Economics > Adam smith is called the father of Modern Economics. > Ragnar Frisch divided economics into microeconomics and macroeconomics. Division of Economics Micro Economics > It is a branch of economics that studies the behavior of individuals and firms. > The concepts of wages, rent, interest and profit are studied under Microeconomics. Macroeconomics > It covers a wide range of Economics. It takes into consideration the investment, production consumption in an economy as a whole. > It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation. > It analyzes the income of a nation, its GDP, Inflation states and its controlling measures, monetary policy of the central bank etc. Type of Economic System Capitalism > Capitalism is an economic system based on private ownership.> In this type of system private firms are the key players, they actually focus on their profit and the quality of service provided by them is also better. > Capitalism is based on Laissez-faire economics, a theory that restricts government intervention in the economy. > Countries like the USA, Australia, Hong Kong, Singapore and Canada are Capitalist countries. Socialism > It is an economic system where the state owns the resources and utilizes it for public good. > A socialist economy is a system of production where goods and services are produced directly for use. > In this type of economy there is less or no competition as the state is the only entrepreneur. > China is the best example of a Socialist country. Mixed Economy > A mixed economic system is a system that combines aspects of both capitalism and socialism. > “John Manyhard Keynes” is called the father of mixed economy. > Amixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. > India, Indonesia, France etc are examples of mixed economies. > France was the 1st country to implement the concept of mixed economy.Sector of Economy Primary sector « The sector of the economy that includes agriculture and activities related to agriculture. Examples of the primary sector are agriculture, mining and quarrying, fisheries, forestry, woodworking etc. Secondary sector © The sector of the economy in which the main emphasis is on manufacturing and industrial activities. e In this, the products obtained from the primary sector are used as raw materials. e Industry, manufacturing, water supply, electricity supply, gas etc. come under the secondary sector. Tertiary sector The sector of the economy in which various types of services are produced is called ‘Tertiary Sector’. ¢ Tertiary sector provides its services to the primary and secondary sector. Medical, business, hotels, banking, insurance, real estate, public administration, transport, communication and storage come under the tertiary sector. Quaternary Sector Some economists have included a new category of economy which is an advanced form of the third category, called the ‘quaternary sector’ of the economy. e In this sector, services related to the field of knowledge are included.For example information technology, technical skills, management related skills, statisticians, software developers, research and researchers etc. Quinary Sector © The fifth sector of the economy deals with higher quality services. ¢ It consists of gold collar professionals who are experts in their field. For example: legal advisor, financial manager, scientist, researcher etc. Classification of Economy On the role of government Capitalist economy Socialist economy Mixed economy Depending on the stage of Developed economy development Developing economy Underdeveloped economy Agriculture based economy Industrial system Service economy Based on different regions On the basis of interrelationship with the rest of the world Open economy Closed economy Indian Economy Important ideas about the economy of India before independence ¢ First of all, Dadabhai Naoroji in his book ‘The Poverty and Un-British Rule in India’ drew people's attention to the outflow of Indian wealth.« Renowned economist Ramesh Chandra Dutt in his book ‘Economic History of India’ mentioned ‘Drain of wealth’. © In 1938, Subhash Chandra Bose formed the National Planning Committee, whose chairman was Pandit Jawaharlal Nehru. e In 1944, eight industrialists of the then Bombay, under the leadership of Sir Ardeshir Dalal, presented a 15-year plan, also known as the ‘Bombay Plan’. In 1945, MN Roy presented ‘People's Plan’ and in 1950, Jayaprakash Narayan presented 'Sarvodaya Yojana’. CHARACTERISTICS OF INDIAN ECONOMY (i) Mixed economy: India is a mixed economy country, in which the qualities of both capitalism and socialism are found. It is the principal feature of the Indian economy which differentiates it from other economies of the world. (ii) Federal economy: It implies that the Governmental economic activities and institutions operate at two levels- at central level and at state level. For eg. Railways, post, etc. come under the central. (iii) Underdeveloped or developing character: We have all features of an undeveloped economy such as low per capita income and widespread poverty; economic inequalities; unemployment; low level of technology, etc. (iv) Progressive character: A number of things suggest the progressive character of the Indian economy such as the development of basic industries (Iron and steel, fertilizers, etc.) improvement in education (National Education policy-2020), Health, etc. (v) Dual character: Indian economy encompasses the features of both types of economies- underdeveloped as well as progressive.National Income GDP (Gross Domestic Product) © The total monetary value of all final goods and services produced in an economic system during a given time period is called 'Gross Domestic Product’. e Itincludes all final goods and services—those are produced by the economic agents located in that country regardless of their ownership and that are not resold in any form. © For example a car manufactured in India by a German company will be included in India’s GDP whereas a car manufactured in Germany by Tata will not be included in India's GDP. Final goods and services are included in the calculation of GDP and intermediate products are not included during this. It is used throughout the world as the main measure of output and economic activity. Nominal GDP and Real GDP e In Nominal GDP, the value of goods and services is calculated on the basis of current year's price. ¢ The value of goods and services in Real GDP is calculated on the basis of base year prices. ¢ Real GDP is considered the best way to calculate the economy of a country. GNP (Gross National Product) ¢ Gross National Product (GNP) is referred to as the total value of all the goods and services produced by the residents and businesses of a country, irrespective of the location of production.¢ GNP = GDP + Factor income earned by the domestic factors of production employed in the rest of the world - Factor income earned by the factors of production of the rest of the world employed in the domestic economy Or GNP = GDP + Net factor income from abroad Apart of the capital gets consumed during the year due to wear and tear. This wear and tear is called depreciation. NNP (Net National Product) ¢ Net national product or NNP is the market value of all the finished goods and services that are produced by citizens of a nation, living domestically and internationally during a year. ¢ Net national product is also referred to as the value that is obtained by subtracting depreciation from the gross national product (GNP). e NNP =GNP - Depreciation NDP (Net Domestic Product) ¢ Net domestic product is obtained by deducting the amount of depreciation from gross domestic product. ¢ In other words, ‘Net Domestic Product’ is obtained after adjusting or deducting the total amount of wear and tear that occurs while producing goods and services. It is also commonly referred to as Net GDP. NDP = GDP - DepreciationPer capita income e Per capita income is a measure of the amount of money earned per person in a nation or geographic region. e Per capita income can be used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population. © Per capita income for a nation is calculated by dividing the country’s national income by its population. Personal Income and Disposable Income ¢ Personal income is the amount of money collectively received by the inhabitants of a country. ¢ Sources of personal income include money earned from employment, dividends and distributions paid by investments, rents derived from property ownership, and profit sharing from businesses. Personal income is generally subject to taxation. © Disposable Income: Personal Income - Taxes ie. money in hand to spend. Measurement of National income There are three methods to calculate National Income: 1. Income Method 2, Product/ Value Added Method 3. Expenditure Method INCOME METHOD In this National Income is measured as flow of income. We can calculate NI as:NET NATIONAL INCOME = Compensation of Employees Operating surplus mixed (w +R +P +I) + Net income + Net factor income from abroad. Where, W = Wages and salaries R = Rental Income P = Profit I= Mixed Income Product/ Value Added Method In this, National Income is measured as the flow of goods and services. We can calculate NI as: NATIONAL INCOME = G.N.P - COST OF CAPITAL - DEPRECIATION - INDIRECT TAXES Expenditure Method In this National Income is measured as flow of expenditure. We can calculate NI through Expenditure method as: Y=C+1+G+(X-M), where Y = GDP at Market Price, C = Private Sector’s Expenditure on final consumer goods, G = Govt’s expenditure on final consumer goods,I= Investment or Capital Formation, X = Exports, I= Imports, X-M = Net Exports Economic planning in india Historical Background » Joseph Stalin, president of the then USSR, implemented the first Five-Year Plan in the late 1920s. India too followed the Socialist path. > Socialism is an economic system where the state owns the resources and utilizes it for public good. > 1938 :- The Indian National Congress set up a “National Planning Committee” under the chairmanship of Jawaharlal Nehru. However its recommendation was not implemented due to the beginning of the 2nd world war. > 1944 :- Eight leading industrialists of Bombay presented the “Bombay plan”. 1944 :- Shriman Narayan Agarwal gave “Gandhian Plan”. 1945 :-MN Roy gave the “People’s plan”. 1950 :- JP Narayan gave the Sarvodaya Plan”. 15th March 1950 :- The Planning Commission was established with PM Jawaharlal Nehru as Chairman > 1st Jan, 2014 :- PM Narendra Modi replaced the Planning commission with NITI Aayog. vouve Planning Commission It was a non-constitutional and non-statutory body.e It was established on 15 March,1950. Responsible for formulating India’s five years plans for social and economic development in India. © Prime minister of India is the Ex-officio chairman of the planning commission. National Development Council > It is an extra-constitutional body responsible for building co-operation between the planning commission and states of India. > All plans proposed by the Planning commission have to be approved by it. > It was established on 6th August, 1952. > Prime Minister of India is ex-officio chairman of NDC. > Since the inception of NITI Aayog, NDC has had no work assignment but it is not published till now. NITI Aayog > Established- January 1, 2015 > President- Prime Minister > Vice President- Suman Berry > CEO - Parameswaran Iyer > Full name of NITI - National Institute for Transforming India > It acts as an advisory body or "think tank” to the Government of India. > Arvind Panagariya was the first Deputy Chairman of NITI Aayog.Five-year plans The form of economic planning in India was based on a decentralized and mixed economy, in which qualities of both socialist and capitalist are found. The main objective of economic planning in India was to achieve economic prosperity and self-sufficiency and to eradicate poverty and achieve full employment. The first idea related to planning in India was presented by M. Visvesvaraya. For this, he presented a ten-year plan. 1944 :- Eight leading industrialists of Bombay presented the “Bombay plan”. 1944 :- Shriman Narayan Agarwal gave “Gandhian Plan”. 1945 :-MN Roy gave the “People’s plan”. 1950 :- JP Narayan gave the Sarvodaya Plan”. 15th March 1950 :- The Planning Commission was established with PM Jawaharlal Nehru as Chairman. Economic planning is a subject of the concurrent list. Therefore, both the Center and the State have the right to make laws on this. Five Year Plan Key Objectives Plan Duration First 1951-1956 Focuses on Agriculture and community Development Second 1956- 1961 focused on Rapid Industrialisation Third 1961-1966 Spread of basic industries Fourth 1969-1974 _| Attainment of self-reliance and development with stability Fifth 1974-1978 Removal of poverty (Garibi Hatao)and Attainment of self-reliance. Sixth 1980-1985 Seventh 1985-1990 _| Achieve self-reliance Eighth 1992-1997 Ninth 1997-2002 Self-reliance, quality of life, generation of productive employment, and regional balance. Tenth 2002-2007 | Primarily focused on achieving a GDP growth rate of 8 per cent. Eleventh 2007-2012 | faster and more inclusive growth Twelfth 2012-2017 Faster, more inclusive and sustainable growth First five year e The first five year plan was based on the 'Harrod-Domar model’. plan. Agriculture sector was given prominence during this five year e To make this scheme successful, a community development program was started on October 2, 1952, whose objective was to develop agriculture, animal husbandry and village industry in the village. Second five year e The second five year plan was based on the 'Mahalanobis model’. The objective of this plan was to establish a socialist society. © The process of industrialization was started in this five year plan.During this period three iron and steel plants were established in the country. ¢ During this plan in collaboration with the Soviet Union in Bhilai, Chhattisgarh; A steel plant was established in Durgapur in West Bengal with the help of Britain and in Rourkela in Odisha with the help of Germany. Third Plan © This five year plan is also known as the 'Gadgil Plan’. e In the history of the Five Year Plan, the Third Plan is considered to be the most unsuccessful plan of India. e During this, the agricultural policy was adopted by the government which gave birth to the Green Revolution. e During this five year plan India had to face two wars: Indo-China war (1962) and Indo-Pak war (1965). Fourth Five Year Plan * Its objective was to control high priority inflation and bring stability to the economic situation. * Bangladeshi refugees coming to India and bad monsoon were the main reasons for the failure of the fourth five year plan. * During this five year plan, 14 commercial banks were nationalized in July 1969. Fifth Five Year Plan The approach paper of the Fifth Five Year Plan was prepared by Arthashastra DP Dhar. e The Minimum Needs Program was started during this plan. The slogan of Garibi Hatao was given during this five year plan. e During this plan, ‘Food for work’ scheme and ‘Antyodaya scheme’ were started.© This five-year plan was abolished in 1978 by the Janata Party government within 4 years. Seventh Five Year Plan e The Seventh Five Year Plan was drafted by Ramakrishna Hegde. e The Jawahar Rozgar Yojana was started during this five year plan. 'Self-reliance’ was the main objective of this five year plan. During this plan, for the first time, emphasis was laid on ecology and environmental protection. Eighth Five Year Plan e The Eighth Five Year Plan was drafted under the direction of Pranab Mukherjee. The rate of economic prosperity of this five-year plan was more than its target. Ninth Five Year Plan @ The objective of the Ninth Five Year Plan was development with just distribution and equality. ¢ Four essential dimensions of the plan were self-reliance, quality of life, generation of productive employment, and regional balance. Tenth Plan (2002-2007) ‘™ Primarily focused on achieving GDP growth rate of 8 per cent and to reduce the poverty ratio by 5 per cent by 2007. The Plan laid emphasis on the provision of gainful high quality employment to the labour force, and universal access to primary education by 2007. ‘™It also aimed at increasing literacy rate to 72 percent within the plan, and to increase it to 80 per cent by 2012; and to reducedecadal rate of population growth between 2001 and 2011 to 16.2 per cent. The Plan had the objective of reducing gender gap in wage rate and literacy rate by 50 per cent by 2007, and increasing literacy rate to 72 per cent within the plan period and to 80 per cent by 2012 ™» Other objectives of the plan included increasing the forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012, and cleaning of all major polluted rivers by 2007 and other notified stretches by 2012. Eleventh Plan (2007-2012) ‘™ The Plan laid emphasis on increasing GDP growth from 8 per cent to 10 per cent, and increasing agricultural GDP growth rate to 4 per cent per year. ‘™ The objective of the Plan was reducing educated unemployment to less than 5 per cent, and to create 70 million new work opportunities. “™ Other objectives of the plan were increasing real wage rate of unskilled workers by 20 per cent, reducing the total fertility rate to 2.1, and raise the sex ratio for age group 0-6 to 935 by 2011-12 and to 950 by 2016-2017. “= It also aimed at lowering gender gap in literacy to 10 percentage point and increasing the percentage of each cohort going to higher education from the present 10 per cent to 15 per cent. “™» The Plan also aimed at attaining WHO standards of air quality in all major cities by 2011-2012, and provision of clean drinking water for all by 2009. Twelfth Plan (2012-2017) e The Twelfth Five Year Plan (2012-17), as per the draft document released by the Planning Commission, aims at a growth rate of 8 per cent, which is the revised rate when compared to theinitial approach paper. Other objectives of the Plan are listed as follows. Its focuses on growth- growth which is + Faster + Inclusive + Sustainable Inflation > Inflation refers to the condition of the economy in which there is a continuous increase in the prices of goods and services, and in this situation the value of money decreases because consumers have to pay more to buy goods in the market. > Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. >This could ultimately lead to a deceleration in economic growth. > However, a moderate level of inflation is required in the economy to ensure that production is promoted. >The reason for price rise can be classified under two main categories: (1) Increase in demand (2) Reduced supply Types of Inflation Demand-pull Inflation ¢ When the demand for goods and services in an economy is more than the supply, then such an economy is said to have demand-pull inflation.© This type of inflation increases due to increase in population, urbanization, increase in employment, increase in government expenditure and increase in income of citizens, because increase in all these factors leads to increase in demand. * Due to the increase in employment, the means of income are created with the people, which increases the demand. Similarly, urbanization and population growth also induce an increase in demand. e Due to an increase in government expenditure, people get more money, which increases the demand for goods and services. Cost-Push Inflation e When there is an increase in the cost of a commodity in the process of production, then the inflation generated due to this is called cost-push inflation. e This type of inflation arises due to increase in indirect taxes, higher taxes on intermediate goods used in production of goods and increase in prices of structural industries (cement, coal, steel and electricity). e For example, if there is an increase in international crude oil prices, it has an adverse effect on the Indian economy because India is dependent on foreign countries for more than 80% of its energy needs and also for transportation of goods. As oil is required. ¢ Followings are the possible causes for Cost Push Inflation: e Increase in price of inputs i.e. increase in wages, price of raw materials etc. Hoarding of commodities Defective Supply chain ¢ Increase in indirect taxesCrude oil price fluctuation Low growth of Agricultural sector © Interest rates increased by RBI Stagflation © Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (ie. inflation). © Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP). Hyperinflation e Hyperinflation is a situation when inflation rises at an extremely fast rate. The rate of inflation can increase from 50 times to 300 times. e The effects of hyperinflation can be devastating for the economy. e The major causes of the hyperinflation are; the government issuing too much currency to finance its deficits; wars and political instabilities and unexpected increase in people’s anticipation of future inflation. Structural Inflation © Structuralist Inflation is another form of Inflation mostly prevalent in the Developing and Low-Income Countries. @ This inflation is prevalent in the developing countries mainly due to the weak structure of their economies. e As a result of imperfections, some sectors of the economy like agriculture will witness shortages of supply, whereas some sectors like consumer goods will witness excessive demand.Such economies face the problem of both shortages of supply, under utilization of resources as well as excessive demand in some sectors. Deflation « When there is a decrease in the demand for goods due to excess supply in the market, then the price also falls rapidly; Due to which the purchasing power of money increases, this situation is called currency contraction or currency deflation. © This is the opposite of inflation, in which the rate of inflation is negative or below zero. The deflation of currency has a positive effect on the consumer while the borrower suffers a loss. This benefits both the lender and the fixed income investor. Disinflation © Deflation is the process of controlling inflation, under which an attempt is made to bring the price back to normal by gradually reducing it. Currency deflation is a part of the monetary and fiscal measures of the government © Although it is not as harmful to the economy as deflation. Reflation ¢ This is such a system of inflation in which an attempt is made to bring the price to normal level by gradually increasing it. In fact it is a process to control deflation. To control inflation, the money supply in the economy is increased by reducing the interest rate, cutting taxes.Many times the process of inflation is encouraged by the concerned government to solve the problem of unemployment and also to increase the demand for goods and services. Skewflation e When the price increase is for only a few products instead of all the products, it is called squelch inflation. ¢ In other words, when the situation of inflation and deflation of money exist together in the economy, that situation is called 'squaflation’. ¢ Insuch a situation, the rate of inflation remains high in some areas and the situation of currency contraction is seen in some areas. Creeping Inflation e The condition of the economy in which the rate of inflation is 3% or less is called creeping inflation. © This type of inflation is commonly seen in developed countries (USA). This type of inflation is considered good for the economy. Headline inflation © Headline inflation is also called ‘overall inflation’. It is issued on the basis of the Consumer Price index. This index covers all consumer goods, including food and fuel. Core inflation « Core inflation measures changes in the cost of goods and services, although it excludes the food and energy sectors, as their prices are more volatile© Core inflation is important because it is used to determine the effect of rising prices on consumer income. The concept of core inflation was given by Exten in 1981. Phillips curve ¢ The Phillips curve is a curve showing the relationship between the rates of unemployment and inflation in an economy. e According to this, there is an inverse relationship between the rates of unemployment and inflation. e This curve shows that when inflation is low, unemployment increases and when inflation increases, unemployment decreases. How to combat inflation: “ The Central Bank (in India RBI) follows a strict monetary policy i.e. loans became expensive — decrease in money supply. “ Tax deduction & subsidy to producers in order to decrease cost of production. * Curtailing schemes & subsidies that increase money in the hands of people * Increase contribution to provident funds etc. + so people have less in hand to spend. Effect of Inflation consumer Loss lender Loss indebted profit pensioner Loss fixed income group _ | Lossconsumer Loss lender Loss indebted profit Import Growth export Shortage Measurement of Inflation Wholesale Price Index (WPI) and Consumer Price Index (CPI) are two widely used indices to calculate inflation in the country. e The Wholesale Price Index is used to calculate inflation in India. Wholesale price index: e The change in the wholesale price of commodities[only Goods] is shown in the wholesale price index. © The Wholesale Price Index data is released by the "Office of the Economic Adviser" of the Ministry of Commerce and Industry. e At present, the base year of Wholesale Price Index has been changed to 2011-12, which was recommended by the working group of Dr. Soumitra Chowdhary constituted in March, 2012. Calculation of Wholesale Price Index in Revised Series: Commodities No. Of Products Weightage Primary Product 117 22.62 Fuel and Energy 16 13.15Manufactured Product 564 64.24 © Currently 697 items are included in the wholesale price index. Consumer Price Index: e The consumer price index is an index measuring the average price of goods and services purchased by domestic consumers. © This index covers economic activities related to education, communication, transportation, entertainment, clothing, food & beverages, housing and medical expenses. ¢ The Consumer Price Index (Rural, Urban and Combined) is published by the Central Statistics Office (Ministry of Statistics and Program Implementation). The base year of CPI is 2012. GDP deflator e Apart from the Wholesale Price Index and Consumer Price Index, inflation is also calculated by the GDP deflator. e The GDP deflator measures the difference between real GDP and nominal GDP, and nominal GDP includes inflation, so it also measures inflation. © The problem with the CPI is that it is limited to a few baskets of goods, but the GDP deflator covers the entire economy. © The GDP deflator is only available with GDP estimates on a quarterly basis, while CPI and WPI data are released monthly. Banking History © 1770 :- Bank of Hindustan was established.1786 : “General Bank of India” was established. 1809 : Bank of Bengal by East India Company. 1840 : Bank of Bombay by East India Company. 1843 : Bank of Madras by East India Company. : These three banks were known as the Presidency Bank. © 1865 : Allahabad bank was established. : Oldest existing Public Sector Bank. © 1894: Punjab National Bank was established. : It was the first Indian bank to have been started solely with Indian capital investments. o 1935: RBI was established. o 1955 : Imperial Bank was converted as state Bank of India (SBI) 0000 Classification of Banks Scheduled Commercial Bank > > To simplify, the scheduled commercial banks are those banks which carry out the normal business of banking such as accepting deposits, giving out loans and other banking services. All these banks have been included in the 2nd schedule of RBI Act 1934. Time to time some banks are included and some are removed. For example, six banks were removed from the 2nd schedule because of merger with other banks. They are. namely, Syndicate Bank, Oriental Bank of Commerce, United Bank of India, Andhra Bank, Corporation Bank, and Allahabad Bank :- Banks which have been incorporated in the 2nd schedule of RBI Act 1934. :- These banks classified into Private Banks / fasit dar Eg.- ICICI Bank, Axis Bank, Kotak Mahindra Bank etc. Public Banks (PSBs) / Udatfern ta (dread) Eg.: SBI, PNB, etc. Foreign Bank Eg.: HSBC, Citi Bank, Deutsche Bank, Bank Bahrain & Kuwait . Regional Rural Bank / are areirer den > The Indian Government set up RRB on 2nd October 1975. > These banks grant credit to the weaker section of rural areas mainly small and marginal farmers, small entrepreneurs, agriculture labourers. > These banks are sponsored by the central government, state governments and a sponsor central bank collectively. Central government holds 50% share State governments holds 15% share Sponsor Bank holds 35% share Non - Scheduled Commercial Bank / Cooperative Banks i It includes [A] Urban cooperative bank [B] Rural Cooperative Bank. =» What is Cooperative societies? :- It is an autonomous association of people bound together to fulfill common social, cultural and economical needs. :- It is said that the system of cooperation is as old as human society. :- These groups are sub-divided into two sub-groups.[a] Agricultural societies. :- Mostly found in rural areas. [b] Non-Agricultural societies :- Mostly found in urban Areas :+ Societies based on cottage industry are also found in rural areas. :- In order to support these societies, the Indian government announced a policy in 2002. The major objective of this policy were Provision of financial and infrastructural support Reduction in regional imbalance Strengthening of training human resource development and cooperation education. Nationalization of banks > After independence, all the major banks of India were under private ownership which was a cause of concern as the people belonging to rural areas were still dependent on unauthorized money lenders for financial assistance which led to their exploitation even after independence. > In Order to get rid of the problem of non-availability of credit for poor rural sections from the organized sector, the banks were nationalized under the Banking Regulation Act, 1949. > Also the Reserve Bank of India was nationalized in 1949. > After the formation of the State Bank of India in 1955, several banks were nationalized in the time period 1969-1991. > 14 Banks nationalized in 1969 > In 1980, another 6 banks were nationalized A point to be noted in respect of SBI> In 1955, the Government of India and Reserve Bank of India jointly established the State Bank Of India i.e. they both have joint ownership of SBI. > In 2007, Reserve Bank’s share of SBI was transferred to the government of India. > SBI is governed by a board of directors headed by a chairman. The chairman and managing directors of the bank are appointed by the government. > It is evident that the SBI works under the Government of India, but it is also a fact that SBI is not called a nationalized bank. RBI e The Reserve Bank of India is the apex bank of India which regulates and controls all the monetary policies of India. Hence, it is called the “Monetary Authority of India”. © RBI was established in April, 1935. e The affairs of RBI are governed by a central board of directors, which are fourteen in number, including the governor and four deputy governors. Functions of RBI > Monetary Management Authority > Regulation and Supervision of the Banking and Non-Banking Financial Institutions. > Regulation of Foreign Exchange Market, Government Securities Market and Money Market. > Management of Foreign Exchange Reserves. > Current Account and Capital Account Management. > Banker to Central and State governments > Debt Manager of Central and State Governments > Banker to Banks> Issuer of Currency > Oversight of Payment and Settlement Systems © The Security Printing and Minting Corporation of India Limited (SPMCIL) Printing Press :- Nasik (Maharashtra) Dewas (Madhya Pradesh) :- Noida Mumbai + Kolkata :- Hyderabad Mint Money Supply © The meaning of money supply is related to the total amount of currency, which is kept by people in various forms in the economy. e The main elements of the money supply are the currency kept by people and the demand deposits made by commercial banks. In India, the demand for money supply is generally measured as M1, M2, M3, M4. ¢ Among all the concepts of money supply, M1 and M2 is the narrowest and most important measure of money supply. © M3 and M4 is a broad measure of money supply. © M1 is the most liquid and M4 is the least liquid.” Measure Description Liquidity M1 Currency with the public + Demand deposits with the banking system + Highest Other deposits with the RBIM2 M1+ Post office savings deposits Intermediate M1+ Time Deposit with the Banking Lower than M1 M3 System and M2 Ma M3+ All deposits with the post office | vac (except National Savings Certificates) Types Of Deposit Type of Deposit Description e A basic account used for daily transactions. Savings Money deposited in a savings bank account earns Bank interest. Deposits These accounts typically come with withdrawal restrictions but offer easy accessibility. © A type of fixed deposit where the interest earned is . reinvested back into the deposit instead of being Reinvestme ah nt Deposits regularly paid out. ott © The interest is compounded quarterly and is paid along with the principal amount at the time of maturity. © A financial instrument provided by banks that offers a Fixed higher rate of interest than a regular savings account. Deposits The money is deposited for a fixed period, and withdrawal before maturity can result in penalties. © A type of term deposit offered by banks in which a ; fixed amount is deposited at regular intervals ona Recurring " ., monthly basis. Deposits @ This is suitable for individuals who have a regular income and can make consistent deposits each month.Types Of money Type of Money Description Acurrency whose acceptance or not as a form of Credit payment depends entirely on the will of the payee. Money For example hundi, promissory note, bill of exchange etc. @ This is the type of money that we're most familiar with today. e Ithas no intrinsic value; its value comes from the Fiat Money government declaring it as legal tender, meaning it must be accepted as a form of payment within a country. © currency notes and coins. a © A type of commodity money that specifically letallic " 7 refers to coins made from precious metals like gold Money * and silver. Reserve © Currency in circulation + Bank deposits with RBI + Money (MO) Other deposits with RBI Token Money Important Committee Committee * Money whose face value is greater than its cost of production, like most modern coins. Formed Headed By Purpose Kelkar Committee (on Recommend tax Tax Reforms) Kelkar Committee (on Fiscal Consolidation) 2002 Vijay Kelkar reforms Outline a roadmap for 2012 Vijay Kelkar Fiscal consolidationNarasimham M. Recommend financial Committee I 1991 Narasimham — system reforms Narasimham a M. Recommend banking Committee II Narasimham _ sector reforms Tendulkar Committee 2005 — Suresh Rewien: methodaleay. Tendulkar for poverty estimation Monetary policy > Monetary policy refers to the credit/money control measures adopted by the central bank of a country. > In the case of the Indian economy, the RBI is the sole monetary authority which decides the supply of money in the economy. Objective of Monetary Policy e The main objective of monetary policy is to maintain price stability while keeping in mind the objective of growth as price stability is a necessary precondition for sustainable economic growth. In India, the RBI plays an important role in controlling inflation through the consultation process regarding inflation targeting. The current inflation-targeting framework in India is flexible. The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016, to provide for a statutory and institutionalized framework for a Monetary Policy Committee, for maintaining price stability, while keeping in mind the objective of growth. The Monetary Policy Committee is entrusted with the task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target level.The Government of India, in consultation with RBI, notified the “Inflation Target’ in the Gazette of India dated 5 August 2016 for the period beginning from the date of publication of the notification and ending on March 31, 2021, as 4%. e At the same time, lower and upper tolerance levels were notified to be 2% and 6% respectively. Monetary policy committee © Established in the year 2016, under section 45ZB of the RBI Act, 1934, e Itis a six member body which has to hold at least 4 meetings ina year. Three of these members are from RBI and the other three members are appointed by the Central Government. It is headed by the RBI Governor. The central government set up this committee to determine the policy interest rate needed to achieve the inflation target. The instruments of monetary policy are of two types: 1. Quantitative, general or indirect (CRR, SLR, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate) 2. Qualitative, selective or direct (change in the margin money, direct action, moral suasion) Let’s have discuss of these instruments : Repo Rate @ The repo rate is the interest rate at which a country's central bank loans money to commercial banks. The Reserve Bank of India (India's central bank) employs repo rates to control liquidity in the economy.@ The Repo rate is connected to the repurchase option’ or repurchase agreement’ in banking. The Reserve Bank of India (RBI) increased the repo rate by 35 basis points to 6.25% on December 7, 2022, for the fifth consecutive time. Reverse Repo Rate Reverse Repo Rate is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term. It is an important monetary policy tool employed by the RBI to maintain liquidity and check inflation in the economy. @ The Reverse Repo Rate helps the RBI get money from the banks when it needs. ¢ Inreturn, the RBI offers attractive interest rates to them. The Reverse Repo Rate is decided by the Monetary Policy Committee (MPC), headed by the RBI Governor. Marginal Standing facility © The rate at which scheduled commercial banks decide to exchange their SLR with RBI to meet their very short term liquidity requirement is called Marginal Standing Facility. ¢ The RBI first mentioned the MSF in the annual monetary policy review in the financial year 2011-12. It was fully implemented on 9 May 2011. ¢ In this, all scheduled commercial banks can take loans up to 1% of their total deposits for one night.Difference Between RR, RRR and MSF Repo Rate Reverse Repo Rate Marginal Standing Facility Repo Rate is the rate at which the Central Bank grants loans to the commercial banks against government securities. Reverse Repo Rate is the rate offered by the RBI fo the banks that deposit funds with it. Marginal Standing Facility (MSF) is a special window for commercial banks to borrow from the RBI against approved government securities. Rate of interest in case of Repo rate is higher than the Reverse Repo Rate The Reverse Repo rate has always a lower interest rate than the repo rate The interest rate of MSF is higher than the Repo Rate. Repo rate controls the inflation in the economy Reverse Repo Rate controls the money supply in the economy MSF controls the mismatch in short-term asset liability more effectively The purpose of Repo Rate is to fulfill the deficiency of funds. The purpose of the reverse repo rate is to maintain liquidity in the economy. MSF controls a severe shortage of liquidity. Bank Rate Policy: > The rate at which RBI provides long term loans to commercial banks is called bank rate. > Also known as the discount rate, bank rates are interest charged by the RBI for providing funds and loans to the banking system. > An increase in bank rate increases the cost of borrowing by commercial banks which results in the reduction incredit volume to the banks and hence the supply of money declines. > An increase in the bank rate is the symbol of the tightening of the RBI monetary policy. Open Market Operations: > An open market operation is an instrument which involves buying/selling of securities like government bonds from or to the public and banks. > The RBI sells government securities to control the flow of credit and buys government securities to increase credit flow, Cash Reserve Ratio (CRR): > Cash Reserve Ratio is a specified amount of bank deposits which banks are required to keep with the RBI in the form of reserves or balances. > The higher the CRR with the RBI, the lower will be the liquidity in the system and vice versa. Statutory Liquidity Ratio (SLR): > All financial institutions have to maintain a certain quantity of liquid assets with themselves at any point in time of their total time and demand liabilities. This is known as the Statutory Liquidity Ratio. > The assets are kept in non-cash forms such as precious metals, bonds, etc.Credit Ceiling: > With this instrument, RBI issues prior information or direction that loans to the commercial bank will be given up to a certain limit. > In this case, a commercial bank will be tight in advancing loans to the public. > They will allocate loans to limited sectors. > A few examples of credit ceiling are agriculture sector advances and priority sector lending. Moral Suasion: Under this method RBI urges commercial banks to help in controlling the supply of money in the economy. Demonetisation © The act of stripping a currency unit of its status as a legal tender. e Demonetisation is necessary whenever there is a change of national currency. e The old unit of currency must be retired and replaced with a new currency unit. e Such a step is especially taken to curb the menace of counterfeiting, black money and money laundering. e A recent example is demonetisation of 500 and 1000 denomination currency units in India. ¢ Another example of demonetisation is when the European Monetary Union nations decide to adopt Euro as their currency. Demonetisation in India ¢ For the first time in January 1946, ‘1,000’ and '10,000° banknotes were demonetised.e These two denominations were reintroduced in 1954 along with currency notes of ‘5,000’. e But all these three denominations were again demonetised in January 1978 by the Morarji Desai government. The RBI more recently in 2014 had demonetised all banknotes printed before 2005. On8 November 2016, the Prime Minister announced that Rs.500 and Rs.1000 denomination notes will become invalid. India post payments Bank > To connect the poor with the banking system, ‘India Post Payments Bank’ was started on 1 September 2018. > This bank will be formed as a public company under the Department of Posts. > The government of India will have 100 percent stake in this bank. > Through this payment bank, except loan and credit card, all banking related work like; You can deposit money in the bank, send money, receive money sent by someone else and you can also send money to a relative. NBFC ¢ Full Name- Non Banking Financial Company © There are financial institutions in India which are not banks but which accept deposits and provide credit facilities like banks are called Non-Banking Financial Companies (NBFCs). e A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956. e It acquires shares/stocks/bonds/debentures/securities issued by the government or local authority.These companies do investment business, insurance business, chit fund, nidhi, merchant banking, stock broking, alternative investment etc. « NBFCs cannot issue cheques, so they are not part of the payment and settlement system. ¢ NBFCs are regulated by SEBI. Taxation Structure in India The taxation system in India comprises a three-fold federal structure (it refers to relations between the Centre and the States of the Union of India), which includes the following. 1. The Union Government 2. The State Government 3. The Local Bodies “ Taxes that are levied by the Indian Government: - Income Tax, Central Excise Duty (tax imposed on goods for their production, licensing and sale like alcohol), Customs Duty, Sales Tax and Service Tax. % Taxes that are levied by the State Government: - Entertainment Duty(on films), Land Revenue, Profession Tax, Sales Tax, Stamp Duty and Excise Tax. Taxes that are levied by the local bodies: - Consumption Tax (tax levied on consumption spending on goods and services), Octroi Tax (Tax by Local bodies on certain categories of goods on entry in state) and Property Tax.Types of taxation based on determination of rate of tax: Progressive e When the rate of tax increases along with the increase in income, then such taxation is called ‘progressive taxation’. © Itis considered the best way of redistributing income in a country. Under this taxation, rich people pay more tax and poor or low income people pay less. Proportional © When no matter how much the income increases but there is no change in the rate of tax, it is called ‘proportional taxation’. Regressive © When the rate of tax is reduced with increase in income, it is called ‘regressive taxation’. © This type of taxation system is imposed equally on all income groups, that is why the regressive tax system is also called ‘indirect tax system’. Degressive When the tax rate increases with the increase in income up to a certain limit, but becomes constant after that limit, it is called ‘regressive taxation’. Laffer curve « It was propounded by the economist Arthur Laffer. ¢ This curve shows the negative relationship between tax rate and tax revenue.© According to this curve, if the tax rate is increased after a point, then the tax revenue starts decreasing, on the contrary, if the tax rate is decreased, then the tax revenue increases. Revenue Maximising ee The Laffer Curve Region of Increasing // Revenue j 3 Region of 5 Deeting 5 \ Revenue 5 \ A @isrom \ 7 axliizing) \ Paint \ j \ \ \ Tax Rate 100% Taxes in India are divided into two categories- a) Direct taxes b) Indirect taxes Direct tax Indirect tax Income tax GST Corporate tax Custom Duty Wealth Tax Excise Duty Capital Gains tax Central sales tax Securities transaction taxIn India, direct taxes are- e Incase of direct taxes (income tax, wealth tax, corporation tax etc.), the burden falls directly on the taxpayer. e These are the taxes which cannot be shifted by the taxpayers to others. © Corporate Tax, Capital Gains Tax, Fringe Benefit Tax (tax that companies paid in lieu of benefits they offered their employees), Securities Transaction Tax, Personal Income Tax are the example of direct tax. Income Tax * To fill the treasury, the first Income-tax Act was introduced in February 1860 by Sir James Wilson (British India’s first finance minister). He is known as father of Income Tax in India. Father of Tax Reforms of India is known as Raja Chelliah. * Income tax is levied on the income of individuals, Hindu undivided families, unregistered firms and other associations of people. * In India, the nature of income tax is progressive. * For taxation purposes income from all sources is added and taxed as per the income tax slabs of the individual. Current income-tax law is governed by the 1961 act, which has 298 sections and four schedules. © Political parties in India are eligible for 100% tax exemption on all income sources as per Section 13A of the Income Tax Act.Agricultural income is not taxable under Section 10 (1) of the Income Tax Act as it is not counted as a part of an individual's total income. e Form 16 is a document that contains all details required to file the income tax returns. Corporate Tax * The income-tax paid by domestic companies, and foreign companies on their income in India is corporate income-tax (CIT). The CIT is at a specific rate as prescribed by the income tax act subject to the changes in the rates in the union budget every year. * Rate of tax is different for domestic and foreign companies. Capital Gain Tax Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. © This gain or profit comes under the category of ‘income’. e Hence, the capital gain tax will be required to be paid for that amount in the year in which the transfer of the capital asset takes place. It is of two types - long term capital gain and short term capital gain e When the asset is sold after more than 3 years it is called ‘Long Term Capital Gain’ whereas if it is sold in less than 3 years it is called ‘Short Term Capital Gain’. In India, indirect taxes are- ¢ Indirect taxes are those taxes which can be shifted by the taxpayers on others.¢ If the central government increases the rate of service tax on various services, then the seller passes on this increase to the end consumer of the service. © GST, Anti Dumping Duty, Custom Duty, Excise Duty, Sales Tax are the example of Indirect tax. Goods and Services Tax (GST) ® Goods and Services Tax (GST) is an indirect tax imposed on manufacture, sale, and consumption of goods and services all over India. © GST has been added to the constitution under the 101st Constitutional Amendment Act 2016. e GST was implemented from July 1, 2017, and thereafter became the biggest tax reform in the country. The first country to impose GST was France in 1954. Since then, more than 140 countries have implemented the GST. Genesis of GST occurred during the previous NDA Government under Atal Bihari Vajpayee when it set up the Asim Dasgupta Committee to design a model for GST. © GST is levied at four rates viz. 5%, 12%, 18% and 28%. © The schedule or list of items that would fall under these multiple slabs are worked out by the GST council. © GST, which subsumed almost all domestic indirect taxes (Petroleum, Alcoholic beverages and stamp duty are the major exceptions) under one head, is perhaps the biggest tax reform in the history of independent India. GST Council « The GST Council was established on 12 September 2016. * To implement GST, the Constitutional (12nd Amendment) Bill was passed by both the Houses of the Parliament in 2016.© The GST Council has been notified as a constitutional body to deal with issues related to GST. ¢ The Finance Minister of India is the chairman of the GST Council. ¢ Itis a joint forum of the Center and the States, which was established by the President in accordance with Article 279A (1) of the amended Constitution. There are Four GST types namely:- SGST (State Goods and Service Tax) © SGST is levied by the state government on intra-state goods and service transactions. e The revenue collected through State Goods and Service Tax is earned by the state government where the transaction is made.SGST subsumes earlier taxes such as VAT, entertainment tax, luxury tax, octroi, tax on lottery and purchase tax. CGST (Central Goods and Service Tax) © CGST is levied by the central government on intra-state goods and service transactions. The central government collects the revenue generated through central Goods and service Tax. ¢ Itis levied along with SGST or UGST and revenues are shared between the state and the center. IGST (Integrated Goods and Service Tax) © Integrated Goods and Service tax is the tax levied on inter state goods and service transactions. ¢ Itis applicable on imports and exports as well.Under 1655, the taxes charged are shared by both the center and state. The soft part of the tax goes to the state wherein the goods and services are consumed. UTGST (Union Territory Goods and Service Tax) @ Union Territory Goods and Service Tax is an indirect tax that is collected when intra-state goods or services are supplied, along with tax charged as under CGST ACT, 2017. Generally, intra-state supply is treated where the location of the supplier and the place of supply of goods or services are in the same Union Territory. Under GSTIN (Goods and Services Tax Identification Number), a service tax registration number by the Central is given to each and every service Board of Excise and Custom (CBEC) provider. All the service providers are under the same format number which consist of 16 digits. Taxes Replaced by GST © GST replaces almost all vital indirect taxes and cesses on goods and services in the country. ‘Among the taxes levied by center, GST will subsume the following Excise duty Additional Duties of Customs (commonly known as CVD) Additional Duties of Excise (Goods of Special Importance) Central Excise duty & Service Tax Special Additional Duty of Customs (SAD) Additional Duties of Excise (Textiles and Textile Products)Central Surcharges and Cesses so far as they relate to supply of goods and services. Among the state taxes that would be replaced by GST include: © State VAT Central Sales Tax Luxury Tax Entry Tax (all forms) Entertainment and Amusement Tax (except when levied by the local bodies) Taxes on advertisements Purchase Tax Taxes on lotteries, betting and gambling State Surcharges and Cesses so far as they relate to supply of goods and services Excise duty e Excise duty refers to the taxes levied on the manufacture of goods within the country. © It isa form of indirect tax which is generally collected by a retailer or an intermediary from its consumers and then paid to the government. Although this duty is payable on manufacture of goods, it is usually payable when the goods are ‘removed’ from the place of production or from the warehouse for the purpose of sale. e There is no requirement for the actual sale of the goods for imposing the excise duty because it is imposed on the manufacture of such goods. Customs Duty e Customs Duty refers to the tax that is imposed on the transportation of goods across international borders.¢ Itis a kind of indirect tax that is levied by the government on the imports and exports of goods. Companies that are into the export-import business need to abide by these regulations and pay the customs duty as required. Pigouvian tax ¢ A Pigovian tax is a tax on any market activity that generates negative impacts on the environment or society. © The intention of this tax is to correct an undesirable or inefficient market outcome. e Acarbon tax is a tax levied on the carbon content of goods and services. Dumping e Dumping is a process where a company exports a product at a price lower than the price it normally charges in its own home market. ¢ This is an unfair trade practice which can have a distortive effect on international trade. Anti-dumping duty © Ananti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Thus, the purpose of anti-dumping duty is to rectify the trade distortive effect of dumping and re-establish fair trade.Countervailing duties © Countervailing duties (CVDs) are levied on imported goods to compensate for subsidies given to producers of these goods in the exporting country. © The objective of CVD is to provide a level playing field between domestic producers of a product and foreign producers of the same product who can sell it at a lower price due to subsidies received from their governments. ¢ CVD helps to overcome the negative impact on producers of the same commodity due to foreign competition. Cess e Itis a form of tax levied by the government for the development or welfare of a particular service or sector. It is charged above direct and indirect taxes. Cess collected for a particular purpose cannot be diverted to other purposes. ¢ It is not a permanent source of revenue for the government, and it is discontinued when the purpose of levying it is fulfilled. Currently, the cess and surcharge collected by the Centre. Examples: Education Cess, Swachh Bharat Cess Surcharge Surcharge is an additional charge or tax levied on an existing tax. ¢ Unlike a cess, which is meant to raise revenue for a temporary need, surcharge is usually permanent in nature, ¢ Itis levied as a percentage on the income tax payable as per normal rates. The revenue earned via surcharge is solely retained by the Centre and, unlike other tax revenues, is not shared with States.© Collections from surcharge flow into the Consolidated Fund of India. Aspect Cess ‘Surcharge Definition | Additional tax imposed for a specific Extra charge applied on the existing purpose or to fund a particular government | tax liability. initiative. Purpose _| Typically used for specific purposes like Generally used to meet the overall education, health, or disaster relief. revenue needs of the government. Calculation | Calculated on the total tax amount. Calculated on the income tax ‘amount before adding Cess. Applicability | Can be applicable to both individuals and _| Mainly applicable to individuals and businesses. corporates with high income levels. Examples | Swachh Bharat Cess, Education Cess in Income Tax Surcharge, applicable on India. high-income individuals. Rate Fixed percentage on the total tax liability. | Applied as a percentage of the income tax amount. Flexibility Can be introduced or withdrawn based on specific needs or situations. Applied as a fixed percentage and may change with the tax slabs. Terminology related with tax Tax evasion e Tax evasion is an illegal action in which an individual or company to avoid paying tax liability.© In this deliberately wrong income is shown, tax return is not filed and misleading statements are presented in relation to tax. © Tax evasion is an illegal and criminal activity. Tax Avoidance * Tax avoidance is the use of legal methods to reduce taxable income or tax owed. ¢ Tax avoidance is not the same as tax evasion, which relies on illegal methods such as underreporting income and falsifying deductions. ¢ Individual taxpayers and corporations can use forms of tax avoidance to lower their tax bills. * Tax credits, deductions, income exclusion, and loopholes are forms of tax avoidance. Tax shifting Tax shifting is the activity of shifting the burden (payment) of a tax from one person to another. For example, in the case of GST, the tax is shifted ultimately from the producer to the consumer. The manufacturer shifted the tax burden to the ultimate consumer. Tax Buoyancy e If tax revenue increases proportionately more in response to an increase in national income or output, the tax is said to be buoyant. e Tax buoyancy explains this relationship between the changes in government's tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP.Micro-Economics Utility: e - Utility of a commodity is its want-satisfying capacity. The more the need of a commodity or the stronger the desire to have it, the greater is the ability of that commodity. Marginal Utility e :- Marginal utility is the change in total utility due to consumption of one additional unit of a commodity. For Ex.: Let 4 bananas give us 28 units of utility and 5 bananas give us 30 units of total utility. Then marginal utility of the 5th banana or 2 units. Law of Diminishing Marginal utility: © - This law states that marginal utility from consuming each additional unit of a commodity declines as its consumption increases. Demand e Demand: - The quantity of a commodity that a consumer is willing to buy and is able to afford, at a given price of goods, is called demand. Factors affecting demand: Law of Demand © This law states that Demand depends on the price of a commodity. According to this law when other things remainconstant, there is a negative relation between demand for a commodity and its price. Ie. When the price of a commodity increases, demand for it falls and when the price of the commodity decreases, demand for it rises. Substitute goods e Substitute goods are those goods which can be used in place of another goods and give the same satisfaction to a consumer. It means with an increase in price of substitute goods, the demand for a given commodity also rises and vice-versa. For example, Pepsi and Coke. Complementary goods e Complementary goods are those which are useless in the absence of other goods and which are demanded jointly. © Itmeans, with a rise in price of complementary goods, the demand for a given commodity falls and vice-versa. It is also called Derived demand. For example, pen and refill. There are three types of goods: e Normal Commodity: For normal commodities, with a rise in income, the demand of the commodity also rises and vice-versa. Shortly, a direct relationship exists between income of a consumer and demand of normal commodities. Inferior Goods: For inferior goods, with a rise in income, the demand of the commodity falls and vice-versa. In Short, an inverse relationship exists between the income of a consumer and demand for inferior goods. Necessity Goods: For necessity goods, whether income increases or decreases, quantity demanded remains constantDemand function © Itis the relationship between quantity demanded for a particular commodity and the factors that are influencing it. Individual demand function refers to the functional relationship between individual demand and the factors affecting the individual demand. e Market demand function refers to the functional relationship between market demand and the factors affecting the market demand. Movement along the Demand Curve e It is based on the Law of Demand which states that quantity demanded of the commodity changes due to the changes in price of the commodity. e The change in quantity demanded due to the change in price of the commodity is known as movement along the demand curve. Giffen goods e Giffen goods are a special category of inferior goods in which demand for a commodity falls with a fall in its price. e Incase of certain inferior goods when their prices fall, their demand may not rise because extra purchasing power (caused by fall in prices) is diverted on purchase of superior goods. Elasticity of Demand (eD) - Elasticity of demand is a measure of responsiveness of the demand for a good to changes in its prices.Supply It refers to the quantity of a commodity that a firm is willing and able to offer for sale, at each possible price during a given period of time. In other words, supply is that part of stock which is actually brought into the market for sale. Stock can never be less than supply. For example, a seller has a stock of 50 tonnes of sugar in the godown. If the seller is willing to sell 30 tonnes at a price of Rs. 37 per kg, then supply of 30 tonnes is a part of total stock of 50 tonnes. Market supply: It refers to the quantity of a commodity that all firms are willing and able to offer for sale at each possible price during a given period of time. Law of Supply It states that price of the commodity and quantity supplied are positively related to each other when other factors remain constant. Movement along the supply curve: The change in quantity supply due to the change in the price of the commodity is known as Movement along the supply curve. Expansion in supply: The rise in quantity supplied due to the rise in price of the commodity is known as expansion in supply. It is based on the law of supply which states that the quantity supplied of a commodity rises due to the rise in price of the commodity. The rise in quantity supplied due to the rise in price of the commodity is known as expansion in supplyElasticity of supply © The degree of responsiveness of quantity supplied due to the changes in determinants of supply (price of other commodities, price of factors of production, technology, etc) is known as elasticity of supply. Price elasticity of supply: The degree of responsiveness of quantity supplied due to the changes in price of the commodity is known as price elasticity of supply Equilibrium e Ina market, Equilibrium is the condition at which market supply equals market demand. e The price at which Equilibrium is reached, called Equilibrium price. The quantity of goods sold and bought at equilibrium prices is called equilibrium quantity. m price: The price at which equilibrium is reached is called equilibrium price. jum quantity: The quantity bought and sold at the equilibrium price is called equilibrium quantity. Equilibrium point: Equilibrium point is the point of intersection of the demand curve and supply of commodities. © Producer’s equilibrium: A producer is said to be in equilibrium when he produces that level of output at which his profits are maximum. Producer’s equilibrium is also known as profit maximization situation. Price Ceiling e Government-imposed upper limit on the price of a good or service is called price ceiling.© Price ceiling is generally imposed on necessary items like wheat, rice, Kerosene, sugar etc and price is fixed, below the market fixed price since at market-fixed price some-section of the population is not able to afford these goods. Fiscal policy e Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as its Fiscal Policy. ¢ Through fiscal policy the government adjusts its spendings and tax rate to monitor and influence the nation’s economy. © Governments use fiscal policy to promote strong and sustainable growth and reduce poverty. © In India, Fiscal Policy is formulated by the Ministry of Finance. Fiscal policy is implemented through the announcement of the budget. © There are 4 tools of fiscal policy - tax, public expenditure, debt and issue of new currency e When there is a decrease or increase in these instruments by the government, its direct effect is seen on the fiscal deficit of the government. e By increasing the tax, the government gets more revenue, due to which the fiscal deficit decreases. On the same reduction in taxes, there is an increase in the fiscal deficit. Similarly, by increasing or decreasing the public expenditure, the fiscal deficit of the government decreases or increases. ¢ The government's fiscal deficit had increased to more than 9% of GDP due to large scale increase in public expenditure during the Korona period (mainly food subsidy).Main Objectives of Fiscal Policy Fiscal Defi Maintaining the condition of full employment. Keeping the price level stable. To stabilize the growth rate of the economy. Maintaining a balanced balance of payments. it Fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). A fiscal deficit occurs when this expenditure exceeds the revenue generated. Fiscal deficit of a country makes it clear how much resources the government of that country has to spend and where to spend them. Fiscal Deficit = Total Expenditure (Revenue Expenditure + Capital Expenditure) - (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (all Revenue and Capital Receipts except loans taken) To fulfill the fiscal deficit, the government has to take a loan from international institutions, which increases national debt. For example, during the year 1990-91, the fiscal deficit was about 8.4% of GDP. At the time of this economic crisis, a loan was taken from the IMF. However, India had to adopt liberalization, globalization and privatization to obtain loans from the IMF, which proved to be correct for the Indian economy. Due to high fiscal deficit, the growth of GDP also slows down. Many times, due to high fiscal deficit, the government of the concerned country has to borrow money from other countries and international financial institutions.Primary deficit The difference between the current year's fiscal deficit and interest payments on borrowings already taken is called ‘primary deficit’. Current year refers to the year which is currently running:- eg 2023-24 In other words, the ‘primary deficit’ is obtained after deducting the interest payments from the fiscal deficit. Primary deficit = Fiscal deficit-Interest payments. Revenue Deficit It is related to the revenue expenditure and revenue receipt of the government. When revenue expenditure is more than revenue receipt, it is called ‘revenue deficit’. It includes those transactions which involve the current income and expenditure of the government. It does not include capital receipt and capital expenditure. Revenue Deficit = Revenue Expenditure - Revenue Receipt Revenue Expenditure Revenue Expenditure is that part of government expenditure that does not result in the creation of assets.such as salary and pension. Revenue expenditure does not reduce the liabilities of the government in the same way as capital expenditure does. Revenue expenditure keeps on increasing the treasury of the government. The salary and allowances of all the departments given by the government are also under revenue expenditure. Interest paid on loans taken by the government, subsidies given (agriculture subsidy, fertilizers), grants given to states, expenses incurred in welfare schemes (MNREGA, housing scheme) and old age pension and scholarship etc. come under revenue expenditure.Revenue Receipt Revenue receipt is such receipt earned by the government, due to which the government does not create any kind of liability, nor does it decrease in any kind of assets. It is of two types - tax revenue receipt and non-tax revenue receipt. The income that the government receives from different types of taxes is called ‘tax revenue’. This type of tax includes both direct and indirect taxes. For example income tax, corporation tax, capital gains tax, wealth tax come under direct tax. Goods and Services Tax, Excise Duty, Customs Duty come under Indirect Taxes. When the government of a country receives revenue from different types of sources other than tax, it comes under ‘non-tax revenue receipt’. In this, different financial services by the government such as printing currency, issuing postage stamps, profits and dividends received from public sector units, interest received from loans (internal and external loans) to the government and the amount received from fines, under this comes Revenue Receipt Revenue expenditure Tax Revenue Receipt- * Grant to states Direct Tax and Indirect Tax e Subsidy Non-Tax Revenue Receipt- « Defense expenditure Printing of currency, * Police administration receipt of interest, benefits | Interest payment and dividends received Pension spending etc. from public sector unitsCapital Receipt © Capital Receipt is the receipt earned by the government which reduces the assets of the government or increases the liabilities of the government. ¢ This receipt to the government includes disinvestment (money received from selling shares of public companies), recovery of loans, loans taken by the government (internal and external debt) and provident fund deposits. Capital Expenditure Capital expenditure is the expenditure incurred by the government of a country due to which new assets are created and the liability of the government decreases. Land purchased by the Government of India, purchase of new machines and equipment, repayment of loans, investment, purchase of shares comes under capital expenditure. Capital receipt Capital expenditure Foreign debt, © Construction of building ¢ Internal market credit (construction of new Parliament © Disinvestment House) Provident fund deposit Payment of loans © Government loan Purchase of machines Investment in new projects Infrastructural construction (highway airports etc.)FRBM Act ¢ The Fiscal Responsibility and Budget Management (FRBM) Bill was introduced by the Atal Bihari Vajpayee Government (then Finance Minister Yashwant Sinha) in the parliament. © The Bill was introduced in the year 2000 to provide legal backing to the fiscal discipline to be institutionalized in India. ¢ The Bill became an Act in the year 2003 but came into effect from July 5, 2004. ¢ The FRBM Act set targets for the Government of India to achieve fiscal stability, to provide RBI with the flexibility to deal with inflation, to improve the management of public funds, to strengthen fiscal prudence and to reduce fiscal deficits. e The FRBM act requires the government to limit the fiscal deficit to 3% of the GDP by March 31, 2021, and the debt of the central government to 40% of the GDP by the year 2024-25 as per the latest targets set under the FRBM Act. However, the Finance Ministry is likely to be connected with its internal fiscal consolidation roadmap and the 2023 Union Budget may target a fiscal deficit of between 5.5-6 percent of nominal GDP in FY24. e The roadmap aims for a fiscal deficit target of 4.5 percent of GDP by 2025-26. Budget © A Budget is a formal expression of the expected incomes and expenditures for a definite future period. ¢ Insimple words, the budget is an estimate of income and expenditure for a definite duration.e The word ‘budget’ has been borrowed from the English word "Bowgette” which traces its origin from the French word “Bougette”, which means a leather bag. © The First Union Budget of Colonial India was introduced on 7 April 1860 by the East India Company to the British Crown. It was presented by a Scottish Economist and politician James Wilson. Interesting Facts About Indian Budget e First Union Budget of Independent India was introduced on 26 November 1947. It was presented by the first Finance Minister RK Shanmukham Chetty. e Former Prime Minister Jawaharlal Nehru was the first PM to present the Union Budget for the FY 1958-1959. e Former Finance Minister Moraji Desai presented the Union Budget a record 10 times from 1962-69. e Former Prime Minister Indira Gandhi was the first woman to present the Union Budget for the FY 1970-71. e For FY 1973-74, the Budget was presented by the then Finance Minister Yashwantrao B. Chavan is called the 'Black Budget’ due toa high budget deficit of Rs 550 crore. The Budget presented by the then Finance Minister Manmohan Singh for the FY 1991-92 is known as 'The Epochal Budget'-- a budget that changed India forever as it marked the economic liberalization of the nation. The Budget presented by the then Finance Minister P. Chidambaram for the FY 1997-98 is known as ‘Dream Budge?’ as it proposed to lower the tax slabs of personal and corporate taxes. The Budget presented by the then Finance Minister Yashwant Sinha for the FY 2000-01 is known as ‘The Millenium Budget'-- a budget that revolutionized India’s IT sector. In the year 2017, the Rail Budget was merged with the Union Budget.Types of Budget Traditional or General Budget © Traditional budgeting is a method by preparing a budget for any specific period where the budget of the previous year is considered as a base and using which the budget of the current year is prepared. « Inother words, we can say the current year’s budget is prepared by making some changes in the previous year’ budget. e Surplus Budget : When Goverments’s generated income greater than the expenditure. ¢ Deficit Budget : When the government’s expenditure exceeds its generated income Performance Budget e Inthe performance Budget, Goals and targets are predefined. e Performance Budgeting is a method of allocation of funds to any dept, based on their future set targets. e In traditional budgeting, previous expenditures are on focus whereas in future performances, milestones and targets are considered. © For example- If the AYUSH Ministry demands Rs. 1000 CR for Jan Aushadhi Yojana. So before allocating this much amount, the AYUSH ministry will be asked about what targets or goals it will be achieving by these funds. It can be increasing free vaccination to infants and children, can be increasing varieties of free medicines in government hospitals etc. e For the first time in the world, the performance budget was made in the USA.Outcome Budget e Inthe outcome budget, allocation of funds are done on various government schemes but depending on the fact that how much progress is being made by those schemes from the previous allotted funds. © Italso ensures that where and how the previous allotted funds are being used and what was the outcome of that particular spending. For example- NHAI demands Rs 500 CR for building the next phase of any bridge. So before allocating this amount, it will be asked to tell how much that bridge is being built from the previous amount and what is the purpose of demanding new funds. © Therefore, in order to reduce this cost, the Government of India introduced the Outcome Budget in 2005. Zero Based Budget © Zero based budgeting is a method of allocating funds to different departments and ministries but not considering its previous expenditures or performances. In this only thing we consider is why the demanded funds are needed and one should justify the usage and requirement of demanded funds. e It does not focuses on ‘How much’ rather it focuses on 'Why' (for the demanded funds) For Example- If any dept. demands Rs. 100 CR for any of its needs, so ZBB will ask that particular department why this amount is required and where this amount will be spent. ¢ This budget is also known as ‘Sun Set Budget’ which means the finance department has to present the zero-based budget before the end of the financial year.