Economy Kalam Golden Pages (KGP 2024)

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Economy KGP (Kalam Golden Pages)
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Economy Handout
INDEX
1 Human and social development
2 Other basic concepts in economy
3 Five Year Plans
4 Microeconomic
5 National Income and GDP
6 Govt. Budgetingv
7 Taxation
8 RBI and Monetary Policy
9 Banking operations
10 Banking regulations
11 Digital economy
12 Financial inclusion
13 Inflation
14 FDI, FII, Bonds, disinvestment
15 Tools (Money and Capital market)
16 Balance of payment
17 Currency and Foreign exchange
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Human and social development
POVERTY - State or condition in which people or communities lack the financial resources Inflation adjustment
and essentials for a minimum standard of living. in both Tendulkar
and Rangarajan
Type Concept Measure
committees done
using Fisher’s Price
Absolute  Condition where an individual does not have the  Poverty Line Index
Poverty financial means to meet Basic minimum needs.  Poverty Gap
 WB defines extreme poor as those with income India’s rank in
<$1.9/day (PPP) Global Hunger
Index, 2023 is at 111
Relative  Economic status/ standard of living compared to  Gini Coefficient out of 121 countries
Poverty economic standards of living of others within the  Lorenz curve
India has by far the
same surroundings. largest number of
poor people
worldwide at 22.8
Committees Recommendation crore, followed by
Nigeria at 9.6 crore.
Dandekar & Rath Calorie based Poverty line
As many as 41.5
crore people moved
Alagh Calorie based but different line for Urban and Rural
out of poverty in
India during the 15-
Lakdawala  Calorie based and State level poverty line. year period between
 Inflation adjustment done for Urban and rural 2005-06 and 2019-
21.
Tendulkar  Uniform Poverty line for Urban & Rural
 Calorie + Non-food expenditure based More than one in
five children in India
Rangarajan  Separate lines for Urban & Rural are poor compared
with around one in
 Comprehensive definition of Poverty line (Calories + Proteins +
seven adults.
fats + Education + Health + House rent etc.)
Alternate Measures to Poverty:

Multidimensional
Poverty Index
(MPI)
● By UNDP under Human Development Report

● If deprived of > 1/3rd of indicators, then Multidimensionally
Poor
SOCIAL CAPITAL Human capital is an
Social capital refers to the networks, norms, and trust that facilitate cooperation and intangible asset that is not
coordination among individuals and groups in a society. It is a key factor in recorded on the financial
determining the success of social, economic, and political systems. sheet of a corporation.
Types of Social Capital
Human Capital and Economic
Growth: People with a
Bonding social capital - networks that exist among individuals who share similar greater level of education
backgrounds and interests. are more likely to earn better
salaries, allowing them to
Bridging social capital - networks that connect individuals and groups who are spend more. Thus, impacting
diverse and have different backgrounds. positively on the growth.
India’s population is among

Linking social capital - refers to the relationships between individuals and the youngest in an aging
organizations or institutions that provide opportunities and access to resources world. By 2022, the median
and power. age in India will be 28 years;
in comparison, it will be 37
Various indicators such as in China and the United
States
Measurement ● Level of trust and cooperation in a community,
● Number of voluntary organizations, and According to the latest
● Extent of civic engagement. United Nations Population
Fund data, India’s
population in 2023 stands at
Demographic Dividend 142.86 crore.
It is the potential for economic gains when the share of the working-age
population (15-64 years) is higher than the non-working age group.
DEMOGRAPHIC TRANSITION:
Inclusive governance and inclusive growth
Inclusive Governance refers to the process of involving all stakeholders in decision 12th Five Year Plan
making and ensuring that the benefits of governance reach all sections of the society, slogan was designed as
regardless of their social, economic or political status. “Faster, sustainable and
More inclusive growth”
DIMENSIONS
Nearly one in three
Political This refers to the participation of all citizens in the political process, young Indians between
Inclusiveness including elections, representation, and decision-making. the ages of 15 and 29 is
not engaged in either
Social This dimension aims to ensure that all sections of the society, education, employment,
Inclusiveness including marginalized groups, have access to the benefits of or training, and the
development and are not left behind. numbers are even
worse when it comes to
women alone, according
Economic ensuring that all citizens have access to economic opportunities,
to the latest Multiple
resources, and services, regardless of their social status.
Indicator Survey (MIS)
report of the
Administrative provision of responsive and accountable governance, with all government’s National
citizens being able to access and utilize public services. Sample Survey Office
(NSSO).
Environmental ensuring that all citizens have access to a clean and healthy
environment, and that the consequences of environmental Components of
degradation are equitably distributed. Inclusive Growth – 11th
Five-year Plan
● Access to essential
INCLUSIVE GROWTH services
Inclusion of all sections of society in the process of economic development and sharing ● Employment
of its benefits. Generation
● Women
empowerment
● Good governance
● Skill building
● Equality of
opportunity
● Poverty Reduction
Employment and unemployment
KEY CONCEPTS ● NSSO is the Principal
source of Data on
Labor force 15-59 year age persons, able and willing to work
employment /
unemployment.
Labor Force % of Labor force in a Working age population ● NSSO uses 3 different
Participation measures:
Rate (LFPR) ● Usual Status Approach
● Current weekly Status
● Current daily status
Worker % of employed persons in a Population.
approach
Population Ratio
● Usual status approach -
(WPR) -
unemployed when
there’s no gainful
employment for major
time of the Year
● Current weekly status -
Unemployment Percentage of persons employed among the people in Labor
when there’s no gainful
Rate (UR) Force
work even for an hour
on any day of the
Types of Employment week
● Current Daily status
Organized Salaried & working in enterprises employing 10 or more workers approach - when no
gainful work for even 1
hour in a day -
Unorganized Salaried & working in enterprises employing less than 10 workers described as
unemployed for that
Organized Different types of Contract work, work for short duration, without day
Job security and company having 10 or more workers ● 90% of the workforce
in India is in Informal
sector
Unorganized All types of casual workers, daily/weekly Labourers without any
social security and in enterprises employing less than 10 workers
Types of Unemployment
Cyclical When there is not enough demand in market for their work
Frictional When a person leaves/loses a job and starts looking for another
Seasonal Occurs based on Seasons/certain parts of the Year. Ex: in Agriculture

or Tourism Sector
Structural When the structure of an Industry changes, mainly due to change in

Technology or tastes
Disguised When people are employed in such a way that there is zero Marginal
Productivity
Five Year Plans
After the formation of the National Planning Commission, India began the planned economic
development by introducing the five-year plan. The first plan in India was launched in 1951. The plan in 1979-80,
though initially
However, in 2017 these were replaced by the 3-year action agenda of NITI Aayog.
planned by Janata
Established in 1950 under the chairmanship of the First prime Govt for 5 years,
minister.
lasted only for two
was a non-constitutional body. It functioned under the guidance of years and is called
Planning the National Development Council (NDC). Rolling Plan.
Commission was set up with an objective to formulate economic plans keeping in
view the resources of the country Towards the end of
From 1951 to 2017, the Government of India implemented 12 five- 1938, the National
year plans in India in total. Planning Committee
Five Year Plans under the
1st - [1951- Harod-Domar Model - increase agricultural production and thereby chairmanship of
1956] increase growth of the sector Pandit Jawaharlal
2nd - [1956- Mahalanobis plan - focused mainly on rapid industrialisation with Nehru was
1961] particular emphasis on development of basic and heavy industries. established by then
3rd - [1961- Created a base for the growth of medium and small-scale industries President of INC,
1966] and cottage industries. Chinese aggression 1962, Indo-Pak war 1965 Netaji Subhash
and severe drought 1965 to 1966 Chandra Bose
4th - [1969- Growth with stability and being self-reliant esp. in the defense sector.
1974]
5th - [1974] Removal of poverty (Garibi Hatao) and attainment of self-reliance
6th - [1980- Removal of poverty, higher growth rate, improved productivity,
1985] modernization of technology and significant reduction in the
disparities of income and wealth.
7th - [1985- Increasing the production of food grains at a larger scale and the
1990] employment opportunities. recorded the highest ever agricultural and
overall growth rate in FY 1988-89
8th - [1992-  Fiscal and economic reforms were introduced.
1997]  To have universal education and eradication of illiteracy in the age
group of 15 to 35 years
9th - [1997-  Focused on growth with social justice & equality.
2002]  Priority given to Agri and rural development
10th - [2002- monitorable targets fixed for a few key indicators of development.
2007] Attainment of GDP growth rate of 8%/ annum.
11th - [2007- “Towards faster and more inclusive growth”. Around 27 detailed
2012] national targets were set during the plan.
12th - [2012- Inclusive growth was the central theme and objective. planners set
2017] 25 core monitorable targets
ECONOMIC PLANNING - NITI Aayog
 In January 2015, the Government of India replaced the Planning Commission with an institution called NITI
Aayog by passing a resolution.
 In 1934, Sir Visvesvaraya published a book entitled “Planned Economy For India”. He was the first person in
the country to advocate economic planning for India.
Aim To achieve Sustainable Development Goals and to enhance cooperative federalism by fostering the
involvement of State Governments of India in the economic policy-making process using a bottom-
up approach
Chairperson Prime Minister of India

Composition
Governing Comprising the Chief Ministers of all the States and Lt. Governors of Union
Council Territories.
Regional It will be formed to address specific issues and contingencies impacting more
Councils than one state or a region
Ad-hoc Two members in ex-officio capacity from leading Research institutions on a

Membership rotational
Ex-Officio Maximum four from the Union council of ministers to be nominated by the
membership Prime Minister
Chief Executive Appointed by the Prime-minister for a fixed tenure, in the rank of Secretary to
Officer Government of India.
Special Invitees Experts, Specialists with domain knowledge nominated by the Prime Minister
NITI Aayog
Team India Hub Acts as interface between States and Centre
Hubs
Knowledge and Builds the think-tank acumen of NITI Aayog

Innovation Hub
Initiatives Digital India Good Governance Index
Atal Innovation Mission Aspirational Districts Programme
SDG India Index Composite Water Management Index
India Innovation Index Women Transforming India awards.
NITI Aayog Planning Commission
draws membership from a wider expertise. had limited expertise.
serves in spirit of Cooperative Federalism as states are States participated as spectators in annual plan meetings.
equal partners.
Secretaries to be known as CEO appointed by Prime- Secretaries were appointed through usual process.
Minister.
Focuses upon ‘Bottom-Up’ approach of Planning. Followed a ‘Top-Down’ approach.
Does not have powers to allocate funds, which are vested Had powers to allocate funds to ministries and state
in Finance Minister. governments.
Prime Minister’s Economic Advisory Council
Neither constitutional nor statutory body
Started in the 2000s to give advice on economic issues to the Prime Minister
NITI provides administrative and secretarial support to PM- EAC
Planning initiatives in India before Planning Commission
National Planning Committe (1938)
Bombay Plan (1944)
Gandhian Plan (1944)
Sarvodaya Plan (1950)
National Income and GDP
 It is a set of principles and methods used to measure the income and production of a  Measurement of
country. National Income in
India is done by
MEASURES CONCEPT
NSO, MoSPI
GDP  Measures value of final goods & services produced within a  In Value Added
geographical boundary of a country irrespective of nationality. method, only final
 Intermediate goods are not included in the calculation, coz it will goods taken and
lead to counting the value of the goods twice. Intermediate goods
are not taken to
GNP Value of output by Nationals (GDP + Net Factor Income from abroad) avoid double-
counting
NNP GNP after adjustment for depreciation (GNP - depreciation)  GDP does not
include: Gender
NDP GDP after adjusting for depreciation (GDP - depreciation) disparities, Care
economic
Factor Cost Market Cost (MC) - Indirect taxes + Subsidies activities/ unpaid
work, Income
Market Price Market Price = Factor cost + Net indirect taxes inequalities /
(MP) unequal
distribution of
Transfer Payments by Govt to Individuals for which there is no return economic wealth, negative
Payments activity externalities to
environment, value
National Income NNP@MP - Indirect taxes + Subsidies of ecosystems and
(NI)@FC sustainability

Personal Income NI + Transfer payments - (Corporate retained earnings 
(PI)
 Measurement of
GDP at constant
Disposable Refers to the Income at the disposal of the Individuals (PI - Personal Market prices.
Personal Income Taxes)

  MCA 21 database
of Min of Corporate
Methods used to calculate GDP Affairs is used for
Value added GDP calculated at MP by taking the value added to a product during the GDP calculation
method various stages of production into account  Govt expenditure
on Pension
Aggregates payments by Firms to Households (GDP = Wages + Interest + schemes,
Income Rent + Profit + Dividend + Indirect Taxes - Subsidies +Depreciation) scholarships,
Method unemployment
allowances are not
Measures total spending on produced Goods & services in an economy. included in GDP as
Expenditure they come under
Method (GDP = Consumption Exp + Investment Exp + Govt Exp + Net Exports)
transfer payments.


Government Budgeting
 Art 112 of the Constitution provides for Annual Financial Statement to be laid before the Parliament (Art 202 for
State Assemblies).
MAJOR COMPONENTS OF THE BUDGET
Revenue  Should not create any liability for Govt.

Account Receipts  Should not decrease in the assets.
 Tax Revenue - Direct & Indirect tax
 Non-Tax Revenue - Interests received, fees, fines and penalties
 Expenditures incurred for purposes other than creating of physical or financial

Expenditure assets of Govt.
 Ex: Interest Payments, Defense Expenses, Salaries to Central Government
employees, etc.
Capital These are which increase liability or minimize financial assets.

Account Receipts Ex: Loans Recovery, Disinvestments, Borrowing & other liabilities.
Expenditure of the Govt that results in creation of physical or financial assets /decrease of
Expenditure financial liabilities. Ex: Loans repayments, Loans to public enterprises, etc.
 Three types of Information in Annual Financial Statement includes:  The Constitution doesn't mention
the term Budget
Actual figures of receipts and expenditure of Previous year (2022-23)
All the receipts and expenditures of

Budget and revised figures for the current year (2023-24)
the government are credited and
debited from the following:
Budget estimate of the upcoming year (2024-25)
1. Consolidated Fund of India
2. Contingency Fund
Types of Deficits 3. Public Account
Revenue Deficit = Revenue Receipt – Revenue Expenditure  Statements under FRBM Act:
● Macro-economic Framework
statement
Effective = Revenue Deficit – Grants for creation of capital assets ● Medium term Fiscal policy cum
Revenue Deficit Fiscal policy strategy statement
Fiscal Deficit = Revenue Receipts + Non-Debt creating Capital  Documents tabled by Finance
Receipts – Total Expenditure Minister along with AFS during
Budget:
Budget Deficit = Total Budgeted Expenditure - Receipts (Revenue + ● Demand for Grants
● Finance bill
Capital Receipts (Non-debt creating + Debt creating)
● Statements under FRBM Act
● Receipt budget
Monetized = Borrowing by Government through Printing fresh ● Expenditure budget
Deficit currency. ● Output Outcome monitoring
framework
Primary Deficit = Fiscal Deficit – interest payments

Types of Budgeting
Balanced Estimated revenue is equal to its anticipated

budget expenditure.
Unbalanced Revenue & expenditure are not equal - Surplus Budget or

budget
Deficit Budget
Zero based all expenses are evaluated each time a budget is made
budget and expenses must be justified for each new period.
Outcome analyses progress of each ministry and department and

based what the respected ministry done with its budget outlay.
Gender process of keeping a gender perspective in policy/

Budgeting programme formulation, its implementation and review.
Taxation
The Tax structure in India is divided into Direct and Indirect Taxes Commodities outside GST
includes:
Direct Tax
Alcohol for human
Type of tax where the Incidence and impact of taxation falls on the same entity. consumption,
Petroleum products,
Direct Taxes Union Govt State Govt Electricity, The supply of
goods to the SEZ,
On income  Corporation Tax  Agriculture tax Supply of goods that come
 Minimum Alternative Tax  Professional tax under zero rate
(MAT) Fresh vegetables, fresh
milk, cereal, meat etc.
 Dividend Distribution tax,
Raw materials.
Capital Gains tax
On assets  Securities Transaction tax  Land Revenue GST Council is a

 Commodities transaction tax  Stamp duty. Constitutional Body under
 Property tax- Urban areas Art 279A. The decisions
are made by a majority of
On  Fringe benefit Tax
3/4th members.
Expenditure  Gift tax etc.
Indirect Tax
The Incidence and Impact of taxation doesn't fall on the same entity. It is a tax imposed
by a government on a taxpayer for goods and services.
Types of Indirect Taxes Brief description
Ad Valorem Tax Based on the value of the transaction or property.
VAT Imposed and collected at various points of the value chain.

Cascading in nature
Excise Tax On goods produced or manufactured in country
Customs Duty On goods Imported and exported out of country
GST Destination based Single Tax under 101CAA
Methods of Taxation
Progressive Tax Tax rate increases with increasing Income. Ex: Income Tax
Regressive Tax Average tax burden decreases with Income. Ex: Sales tax
Proportional Tax Same tax rate regardless of Income
Retrospective Tax Tax imposed on a transactions/product retrospectively
Share of Taxes as per recent Budget 2024 –
For every rupee, 63 paise will come from direct and indirect taxes, 28 paise from borrowings and other liabilities, 7 paise
from non-tax revenue like disinvestment and 1 paise from non-debt capital receipts, according to the interim Budget 2024-
25 documents.
RBI and Monetary Policy
RESERVE BANK OF INDIA
Functions  Banker to Govt - performs Merchant banking function for Central and State govts and also acts
as their Banker
 Banker to Banks - maintains the banking accounts of all scheduled banks and acts as the Banker
of Last Resort
 Monetary Authority - formulates, implements & monitors the Monetary Policy
 Stabilizing the rupee and Inflation targeting
 Regulator and supervisor of financial system
 Manager of Foreign Exchange as per Foreign Exchange Management act, 1999
Monetary Policy
 Monetary Policy is the process by which the monetary authority (RBI) of a country controls the creation and
supply of money in the economy.
MPC Constitution:
 Membership: 6 members (3 from RBI [including RBI Governor] + 3 appointed by GOI).
 Voting: all members one vote - in event of a tie, Governor has casting vote
 MPC can decide repo rate, but not CRR or SLR.
As per the new “Monetary Policy Framework” Agreement 2015:

Primary Objective: maintain Price stability while keeping the Economic growth in mind.
Monetary Policy framework operated by RBI.
Inflation target is 4% with a range of +/- 2%.
The Inflation index considered: CPI-Combined given by NSO, MoSPI.
Major Monetary policy tools used by RBI & its uses
Liquidity Adjustment Instrument used by RBI which allows banks to borrow money through repurchase
Facility (LAF) agreements (repo)
Repo Rate Rate at which RBI provides overnight liquidity to banks under LAF
Reverse Repo Rate at which RBI absorbs liquidity
Marginal Standing Banks can borrow overnight from RBI by dipping into their SLR portfolio at a penal
Facility rate of Interest i.e @Repo+0.25%
Bank rate Standard rate at which RBI is prepared to buy debt instruments
Reserve Requirements CRR (maintain fortnightly basis) & SLR (maintain Daily basis)
Open Market Operations Sale or purchase of Govt Securities by RBI in open market to banks for injection &
absorption of durable liquidity in Economy.
Market Stabilization absorb liquidity from Large Capital inflows (often foreign investments) - uses OMO
scheme operations.
 RBI is considered to have failed if unable to keep inflation within range of 2-6% for 3 consecutive quarters.
 Inflation target decided by Govt in consultation with RBI - to be set every 5 years as per RBI Act,1934
 RBI is the issuing agency of Currency (except Rs.1 Coins and currency)
 RBI acts as the Agent of GOI in IMF.
BANKS IN INDIA
FUNCTIONS OF A BANK  Priority Sector Lending (PSL)

Norms
Primary Accepting  Savings account  RBI mandates banks to lend a
Functions deposits  Current account certain portion of their funds to
 Fixed deposit and Recurring deposits specified sectors, like
agriculture, Micro, Small and
Granting  Loans Medium Enterprises (MSMEs),
advances  Cash credits export credit, education,
housing, social infrastructure,
Secondary Agency  Transfer of funds
renewable energy among others.
Functions functions  Sale/purchase of securities
 All scheduled commercial banks
 Collection of Cheques, Bills etc
and foreign banks (with a sizable
presence in India) are mandated
Utility  Safety various/ lockers to set aside 40% of their
Functions  Adjusted Net Bank Credit (ANDC)
Underwriting of Shares/Debentures
for lending to these sectors.
 Social Welfare Programmes
Financial Services Institutions Bureau

(FSIB) is responsible for the selection
and appointment of the Board of
Directors in Public Sector Banks and
Financial Institutions.
Loan Status:
Insolvency Unable to pay back at the Promised date
Default Bereft/fraud due to financial or business failure
Bankruptcy Declared by authority under a law as incapable of

paying debt anytime
Liquidation Winding up of a corporation under supervision of a

Liquidator
Measures for Regulation of Banks Shadow banks are non-
Bank financial
● Power to issue licenses to new banks, intermediaries, provide
RBI ● Direct and control bank operations, inspect banks, services similar to
● Enforce actions such as penalties and revoking of licenses. traditional banks but
operate outside of the
Prompt Regular banking system.
Corrective Partial credit
action entrancement - a method
where a company
attempts to improve
credit worthiness by
assurances from Banks -
RBI allows PCE upto 50%
AT1 Bonds / Cocos Bonds

● Issued under Basel 3
norms.
● Combo of both equity
and debts
● Debt will convert to
equity when certain
conditions are met.
Basel RBI and SEBI jointly

Norms regulate the Exchange
traded foreign currency
and Interest rate futures.
Loan
Classificati
ons
Banking Reforms
Narasimhan ● 4 tier hierarchy for banking structure

Committee ● Setting up of Asset Reconstruction fund
(1991) ● Deregulation of Interest rates
● Passed reduction of SLR and CRR
Narasimhan ● Strengthening of banks through mergers

committee ● Narrow banking
(1998) ● Rise in Capital adequacy Ratio
● Faster computerization, technology upgradation etc
Nachiket ● Universal Electronic Bank account

Mor ● Universal access to insurance and risk management products
Committee ● Universal access to deposit and investment products
● Access to affordable formal credit
PJ Nayak ● State should keep completely off operational control

Committee ● Examined problems/aspects affecting leadership in Banks
Digital economy
Digital economy is the worldwide network of economic activities, commercial transactions India has over
and professional interactions that are enabled by information and communications 6,300 fintech, of
technologies (ICT). which 28% are into
investment
technology, 27%
into payments,
16% into lending,
and 9% into
banking
infrastructure,
while over 20% are
into other fields.
 Provides that an intermediary is not liable for any third-party content
Section hosted/made available through such intermediary when:
79 of  The contravention is done without its knowledge, or
the IT  The intermediary observes due diligence and abides by other
Act guidelines prescribed by the Government.
 Over 40 per cent of India’s goods and services exports consist of software services and
IT-enabled services (ITES) from financial analysis, medical transcription to the provision
of applications for smartphones.
 The number of internet users has expanded from 5.5 million in 2000 to 850 million
internet users in 2023. This figure was projected to grow to over 1.5 billion users by
2040
 Unicorn products: 87% of the unicorns’ products are software, 7% are hardware and the
rest 6% are other products & services.
 India has become the 3rd largest start-up ecosystem in the world after the US and
China.

Inflation
Inflation Rise in Prices
Deflation Fall in the level of prices
Disinflation Reduction of the rate of Inflation

 Disinflation is a slowdown in the rate of Inflation, while Deflation is the inverse of
Inflation i.e prices would be falling.
Creeping Inflation Inflation rising slowly

[less than 3% per annum]
Walking/ When price rise moderately.

Trotting Inflation [Inflation between 3-10%]
Running Inflation  Rapid acceleration in the rate of rising prices.

 [Inflation is in between 10%- 20%]
Galloping/ Jumping  Prices rise by dual or triple digit inflation rates like 30% or 400% or 999% yearly.
Inflation  Prices rise by more than 20%, but less than 1000% per annum.
 Continuous fall in purchasing power of money.
Hyper inflation When prices rise above 1000% per annum
Stagflation / Misery Inflation + Rising unemployment due to recession

Index
Reflation Inflation returns after a spell of deflation & recession.
Recession Decline in GDP for two or more consecutive quarters
 During this, govt may undertake public work prog through deficit financing.
Technical Recession  When a recessionary phase sustains for long enough, it is called a recession.
 In other words, when the GDP contracts for a long enough period, the
economy is said to be in a recession
 Technical recession is a term used to describe two consecutive quarters of decline in
output [shorter term].
 In the case of a nation’s economy, the term usually refers to back-to-back
contractions in real GDP.
 Difference between a ‘technical recession’ and a ‘recession’ is that while the former
term is mainly used to capture the trend in GDP, the latter expression encompasses
an appreciably more broad-based decline in economic activity that covers several
economic
Depression An extreme recession that lasts two or more years
Core Inflation/ Change in costs of goods and services, but does not include food and fuel (because of
Underlying inflation Volatility)
Headline inflation Core inflation + Inflation in primary article (food + fuel)
Reduced Core Inflation It was constructed to address this anomaly by excluding main fuel items namely “petrol
for vehicle”, “diesel for vehicle” and “lubricants and other fuels for vehicles”, in addition
[Eco Sur 2022] to “food and beverages” and “fuel and light” from the headline retail inflation.
Inflation Spiral Spiral effect of Inflation : A process of wage and price interaction as when wages press
prices up and prices pull wages up.
Philips Curve Relation between Inflation & Unemployment
Shrinkflation  It is the practice of reducing the size or quantity of a product while the price of the
product remains the same or slightly increases.
Inflation, Interest Rate &  Higher the current rate of inflation, the higher the yields will rise across the yield
Bond Yield curve, as investors will demand a higher yield to compensate for inflation risk.
 The central bank raises the interest rate to battle inflation.
 Inflation makes interest rates go up. This, in turn, makes bond values go down.
Inverse relationship - higher interest rates lead to lower bond values. But this will
increase the Bond Yield.
Fischer Effect Relationship between inflation & interest rate.
Cantillon Effect Refers to the idea that changes in the money supply in an economy causes
redistribution of purchasing power among people, disturbs the relative prices of goods
and services, and leads to the misallocation of scarce resources.
Impact of Inflation on:
 Creditors vs Debtors - Creditors loose and Debtors gain
 Exports vs Imports - Imports rise and Exports decrease in general.
In India, MoSPI is the incharge of measuring Inflation
Measures used to curb Inflation:

 Fiscal Measures - through Budgetary Policy - Inc in Direct taxes - Dec in Indirect taxes - Dec in Govt Expenditure
 Administrative Measures - Ban on export, hoarding or promote import of items in short supply etc
 Monetary Measures - quantitative control methods, raise CRR, SLR, Repo rate etc
INDICATORS
Index Who Publishes Base year Used for
CPI (all India) CSO 2011-12 Inflation Targeting, Services Included
CPI-IW Labour Bureau, 2011-12 DA

Ministry of Labour
CPI-AL Labour Bureau, 2011-12 MGNREGA wages
CPI-RL Labour Bureau 1986-87 used to fix minimum wages of agricultural labourers and
rural unskilled employees.
CPI-rural CSO 2011-12
CPI-Urban CSO 2011-12 reflect the changes in the price levels of various goods and
services consumed by the urban population
WPI Office of Economic 2011-12 services not included

Advisor
FDI, FII, Bonds, disinvestment
Foreign Direct Investment (FDI) Foreign Institutional Investors (FII) Stocks, bonds, mutual
FDI can be made by a person resident FII are large companies and institutions that funds, exchange
outside India, foreign corporations, and invest in overseas countries’ financial traded funds,
institutions in the following ways: markets. It refers to foreign entities investing American depositary
 in an unlisted Indian company; in the nation’s financial markets. receipts (ADRs), as
 in 10 percent or more of the post-  FII examples are hedge funds, insurance well as global
issue paid-up equity capital on a companies, investment banks, and depositary receipts
fully diluted basis of a listed Indian mutual funds. FII is an essential source of (GDRs) are a few
company. capital in developing economies. examples of overseas
portfolio investments.
FDI -Total FDI inflows

in the country in the
FY 22-23 is $70.97 Bn
and total FDI equity
inflows stands at
$46.03 Bn.
Foreign Currency
Convertible Bonds
(FCCBs) are foreign
currency Bonds
invested in Indian
companies. These are
convertible into equity
shares over a period of
time, therefore they
are covered under FDI
policy.
Tools (Money and Capital market)
Money Market Hundi is a commercial bill
It is a Segment of the Financial Market where borrowing and lending of short-term of the unorganized sector
funds (term of less than or equal 1yr) takes place. – not accepted by Banks.
● Deals in short term financial transactions (upto 1yr)

● A source of working capital finance for firms CPs and Certificate of
Features ● Deals only in bonds deposits are issued at a
● General Public participation is low discount to their face
● RBI is the prime regulator value.
Certificate of Deposits
are similar to FDs but are
negotiable and tradable
in Money market.
Structure
Discount and Finance
House of India (DFHI)
serves as a secondary
market for Money market
instruments.
CDEX is a leading
MONEY MARKET INSTRUMENTS agricultural commodity
exchange in India.
Treasury Bill - used by Central govt to fulfil its short term (<365 days)
liquidity requirement.
Commercial Paper (CP) - An Unsecured security by a high-net-worth

company to a Bank against short term loan. Maturity: 14 days to 1 yr.
Money Commercial Bill - issued by one merchant to another against a credit

Market transaction
Instrument
Certificate of Deposit - issued at a discount by Banks to depositor of
funds
Interbank Call Money market - day to day lending and borrowing

among Banks. Very short-term loan usually for 1-2 days @Call money
rate (market determined)
Escrow Account Is an
account where funds or
assets are held in trust by
a third party whilst two or
more parties complete a
transaction.
NSE has launched NSE

Prime as a new corporate
governance initiative. It is
a framework that
prescribes higher
standards of corporate
governance for listed
companies.
Capital market: In Spot Market, delivery

It is the long-term financial Market of an Economy. Regulated by SEBI. of goods is compulsory
Primary ● 1st time sale of security. Ex: IPO while in Forward market,
Market ● Company sells to Investors delivery is not compulsory
● Company fixes the Price based on valuation
● Firm raises funds for long term Bombay Stock
Exchange (BSE) is the
Secondary ● Existing securities are traded. oldest stock exchange
Market ● Traded from one Investor to another.
of Asia, estd in 1875
● Prices are market determined (Demand & Supply).
● Provides liquidity to existing securities.
Nifty (50 companies),
S&P 100 etc. are
Indices associated with
NSE
Masala Bonds are

rupee-denominated
bonds issued by Indian
entities in foreign
markets in Indian
currency. Here,
investors bear the
exchange rate risk.
IPO: unlisted company raises funds by first shares
FPO (Follow-on Public offering): fresh issue of shares by a Listed company, offered to
Means Public
Primary of
Preferential Issue: preferential allotment of fresh shares to a specific group
Market Raising
(individuals/companies)
Funds
Rights Issue: Issue of shares to existing Equity shareholder
Private Placement: offer securities to small group of Investors
Organized Exchange - Stock Markets (BSE, NSE etc)

Types
Over-the-counter exchange (OTCEI Ltd)
Secondary
Market Market Spot Market: Transactions completed on spot @prevailing rate
divided Forward Market: Derivatives trading - includes:
as Forward Contracts, Futures, Options, Swaps etc
KEY CONCEPTS AND INFORMATION ON FINANCIAL MARKETS
 LEI is a 20-character, alpha-numeric code based on the ISO 17442 standard from
International Organization for Standardization (ISO).
Legal Entity
 Used to uniquely identify parties to financial transactions worldwide
Identifier (LEI)
 RBI made the LEI mandatory for cross-border transactions for capital or current account
transactions worth Rs 50 crore and above
Equalization A levy to equalize the tax component of a resident ecommerce company as well as a non-
Levy resident e-commerce company
An online platform designed to help investors to lodge their complaints with SEBI against listed
SCORES portal
companies and intermediaries.
 An alternative form of corporate vehicle from companies, unit trusts and LLPs which can be
Variable Capital set-up as standalone fund/umbrella fund with multiple sub-funds.
Company (VCC)  It can help in building the overall financial services ecosystem
An account that a domestic bank holds for a foreign bank in Domestic Bank’s currency
Vostro Account
 It is a price-based index tracking the price movement in the futures contracts of its
underlying i.e., Guar Seed and Guar Gum Refined Splits on a real-time basis.
GUAREX  Launched by National Commodity and Derivatives Exchange Limited (NCDEX)
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
 SEBI is a Statutory Body established on 12th April, 1992 in A Securities Appellate Tribunal (SAT) has
accordance with the provisions of the Securities and Exchange been constituted to protect the interest of
Board of India Act, 1992. entities that feel aggrieved by SEBI’s
 Before SEBI came into existence, Controller of Capital Issues decision.
was the regulatory authority; it derived authority from the
Capital Issues (Control) Act, 1947.
 Initially SEBI was a non statutory body without any statutory Securities Appellate Tribunal (SAT) has the
power, established through Govt Resolution. same powers as vested in a civil court. if
any person feels aggrieved by SAT’s
decision or order can appeal to the
Supreme Court.
In 2015, the commodity markets

regulation was also given to SEBI by
merging Forwards Market Commission
with SEBI
SEBI recently announced a framework for

setting up a gold exchange that will
provide investors security in the form of
electronic gold receipts (EGR).
The first ever green bond of India was

launched by Yes Bank in 2015
REGULATORY DEVELOPMENTS FROM SEBI
Algo Trading  Algorithmic trading or Algo trading is a computer assisted buying and selling of stocks using
pre-programmed computer strategies to execute buy and sell trades based on set
parameters, instructions or market pattern and conditions.
 SEBI is working to regulate Algo Trading due to issues of preferential access and its misuse
for systematic market manipulation
T+1 SEBI (Securities and Exchange Board of India) has introduced an optional T+1 settlement cycle
Settlement for the markets.
Cycle
Sweat Equity  Sweat equity refers to shares issued by a company to its employees for non-cash
consideration.
 SEBI has relaxed the quantum of sweat equity that can be issued by new-age technology
companies listed on the Innovators Growth Platform (IGP)
SOCIAL STOCK EXCHANGE

Social Stock Exchange (SSE) functions as a regulated funding platform to allow For-Profit Social Enterprises (FPEs)
and not-for-profit organizations (NPO) with a social purpose, to raise funds.
Provides the investors opportunities to mitigate socio-economic problems through investments

FEATURES that also have the potential to produce financial returns
The Impact investors can buy stakes in the form of bonds from listed organizations.
SSE will work under the regulatory ambit of SEBI
Based on 15 broad eligible social activities approved by SEBI
NPOs engaged in those activities may raise funds through equity, Zero Coupon Zero Principal
FRAMEWORK
Bonds, Mutual Funds etc. after registering with SSE
instituting a capacity-building fund with a corpus of ₹100 crore
Social audit shall be mandated for social enterprises raising funds/registered on SSE
At present, avenues through which the social sector (FPEs and NPO) receive funding include Corporate Social
Responsibility (CSR), impact investing, philanthropic/Government grants etc.
Balance of payment
To increase its market
size and ensure better
penetration, in 2022,
India signed CEPA with
UAE and ECTA with
Australia.
According to the World

Bank's latest Migration
and Development
Report, India retained
its position as the
largest recipient of
remittances, with an
estimated 125 billion
dollars in 2023.
Remittances are the

second largest source of
external financing after
service export.
The sum of the current

account and capital
account indicates the
overall balance, which
could either be in
surplus or in deficit.
Balance of Payments is
the net credit in Current
Account and Capital
Account.
 BoP = net credit in (Current Account + Capital Account and Financial Account).
 The SDR is neither a currency nor a claim on the IMF. Rather, it is a potential claim
on the freely usable currencies of IMF members. SDRs can be exchanged for these
currencies.
Components
Current Account Deals with inflow and outflow of goods and services between countries.
Capital Account Deals with foreign exchange reserves, investments, loans & borrowings.
Current Account
Net Invisibles Net Service Exports
Net Transfers Net Private
Net Official
Net Factor Income from Net Compensation of Employees

Abroad
Net Investment Income
Net Exports
Capital Account
Net External assistance External Loans from Government, including from IMF, WB etc
Short term external debt External Debt which is to be completely repaid by Current Year / Short term
Net External commercial borrowings Commercial Loans taken by Indian Corporates from Foreign banks
Net Banking Capital Residents of one country having Long Term deposits in target country
INDIA’S EXPORTS
The global economy faced two global shocks in the new millennium namely economic and health shock. India has been
able to face headwinds (challenges) due to strong macroeconomic fundamentals and buffers.
Share of India’s trade as Steadily increasing, being above 40 per cent since 2005 (except 2020 being the
a percentage of World pandemic year).
GDP
Trends in Merchandise Achieved an all-time high annual merchandise export of US$ 447.46 Billion in FY23.
Trade
Trade in Services Services exports stood at USD 322.72 Billion in FY23as compared to USD 254.53
Billion in FY 2021-22.
 India is the 7th largest service exporter in the world.

 Software and business services together constitute more than 60 per cent of India’s total services exports.
 India has secured the fourth spot in the world for foreign exchange reserves as of the second quarter of
2023. A report by FOREX.com shows that India has $527 billion in foreign currency assets.
Exports Imports
Machinery, Transport and Metal Manufacture Petroleum Oil and Lubricants
Mineral Fuels and Lubricants Capital Goods
Agri and Allied products Non-ferrous minerals
Chemicals and allied products Chemical element & compound
Gems and Jewelry Pearls, precious and semi-precious stones
External Debt Situation
The external debt to GDP ratio stood at 18.61 per cent as at end-September 2023.
About 97 percent of short term debt is in the form of trade credit to finance imports. So, the rise is stability
friendly.
Sovereign External Debt decreased by 5.7 per cent
INDIA’S GLOBAL TRADE ENGAGEMENTS
India has so far concluded 13 FTAs and 6 Preferential Trade Agreements (PTAs). In the India has signed CEPAs
year 2022, India signed Economic Cooperation and Trade Agreement (ECTA) and with UAE, South
Comprehensive Economic Cooperation Agreement (CECA) with Australia and UAE, Korea and Japan
respectively.
Early harvest scheme is a
TYPES OF TRADE AGREEMENTS
precursor to an FTA
between two trading
partners. This is to help
the two trading countries
identify certain products
for tariff liberalisation
FTAs normally cover trade

in goods (like agricultural
products) or trade in
services (banking,
construction etc.), but can
also cover other areas
such as intellectual
property rights (IPRs),
investment, government
procurement etc.
Two or more partners give preferential right of entry to
Preferential Trade certain products. This is done by reducing duties on an
Agreement (PTA) agreed number of tariff lines. The South Asian Free
Ex: India signed a PTA with Afghanistan Trade Area (SAFTA) is a
2004 agreement that
A free trade agreement is a preferential arrangement in created a free-trade area
which members reduce tariffs on trade among themselves,
Free Trade of 1.6 billion people in
while maintaining their own tariff rates for trade with non-
Agreement (FTA) Afghanistan, Bangladesh,
members.
Ex: Sri Lanka and various trading blocs like ASEAN Bhutan, India, the
Maldives, Nepal,
Comprehensive Involves only “tariff reduction/elimination in a phased Pakistan and Sri Lanka
Economic manner on listed / all items except the
Partnership negative list and tariff rate quota (TRQ) items”
Agreement (CECA) Ex: India has signed CECA with Malaysia As per the BIS Triennial
Central Bank Survey
Members apply a common external tariff (CET) schedule to 2022, the US dollar is the
Customs Union imports from non-members. Ex: Southern African Customs dominant vehicle
Union (SACU)
currency accounting for
Movement of factors of production is relatively free 88 per cent of the global
Common Market
amongst member countries. forex turnover. The INR
accounted for 1.6 per
An economic union is a common market where member
cent.
Economic Market countries coordinate macro-economic and exchange rate
policies. Ex: European Union
Approaches to measure the adequacy of Foreign Exchange Reserves:
Conventional Approach
Traditional approach
Guidotti–Greenspan IMF Rule
Currency and Foreign exchange

Foreign Exchange or forex is the conversion of one country's currency into another. A The Indian
currency’s value can be pegged to another country’s currency or even to a basket of rupee is fully
currencies, or it may also be set by a Govt. convertible only
in the current
account and not
Exchange Rates factors
in the capital
Depreciation Decrease in the level of a currency in a floating exchange rate account
system due to market forces S.S.Tarapore
Appreciation An increase in the value of currency committee has
recommended
Devaluation Official lowering of value of a country’s currency within a fixed to move
exchange rate system towards Full
Flexible/Floating Central Banks do nothing to directly affect the level of exchange Capital Account
Exchange Rate rate convertibility
Fixed Exchange rate Central bank uses an Open market mechanism and is committed
to buy/sell its currency only at a fixed price
Managed Floating rate It's a mix of Flexible exchange rate system & the Fixed exchange
rate system
Types of Exchange Rate System
Nominal Exchange rate Relative prices of the currency of the two countries
Real Exchange rate Rate at which we can trade the goods of one country for the
goods of another
Nominal Effective It is the weighted average value of nominal exchange rate of the
Exchange rate (NEER) rupee against the currencies of major trading partners of India
Real Effective exchange It is the weighted average value of real exchange rate of the rupee
rate (REER) against the currencies of major trading partners of India
Purchasing Power parity It tells how much of a basket of internationally traded goods and
services can be bought with Indian Rupees in India, the same
basket bought in US with the help of a Dollar

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Old Rajindra Nagar Delhi Call: +91- 98878-44044 Visit: https://kalamias.

Explainer: How to use this hand out effectively.

Concept Prelims Marks Maximizer

Current Co-relation DIY WORKBOOK

Recent context of the topic. An intriguing workspace for you to think.

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2 Other basic concepts in economy

3 Five Year Plans

5 National Income and GDP

8 RBI and Monetary Policy

14 FDI, FII, Bonds, disinvestment

15 Tools (Money and Capital market)

17 Currency and Foreign exchange

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Alternate Measures to Poverty:

● By UNDP under Human Development Report

India’s population is among

Seasonal Occurs based on Seasons/certain parts of the Year. Ex: in Agriculture

Structural When the structure of an Industry changes, mainly due to change in

Chairperson Prime Minister of India

Ad-hoc Two members in ex-officio capacity from leading Research institutions on a

Knowledge and Builds the think-tank acumen of NITI Aayog

Initiatives Digital India Good Governance Index

Atal Innovation Mission Aspirational Districts Programme

SDG India Index Composite Water Management Index

India Innovation Index Women Transforming India awards.

draws membership from a wider expertise. had limited expertise.

Focuses upon ‘Bottom-Up’ approach of Planning. Followed a ‘Top-Down’ approach.

Prime Minister’s Economic Advisory Council

Neither constitutional nor statutory body

NITI provides administrative and secretarial support to PM- EAC

Planning initiatives in India before Planning Commission

National Planning Committe (1938)

Bombay Plan (1944)

Gandhian Plan (1944)

Sarvodaya Plan (1950)

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Revenue  Should not create any liability for Govt.

 Expenditures incurred for purposes other than creating of physical or financial

Capital These are which increase liability or minimize financial assets.

All the receipts and expenditures of

Balanced Estimated revenue is equal to its anticipated

Unbalanced Revenue & expenditure are not equal - Surplus Budget or

Outcome analyses progress of each ministry and department and

Gender process of keeping a gender perspective in policy/

On assets  Securities Transaction tax  Land Revenue GST Council is a

Types of Indirect Taxes Brief description

Ad Valorem Tax Based on the value of the transaction or property.

VAT Imposed and collected at various points of the value chain.

Excise Tax On goods produced or manufactured in country

Customs Duty On goods Imported and exported out of country

GST Destination based Single Tax under 101CAA

Proportional Tax Same tax rate regardless of Income

Retrospective Tax Tax imposed on a transactions/product retrospectively

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As per the new “Monetary Policy Framework” Agreement 2015:

Monetary Policy framework operated by RBI.

Inflation target is 4% with a range of +/- 2%.

The Inflation index considered: CPI-Combined given by NSO, MoSPI.

Major Monetary policy tools used by RBI & its uses

Reverse Repo Rate at which RBI absorbs liquidity

FUNCTIONS OF A BANK  Priority Sector Lending (PSL)

Financial Services Institutions Bureau

Default Bereft/fraud due to financial or business failure