availability of fertilizers to farmers.
• In some cases this kind of subsidies are granted through lifting the tariff on the import
of fertilizers, which otherwise would have been imposed.
(b) Irrigation Subsidy:
• Subsidies to the farmers which the government bears on account of providing proper
irrigation facilities.
• Irrigation subsidy is the difference between operating and maintenance cost of irrigation
infrastructure in the state and irrigation charges recovered from farmers.
• This may work through provisions of public goods such as canals, dams which the
government constructs and charges low prices or no prices at all for their use from the
farmers.
• It may also be through cheap private irrigation equipment such as pump sets.
(c) Power Subsidy:
• The electricity subsidies imply that the government charges low rates for the electricity
supplied to the farmers. Power is primarily used by the farmers for irrigation purposes.
It is the difference between the cost of generating and distributing electricity to farmers
and price received from farmers.
(d) Seed Subsidies:
• High yielding seeds can be provided by the government at low prices. The research and
development activities needed to produce such productive seeds are also undertaken by
the government, the expenditure on these is a sort of subsidy granted to the farmers.
(e) Credit Subsidy:
• It is the difference between interest charged from farmers, and actual cost of providing
credit, plus other costs such as write-offs bad loans. Availability of credit is a major
problem for poor farmers. They are cash strapped and cannot approach the credit
market because they do not have the collateral needed for loans. To carry out production
activities they approach the local money lenders.
(2) Price Subsidy
• It is the difference between the price of food-grains at which FCI procures food-grains
from farmers, and the price at which PCI sells either to traders or to the PDS.
• The market price may be so low that the farmers will have to bear losses instead of
making profits. In such a case the government may promise to buy the crop from the
farmers at a price which is higher than the market price.

Economy
• The difference between the two prices is the per unit subsidy granted to the farmers by
the government. The price at which the government buys crops from the farmers is
called the procurement price.
• Such procurement by the government also has a long run impact. It encourages the
farmers to grow crops which are regularly procured.
(3) Infrastructural Subsidy
• Private efforts in many areas do not prove to be sufficient to improve agricultural
production. Good roads, storage facilities, power, information about the market,
transportation to the ports, etc. are vital for carrying out production and sale operations.
• These facilities are in the domain of public goods, the costs of which are huge and
whose benefits accrue to all the cultivators in an area.
• The government takes the responsibility of providing the public goods and given the
condition of Indian farmers a lower price can be charged from the poorer farmers.
(4) Export Subsidies
• This type of subsidy is not different from others. But its purpose is special. When a
farmer or exporter sells agricultural products in foreign market, he earns money for
himself, as well as foreign exchange for the country. Therefore, agricultural exports are
generally encouraged as long as these do not harm the domestic economy. Subsides
provided to encourage exports are referred as export subsidies.
Objectives of Agricultural Subsidy
• Economic objectives:
– Stimulate agricultural production.
– Compensate for high costs of transport from port or factory to farms that raise costs
of inputs.
– Improve soil quality and combat soil degradation (in the case of fertilizer).
– Make inputs affordable to farmers who cannot buy them, owing to poverty, lack of
access to credit, and inability to insure against crop losses.
– Learning — to allow farmers to try novel inputs and become familiar with their
advantages.
• Social objectives:
– Social equity – to transfer income to farmers who are poor, live in remote
disadvantaged areas, or both
WTO and Agricultural Subsidies
• The WTO Agreement on Agriculture (AoA), 1995 permitted the developed countries to
continue to provide farm subsidies, but under certain restrictions. In WTO terminology,
agricultural subsidies have been segregated into various ‘boxes’:
1. Green Box subsidies - It includes amounts spent on research, disease control, and
infrastructure and food security. These also include direct payments made to farmers
such as income support that do not stimulate production. These are not considered
trade distorting and are encouraged.
2. Blue Box subsidies - It includes direct payments to farmers to limit production and
certain government assistance to encourage agriculture and rural development in
developing countries. Blue Box subsidies are seen as being trade distorting.

Economy
3. Amber Box subsidies - It includes all agricultural subsidies that do not fall into either
blue or green boxes. These include government policies of Minimum support Prices
(MSP) for agricultural products or any help directly related to production quantities
(e.g. power, fertilizer, seeds, pesticides, irrigation, etc.). These are subject to reduction
commitment to the de-minimus level of agricultural outputs- to 5% for developed and
10% for developing countries. India insisted that developed countries should first
dismantle their agricultural subsidy structure before asking developing countries to
open up their market for farm imports.
FERTILIZER SUBSIDY
• Urea is highly subsidized for Indian Farmers.
• However, the skewed subsidy regime, resulting in farmers paying lesser for urea compared
to phosphorus and potassium, had led to urea overuse.
• India purchases about 50 lakh metric tonnes of excess urea, leading to farmers and the
government wastefully spend Rs. 2,680 crore and Rs. 5,860 crore respectively, further
putting constraint on government’s resources.
• The distorted policy has also led to stagnation of private investment in the sector, especially
in urea, and increased reliance on imports. The fertilizer subsidy hurts everyone —
farmers, firms, taxpayers and consumers.
FUEL SUBSIDIES IN INDIA
• Selling fuel at less than market prices result in under-recoveries for Oil Marketing
Companies (OMCs) like Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation
Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL).
• Govt compensates these OMCs by directing upstream oil companies like Oil and Natural
Gas Corporation Ltd (ONGC), Oil India Ltd (OIL), GAIL India Ltd to provide discount on
crude oil purchases by these companies and issuing oil bonds. The government has
over the years ensured that OMCs remain profitable and honour their financial obligations.
• Subsidies on kerosene have increased from Rs. 12.92/litre to Rs. 34.80/litre and LPG
cylinders from Rs. 175.04/cylinder to Rs. 522.10/cylinder during the same period. Diesel
accounts for 45%, LPG 33% and kerosene 22% of the total under-recoveries. \To rein in
subsidies, petrol prices were de-controlled in June 2012. However, it did not have a
significant impact on under recoveries because petrol accounts for only 10% of total
petroleum product consumption in the country.
FOOD SUBSIDY - NATIONAL FOOD SECURITY ACT
• To ensure food security at the individual or household level, the Government of India
implements various schemes in partnership with State Governments and Union Territory
Administrations.
• The Government is implementing the Targeted Public Distribution system (TPDS)
under which food-grains at subsidized rates are provided to Below Poverty Line and
Above Poverty Line Households through a network of more than 5 lakh fair price shops
spread across the country.
• Currently, allocations of subsidized food-grains is being made for about 6.5 crore BPL
households.
• Besides, Government is also implementing schemes to specifically address the concerns
related to malnutrition, especially among women and children, through schemes like

Economy
Integrated Child Development Services, Mid-Day Meal, Annapurna, etc.

Some of the major highlights of the Food Security Bill are:
• Up to 75% of the rural population (with at least 46% from priority category) and up to
50% of urban population (with at least 28% from priority category) are to be covered
under Targeted Public Distribution System.
• 7 kg of food-grains per person per month to be given to priority category households
which include rice, wheat and coarse grains at Rs. 3, 2, and 1 per kg, respectively.
• At least 3 kg of food-grains per person per month to be given to general category
households, at prices not exceeding 50% of Minimum Support Price.
• Women to be made head of the household for the purpose of issue of ration cards.
• Maternity benefit to pregnant women and lactating mothers.
• End-to-end computerization of Targeted Public Distribution System.
• Three-tier independent grievance redressal mechanism.
• Social audit by local bodies such as Gram Panchayats, Village Councils etc.
• Meals for special groups such as destitute, homeless persons, emergency/disaster affected
persons and persons on the verge of starvation.
Targeted Public Distribution System (TPDS)
• In June 1997, the Government of India launched the Targeted Public Distribution System
(TPDS) with focus on the poor.
• India’s Public Distribution System (PDS) with a network of 4.78 Lakh Fair Price Shops
(FPS) is perhaps the largest retail system of its type in the world.
• The objectives of PDS are:
– Providing food grains and other essential items to vulnerable sections of the society
at reasonable (subsidized) prices
– To put an indirect check on the open market prices of various items and
– To attempt socialization in the matter of distribution of essential commodities
• Under the TPDS, States are required to formulate and implement foolproof arrangements
for identification of the poor for delivery of food grains and for its distribution in a
transparent and accountable manner at the FPS level.
• The TPDS system today supports over 40 Crore Indians below the poverty line with
monthly supply of subsidized food grains. The system also provides gainful employment
for 4.78 Lakh Fair Price Shops Owners, their employees and hired labour who work at
the FCI and state ware housing godowns.
• PDS also has become a cornerstone of government development policy and is tied to
implementation of most rural development programs.
• PDS is also a key driver of public sentiment and is an important and very visible metric
of government performance.
• Apart from supplying food grains under the TPDS, other welfare schemes related to food
are also executed. They are:
– Mid-Day Meal Scheme
– Wheat Based Nutrition Program (WBNP)
– Scheme For Supply of Foodgrains to SC/ST/OBC Hostels/Welfare Institutions

Economy
– Annapurna Scheme
– Sampoorn Gramin Rozgar Yojna (SGRY)
– National Food For Work Program (NFFWP)
– Foodgrains To Adolescent Girls , Pregnant And Lactating Mothers ( AGPLM)
– Village Grain Banks Scheme
– World Food Program
There are many systemic challenges that plague the PDS system today
1. PDS Leakages
a. A large number of families living below the poverty line have not been enrolled and
therefore do not have access to ration cards
b. A number of bogus ration cards which do not correspond to real families, exist in
the BPL & AAY categories.
c. A number of instances where benefits are being availed in the names of rightfully
entitled families without their knowledge.
d. Errors in categorization of families that lead to BPL families getting APL cards and
vice versa.
2. Scale and Quality of Issue – The scale of issue and the quality of food grains
delivered to the beneficiary is rarely in conformity with the policy. Many FPS are open
only for a few days in a month and beneficiaries who do not visit the FPS on these days
are denied their right.
3. System Transparency and Accountability –The most serious flaw plaguing the system
at present is the lack of transparency and accountability in its functioning.
4. Grievance Redressal Mechanisms – There are numerous entities like Vigilance
Committee, Anti-Hoarding Cells constituted to ensure smooth functioning of the PDS
system. Their impact is virtually non-existent on the ground and as a result, malpractices
abound to the great discomfiture of the common man.
DIRECT CASH TRANSFER
• Recent studies by the Planning Commission have shown that the Public Distribution
System has become so inefficient that 58% of the subsidized grains do not reach the
targeted group and almost a third of it is siphoned off the supply chain. According to
the Finance Ministry the inefficiencies of the PDS ensure that the Government is
forced to spend Rs.3.65 for transferring of Rs. 1 to the poor.
• The idea behind the Direct Cash Transfer is to cut down wastage, duplication and leakages
and also to enhance efficiency. The idea is to move to a completely electronic cash
transfer system for the entire population.
Launch of the programme
• The programme is now called direct benefit transfer (DBT).
• On January 01, 2013, the government of India rolled out the DBT covering seven welfare
schemes in 20 districts in 16 states.
• The programme covers schemes like educational scholarship for the Scheduled Castes
and the Scheduled Tribes and pensions to widows. Food, fertilizers, LPG, diesel and
kerosene have been kept out for the present.

Economy
• Among other objectives like better delivery, more accurate targeting, giving broader choice
to the beneficiaries, reducing pilferage and corruption, the programme is also aimed at
cutting the massive subsidy bill of Rs 1,64,000 crore .
Scope of DBT
• The DBT program aims that entitlements and benefits are transferred directly to the
beneficiaries. The beneficiaries could include widows, students and pension takers.
This would be done through biometric-based Aadhaar- linked bank accounts. This would
reduce several layers of intermediaries and delays in the system.
Advantages of DBT system
• The use of Aadhaar or other biometric based systems would dissolve problems like
duplicates or ghosts. Duplicates are when the name of the beneficiary is repeated and
Ghosts is when the name of a nonexistent beneficiary is mentioned.
• It helps in the quick and direct cash transfer to the intended beneficiary.
• The cash transfer happens through a dense Business Correspondent system on the
ground with micro ATM’s.
• This ensures that the poor get the same level of service that the rich and the middle
classes in the society receive.
• The financial inclusion offered by the DBT infrastructure can also be used by internal
migrants to send their remittances.
• The Aadhaar-based micro-ATM network could ensure that remittances take place
instantly and at much lower cost to migrants.
Subsidies and Export Promotion
• As a part of export promotion strategy, besides various other measures, various types of
export incentives have been evolved. These have been altered and modified from time to
time to meet varying conditions. Broadly, these incentives can be classified into three
categories, viz.
• Fiscal Incentives - Under fiscal incentives, the important measures that have been in
vogue are income tax concessions, customs draw-backs, refund of excise duty,-
exemption from sales tax, provision for export undertaken, and facility for manufacture
under bond.
• Financial Incentives - These incentives refer to the provision of cash assistance for
specified export promotional efforts and export facilities.
• Special Incentive Schemes - Besides the recent reforms in the export incentive structure,
export profitability was sought to be improved through a variety of fiscal concessions,
and explicit and implicit subsidies. These measures were considered necessary to
neutralise the negative financial impact of high administered prices of inputs
and differential tax incidence that exporters suffer vis-a-vis ‘across the border’
competitors.

Economy
PLANNING IN INDIA
Planning is programming for action for a particular period for achieving certain specific
progressive developmental goals. In other words, it is a method of achieving economic
prosperity by the optimum utilization of the resources of an organization. It is a tool to
bridge the gap between reality and objectives of an organization. Also, it is an effort towards
attaining self-sufficiency and narrowing the intra and inter-regional disparities and preparing
ideal conditions for the development.
The first almost rudimentary idea of economic planning as part of republican justice in
India started in 1938 when he was Congress President, Netaji Subhas Bose, with the
collaboration of the physicist and mathematician, Meghnad Saha, gave us a glimpse of all
that planning for the long term, by an independent and transparent apex, could do for an
India of the future. In his presidential address at the Haripura session of the Congress in
February 1938, Netaji envisaged “the first task of the Government of Free India” as being
the setting up of a “National Planning Commission” in order to address the task of fighting
poverty. He created what was, in effect, the nucleus for the future Union Planning
Commission in the National Planning Committee under the aegis of the Indian National
Congress, with Jawaharlal Nehru as the first Chairman of the Committee.
NEED OF PLANNING
Socio-economic planning has been one of the most noteworthy inventions of the
20th century. Starting with the Soviet experiment in 1928, planning gradually swept over
almost two-thirds of the entire world.
1. For developing countries, whether belonging to a democratic or an authoritarian political
culture, planning has been considered a prerequisite for balanced socio-economic
development and a strategy for making the best possible use of a available natural
manpower, and financial as well as infrastructural resources. There are continuing
pressures on developing countries to accelerate the speed of development so that the
gap between the standard of living of their people and that of the developed countries
is reduced at the fastest possible pace and consequently, they also emerge as dignified
members of the international community.
2. Even in the developed countries of the west, planning in one form or another, has
remained an integral part of their economic system. Only, it is termed “indicative”
planning for it is expected to indicate the direction of growth and not to dictate it.
Developing countries like China (in late 1970s) and India (in 1990s) started using
indicative planning also.
OBJECTIVES OF PLANNING
Indian planning, ever since its inception, has attempted to meet the following objectives
of multi-faceted development:
• Securing an increase in national income.
• Accelerating the planned rate of investment to enhance the proportion of actual
investment to national income.
• Mitigating the inequalities of income and wealth and regulating the concentration of
economic power.
• Increasing the quantum of employment for the maximum possible utilization of
manpower.
• Promoting development in agricultural, industrial and other sectors and striving to
achieve inter-sectoral development.

Economy
• Speeding up the development of relatively backward regions and promoting balanced

regional development.
• Reducing, in a progressive manner, incidence of poverty by providing food, work and
productivity to the people below the poverty-line.
• Modernization of the economy through effecting shifts, in the sectoral composition of
production diversification of activities, advancement in technology and institutional
innovation.
TYPES OF PLANNING
There have been several experiments in planning in India. The different types of planning
that one come across while talking about planning in India are discussed below.
Indicative Planning
• Indicative planning was adopted since 8th five year plan which is driven by liberalization
of the Indian economy and the private sector being given a role on par with or more
than that of the government in quantitative terms. State would turn its role into a
facilitator from that of a controller and regulator.
• It was decided that trade and industry would be increasingly freed from government
control and that planning in India should become more and more indicative and supportive
in nature. In other words, the remodeling of economic growth necessitated recasting the
planning model from imperative and directive (‘hard’) to indicative (soft) planning. Since
the Government did not contribute the majority of the financial allocation, it had to
indicate the policy direction to the corporate sector and encourage them to contribute to
plan targets. Government should create the right policy climate - predictable, irreversible
and transparent - to help the corporate sector contribute resources for the plan.
• Indicative planning is to assist the private sector with information that is essential for its
operations regarding priorities and plan targets. Here, the Government and the corporate
sector are more or less equal partners and together are responsible for the
accomplishment of planning goals. Government, unlike earlier, contributes less than
50% of the financial resources. Government provides the right type of policies and
crates the right type of milieu for the private sector-including the foreign sector to
contribute to the results.
• Indicative planning gives the Government an opportunity to give the private sector
encouragement to achieve growth in areas where the country has inherent strengths. It
is known to have brought Japan results in shifting towards microelectronics. In France,
too indicative planning was in vogue.
• Planning Commission would work on building a long-term strategic vision of the future.
The concentration would be on anticipating future trends and evolving strategies for
competitive international standards. Planning will largely be indicative and the public
sector would be gradually withdrawn from areas where no public purpose is served by
its presence. The new approach to development will be based on “a re-examination
and re-orientation of the role of the government”. The state has to play more of a
facilitating role. This point is particularly stressed in the development strategy of the
Tenth Five Year Plant (2002-2007)
Rolling Plan
• It was adopted in India in 1962, in the aftermath of Chinese attack on India, in the
Defence Ministry in India. Professor Gunnar Mrydal (author of the more famous book

Economy
‘Asian Drama’) recommended it for developing countries in his book Indian Economic
Planning in Its Broader Setting.
• In this type, every year three new plans are made and implemented - annual plan that
includes annual budget; three-four-five plan that is changed every year in response to
the economic demands; and perspective plan for 10 or 15 years into which the other two
plans are dovetailed annually. Rolling plan becomes necessary in circumstances that
are fluid.
Financial Planning
• Here, physical targets are set in line with the available financial resources. Mobilization
and setting expenditure pattern of financial resources is the focus in this type of planning.
Physical planning
• Here, the output targets are prioritized with inter-sect oral balance. Having set output
targets, the finances are raised.
FIVE YEAR PLANS
Plan Objectives and Achievements
First Plan (1951-56) Target Growth: 2.1%Actual Growth 3.6%
• It was based on Harrod-Domar Model.
• Influx of refugees, severe food shortage & mounting inflation confronted the country at
the onset of the first five year Plan.
• The Plan Focussed on agriculture, price stability, power and transport
• It was a successful plan primarily because of good harvests in the lasttwo years of the
plan. Objectives of rehabilitation of refugees, food self sufficiency & control of prices
were more or less achieved.
Second Plan (1956-61) Target Growth: 4.5%Actual Growth: 4.3%
• Simple aggregative Harrod Domar Growth Model was again used for overall projections
and the strategy of resource allocation to broad sectorsas agriculture & Industry was
based on two & four sector Model prepared by Prof. P C Mahalanobis. (Plan is also called
Mahalanobis Plan).
• Second plan was conceived in an atmosphere of economic stability . It was felt agriculture
could be accorded lower priority.
• The Plan Focussed on rapid industrialization- heavy & basic industries. Advocated huge
imports through foreign loans.
• The Industrial Policy 1956 was based on establishment of a socialistic pattern of society
as the goal of economic policy.
• Acute shortage of forex led to pruning of development targets , price rise was also seen
( about 30%) vis a vis decline in the earlier Plan & the2nd FYP was only moderately
successful.
Third Plan (1961-66) Target Growth: 5.6%Actual Growth: 2.8%
• At its conception, it was felt that Indian economy has entered a “take- off stage”.
Therefore, its aim was to make India a ‘self-reliant’ and ‘self- generating’ economy.
• Based on the experience of first two plans (agricultural production was seen as limiting
factor in India’s economic development) , agriculture was given top priority to support
the exports and industry.

Economy
• The Plan was thorough failure in reaching the targets due to unforeseen events - Chinese
aggression (1962), Indo-Pak war (1965), severe drought1965-66. Due to conflicts the
approach during the later phase was shifted from development to defence & development.
Three Annual Plans (1966-69) euphemistically described as Plan holiday.
• Failure of Third Plan that of the devaluation of rupee( to boost exports) along with
inflationary recession led to postponement of Fourth FYP. Three Annual Plans were
introduced instead. Prevailing crisis in agriculture and serious food shortage necessitated
the emphasis on agriculture during the Annual Plans.
• During these plans a whole new agricultural strategy was implemented. It involving
wide-spread distribution of high-yielding varieties of seeds, extensive use of fertilizers,
exploitation of irrigation potential and soil conservation.
• During the Annual Plans, the economy absorbed the shocks generated during the Third
Plan.
• It paved the path for the planned growth ahead.
Fourth Plan (1969-74) Target Growth: 5.7%Actual Growth: 3.3%
• Refusal of supply of essential equipments and raw materials from the allies during Indo
Pak war resulted in twin objectives of “growth with stability” and “progressive achievement
of self reliance “for the Fourth Plan.
• Main emphasis was on growth rate of agriculture to enable other sectors to move forward
. First two years of the plan saw record production. The last three years did not measure
up due to poor monsoon. Implementation of Family Planning Programmes were amongst
major targets of the Plan.
• Influx of Bangladeshi refugees before and after 1971 Indo-Pak war was an important
issue along with price situation deteriorating to crisisproportions and the plan is
considered as big failure.
Fifth Plan (1974-79) Target Growth: 4.4%Actual Growth: 4.8%
• The final Draft of fifth plan was prepared and launched by D.P. Dharin the backdrop of
economic crisis arising out of run-away inflation fuelled by hike in oil prices and failure
of the Govt. takeover of the wholesale trade in wheat.
• It proposed to achieve two main objectives: ‘removal of poverty’ (Garibi Hatao) and
‘attainment of self reliance’
• Promotion of high rate of growth, better distribution of income and significant growth in
the domestic rate of savings were seen as key instruments
• Due to high inflation, cost calculations for the Plan proved to be completely wrong and
the original public sector outlay had to be revised upwards. After promulgation of
emergency in 1975, the emphasis shifted to the implementation of Prime Ministers 20
Point Programme. FYP was relegated to the background and when Janta Party came to
powerin 1978, the Plan was terminated.
Rolling Plan (1978-80)
• There were 2 Sixth Plans. Janta Govt. put forward a plan for 1978-1983 emphasising on
employment, in contrast to Nehru Modelwhich the Govt criticised for concentration of
power, widening inequality & for mounting poverty. However, the government lasted for
only 2 years. Congress Govt. returned to power in 1980 and launched a different plan
aimed at directly attacking on the problem of poverty by creating conditions ofan
expanding economy.

Economy
Sixth Plan (1980-85) Target Growth: 5.2%Actual Growth: 5.7%

• The Plan focussed on Increase in national income, modernization of technology, ensuring
continuous decrease in poverty and unemployment through schemes for transferring
skills(TRYSEM) and seets(IRDP) and providing slack season employment (NREP),
controlling population explosion etc. Broadly, the sixth Plan could be taken as a success
as most of the target were realised even though during the last year (1984-85) many
parts of the country faced severe famine conditions and agricultural output was less
than the record output of previous year.
Seventh Plan (1985-90)
• The Plan aimed at accelerating food grain production, increasing employ- Target Growth:
5.0% ment opportunities & raising productivity with focus on ‘food, work & Actual
Growth: 6.0% productivity’.
• The plan was very successful as the economy recorded 6% growth rate against the
targeted 5% with the decade of 80’s struggling out of the’ Hindu Rate of Growth’.
Eighth Plan
• The eighth plan was postponed by two years because of political (1992-97) uncertainty
at the Centre
Target Growth 5.6%
• Worsening Balance of Payment position, rising debt burden, widening Actual Growth
6.8% budget deficits, recession in industry and inflation were the key issues during the
launch of the plan.
• The plan undertook drastic policy measures to combat the bad economic situation and
to undertake an annual average growth of 5.6% through introduction of fiscal & economic
reforms including liberalisation under the Prime Minister ship of Shri P V Narasimha
Rao.
• Some of the main economic outcomes during eighth plan period were rapid economic
growth (highest annual growth rate so far – 6.8%), high growth of agriculture and allied
sector, and manufacturing sector, growth in exports and imports, improvement in trade
and current account deficit. High growth rate was achieved even though the share of
public sector in total investment had declinedconsiderably to about 34%.
Ninth Plan (1997-2002)
• The Plan prepared under United Front Government focussed on “Growth Target Growth:
6.5% With Social Justice & Equality” Ninth Plan aimed to depend Actual Growth: 5.4%
predominantly on the private sector – Indian as well as foreign (FDI) & State was envisaged
to increasingly play the role of facilitator & increasingly involve itself with social sector
viz education, health etc and infrastructure where private sector participation was likely
to be limited. It assigned priority to agriculture & rural development with a view to
generate adequate productive employment and eradicate poverty
Tenth Plan (2002-2007)
• Recognising that economic growth cant be the only objective of national Target Growth
8% plan, Tenth Plan had set ‘monitorable targets’ for few key indicators (11) Actual
Growth 7.6 % of development besides 8 % growth target. The targets included reduction
in gender gaps in literacy and wage rate, reduction in Infant & maternal mortality rates,
improvement in literacy, access to potable drinking water cleaning of major polluted

Economy
rivers, etc. Governance was considered as factor of development & agriculture was
declared as prime moving force of the economy. States role in planning was to be
increased with greater involvement of Panchayati Raj Institutions. State wise break up
of targets for growth and social development sought to achieve balanced development of
all states.
Eleventh Plan (2007-2012)
• Eleventh Plan was aimed “Towards Faster & More Inclusive Growth Target Growth 9%
“after UPA rode back to power on the plank of helping Aam Aadmi Actual Growth 8%
(common man). India had emerged as one of the fastest growing economy by the end
of the Tenth Plan. The savings and investment rates had increased, industrial sector
had responded well to face competition in the global economy and foreign investors were
keen to invest in India. But the growth was not perceived as sufficiently inclusive for
many groups, specially SCs, STs & minorities as borne out by data on several dimensions
like poverty, malnutrition, mortality, current daily employment etc.
• The broad vision for 11th Plan included several inter related components like rapid
growth reducing poverty & creating employment opportunities, access to essential services
in health & education, specially for the poor, extension if employment opportunities
using National Rural Employment Guarantee Programme , environmental sustainability,
reduction of gender inequality etc. Accordingly various targets were laid down like
reduction in unemployment( to less than 5% among educated youth) & headcount ratio
of poverty ( by 10%), reduction in drop out rates, gender gap in literacy, infant mortality,
total fertility, malnutrition in age group of 0-3 (to half its present level), improvement
in sex ratio, forest & tree cover, air quality in major cities, ensuring electricityconnection
to all villages & BPL households (by 2009) & reliable power by end of 11th Plan, all
weather road connection to habitations with population 1000& above (500 in hilly
areas) by 2009, connecting every village by telephone & providing broad band connectivity
to all villages by 2012.
• The Eleventh Plan started well with the first year achieving a growth rate of 9.3 per cent,
however the growth decelerated to 6.7 per cent rate in 2008-09 following the global
financial crisis. The economy recovered substantially to register growth rates of 8.6 per
cent and 9.3 per cent in 2009-10 and 2010-11 respectively. However, the second bout of
global slowdown in 2011 due to the sovereign debt crisis in Europe coupled with
domestic factors such as tight monetary policy and supply side bottlenecks, resulted in
deceleration of growthto 6.2 per cent in 2011-12. Consequently, the average annual
growth rate of Gross Domestic Product (GDP) achieved during the EleventhPlan was 8
per cent, which was lower than the target but better than the Tenth Plan achievement.
Since the period saw two global crises -one in 2008 and another in 2011 – the8 per cent
growth may be termed as satisfactory. The realised GDP growth rate for theagriculture,
industry and services sector during the 11th Plan period is estimated at 3.7 per cent,
7.2 per cent and 9.7 per cent against the growth target of 4 per cent, 10-11 per cent
and 9-11 per cent respectively.
• The Eleventh Plan set a target of 34.8 per cent for domestic savings and36.7 per cent for
investment after experiencing a rising level of domestic savings as well as investment
and especially after emergence of structural break during the Tenth Plan period. However,
the domestic savings and investment averaged 33.5 per cent and 36.1 per cent of GDP

Economy
at market prices respectively in the Eleventh Plan which is below the target but notvery
far.
• Based on the latest estimates of poverty released by the Planning Commission, poverty
in the country has declined by 1.5 percentage points per year between 2004-05 and
2009-10.The rate of decline during the period 2004-05 to 2009-10 is twice the rate of
decline witnessed during the period 1993-94 to 2004-05. Though the new poverty
count based on Tendulkar Formula has been subject of controversy, it is believed by the
Committee that whether we use the old method or the new, the decline in percentage of
population below poverty line is almost same.
• On the fiscal front, the expansionary measures taken by the government to counter the
effect fo global slowdown led to increase in key indicators through 2009-10 with some
moderation thereafter.
• The issue of Price Stability remained resonating for more than half of the Plan period.
Inability to pass on burden on costlier imported oil prices might have constrained the
supply of investible funds in the government’shand causing the 11th Plan to perform at
the levels below its target.
Twelfth (2012-17) Targets: ‘Faster, Sustainable, and More Inclusive Growth’.
Monitorable Targets of the Plan: 25 core indicators-
Twenty Five core indicators listed below reflect the vision of rapid, sustainable & more
inclusive growth of the twelfth Plan:
Economic Growth
1. Real GDP Growth Rate of 8.0 per cent.
2. Agriculture Growth Rate of 4.0 per cent.
3. Manufacturing Growth Rate of 10.0 per cent.
4. Every State must have an average growth rate in the Twelfth Plan preferably higher
than that achieved in the Eleventh Plan.
Poverty and Employment
5. Head-count ratio of consumption poverty to be reduced by 10 percentage pointsover
the preceding estimates by the end of Twelfth FYP.
6. Generate 50 million new work opportunities in the non-farm sector and provide
skill certification to equivalent numbers during the Twelfth FYP.
Education.
7. Mean Years of Schooling to increase to seven years by the end of Twelfth FYP.8.
Enhance access to higher education by creating two million additional seats for
each age cohort aligned to the skill needs of the economy.
9. Eliminate gender and social gap in school enrolment (that is, between girls and
boys, and between SCs, STs, Muslims and the rest of the population) by the end of
Twelfth FYP.
Health
10. Reduce IMR to 25 and MMR to 1 per 1,000 live births, and improve Child Sex Ratio
(0–6 years) to 950 by the end of the Twelfth FYP.
11. Reduce Total Fertility Rate to 2.1 by the end of Twelfth FYP.
12. Reduce under-nutrition among children aged 0–3 years to half of the NFHS-3 levels
by the end of Twelfth FYP.

Economy
Infrastructure, Including Rural Infrastructure

13. Increase investment in infrastructure as a percentage of GDP to 9 per cent by the
end of Twelfth FYP.
14. Increase the Gross Irrigated Area from 90 million hectare to 103 million hectare by
the end of Twelfth FYP.
15. Provide electricity to all villages and reduce AT&C losses to 20 per cent by the end
of Twelfth FYP.
16. Connect all villages with all-weather roads by the end of Twelfth FYP.
17. Upgrade national and state highways to the minimum two-lane standard by the
end of Twelfth FYP.
18. Complete Eastern and Western Dedicated Freight Corridors by the end of Twelfth
FYP.
19. Increase rural tele-density to 70 per cent by the end of Twelfth FYP.
20. Ensure 50 per cent of rural population has access to 40 lpcd piped drinking water
supply, and 50 per cent gram panchayats achieve Nirmal Gram Status by the end
of Twelfth FYP.
Environment and Sustainability
21. Increase green cover (as measured by satellite imagery) by 1 million hectare every
year during the Twelfth FYP.
22. Add 30,000 MW of renewable energy capacity in the Twelfth Plan
23. Reduce emission intensity of GDP in line with the target of 20 per cent to 25 per
cent reduction over 2005 levels by 2020.
Service Delivery
24. Provide access to banking services to 90 per cent Indian households by the end of
Twelfth FYP.
25. Major subsidies and welfare related beneficiary payments to be shifted to a direct
cash transfer by the end of the Twelfth Plan, using the Aadhar platform with
linked bank accounts.
Inclusiveness is to be achieved through
• poverty reduction
• promoting group equality
• Regional balance
• Reducing inequality,
• Empowering people etc.
Sustainability is to be achieved through
• Ensuring environmental sustainability
• Development of human capital through improved health, education, skill develop-
ment, nutrition, information technology etc.
• Development of institutional capabilities, infrastructure like power telecommunica-
tion, roads, transport etc.

Economy
NITI AAYOG
• India has undergone a paradigm shift over the past six decades - politically, economically,
socially, technologically as well as demographically. The role of Government in national
development has seen a parallel evolution. Keeping with these changing times, the
Government of India has decided to set up NITI Aayog (National Institution for
Transforming India), in place of the erstwhile Planning Commission, as a means to
better serve the needs and aspirations of the people of India. The new institution will be
a catalyst to the developmental process; nurturing an overall enabling environment,
through a holistic approach to development going beyond the limited sphere of the
Public Sector and Government of India.
The NITI Aayog will comprise the following:
a. Prime Minister of India as the Chairperson
b. Governing Council comprising the Chief Ministers of all the States and Lt. Governors
of Union Territories.
c. Regional Councils will be formed to address specific issues and contingencies
impacting more than one state or a region. These will be formed for a specified
tenure. The Regional Councils will be convened by the Prime Minister and will
comprise of the Chief Ministers of States and Lt. Governors of Union Territories in
the region. These will be chaired by the Chairperson of the NITI Aayog or his nominee.
d. Experts, specialists and practitioners with relevant domain knowledge as special
invitees nominated by the Prime Minister
e. The full-time organizational framework will comprise of, in addition to the Prime
Minister as the Chairperson:
i. Vice-Chairperson: To be appointed by the Prime Minister
ii. Members: Full-time
iii. Part-time members: Maximum of 2 from leading universities research organizations
and other relevant institutions in an ex-officio capacity. Part time members will be
on a rotational basis.
iv. Ex Officio members: Maximum of 4 members of the Union Council of Ministers to be
nominated by the Prime Minister.
v. Chief Executive Officer: To be appointed by the Prime Minister for a fixed tenure, in
the rank of Secretary to the Government of India.
vi. Secretariat as deemed necessary.
The NITI Aayog will aim to accomplish the following objectives and opportunities:
• An administration paradigm in which the Government is an “enabler” rather than a
“provider of first and last resort.”
• Progress from “food security” to focus on a mix of agricultural production, as well as
actual returns that farmers get from their produce.
• Ensure that India is an active player in the debates and deliberations on the global
commons.
• Ensure that the economically vibrant middle-class remains engaged, and its potential
is fully realized.
• Leverage India’s pool of entrepreneurial, scientific and intellectual human capital.
• Incorporate the significant geo-economic and geo-political strength of the Non-
Resident Indian Community.

Economy
• Use urbanization as an opportunity to create a wholesome and secure habitat through

the use of modern technology.
• Use technology to reduce opacity and potential for misadventures in governance.
The NITI Aayog aims to enable India to better face complex challenges, through the
following:
• Leveraging of India’s demographic dividend, and realization of the potential of youth,
men and women, through education, skill development, elimination of gender bias, and
employment.
• Elimination of poverty, and the chance for every Indian to live a life of dignity and self-
respect.
• Reddressal of inequalities based on gender bias, caste and economic disparities.
• Integrate villages institutionally into the development process.
• Policy support to more than 50 million small businesses, which are a major source of
employment creation.
• Safeguarding of our environmental and ecological assets.

Economy
GENERATION OF ECONOMIC REFORMS

• The reform process in India was initiated with the aim of accelerating the pace of economic
growth and eradication of poverty. The process of economic liberalization in India can be
traced back to the late 1970s. However, the reform process began in earnest only in
July 1991.
• With the onset of the reforms the Government signaled a systemic shift to a more open
economy with greater reliance upon market forces, a larger role for the private sector
including foreign investment, and a restructuring of the role of Government. The reforms
of the last two and a half decades have gone a long way in freeing the domestic
economy from the control regime.
• An important feature of India’s reform programme is that it has emphasized gradualism
and evolutionary transition rather than rapid restructuring or “shock therapy”.
First Generation Reforms (1991 onwards)
• It had its origin in 1985 when the New Economic Policy declared emphasised on
improvement in productivity, absorption of modern technology and fuller utilisation of
capacity and finally on the greater role for the private sector.
• The economic reforms initiated in 1991 introduced far-reaching measures, which changed
the working and machinery of the economy. The reforms have unlocked India’s enormous
growth potential and unleashed powerful entrepreneurial forces.
• Since 1991, successive governments have successfully carried forward the country’s
economic reform agenda in response to the changes in the nature of markets and
institutions, industrial organisation and structures and social relations of production.
• These changes were pertinent to the following:
– Dominance of the public sector in the industrial activity
– Discretionary controls on industrial investment and capacity expansion
– Trade and exchange controls
– Limited access to foreign investment
– Public ownership and regulation of the financial sector
• The focus of reforms was mostly on stabilization with a little stress on structural reforms.
• New policy introduced various changes regarding industrial licensing, technology up-
gradation, elimination of controls and restrictions, foreign capital, fiscal policy,
rationalizing and simplifying the system of fiscal and administrative regulation and
export-import policy in order to provide greater scope to private sector.
• The policy changes were expected to provide a big boost in private sector investment
particularly in the corporate segment of manufacturing industry which would, in turn
usher in rapid growth of the economy as well as pave the way for modernization of the
economy.
• Broader Reforms among First Generation were as follows:
– Chelliah Committee suggestions in Taxation, focus was on broadening the Tax Base.
– Narasimham Committee suggestions for Financial Sector, focus was on increasing
stability.
– LPG reforms through New Industrial Policy, focus was on freeing the economy
from clutches of ageing public sector.

Economy
– Partial convertibility of Rupee in Current Account.

Second Generation Reforms
• In a way the Second Generation Reforms began in right earnest in 1999. India embarked
on an exercise of cutting personal taxes, investing in infrastructure and creating world
class companies.
• Second generation of economic reforms in the country gave special stress on fiscal
reforms, financial reforms, structural reforms, labour law reforms etc. Major fiscal
reforms have been undertaken for broadening the income tax base and streamlining
the excise and customs duty structures.
• Major financial sector reforms undertaken by the government include allowing private
companies to enter into insurance sector, allowing foreign bank to open their branches
in India.
• The focus of reforms was on structural reforms through institutional strengthening.
Overall, the objective was to push economy on a higher growth trajectory & the second
generation reforms did pushed India to 8% growth path as against 6% growth path
that was guided by first generation reforms.
• Broader Reforms among Second Generation were as follows -
– Foreign Exchange - Abolition of (FERA) Foreign Exchange Regulation Act and
creation of (FEMA) Foreign Exchange Management Act; Partial convertibility of Rupee
in Capital Account on basis of Second Tarapore Committee
– Labour - Voluntary Retirement Scheme (VRS); Board for Industrial and Financial
Reconstruction (BIFR); National Renewal Fund
– Financial Sector - Narasimham Committee II suggestions regarding prudential
norms and the Capital Adequacy Ratio (CAR)
– Taxation - Value Added Tax (VAT); Kelkar Panel Suggestions on Direct tax; Provision
of Minimum Alternate Tax (MAT), Fringe Benefit Tax (FBT) and other tax avoidance
aspects; Introduction of service tax
Third Generation Reforms
• Currently India is under 3rd generation of reforms.
• The First & Second generation of reforms had a few downsides. The GDP had been
growing but the GDP per capita still left a lot to be desired. India ranks much lower than
Asian and Latin American peers when compared on parameters like GDP per capita and
Tax/GDP. This is one of the first challenges before the Indian government.
• The second challenge was the creation of world class infrastructure. We are not only
referring to infrastructure in terms of roads, railways and ports; but also in terms of
manufacturing and manpower infrastructure.
• The third area of focus is on creating, encouraging and nurturing the spirit of
entrepreneurship.
• Broader Reforms among Third Generation were as follows:
– GST (Goods and Service Tax)
– Exit Policy/Bankruptcy Code
• Capital easing norms for start-ups or entrepreneurs through Mudra Bank

Economy
POVERTY
Poverty is a condition characterized by severe deprivation of basic human needs, including
food, safe drinking water, sanitation facilities, health, shelter, education and information. It
depends not only on income but also on access to services. The World Bank has defined
poverty as an income level below some minimum level necessary to meet basic needs. This
minimum level is usually called the "poverty line". The definition agreed by the World Summit
on Social Development in Copenhagen in 1995 is as follows: It includes a lack of income and
productive resources to ensure sustainable livelihoods; hunger and malnutrition; ill health;
limited or lack of access to education and other basic services; increased morbidity and
mortality from illness; homelessness and inadequate housing; unsafe environments and
social discrimination and exclusion.
As per the Oxfam study, India's top 10 per cent of the population holds 77.4
per cent of the total national wealth. The contrast is even sharper for the top
1 per cent that holds 51.53 per cent of the national wealth. The bottom 60
per cent, the majority of the population, own merely 4.8 per cent of the national
wealth. Wealth of top 9 billionaires is equivalent to the wealth of the bottom
half of the population.
• Relative poverty: A condition where household income is a certain percentage below
median incomes. For example, the threshold for relative poverty could be set at 50% of
median incomes (or 60%).
• Absolute Poverty: It is a condition where household income is below a necessary level
to maintain basic living standards (food, shelter, housing). "Absolute" Poverty is the
shortfall in consumption expenditure from a threshold called the "Poverty line".
• Poverty Line: The conventional approach to measuring poverty is to specify a minimum
expenditure (or income) required to purchase a basket of goods and services necessary
to satisfy basic human needs. This minimum expenditure is called the poverty line.
• Poverty Line Basket: The basket of goods and services necessary to satisfy basic human
needs is the poverty line basket or PLB.
• Head Count Ratio: The proportion of population below the poverty line is called the
poverty ratio or headcount ratio (HCR).
Committees on estimation of Poverty:
• Six official committees have so far estimated the number of people living in poverty in
India:
• Planning Commission Expert Group of 1962
• V.N. Dandekar and N Rath in 1971
• Y K Alagh in 1979
• D T Lakdawala in 1993
• Suresh Tendulkar in 2009
• C Rangarajan in 2014
• Poverty in India is currently measured using the Tendulkar poverty line. As per this,
21.9% of people in India live below the poverty line.
• Note: The report of the Rangarajan committee was rejected as it stuck to expenditure-
based poverty rates and failed to examine the possibility of a wider multi-dimensional
view of deprivation.

Economy
Criticisms of the Poverty line estimates :

• The 1962 group did not consider age and gender-specific calorie requirements.
• Expenditure on health and education were not considered by committees before the
Tendulkar Committee.
• The Tendulkar Committee was criticized for setting the poverty line at just Rs 32 per
capita per day in urban India (and at Rs 27 in rural India).
• Rangarajan Commission was criticized for selecting the food component arbitrarily. The
emphasis on food as a source of nutrition overlooks the contribution of sanitation,
healthcare, access to clean water, and prevalence of pollutants.
Tendulkar Poverty Line:
• The current methodology for poverty estimation is based on the recommendations of the
Tendulkar Committee established in 2005.
• The Committee calculated poverty levels for the year 2004- 05.
• Uniform Poverty line Basket: Tendulkar Committee computed new poverty lines for
rural and urban areas of each state based on the uniform poverty line basket and
calculated all India poverty line (2004-05) as:
• Rs 446.68 per capita per month in rural areas.
• Rs 578.80 per capita per month in urban areas.
WHY ARE POVERTY NUMBERS IMPORTANT?
Welfare Schemes and Poverty Elimination:
• Poverty numbers matter because central schemes like Antyodaya Anna Yojana (which
provides subsidized foodgrains to households living below the poverty line) and Rashtriya
Swasthya Bima Yojana (health insurance for BPL households) use the definition of poverty
given by the NITI Aayog or the erstwhile Planning Commission.
• The Centre allocates funds for these schemes to states based on the numbers of their
poor.
• Errors of exclusion can deprive eligible households of benefits.
Other way to calculate Poverty:
• MPI Method- The multidimensional poverty index (MPI) captures poverty using 10
indicators:
• Nutrition
• Child mortality
• Years of schooling
• School attendance
• Ownership of assets
• Access to proper house
• Electricity
• Drinking water
• Sanitation
• Clean cooking fuel
• It was devised in 2011 by Oxford University researchers Sabina Alkire and James
Foster.

Economy
• Poverty is measured in terms of deprivation in at least a third of these indicators.

• In 2015-16, 369.546 million (nearly 37 crore) Indians were estimated to meet the
deprivation cut-off for three or more of the 10 indicators.
• The MPI is a more comprehensive measure of poverty because it includes components
that capture the standard of living more effectively.
• However, uses "outcomes" rather than expenditure: the presence of an undernourished
person in the household will result in it being classified as "poor", regardless of the
expenditure on nutritious food.
• The National Statistical Office (NSO) Report on Household Consumer Expenditure for
2017-18 was junked in 2019, so there is no data to update India's poverty figures. Even
the
• The MPI report published by Oxford Poverty and Human Development Initiative used
data from the fourth round of the National Family Health Survey, figures for which are
available only until 2015-16.
• Headcount multidimensional poverty ratio in 2015-16: 27.9%
• Rural Poverty: 36.8%
• Urban Poverty: 9.2%

Economy
UNEMPLOYMENT
Unemployment is defined as a situation where someone of working age is not able to get
a job but would like to be in full time employment.
Employment is expressed in relation to labour force.
Labour Force: The age of peopleabove 15 who are willing and able to work are called
Labour force. India's labor force participation rate was around 50% in 2018.
According to recently released World Employment and Social Outlook Trends-2019 by
International Labour Organization (ILO): Number of jobless in India will increase from 18.3
million in 2017 to 18.6 million by 2018 and 18.9 million by 2019. Growth of unemployment
in India was found to be 3.5%.
India performed better in terms of job creation in 2016, as majority of jobs (13.4 million)
were created.A lot of the jobs being created are of poor quality despite strong economic
growth and some 77% of workers in India will have vulnerable employment by 2019.
TYPES OF UNEMPLOYMENT
Economists distinguish between various overlapping types of and theories of
unemployment, including cyclical or Keynesian unemployment, unemployment, structural
and classical unemployment. Some additional types of unemployment that are occasionally
mentioned are seasonal unemployment, hardcore unemployment, and hidden unemployment.
Though there have been several definitions of "voluntary" and "involuntary unemployment"
in the economics literature, a simple distinction is often applied. Voluntary unemployment
is attributed to the individual's decisions, whereas involuntary unemployment exists because
of the socio-economic environment (including the market structure, government intervention,
and the level of aggregate demand) in which individuals operate. In these terms, much or
most of frictional unemployment is voluntary, since it reflects individual search behavior.
Voluntary unemployment includes workers who reject low wage jobs whereas involuntary
unemployment includes workers fired due to an economic crisis, industrial decline, company
bankruptcy, or organizational restructuring.

Economy
UNEMPLOYMENT IN INDIA: TYPES AND CAUSES

Therefore, we can see unemployment is a serious problem, which is not always easy to
identify. Let us discuss the different types of unemployment in India.
Seasonal Unemployment
Normally when we talk of employed people, we mean those who have work throughout
the year. However, this may not be possible for all. In agriculture, work is seasonal even
though agricultural activities are performed throughout the year. During the peak agricultural
seasons (when the crop is ready for harvesting), more people are required for work. Similarly,
in the sowing, weeding and transplantation period more labour is required. Employment
therefore increases at this time. In fact, we will find that there is hardly any unemployment
in rural areas during these peak agricultural seasons. However, once these seasons are over
the agricultural workers, especially those who do not own land or whose land is not sufficient
to meet their basic requirement (these are landless laborers and marginal farmers respectively),
remain unemployed. This type of unemployment is known as seasonal unemployment.
Voluntary Unemployment
People who are unwilling to work at prevailing wage rate and people who get a continuous
flow of income from their property or any other sources and need not to work, such people
are voluntarily unemployed.
Frictional Unemployment
Unemployment attributable to the time required to match production activities with
qualified resources. Frictional unemployment essentially occurs because resources, especially
labor, are in the process of moving from one production activity to another. It is time spent
between jobs when a worker is searching for a job or transitioning from one job to
another.Employers are seeking workers and workers are seeking employment, the two sides
just haven't matched up. Hence, unemployment of the frictional variety increases.
Frictional unemployment is not very harmful to the economy.
Causal Unemployment
Cyclical unemployment is based on a greater availability of workers than there are jobs
for workers. It is usually directly tied to the state of the economy. Lower demand for products
due to lack of consumer confidence, disinterest, or reduction in consumer spending results
in the workforce cutting back on production. Since production is reduced, companies
that retail such products may also cut back on workforce, creating yet more cyclical
unemployment.
Disguised Unemployment
There are also instances where we find too many people working when so many are not
required. In agriculture, we may find that all members of the family work. It is possible that
3-4 people can do a given work in the farm, but we find that the whole family of say 10 people
doing the job. This may be because the excess people are not able to find employment
elsewhere, so rather than remain unemployed they prefer to do the work along with others.
This is known as disguised unemployment.
CAUSES AND CONSEQUENCES OF UNEMPLOYMENT IN INDIA
The major cause of unemployment in India is the slow pace of development. The major
causes which have been responsible for the wide spread unemployment can be spelt out as
under.

Economy
• Rapid Population Growth: It is the leading cause of unemployment in Rural India. It

has adversely affected the unemployment situation largely in two ways. In the first
place, the growth of population directly encouraged the unemployment by making large
addition to labour force. It is because the rate of job expansion could never have been as
high as population growth would have required.
• Secondly, the rapid population growth indirectly affected the unemployment situation
by reducing the resources for capital formation. Any rise in population, over a large
absolute base as in India, implies a large absolute number. It means large additional
expenditure on their rearing up, maintenance, and education. As a consequence, more
resources get used up in private consumption such as food, clothing, shelter and son on
in public consumption like drinking water, electricity medical and educational facilities.
This has reduced the opportunities of diverting a larger proportion of incomes to saving
and investment.
• Limited Land: Land is the gift of nature. It is always constant and cannot expand like
population growth. Since, India population increasing rapidly, therefore, the land is not
sufficient for the growing population. As a result, there is heavy pressure on the land. In
rural areas, most of the people depend directly on land for their livelihood. Land is very
limited in comparison to population. It creates the unemployment situation for a large
number of persons who depend on agriculture in rural areas.
• Seasonal Agriculture: In Rural Society agriculture is the only means of employment.
However, most of the rural people are engaged directly as well as indirectly in agricultural
operation. But, agriculture in India is basically a seasonal affair. It provides employment
facilities to the rural people only in a particular season of the year. For example, during
the sowing and harvesting period, people are fully employed and the period between the
post-harvest and before the next sowing they remain unemployed. It has adversely affected
their standard of living.
• Fragmentation of Land: In India, due to the heavy pressure on land of large population
results the fragmentation of land. It creates a great obstacle in the part of agriculture.
As land is fragmented and agricultural work is being hindered the people who depend
on agriculture remain unemployed. This has an adverse effect on the employment
situation. It also leads to the poverty of villagers.
• Backward Method of Agriculture: The method of agriculture in India is very backward.
Rural farmers still follow the old farming methods. As a result, the farmer cannot feed
properly many people by the produce of their farm and are unable to provide their
children with proper education or to engage them in any profession. It leads to
unemployment problem.
• Decline of Cottage Industries: In rural India, village or cottage industries are the only
means of employment particularly of the landless people. They depend directly on various
cottage industries for their livelihood. However, now-a-days, these are adversely affected
by the industrialization process. Actually, it is found that they cannot compete with
modern factories in matter of production. As a result of which the village industries have
suffered serious loss and are gradually closing down. Owing to this, the people who
work in there remain unemployed and unable to maintain their livelihood.
• Defective education: The day-to-day education is very defective and is confined within
the classroom only. Its main aim is to acquire certificated only. The present educational
system is not job oriented, it is degree oriented. It is defective on the ground that it is

Economy
more general than vocational. Thus, the people who go through general education are
unable to find work. They are to be called as good for nothing on the ground that they
cannot have any job. They can find the ways of self-employment. It leads to unemployment
as well as underemployment.
• Lack of transport and communication: In India particularly in rural areas, there are
no adequate facilities of transport and communication. Owing to this, the village people
who are not engaged in agricultural work are remained unemployed. It is because they
are unable to start any business for their livelihood and they are confined only within
the limited boundary of the village. It is noted that the modern means of transport and
communication are the only way to trade and commerce. Since there is lack of transport
and communication in rural areas, therefore, it leads to unemployment problem among
the villagers.
• Inadequate Employment Planning: The employment planning of the government is
not adequate in comparison to population growth. In India more than 1 crore population
is added annually to our existing population. However, the employment opportunities
did not increase according to the population growth. As a consequence, a great difference
is visible between the job opportunities and population growth. On the other hand, it is
a very difficult task on the part of the Government to provide adequate job facilities to all
the people. Besides this, the government also does not take adequate step in this direction.
The faulty employment planning of the Government expedites this problem to a great
extent. As a result, the problem of unemployment is increasing day by day.
As a result of massive unemployment there is poverty and increase in social evils like
robbery, crime etc. The social consequences of the educated unemployed are quite serious.
We will find that people with superior qualifications are doing jobs, which could be done by
less qualified people. This results in under-utilization of one's capacity. We can find graduate
engineers doing jobs, which could be performed by diploma holders. Similarly, there may be
clerks and typists with postgraduate qualifications where perhaps matriculates could do the
work. This is because people with lesser qualifications (matriculates) are unable to find jobs
so they go for higher education with the hope that they will be in a better position to qualify
for the same jobs.
Many thieves, pickpockets, smugglers, drug traffickers etc. take up these activities
because they are unable to find gainful employment. The frustrations of unemployed youth
can also lead to terrorism. The highly educated unemployed have anger against society for
their state of affairs. They feel that if this system cannot meet their aspirations for getting
proper jobs it should be destroyed. This leads them to take to organized violence against the
state. Terrorism in Assam and in many other parts of the country is largely a result of the
large number of educated unemployed youth in these states, among other factors.
RURAL AND URBAN UNEMPLOYMENT IN INDIA
The unemployment rate at all India level stood at around 3.5 per cent while in rural and
urban areas it was 3.4 per cent and 5 per cent respectively. Unemployment rate is more in
urban areas than in rural areas as in urban areas, educated unemployed are more in numbers
and also in urban areas it requires some vocational training or technical skill to do a job as
compared to rural areas.
Urban unemployment is that unemployment which exist in urban areas. It is not only
painful at personal level but also at social level. Despite this problem, the government has
not given attention to it. Urban unemployment can be classified into two forms.
Economy
• Industrial unemployment: The exact size of the industrial unemployment is not known
because the necessary data for its estimation are not available.
• Educated unemployment: It constitutes large part of urban unemployment in India.
Rural unemployment is the main problem of Indian government and it requires huge
capitalization of capital. Disguised unemployment, seasonal unemployment etc are some of
the example of rural unemployment. The educated are not the only ones who face the problem
of unemployment in the urban areas. There are large numbers of people in the rural areas
who do not have a high level of education and who are unemployed.
NATIONAL RURAL EMPLOYMENT GUARANTEE ACT (NREGA)
NREGA was enacted in 2005 and brought into force w.e.f. February 2006 in 200 most
backward districts. Extended to another 130 districts in 2007 and further to whole country
from 1st April, 2008. Implemented by Ministry of Rural Development. NREGA is the first
ever law internationally that guarantees wage employment at an unprecedented scale. Primary
objective is augmenting wage employment & auxiliary objective is strengthening natural
resource management. Provides 100 days of guaranteed unskilled wage employment to each
rural household opting for it. It bestows a legal right and guarantee to the rural population
through an Act of Parliament and is not a scheme like the other wage employment programmes.
Allocation to MGNREGA was highest ever in Budget 2018-19 that is Rs. 55000 Cr.
SampoornaGrameen Rozgar Yojana (SGRY) and National Food for Work Programme
(NFFWP) have been subsumed in NREGA. The focus of the Act is on works relating to water
conservation, drought proofing (including Afforestation/ tree plantation), land development,
flood control/ protection (including drainage in waterlogged areas) and rural connectivity in
terms of all-weather roads. The Act envisages strict Vigilance and Monitoring. Gram Sabha
has the power of social audit. Local Vigilance and Monitoring Committees are to be set up to
ensure the quality of works. At least 1/3rd of the beneficiaries are to be women. Rozgar
JagrooktaPurskar instituted for NGOs to generate awareness about NREGA. Later NREGA
was rechristened as MNREGA (Mahatma Gandhi NREGA)
PRIME MINISTER EMPLOYMENT GENERATION PROGRAMME (PMEGP)
Prime Minister's Rozgar Yojana (PMRY) & Rural Employment Generation Programme
(REGP) has been merged to introduce Prime Minister Employment Generation Programme
(PMEGP). Its objectives include:
• To generate employment opportunities in rural & urban areas through new self-
employment ventures/projects/micro enterprises.
• To bring together widely dispersed traditional artisans/ rural & urban unemployed youth
and give them self-employment, continuous and sustainable employment opportunities.
• To increase wage earning capacity of artisans & growth rate of employment.
• It will be implemented through Khadi & Village Industries' Commission under the Ministry
of Micro, Small & Medium Enterprises.
• Upper limit of the project that could be set up in the manufacturing sector was Rs. 25
lakhs & in the business services sector Rs. 10 lakhs. Beneficiaries will be identified with
the help of Panchayats.
• It was started with an allocation of Rs 8.23 billion in the last fiscal to promote agro and
rural industries.
• The government has also modified the subsidy component under PMRY from Rs 7,500
to Rs 15,000 per entrepreneur.

Economy
Employment
• According to the fourth Annual Employment-Unemployment Survey conducted by the
Labour Bureau during the period January 2016 to July 2016, the Labour Force
Participation Rate (LFPR) (usual principal status) is 62.8 for all persons by LFQR Recent
Data.
• The Unemployment Rate (UR) for persons aged 15 years and above according to Usual
Principal Status (UPS) is 4.7 per cent in rural areas and 5.5 per cent in urban areas. The
total UR reported is 4.9 per cent.
• The Government is keen to address the issue of low female LFPR and WPR and has
launched various legislation based schemes and other programmes/schemes where the
emphasis is on female participation. For example, the Mahatma Gandhi National Rural
Employment Guarantee Act (MGNREGA), guaranteeing at least 100 days of employment
to every household in rural areas has been enacted with a stipulation of one-third
participation by women.
• Similarly, the National Rural Livelihoods Mission (NRLM), a restructured version of the
Swarnajayanti Gram Swarozgar Yojana (SGSY), has been in operation since 3 June
2011.
• According to the India Labour and Employment Report 2014 (prepared by the Institute
for Human Development (IHD), New Delhi), the low labour force participation in India is
largely because the female LFPR, which is amongst the lowest in the world and the
second lowest in South Asia after Pakistan.
• Self-Employment Programes:- The government provides training and financial
assistance to the people by which they can engage in viable economy activities, under
this program. Like NRLM - Ajeevika, PMEGP.
• In 1978, Integrated Rural development Program was launched and 1980 it was extended
to all district of India. In 1999 it mergers into Swarnajayanti gram Swa-rozgarYogja
(SGSY). In 2010 it was renamed as National Rural livelihood mission (NRLM) and 2011
it was NRLM-Ajeevika.
• NRLM-Ajevika:-Under this program 6 lakh villages are covered and total 10 crore people.
To bring at Least one member, (Women givenPreference) of all poor family into SHG
network.
• Deen Dayal Upadhya Gramin Kaushal Yojana in sub-scheme of NRLM-Ajevika. In
DDUGKY the youth of rural area are taken to skill development.
• Urban Programs:- In 1997 Swarna JayanteShahri Rozgar Yojana (SJSRY) launched. In
this Yojana The centre grants 75 percentage and state is 25 percentage. It was converted
into national Urban Livelihood Mission and in 2014 it was renamed as DeendyalUpadhya
Urban livelihood Mission (DDUULM).
JawaharLal Nehru National Urban Renewable Mission (JNNURM):
It was launched into 2005. The main focus to create Urban infrastructure (basic) for
poor people (slum). Rajiv Awas Yojana is sub-scheme of this program. It was renamed in
2014 as Atal Mission for Rejuvenation and Urban Transformation (AMRUT). In AURUT 500
cities will be covered with digitalization and wifizone for next 10 year period.
Skill Development Program:-
1. DeenDayalUpadhyayaGrameenKaushal Yojana (DDU-GKY)

Economy
DDU-GKY includes inclusive growth by skill developmentand productive capacity of the

rural youth from poor family.
2. Support to Training and Employment Program (STEP)
It is skill development program for women of above 16 year.
3. NaiManzil
It is skill development and education program for dropouts.
4. Upgrading the skill and training traditional ARTcraft for development (USTTAD)-Inthis
the minority people will be trained in their traditional Art.
5. Maulana Azad National Academy for skills (MANAS)- MANAS is an ambitious and over-
arching skill development architecture, aimed at providing an all India level training
framework to the minority people.

Economy
DEMOGRAPHIC DIVIDEND
According to United Nations Population Fund (UNPFA), demographic dividend is the
economic growth potential which arises out of a changing population age structure with a
large section of people in the working age group (15-64 years) as compared to the non-
working age population (below 14 years and above 65 years of age).
The economic productivity of a country increase when the proportion of people in the
workforce is large and growing as compared to the nonworkers. It is a dividend which results
from more people being productive and contributing to the economic growth. It increases the
savings and investments rate in the economy and reduces the proportion spent on
unproductive consumption.
How does demographic dividend arise?
Demographic dividend results from a transition or change in the population structure
with falling birth rate, lower fertility rate, and increased longevity. The first two conditions
will reduce the burden of expenditure to be made on a population below 14 years while the
last condition will increase the size of the working age population.
Demographic Dividend for India
As per the data from sample registration system of India (SRS), about 64.4 % of India's
population is in the age group of 15 to 59 years, in 2015. Urban areas account for 67.7 % of
the working-age population while rural areas account for 62.9 %. According to the data from
OECD, the median age of many countries of the world is rising, with 35 years for China, 40
years for OECD countries, and 47 years for Japan, while that of India is just 27.3 years.
The above data indicates that the population age structure of India provides it with a
huge economic growth potential with a lower dependency ratio (ratio of population in the
nonworking age to working-age people) and a large workforce. According to the Planning
Commission, the world economy is expected to witness a shortfall in skilled manpower to the
extent of around 56 million by 2020. At the same time, India keeps adding over 12 million
people to its working age population. Thus, India's demography has the potential to not only
accelerate domestic growth but also meet the skilled manpower requirements of other
countries as well.
Challenges for India in reaping the demographic dividend
The demographic dividend is a once-in-a-lifetime opportunity for any country in its
developmental process. India's demographic dividend is expected to peak by 2020s (2020 for
peninsular India, 2040 for hinterland India) after which the population starts ageing and the
dependency ratio starts rising. However, India faces huge challenges in reaping the dividend
such as:
Poor human capital formation reflected in low employability among India's graduates
and postgraduates. According to ASSOCHAM, only 7 % of MBA graduates have employable
skills in India, and only around 20-30 % of engineers find a job suited to their skills. Low
human development reflected in the human development report of UNDP. According to the
Human Development Index of 2016, India stood at 131 out of 188 countries. Life expectancy
at birth in India (68 years) is much lower than other developing countries (Sri Lanka - 75
years, China - 76 years). The mean years of schooling and the expected years of schooling
are still low at 6.3 years and 11.7 years respectively.

Economy
• Jobless Growth: India's high growth rate phase (2004-05 to 2010-11) has created
significantly fewer jobs as compared to previous decades of economic growth.
Unemployment rates in rural and urban India are at 4.59 % and 5.47 % in 2017, according
to a study by Bombay Stock Exchange. Around 47 % of India's population is still dependent
on agriculture which is notorious for underemployment and disguised unemployment.
Majority of the workforce is employed by the unorganized sector where workers are
underpaid and lack any kind of social security.
• Falling Femalelabour Force Participation: According to data from International Labour
Organization and World Bank, India's female labour force participation rates have fallen
from 34.8 % in 1990 to 27 % in 2013. This has further declined to 23.7 % in 2016, as per
the data from the Labour Ministry. Sociocultural factors and rising family incomes have
been identified as the main reasons for this decline
Apart from the above challenges, several others such as high levels of hunger,
malnutrition, stunting among children, high levels of anaemia among adolescent girls, poor
sanitation etc., reduce the productivity among India's youth.
Steps needed to utilize the potential demographic dividend
It is clear that there is nothing obvious about the benefits arising out of the population
age structure of India. Deliberate policy measures and their strict implementation is
necessary.
• India needs to increase its spending on health and education. As recommended by the
National Health Policy 2017 and the National Policy on Education 1986, India needs to
increase its spending on health and education to at least 2.5 % in 6 % of GDP respectively
from its current levels.
• India has to invest more in human capital formation at all levels, from primary education
to higher education, cutting-edge research and development as well as on vocational
training to increase the skill sets of its growing working-age population.
• The number of formal jobs have to be created, especially in labour intensive, export-
oriented sectors such as textiles, leather and footwear, gems and jewellery etc. These
sectors also have a higher share of the female workforce.
• The flagship schemes such as Skill India, Make in India, and Digital India has to be
implemented to achieve convergence between skill training and employment generation.
DIFFERENCE BETWEEN ECONOMIC GROWTH & DEVELOPMENT
Economic Growth
Economic Growth is the quantitative increase in the income of a country over a period of
time. It is generally measured as the change in the real GDP of a Nation or the per capita
income of a Nation over a period of time. Economic Growth in itself cannot lead to economic
development, however, economic development is not possible without economic growth.
Economic Development
Economic development has been defined as the improvement in the social, political, and
economic well-being of a nation and its people. It is also understood as a process through
which simple, low-income economies are transformed into sophisticated, modern industrial
economies. It is a qualitative phenomenon which focuses on improvement in the quality and
standard of living of the people.

Economy
Difference between Growth and Development

For a significant period of time in the study of economics, the focus of economists and
policymakers remained on the improvement in the quantitative aspects of expanding the
level of production as well as income of a country's economy. It was believed that once a
country is able to increase its production, its income will also increase and there will be an
automatic betterment in the lives of its people. Economic growth in itself was considered to
be a cause and effect for the betterment of the lives of the people.
From the 1960s, it was realized that there was no such automatic betterment in the
quality of people's lives in economies which witnessed relatively high economic growth. Thus,
the time had come to define economic development distinctly from economic growth.
Development was generally understood as an indicator of the quality of life in the economy,
which might be seen in accordance with the availability of many variables such as:
• level of education
• expansion and reach of healthcare facilities
• level of nutrition
• other such variables which determine the quality of life
An important aspect of the betterment of quality of life is that if the masses are to be
guaranteed with a basic minimum level of quality-enhancing inputs such as good food,
health, education etc., in their lives, a minimum level of income must be ensured for them.
This implies that before assuring development we need to assure growth. Thus higher economic
development requires higher economic growth.
But higher economic growth by itself cannot bring about economic development. For
instance, two countries at similar levels of national incomes and economic growth may spend
differently on developmental aspects such as health, education, human capital formation
etc. The country which tries to improve on these developmental aspects will attain higher
levels of economic development than the other
Thus, there can be diverse cases of growth and development such as:
• high growth but low development. E.g., emerging economies such as India.
• high growth and high development. E.g., China and other East Asian economies.
• low growth but high development. E.g., the developed countries of the West.
• low growth and low development. E.g., the least developed countries
The above combinations indicate that without a conscious public policy, development
cannot be attained. Similarly, without achieving higher levels of growth, development cannot
be possible. The first instance of growth without development was witnessed in the Gulf
countries. These countries, though they had far higher levels of growth and income, the
levels of development were not of comparable levels. A new branch of economics, known as
'development economics', had evolved to study and understand such inconsistencies between
economic growth and economic development which was aided by the arrival of multilateral
institutions such as the IMF and World Bank.
Thus, it can be said that economic development is quantitative as well as qualitative
progress in an economy. It implies that when the term economic growth is used it usually
refers to the quantitative progress whereas economic development is a broader concept.
There seems to be a circular relationship between growth and development. If economic
growth is suitably used for development, it comes back to accelerate growth and ultimately

Economy
greater and greater population is brought under the scope of development. Similarly, high
growth with low development and ill-cared developmental policy approaches will finally result
in a fall in the economic growth.
Post the occurrence of the 'Great Depression', the concept of a 'welfare state' has started
gaining prominence. Economic development thus became a matter of great concern for the
governments of the world, economists and policymakers alike.
The concept of Inclusive Growth
According to OECD, inclusive growth is economic growth that is distributed fairly across
the society and creates equal opportunity for all. An essential aspect of inclusive growth is
that the poor have adequate access to essential services such as healthcare, education, skill
development etc. The aim of inclusive growth is to ensure the empowerment of weaker sections
of society.
Inclusive growth aims to ensure that the growth is environment-friendly as the weaker
sections of the society are the main victims of environmental degradation. Good-governance
and a gender sensitive society are a prerequisite for the growth to be inclusive.
In India, the agenda for inclusive growth was envisaged by the Eleventh Plan which
aimed for a broad-based growth which can ensure an improvement in the quality of life of all
people, especially the weaker sections such as SCs, STs, OBCs, minorities, women, and
children. Bringing all the excluded sections onto the mainstream of the growth process is the
objective of India's economic growth. The same was articulated by the Twelfth Plan which
aimed for a faster, sustainable, and inclusive growth. Some of the major steps taken by
Indian state to achieve inclusive growth are the enactment of MGNREGA, NFSA, RTE, the
policy of reservations for SCs, STs, OBCs, initiatives like Ayushman Bharat, Sugamgya Bharat,
Swacch Bharat, Digital India, Skill India etc.
Inequality in India- Need for Inclusive Growth
Oxfam International s report titled An Economy of the 99 percent , released at World
Economic Forum 2017, brought to light the income inequality issue in India. According to
the report, India s richest 1% holds 58% of the country s wealth and that 57 billionaires in
India have the same wealth as that of bottom 70 percent of the population. The statistics
show the status of inequality in India.
Though inequality generally brings to our mind economic and income inequalities,
inequality also includes social, political and gender inequality. Inequality is felt with respect
to choice, opportunity, accessibility, and affordability. India ranks 131 on Human Development
Index which ranks countries based on life expectancy, education and per capita income
indicators. On the Global Gender Gap Index 2017, India ranks 108. Inequality is also felt in
the rural-urban scenarios.
REASONS FOR INEQUALITY IN INDIA
The following can be listed as the reasons for inequality in India.
1. Historical reasons: Discrimination against certain sections of the society since historic
times. This has affected their choice, opportunity, and accessibility to education,
employment and health. Though policies like Reservation have been implemented since
Independence, they were successful only in the economic and political sphere that too
to a limited section of people but failed largely in social upliftment.
2. Females were always treated to be subordinate and weaker to males. Girl education is
considered to be a burden on the family and women have limited choices in employment.
Economy
3. Large-scale informal employment: 80% of the Indian labour force is employed in the
informal sector. Informal sector jobs are more insecure without regular pay and social
security benefits. This increases the wage gap between formal and informal sectors.
4. A huge proportion of the population is still dependent on agriculture but the share of
agriculture to the total GDP is falling.
5. Inter-state inequalities: Growth has been different across sectors and regions. For
examples, Green Revolution has disproportionately benefitted Western and Southern
India when compared to Eastern India.
6. Studies show that globalization and opening up the economy has benefited the rich
more than the poor, thus raising the inequality. Global platforms like WTO have resulted
in increased trade competitiveness affecting the returns of local investors and producers.
7. According to the paper by famous Economist Thomas Piketty, tax progressivity which is
a tool to contain the rise in inequality was progressively reduced. Wage inequality
dispersion also increased in many sectors, as privatizations removed government-set
pay scales, which were less unequal.
8. Lack of skill development and jobless growth.
What is Inclusive Growth?
The Twelfth Five Year Plan of the erstwhile Planning Commission highlighted the
desirability towards inclusive growth. The Plan highlights the objectives of inclusive growth
as the following: Inclusive growth should result in lower incidence of poverty, broad-based
and significant improvement in health outcomes, universal access for children to school,
increased access to higher education and improved standards of education, including skill
development. It should also be reflected in better opportunities for both wage employment
and livelihood, and an improvement in the provision of basic amenities like water, electricity,
roads, sanitation, and housing. Particular attention needs to be paid to the needs of the SC/
ST and OBC population (Planning Commission 2011).
Need for Inclusive Growth in India
Inclusive growth as mentioned above is necessary for the sustainable and holistic
development of all sections of the society. For economic, social and political empowerment of
its citizens, Inclusive growth is indispensable to India.
The following highlight the need for India to focus more on inclusive growth:
• India is the 7th major country by area and 2nd by population. Yet, India is far away from
development while our neighbour China is advancing at a faster rate to become the
largest economy of the world.
• Poverty in India is at 22% according to the Tendulkar committee report.
• Low agriculture growth, low-quality employment growth, low human development, rural-
urban divides, gender and social inequalities, and regional disparities etc. are the problems
for the nation.
• Protests like the recent ones of Jats in Haryana, Patels in Gujarat will only rise if the
issues of agriculture productivity, employment growth are not taken care of.
• Labour productivity is very low due to informalisation and poor skill development.
• Access to education and health is not the same for all sections of the population. Females
are treated to be subordinate to males and are dependent on their families in all spheres.
Inclusive growth is hence the key to women empowerment.

Economy
• Regional inequalities are the cause for the rise in distress migration, either intra-state
or inter-state. Distress migration further creates problems of housing, accommodation,
safety, hygiene, and sanitation.
• Financial Inclusion is the key to transforming the informal economy into the formal
economy.
• Corruption is still rampant in the country and prevents inclusive growth.
• Political leadership plays a vital role in growth and development of the country. But
implementation of many schemes is poor due to lack of political will.
• The importance of inclusive growth is indisputable for sustainable growth.
• Global warming and climate change affect poor more than the rich. Displaced population
further increases distress migration and stress on state s resources.
• MDG report for India (2015) suggests that out of 18 indicators, India is on-track only in
four indicators. In the rest of the indicators, India is identified as either off-track or
moderately on-track . Achieving Sustainable Development Goals is not possible without
concentrating on inclusive growth.
Steps taken by the government for Inclusive Growth
The government has realized the importance of inclusive growth and has taken steps
accordingly. Some of the steps taken by the government are:
• Sarva Shiksha Abhiyaan
• Right to Education
• Midday meal scheme
• MNREGA
• Housing for All
• Pradhan Mantri Gram Sadak Yojana
• Pradhan Mantri Jan Dhan Yojana
• National Social Assistance Programme
• National Health Mission
• Rashtriya Swasthya Suraksha Yojana
• Pradhan Mantri Jeevan Jyothi Bhima Yojana
• Skill India, Make in India and Digital India
• Right to Information
• Other initiatives like Payment Banks, Small Finance Banks.
Conclusion
As understood from above, Inclusive growth is of vital importance to fight inequality in
all aspects and promote holistic development of individuals in the country. Digital technologies
like mobile phones, the internet can be harnessed for financial inclusion to address social-
economic challenges of the country.
Human Development Index And Happiness Index
The issue of measuring the level of economic development of nations was addressed to
a great extent when the United Nations Development Programme (UNDP) published the first
Human Development Report (HDR) in 1990. The report introduced the concept of Human
Development Index which was considered to be the first attempt to define and measure the

Economy
level of economic development of the nations. The report and the index were a product of a
select team of leading experts, development practitioners, scholars and the members of the
HDR office of the UNDP. The HDI was first developed by a team led by Mahbub ul Haq and
Inge Kaul. The report uses the concept of human development in place of economic
development.
UN HUMAN DEVELOPMENT INDEX 2019
The United Nations Development Programme released its latest human development
report on Monday. India further improved its rank to 129 among 189 countries. With the
HDI value of 0.647, India has made significant improvements in the basic dimensions of
human development - a long and healthy life, access to knowledge and a decent standard of
living. As per the report, the overall trend globally is also towards continued human
development improvements as several countries have moved up through the human
development categories. But at the same time, the report this year has analysed the rising
inequality worldwide. It says just as the gap in basic living standards is narrowing for millions
of people, the necessities to thrive have also evolved. Despite global progress in tackling
poverty, hunger and disease, a "new generation of inequalities" is opening up around
education, and around technology and climate change. And if left unchecked, this could
trigger a 'new great divergence' in society of the kind not seen since the Industrial Revolution.
Human Development Index (HDI):
1. The Human Development Index (HDI) is a statistic composite index of life expectancy,
education, and per capita income indicators, which are used to rank countries into four
tiers of human development.
2. A country scores a higher HDI when the lifespan is higher, the education level is higher,
and the gross national income GNI (PPP) per capita is higher.
3. It was developed by Pakistani economist Mahbub ul Haq and was further used to measure
a country's development by the United Nations Development Programme (UNDP)'s Human
Development Report Office.
4. The 2010 Human Development Report introduced an Inequality-adjusted Human
Development Index (IHDI). While the simple HDI remains useful, it stated that "the IHDI
is the actual level of human development (accounting for inequality)", and "the HDI can
be viewed as an index of 'potential' human development (or the maximum IHDI that
could be achieved if there were no inequality)".
5. The index does not take into account several factors, such as the net wealth per capita
or the relative quality of goods in a country. This situation tends to lower the ranking for
some of the most advanced countries, such as the G7 members and others.
Origin:
1. The origins of the HDI are found in the annual Human Development Reports produced
by the Human Development Report Office of the United Nations Development Programme
(UNDP).
2. These were devised and launched by Pakistani economist Mahbub ul Haq in 1990, and
had the explicit purpose "to shift the focus of development economics from national
income accounting to people-centered policies".
3. To produce the Human Development Reports, Mahbub ul Haq formed a group of
development economists including Paul Streeten, Frances Stewart, Gustav Ranis, Keith
Griffin, Sudhir Anand, and Meghnad Desai.
Economy
4. Nobel laureate Amartya Sen utilized Haq's work in his own work on human capabilities.
Haq believed that a simple composite measure of human development was needed to
convince the public, academics, and politicians that they can and should evaluate
development not only by economic advances but also improvements in human well-
being.
Dimensions:
The HDI combining three dimensions:
• A long and healthy life: Life expectancy at birth
• Education index: Mean years of schooling and Expected years of schooling
• A decent standard of living: GNI per capita (PPP US$)
Highlights -Human Development Index 2019:
1. India ranks 129 out of 189 countries on the 2019 Human Development Index (HDI)-up
one slot from the 130th position last year.
2. Norway, Switzerland, Ireland occupied the top three positions in that order. Germany is
placed fourth along with Hong Kong, and Australia secured the fifth rank on the global
ranking.
3. Among India's neighbours, Sri Lanka (71) and China (85) are higher up the rank scale
while Bhutan (134), Bangladesh (135), Myanmar (145), Nepal (147), Pakistan (152) and
Afghanistan (170) were ranked lower on the list.
4. As per the report, South Asia was the fastest growing region in human development
progress witnessing a 46% growth over 1990-2018, followed by East Asia and the Pacific
at 43%.
5. India's HDI value increased by 50% (from 0.431 to 0.647), which places it above the
average for other South Asian countries (0.642).
6. However, for inequality-adjusted HDI (IHDI), India's position drops by one position to
130, losing nearly half the progress (.647 to .477) made in the past 30 years. The IHDI
indicates percentage loss in HDI due to inequalities.
7. The report notes that group-based inequalities persist, especially affecting women and
girls and no place in the world has gender equality. In the Gender Inequality Index (GII),
India is at 122 out of 162 countries. Neighbours China (39), Sri Lanka (86), Bhutan (99),
Myanmar (106) were placed above India.
8. The report notes that the world is not on track to achieve gender equality by 2030 as per
the UN's Sustainable Development Goals. It forecasts that it may take 202 years to close
the gender gap in economic opportunity - one of the three indicators of the GII.
9. The report presents a new index indicating how prejudices and social beliefs obstruct
gender equality, which shows that only 14% of women and 10% of men worldwide have
no gender bias.
10. The report notes that this indicates a backlash to women's empowerment as these biases
have shown a growth especially in areas where more power is involved, including in
India.
11. The report also highlights that new forms of inequalities will manifest in future through
climate change and technological transformation which have the potential to deepen
existing social and economic fault lines.

Economy
Why the report is significant?

• The Human Development Report 2019 is significant because it focuses on inequalities
in development.
• It shows inequalities beyond income which exist in society.
• It also measures loss in the human development progress due to inequalities.
• The report also highlights the gender gaps in development.
Criticism:
The Human Development Index has been criticized on a number of grounds, including
• Alleged lack of consideration of technological development or contributions to the human
civilization,
• Focusing exclusively on national performance and ranking,
• Lack of attention to development from a global perspective,
• Measurement error of the underlying statistics, and on the UNDP's changes in formula
which can lead to severe misclassification in the categorisation of "low", "medium", "high"
or "very high" human development countries.
The concept of Happiness
Over the years, several developmental economists have realized that economic
development has not led to an increase in human happiness, both in the developed as well
as the developing world. All kinds of vices such as corruption, crime, burglaries, extortion,
homicide, rape, drug trafficking, flesh trade etc., were thriving even in the developed world.
This made them question the efforts made towards achieving economic development. A school
of thought began gaining prominence, which argued that there is a need to refine development
which could result in happiness for mankind.
Whenever economists talked about progress, they meant the overall happiness of human
beings. Terms such as growth, development, progress, well-being, welfare etc., were used as
synonyms of 'happiness'. However, happiness is a normative concept, a state of mind. Its
notions may vary from one nation to another.
Initially, development was understood as an increase in the supply or availability of
selected material resources which could improve human life. Some of these resources include
better levels of income, better health and nutrition. better levels of literacy and education
and so on.
Happiness, on the other hand, is a broader concept than development. While development
focuses only on material well-being, happiness includes non-material aspects of human life
as well. These include religion and ethics, spiritualism, cultural values etc.
The Kingdom of Bhutan showed the way to the world when it defined development in
terms of happiness and gave the concept of Gross National Happiness (GNH) in 1972 which
includes material as well as non-material aspects of human life. The parameters involved in
the calculation of GNH are,
• higher real per capita income
• good governance
• environmental protection
• cultural promotion

Economy
It emphasizes that ethical and spiritual values must be inculcated in human life without
which progress may become a curse rather than a blessing.
Happiness Index
The United Nations has released the World Happiness Report- 2019.
Key findings:
• The list is topped by Finland for the second year in a row.
• The US ranks at 19th place despite being one of the richest countries in the world.
• India figures at 140th place, seven spots down from last year.
• People in war-torn South Sudan are the most unhappy with their lives.
About World Happiness Report:
The World Happiness Report is a landmark survey of the state of global happiness that
ranks 156 countries by how happy their citizens perceive themselves to be.
• It is released by the Sustainable Development Solutions Network for the United Nations
by the UN General Assembly.
• It ranks the countries of the world on the basis of questions primarily from the Gallup
World Poll.
How is it measured?
It is based on a questionnaire which measures 14 areas within its core questions: (1)
business & economic, (2) citizen engagement, (3) communications & technology, (4) diversity
(social issues), (5) education & families, (6) emotions (well-being), (7) environment & energy,
(8) food & shelter, (9) government and politics, (10) law & order (safety), (11) health, (12)
religion and ethics, (13) transportation, and (14) work. The results are then correlated with
other factors, including GDP and social security.
Significance:
Happiness has come to be accepted as a goal of public policy. And this discourse has
given a fillip to a new narrative where the interconnections between law, governance and
happiness are being searched.
Experiences from several nations confirm that the countries with higher GDP and higher
per capita income are not necessarily the happiest countries and there exists a link between
the state of happiness and rule of law.

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UPSC & STATE PSC'S

BASIC CONCEPTS OF ECONOMICS

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THE CLASSIFICATION OF ECONOMIC SYSTEM

Sectors of the Economy

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• In the field of environmental economics, agricultural economists have contributed in

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CALCULATION OF NATIONAL INCOME

National Income Accounting (NIA)

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Types of GDP: Real GDP and Nominal GDP

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A. GROSS NATIONAL PRODUCT (GNP)

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capital belonging to residents) - and it doesn’t matter if it is produced domestically or

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• Production due to unwarranted/ illegal activities.

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NEW METHODOLOGY FOR CALCULATION OF GDP IN INDIA

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OTHER CONCEPTS ASSOCIATED WITH NATIONAL INCOME

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Gross National Happiness: ‘Happiness matters, not Money’

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• Proponents of the GPI see it as a better measure of the sustainability of an economy

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the reality of wealth distribution.

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100/- it will be called full bodied money or sometimes standard money.

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On the basis of rate of Inflation, it is categorized into four types

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4. Consumer Price Index for Rural Labourers/workers: (CPI RL):

C. Producer Price Indexes (PPI):

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OTHER RELEVANT TERMS RELATED TO INFLATION

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and industrial development, in particular.

• The Government of India constituted a High-Power Committee headed byMrs.

allowed to set up small finance banks.

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CLASSIFICATION OF BANKS IN INDIA

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– To separate the control of currency and credit from the government.

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There are three types of cooperative banks in India, namely

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