Indian Economy Class Notes-2022 by Kumar Amit Sir-1

INTRODUCTION
Economics
Oikonomia
Oikos Nomos
Household or Family Management
The term Economics is derived from a Greek term Oikonomia which is a combination of two
Greek terms Oikos and Nomos. 'Oikos' means household or family whereas 'Nomos' means
management. Hence, it can be said that economics is a discipline which deals with study of
household management. It tries to understand that how a family manages its expenditure using
its limited resources.
However, this is the simplest definition of economics which is possible. The scope of economics is
much wider than that. Hence, to be more precise it can be said that Economics is a discipline
which deals with the process of production, distribution and consumption of goods and services.
Economics is a discipline and economy is its subject matter. Therefore, the process of
production, distribution and consumption of goods and services constitute the economy which is
studied under the subject called Economics.
As a discipline economics is broadly classified into two parts.
1. Micro Economics
2. Macro Economics
This classification was given by a Norwegian economist Ragnar Frisch who was the first recipient
of Nobel Prize in economics along with Jan Tinbergen of Holland. Nobel Prize in economics is
officially known as Sveriges Riksbank Prize in Economic Sciences. It has been named so mainly
because it was introduced by Sveriges Riksbank which is the central bank of Sweden, on its
300th anniversary. It is the oldest central bank in the world.
Micro-Economics and Macro-Economics

Micro and Macro both are Greek terms. Micro means small whereas Macro means large. Hence,
the terms are self explanatory. Micro economics deals with study of smaller aspects of economy
or those basic units with which the economy is constituted. On the other hand, Macro
economics deals with the study of larger aspects of the economy. The economy is a large complex
arrangement made up of smaller units such as families, firms, demand and supply and the
market where the goods and services are bought and sold. Micro-economics deals with the study
of the economic activities at the level of a family and at the level of a firm. It deals with the study
of demand and supply and also the study of the market. Micro economics serves as the
foundation of any economy over which macro economy lies.
On the other hand, macro-economics deals with the study of economic activities at the level of
entire country. It deals with study of economic growth, economic development, national income,
inflation, unemployment, economic policies of the government as well as the central bank. Micro
economy and Macro economy cannot be completely segregated from each other. They both
influence each other.
For example- Increase in demand from individual families will automatically ensure increase in
production and hence economic growth. Similarly, the policies of central bank lead to increase in
interest rate then it is obvious that the demand from individual family will fall down.
1 Economics By: Kumar Amit Sir

Economic Growth and Economic Development
Economic growth is a quantitative concept whereas economic development is a qualitative
concept. Growth refers to increase in production or increase in GDP over a period of time.
Hence, it is only concerned with numbers. On the other hand, growth with equity is economic
development. It means that if the benefit of increase in production reaches the entire population,
it is termed as economic development. Hence, equitable distribution of resources leading to
improvement in living standard is economic development. It can be said that economic growth is
essential for economic development but it is not sufficient. Development also requires other
initiatives like proper redistribution.
In any country, micro as well as macro both the factors should be conducive enough to ensure
continuous economic growth. The micro factors are the increasing household demand and the
increase in productivity and production of individual firms. On the other hand, macroeconomic
factors include the monetary policies of RBI which at present have kept the interest rate low
leading to high liquidity and high demand. If the fiscal health of the government is according to
expectations and the fiscal deficit is well within control it is also a sign of good economic health.
It leaves more amount of money with the government to improve infrastructure and employment
generation. Even inflation being within control, will ensure continuous demand.
Inclusive Development and Sustainable Development

Inclusive development is a comprehensive form of development which has two aspects-
“development of all” and “development in all the aspects”. Development of all means, everybody
should be made a party to the process of development and nobody should lag behind. It is based
on the concept of Antyodaya and Sarvodaya. Antyodaya means upliftment of those who are at
the bottom of hierarchy which will automatically ensure Sarvodaya i.e. upliftment of all. It is also
associated with the concept of justice. For example- the theory of justice propounded by John
Rawls which states that no chain is stronger than its weakest link. It means that the strength of
a chain is equal to the strength of its weakest link. Similarly, no society is stronger than its
weakest member. Hence, in order to strengthen the entire society, it is the weakest member who
has to be strengthened. Development in all the aspects means economic, socio cultural as well
as political upliftment.
Sustainable Development, on the other hand, is rooted in judicious use of resources. In the
process of development even some negative consequences are seen. It is a possibility that the
irresponsible process of development and the reckless use of resources will deprive the future
generation of the resources. Hence, use of resources in an environment friendly manner,
ensuring that they remain available even to next generation is sustainable development. It is a
process of development which is rooted in the belief that the earth and its resources have not
been inherited by us from our ancestors but they are something that we owe to our next
generation.

INFLATION
It refers to continuous rise in the prices of goods and services leading to decline in the
purchasing capacity of a country's currency. Because of inflation as the purchasing capacity of
the currency comes down to zero that currency will be withdrawn from circulation. At present,
the lowest denomination coin which is legal tender in India is 50 paise coin. However according
to the guidelines of the RBI, 50 paise coins can be used only for a payment up to Rs. 10.
Inflation adversely affects our savings. It affects poor the most. It is mainly because the poor
does not have surplus. Hence, the moment price increases his consumption is affected. On the
other hand, the rich has surplus which can be invested in other assets and as the price of other
commodities and services increases, the value of that asset may increase. This increase in the
value of the asset will neutralise the impact of increase in the price of consumption.
As inflation increases at a rapid pace the lender will be at loss whereas the borrower will be
benefited. Hence, with rapid increase in inflation in order to ensure their profit the banks will
also increase the interest rate while lending. As the interest rate on loans increases it becomes
costlier for the consumer to borrow and the consumption declines. It also becomes costlier for
the investors to borrow. Hence, investment and production are also affected. Therefore, it can be
said that if inflation increases at a rapid pace it will affect economic growth in country.
If the increase in inflation is much higher as compared to the interest paid by banks on the
deposits, the consumer will prefer consuming that amount of money rather than depositing it
with the bank. Hence, in order to attract more and more deposit the bank will have to increase
the interest rate even on deposit.
Based on the cause behind inflation, it can be broadly classified into three different types-
1. Demand Pull Inflation
2. Cost Push Inflation
3. Structural Inflation
Demand Pull Inflation

It takes place in any economy because of increase in demand. If in case the flow of money in the
economy i.e. the liquidity is high either because of increase in our income or employment
opportunities or because of decline in interest rate on borrowing or increase in the expenditure
of the government, the consumer is left with surplus money. Due to this the consumption or the
demand increases. If this increase in demand is not adequately matched with supply then the
price will increase leading to demand pull inflation. That is the reason why every economy tries
to create more and more employment opportunity but employment opportunities have to be
created only to the extent that they do not accelerate inflation beyond control. This is referred to
as NAIRU.
NAIRU (Non-Accelerating Inflation Rate of Unemployment)

Demand pull inflation is always associated with economic growth. As the demand increases, the
companies try to produce more and more which leads to economic growth. However, the gap
between the demand and supply should not be very high otherwise demand pull inflation will not
be beneficial. The goods and services will go beyond the reach of common people. That is the
reason why employment opportunities should be created in a productive manner. It means that
along with increase in income of an individual, he should also contribute in supply.
In a developing economy like India demand pull inflation is a common phenomenon. More and
more employment opportunities are being created leading to continuous increase in demand
which is the cause behind demand pull inflation.

Cost Push Inflation
Cost push inflation does not take place because of increase in demand. It takes place in an
economy mainly because of increase in the cost of production. In other words, if the price of raw
material or any other input increases, the price of the final product or service will increase even
without increase in demand. For example- Crude oil is the source of production of diesel and
diesel is the most important source of fuel in production and transportation activities. Hence, if
diesel becomes costlier the cost of production will increase leading to cost push inflation. Cost
push inflation is not directly associated with demand but it may be indirectly associated with
demand.
Note:- Imported inflation is price rise due to an increase in costs of imported products.
Structural Inflation
It takes place in any economy because of structural deficiencies. In other words if the storage
and transportation facilities are not adequate and even if the goods are produced in sufficient
quantity, they will fail to reach market in adequate quantity. Structural inflation can also
happen because of hoarding, cartelisation or black marketing. Hence, it can be said that
structural inflation is that inflation which takes place because of supply side problems. When a
middleman or a dealer procures a commodity in huge quantity and instead of supplying it in the
market, stores that commodity for a long period of time creating an artificial shortage of product
in the market then it is termed as Hoarding. When the producers of a commodity or providers of
a service mutually decide to increase the price, setting aside competition then it is termed as
Cartelisation. The process through which goods or produces are sold at wrong place or in a
wrong way then it is called Black marketing. All hoarding, cartelisation and black marketing are
illegal.
In India, inflation exists because of all the three factors- demand pull, cost push and structural
problems. India is a developing economy where employment opportunities are continuously
being created. At the same time, public expenditure because of infrastructure development as
well as welfare scheme remains high. It results in demand pull inflation. Flow of black money in
the economy is also an important cause behind demand pull inflation. Similarly, India is not
self-sufficient in terms of production of several raw materials or other inputs. So, the country
depends upon import of these raw materials. Hence, the moment the price of raw materials in
the international market increases, cost push inflation in India becomes obvious. Along with it
lack of the sufficient storage facilities, inadequate transportation facilities also lead to price rise.
Black marketing, hoarding, and cartelisation are common problems leading to structural
inflation.
In India, the RBI is responsible for controlling inflation. Inflation targeting and to keep inflation
within the set target is the responsibility of RBI. However, the RBI through its monetary policies
can only control demand pull inflation that too only to limited extent. The RBI can only control
credit flow in the economy by taking away surplus money from the banking system. However, in
this process economic growth is affected. The RBI cannot control that part of inflation which is
driven by black money. In case if the public expenditure (expenditure of the government)
remains high the monetary policies become ineffective. At the same time, in controlling cost push
inflation and structural inflation the role of government and state government is more important
as compared to the RBI. Hence, inflation can be controlled only through the combined efforts of
the RBI, the central government as well as state governments.

Types of Inflation based on rate
Based on the rate of increase in inflation, it can be broadly classified into four different types.
1. Creeping Inflation- If inflation remains in between 0-3% (mainly it is above 0), it is
termed as creeping inflation. It is a common characteristic of developed economies. Since
the demand in developed economies remains low, the rate of inflation also remains low. It is
a good sign for the economy. It shows that the demand is not very high and even
consumption is happening.
2. Walking or Trotting Inflation- If inflation remains above 3% and up to 10% then it is
termed as walking/trotting inflation. It is a common characteristic of developing economies.
It shows that the demand is high and some type of cost push and structural factors are
also present. However, if a walking inflation is at the upper side then it is a cause of
concern and it should be controlled now.
3. Runaway Inflation- When inflation remains above 10% and up to 30% then it is termed
as runaway inflation. It shows that inflation is moving at a rapid pace and it is going
completely beyond control. It is very bad for any economy.
4. Galloping/Hyper Inflation- When inflation goes completely beyond control and may
move to any extent then it is termed as galloping/hyperinflation. It is a sign of failed
economy and is extremely bad.
Some important concepts related to inflation

Deflation
It is opposite to inflation. It refers to continuous decline in the price of goods and services.
Deflation may occur because of two important factors-
• If the supply exceeds the demand.
• If the demand falls below the supply.
The decline may be because of the following reasons-
• When the credit flow in the economy declines due to low liquidity in the banking system.
• When the rate of unemployment increases.
• When the economy of a country reaches its saturation.
• When the population of a country is ageing.
Continuous deflation in an economy is not a good sign. It affects the economic growth of country.
Hence, a little bit of inflation is always better than deflation.
Disinflation
It is different from deflation. Disinflation is a form of inflation only. However, disinflation refers to
inflation with a continuous declining rate. In other words, continuous decline in the rate of
inflation is disinflation. It can be said that every disinflation is a form of inflation but every
inflation is not a case of disinflation.
100/- (10%) 110/- (20%) 132/- Inflation.

100/- (10%) 110/- (5%) 115.5/- Disinflation
100/- (-2%) 98/- Deflation
Reflation
After a continuous decline in the price i.e. after a long period of deflation, when the prices start
reviving again then it is termed as reflation. Continuous deflation is not good for economy.
Hence, when the price declines continuously, the central bank of the country as well as the
government both becomes active. The central bank reduces the interest rate in order to enhance
credit flow to ensure liquidity which increases consumption. On the other hand, the government
reduces the direct taxes leaving more amount of surplus money with the consumer. This further
adds to consumption. The government also reduces the indirect taxes making goods and services
cheaper which make consumption even more attractive. Because of this external support, the
demand increases and the price start reviving. It is known as reflation.
Wage price spiral

Inflation spiral or wage price spiral refers to the cyclic relationship between increase in the wages
and increase in inflation. As the wages or the income of employee is increased, the demand
increases leading to inflation. As the price increases, there will be further demand for increased
wages and as the wages increases; cost push and the demand pull both the inflation will
increase. This is inflation spiral which is a continuous process.
Inflation tax
Inflation tax is not exactly a tax in its literal sense. It is a kind of loss caused to the general
consumers by inflation. For example- the purchasing capacity of money fall down which the
consumer had saved. Similarly, the cost of consumption increases for the consumers. Because of
inflation the savings of people falls as in the case of tax.
Stagflation
The term stagflation is a combination of two terms stag+flation. Here stag stands for stagnant
and flation stands for inflation. Here, stagnant refers to the economy of a country remaining
stagnant without any growth. It may even fall down. Hence, stagflation is a contradictory
situation in which inflation is not demand pull but it is mainly due to cost push and structural
factors. Since the growth is not there, the unemployment rate is high. Therefore, stagflation
further becomes contradictory because it is a situation of high inflation with high
unemployment. It is the worst condition witnessed in any economy.
Phillips curve
The normal relationship between unemployment and inflation was shown with the help of a
curve by British economist Alban Phillips. This curve is known as Phillips curve. According to
normal relationship as unemployment rate increase, inflation should automatically come down.
Inflation
Unemployment
Relation between inflation and
unemployment during stagflation
This particular relationship is not followed in the case of stagflation.

Shrinkflation
During inflation the price of raw material increases which may result in price hike of final
product. Increase in the price of the product is visible to the consumers, which can negatively
affect the demand for the product. Hence, instead of increasing the price of the product, quantity
is reduced while maintaining the same price. Small reduction in quantity usually goes unnoticed
by the consumers. Under this the price of the product does not increase, but there is an increase
in the price per unit weight or volume of the product. For Example – the price of Parle G (5 Rs),
Rin Detergent Bar (10 Rs) etc have been same for decades.
Skimpflation
This is also related to inflation. It is a situation when companies reduce the quality of a product
or service to reduce the impact of higher costs. In simple term it is known as cost cutting
measure. But sometimes use of low-quality inputs or ingredients can result in bad experience or
even health concerns. Even though prices don't go up directly under it, people must spend more
to get the same service quality that they used to enjoy earlier at same price. For Example – A
restaurant stops providing free water along with food.
Calculation of Inflation
In any country, inflation has to be calculated based on which the money supply in the economy
is regulated. For calculating inflation indices are used. There are three important indices which
are used for calculating inflation.
1. Producer Price Index (PPI)
2. Wholesale price index (WPI)
3. Consumer price index (CPI)
Till the beginning of 2014, WPI was considered to be the main index for calculating inflation in
India. Based on it the monetary policies were formed. However, on the recommendations of the
Urjit Patel committee from 2014, CPI has been made the main index for calculating inflation.
Producer Price Index

PPI is an index which is used in order to calculate inflation at a point of production. It measures
the average change in the price a producer receives for his goods and services sold in the
domestic or foreign market. Hence, it is the most effective tool in order to calculate cost push
inflation. However, this index is not used in India.
Wholesale Price Index

WPI is an index with the help of which inflation at wholesale level is calculated. In India, WPI
figures are calculated and published once in a month by Ministry of Commerce. Under WPI,
since the price data is collected at wholesale level, it is easier to calculate WPI. At wholesale level,
generally price uniformity can be seen throughout the country.
For calculating WPI, a basket is maintained. This basket consists of goods only. It does not
include services.
This basket is modified after a gap of not less than 5 years and not more than 10 years. Last
time this basket was modified in 2017. At present, the basket consists of 697 items which are
divided into three parts. When the basket is modified all those goods which are of no use
anymore are removed from the basket and those new goods which are in use are added in the
basket. The three segments in which the basket is classified are of primary goods, manufactured
goods and fuel, power & lubrication. The primary goods are those goods which we directly derive
from land, plants, trees, animals etc. and are 117 in number. It includes food grains, fruits,
government both becomes active. The central bank reduces the interest rate in order to enhance
credit flow to ensure liquidity which increases consumption. On the other hand, the government
reduces the direct taxes leaving more amount of surplus money with the consumer. This further
adds to consumption. The government also reduces the indirect taxes making goods and services
cheaper which make consumption even more attractive. Because of this external support, the
demand increases and the price start reviving. It is known as reflation.
Wage price spiral

Inflation spiral or wage price spiral refers to the cyclic relationship between increase in the wages
and increase in inflation. As the wages or the income of employee is increased, the demand
increases leading to inflation. As the price increases, there will be further demand for increased
wages and as the wages increases; cost push and the demand pull both the inflation will
increase. This is inflation spiral which is a continuous process.
Inflation tax
Inflation tax is not exactly a tax in its literal sense. It is a kind of loss caused to the general
consumers by inflation. For example- the purchasing capacity of money fall down which the
consumer had saved. Similarly, the cost of consumption increases for the consumers. Because of
inflation the savings of people falls as in the case of tax.
Stagflation
The term stagflation is a combination of two terms stag+flation. Here stag stands for stagnant
and flation stands for inflation. Here, stagnant refers to the economy of a country remaining
stagnant without any growth. It may even fall down. Hence, stagflation is a contradictory
situation in which inflation is not demand pull but it is mainly due to cost push and structural
factors. Since the growth is not there, the unemployment rate is high. Therefore, stagflation
further becomes contradictory because it is a situation of high inflation with high
unemployment. It is the worst condition witnessed in any economy.
Phillips curve
The normal relationship between unemployment and inflation was shown with the help of a
curve by British economist Alban Phillips. This curve is known as Phillips curve. According to
normal relationship as unemployment rate increase, inflation should automatically come down.
Inflation
Unemployment
Relation between inflation and
unemployment during stagflation
This particular relationship is not followed in the case of stagflation.

vegetables, minerals, milk, tea, coffee, cotton, jute etc. The manufactured goods are those goods
which are produced in factories using machines and tools they are 564 in numbers. It includes
consumer durables, Fast Moving Consumer Goods (FMCG), cement, chemicals, metal etc. The
fuel, power and Lubricants consist of 16 items. Under WPI, the average price movement of only
these 697 items is tracked. The price of some of the items may increase whereas the price of
some of the items may decline. Some items which become costlier may push the index upward
and those items which become cheaper may pull the index downward in direction. This upward
and downward pull and push is termed as Skewflation. Although WPI figures are calculated
every month which is figured for a particular month and it is calculated in comparison with the
same month of previous years. At present the base year for calculating WPI is 2011-2012. The
formula which is used for calculating WPI is known as Laspeyres formula. Presently in WPI, the
value of indirect taxes is not taken into consideration.
WPI as an index suffers from three basic problems because of which the Urjit Patel committee
has suggested that it should be replaced with the CPI as the main index. The monetary policies
of the RBI should be based on the figures published under CPI. The three inherent problems for
WPI are as follows.
1. In WPI, the price movement of goods is tracked at wholesale level whereas the consumer
consumes at retail level.
2. In WPI basket, services are not included. Hence, under WPI the price movement of services
cannot be calculated. Even services are important part of our consumption
3. In WPI, maximum weightage is given to manufactured goods. Hence, they influence the
basket the most. However, manufactured goods mainly cement, metal etc. are not bought
on daily basis.
117 564 16 = 697
During 2013, the retail inflation i.e. CPI was rising at an average rate of 10%. Hence, the Urjit
Patel committee had suggested that from the beginning of 2014, in next 12 months, CPI should
be brought down to 8%. In other 12 months it should be brought down to 6% and in the next
12 month it should brought down to 4%. Over this 4% a range of (+)/(-)2% should be placed.
Through its monetary polices the RBI should ensure that retail inflation neither goes below 2%
nor it should move above 6%.
Flexible Inflation Target was adopted through an agreement between RBI and GOI in 2016. For
providing it a statutory backing, even the Reserve Bank of India Act 1934 was amended. Under
this, inflation target is fixed by the Government, in consultation with the RBI for five years. The
GOI mandated, RBI to keep the retail inflation at 4% with a range of (+)/(-)2% for five-year
period 2016-2021.
The Central government has decided to retain the inflation target of 4% (with the upper tolerance
level of 6 % and the lower tolerance level of 2 %) for the 5-year period April 1, 2021 to March 31,
2026.
Note:- The Government of India has constituted a Working Group for the revision of the current
series of Wholesale Price Index with base year 2011-12, under Ramesh Chand, who is a member
of Niti Aayog. This 18 member Working Group has been authorised to recommend a roadmap to
switch over from WPI to PPI.

Consumer Price Index
CPI is another index which is used for calculating inflation. However, as an index it is used for
calculating inflation at retail level. In CPI, since the price data is collected at retail level due to
widespread price variation, it becomes difficult to collect a genuine price data. Under CPI initially
4 different indices were published.
3
1. CPI for industrial workers (IW) MoL
2. CPI for agricultural labourers (AL)
3. CPI for rural labourers (RL)
4. CPI for urban non-manual employees (UNME) - CSO
Out of these 4 indices the first three were calculated and published by labour bureau which
functions under Ministry of Labour. CPI (UNME) was calculated by Central Statistics Office
(CSO) which functions under Ministry of Statistics and Program Implementation (MOSPI). Out of
these four indices at present the last 3 are no more published. It is CPI (IW) through which the
dearness allowance of government employee is calculated. Base year for CPI (IW) has been
revised to 2016. For its calculation data from 78 industrial areas are collected. When the other 3
indices were discontinued, calculation of 3 more indices was introduced. These indices are:
1. CPI (Urban)
2. CPI (Rural)
3. CPI (Combined) & by a so
The CPI (Combined) is the average of CPI (Urban) and CPI (rural). The CPI (urban) is used for
calculating inflation in urban areas. For this price, data is collected from 310 urban centres. For
CPI (rural) which is used for calculating inflation in rural areas the price data is collected from
1183 (1182) rural areas. The base year for these three indices is 2011-12 and all were earlier
calculated by CSO. But as per the proposed National Policy on Official Statistics in 2019 NSSO
and CSO were merged and a single entity named NSO was formed. Presently NSO calculates and
publishes these 3 indices. The basket for calculating CPI is divided into 6 parts:-
1) Food and Beverages 4 5 / %
2) Pan Supari and Tobacco 2 4 % .
3) Housing 10 3 .
5
4) Bedding, Clothing and Footwear ↓ .
5) Fuel and Light 6 5 .
6) Miscellaneous (This segment includes some important services such as transport and
communication, education, entertainment, health care etc.) 20 3 -
In this basket Food and Beverages have the highest weightage.

The CPI (Combined) is also termed as the Headline Retail Inflation.

Core Inflation
In the basket which is used for calculating inflation there are items which are highly volatile
which means the price of these items change at a rapid pace. There are other items also whose
prices remain stable for longer period of time. When the price movement of only these non
volatile items is tracked then it is termed as core inflation. The core inflation is calculated by
excluding ‘food and beverages’ and ‘fuel and light’ groups from overall CPI (Combined) inflation.
The Economic Survey 2021-22 notes that, CPI (Combined) doesn’t include fuel items such as
petrol and diesel for vehicle, under ‘fuel and light’ category. They are included in ‘transport and
communication’, a subgroup of miscellaneous group. Hence, the conventional way of calculating
retail core inflation doesn’t exclude the impact of volatile items. So, the the increase in fuel price
continues to impact core inflation.
Refined Core Inflation

A new Refined Core Inflation has been constructed to address this anomaly by excluding main
fuel items like petrol, diesel, lubricants and other fuels for vehicles, along with ‘food and
beverages’ and ‘fuel and light’ from the headline retail inflation.
*****

MONETARY POLICIES
Monetary policies are related to the flow of money or liquidity in the economy. With the help of
these policies the central bank of a country tries to control the flow of money. These policies are
the responsibility of the central bank. If the flow of money is high it will lead to inflation. Hence in
such a situation the central bank will reduce the flow of money to bring down the demand. It will
automatically reduce inflation. On the other hand if the flow of money in the economy is low it will
affect the demand adversely and economic growth will suffer. In such a situation with the help of
these policies, the central bank of a country tries to infuse additional amount of money in the
economy. In other words we can say that with the help of these policies the central bank decides
that how much credit should reach the consumer and at which particular rate of interest. The
monetary policies in India are formulated by the Reserve Bank of India (RBI) in the month of April
and they are revised after every two months. The main objectives of the monetary policies can be
as follows -
1. To control inflation
2. To manage economic growth
3. To maintain a stable exchange rate of domestic currency against other international
currencies
In order to control the flow of money in the economy the RBI or any other Central Bank uses a
number of tools or instruments. These tools are referred to as Monetary Policy Tools. Such tools
can be broadly classified into -
(A) Traditional Tools (B) Non Traditional Tools
Traditional tools are those tools which are used by the central bank in normal circumstances. If
these tools fail to create an impact then the Non Traditional Tools are used. These tools are used
mainly in abnormal conditions. The non traditional tools may include-
1. Helicopter Drop / Helicopter Money
2. Helicopter Hoover
3. Negative Interest Rate
On the other hand traditional tools are further classified into two parts -
(A) Quantitative tools (B) Qualitative tools
The Quantitative Tools used in India by the RBI are as follows-
1. CRR - Cash Reserve Ratio
2. SLR - Statutory Liquidity Ratio
3. OMO - Open Market Operation
4. Bank Rate
5. Repo Rate
6. Reverse Repo Rate
7. MSF - Marginal Standing Facility
8. SDF – Standing Deposit Facility
When these Quantitative Tools fail to create an impact, the RBI uses the Qualitative Tools. In India
the quantitative tools as well as the qualitative tools both are sometimes used simultaneously as
well.
In banking system the deposits with the bank can be termed as a part of its Liability. On the other
hand the loans given by a bank can be termed as a part of its Asset.
The deposits or the liabilities of a bank can again be classified into:-
A. Demand Deposit or Demand Liability
B. Term / Time Deposit or Liability
(1) Economics By: Kumar Amit Sir

Demand deposit is that deposit with a bank which can be withdrawn by the depositor anytime.
Such deposits do not have a fixed maturity period. They include Current Account deposits and
Saving Account deposits (CASA Deposits).
On the other hand Term or Time deposits have a fixed maturity period and they can be withdrawn
only after a particular fixed time. They include Fixed Deposits (FD) and Recurring Deposits (RD).
When the demand liability and the term liability of a bank are combined together, we derive the
NDTL (Net Demand and Time Liability) of the bank.
Cash Reserve Ratio

CRR can be defined as that part of NDTL of the bank that a bank has to deposit to the RBI in the
form of cash. In other words, CRR is a certain percentage of the total deposits of a bank that the
bank has to keep with the RBI in the form of cash. At present the CRR is 4.50% of the total
deposits. This amount of money which is maintained in the form of CRR is neither used by the
RBI nor can it be used by the bank. Hence the amount goes out of the economy. Earlier there were
lower as well as upper ceilings on CRR. The RBI was not allowed to increase CRR above 15% or
bring it down below 3%. However, through RBI amendment Act 2006 these ceilings were removed.
If the RBI feels that the flow of money in the economy is high, leading to inflation. In such situation
it will increase the CRR to reduce liquidity. On the other hand if the RBI feels that the flow of
money is low and is affecting economic growth. Then the CRR will be reduced in order to infuse
additional amount of money. CRR is calculated every fortnight. It is calculated on total average
deposit of 14 days.
Statutory Liquidity Ratio

SLR can be defined as that part of the NDTL or the total deposit of a bank that the bank has to
maintain with themselves in the form of Cash, Gold or Government securities. At present SLR is
18% of the total deposits. It is also calculated every fortnight. Initially lower and upper ceilings
were applicable on SLR. RBI was not allowed to bring it down below 25% and was not allowed to
raise it beyond 40%. However through the RBI amendment Act 2006 only the lower ceiling was
removed.
The banks may maintain SLR either in the form of Cash, in the form of Gold or even in the form
of Government securities. SLR can be maintained in a combination of all these three. However,
since the SLR maintained in the form of cash may not be of any use for banks so they keep very
less amount in the form of cash. If SLR is kept in the form of gold then it becomes risky. Since the
government securities are least risky and the banks also earn interest on it, they prefer
maintaining SLR mainly in the form of Government securities. SLR is not a very effective tool to
control liquidity in the economy. Only that part of the SLR which is kept in the form of cash,
remains out of the economy. The parts of SLR invested in gold or government securities will
ultimately go into the economy. Although SLR is not a very effective tool to control liquidity, it
definitely influences the direction of the credit flow. Because of it, a part of the total deposit of a
bank essentially goes to the government in the form of loan. If SLR is reduced the bank will be left
with more amount of money to lend to the consumer. Hence the interest rate may fall down.
CRR and SLR are not only monetary tools, they also make the Indian banking system safe.
Together CRR and SLR are known as Reserve Ratios.
Government Securities
These are the instruments used to arrange the loan for the government. Earlier they were issued
in the form of certificate printed on paper. Government securities were just piece of paper over
which a face value was mentioned. These securities act as a Promissory Note because the

government promises that the piece of paper has the monetary value equal to the face value printed
on it. At present the government securities are issued in electronic form. They are issued by the
government and are given to the RBI. The RBI sells them to the banks. In this way the government
securities comes to the bank and the money through RBI goes to the government in the form of
loan. The government uses this to meet its expenses and pays interest to the banks through RBI.
The government securities have a maturity period. If the maturity period is of up to 1 year, then
they are termed as Bills. However, if the maturity period is of more than 1 year, then they are
termed as Bonds.
Open Market Operations

It refers to the mechanism through which RBI purchases and sells government securities in the
form of bills and bonds to the banks as well as financial institutions. However it is over and above
the government securities sold by the RBI to the banks in order to maintain their SLR. If the RBI
follows a contractionist OMO, then more and more government securities will be sold and money
will be taken away from the banking system. This will bring down the demand in the economy. On
the other hand if expansionist OMO is adopted then the RBI will repurchase more and more
government securities from the banking system. It is adopted to enhance liquidity and ultimately
economic growth. It is not mandatory for a bank to buy government securities through OMO. Only
those banks which have surplus and are willing to buy government securities may buy it on this
platform. Presently the government securities are issued in electronic form. They are bought and
sold in electronic form over an electronic platform known as e - KUBER. Negotiated Dealing
System-Order Matching system (NDS-OM) is another screen based electronic anonymous order
matching system for secondary market trading in Government securities owned by RBI.
Market Stabilisation Scheme

This mechanism is similar to Open Market Operations but it is not exactly the same. This
instrument was introduced in India in the year 2004 and after demonetisation it came in to the
light again. After demonetisation the banks had received huge amount of deposits (15 lakh 31
thousand crore rupees). Over these deposits they had to pay interest which would have been a
financial burden over the banks. Hence in order to provide relief to the banks the RBI used market
stabilisation scheme. Under this scheme the RBI took away those huge deposits from the banks.
Under this scheme Market Stabilisation Securities are issued by the government and are given to
the RBI. These securities are sold to the banks and financial institutions. Through this process
surplus money is taken away. However this money is not given to the government in the form of
loan and it remains with the RBI. Banks are paid interest by the RBI from its own resources.
Operation Twist
This instrument has been used by the Federal Reserve in its monetary policy very frequently.
However in India this concept was brought by RBI in December 2019. It is not only used in order
to bring down the burden of interest payment over the governments but it is also used to reduce
the rate of interest for other borrowers.
When the money supply in the banking system or the economy remains low even the government
by selling government securities is compelled to borrow at a higher rate of interest. This rate of
interest becomes a benchmark and loans become costlier even for other borrowers.
Under the Operation Twist the RBI buys the government securities with higher rate of interest
from the banks and financial institutions and repays the amount. Simultaneously short term
securities with lower rate of interest are also sold by the RBI to the banks and financial institutions.

In this way the money is again taken back. Since the rate of interest falls down, the interest burden
over the government and even for other borrowers automatically comes down.
G-SAP 1.0
RBI announced the G-SAP 1.0 in the first Monetary Policy Committee meeting for the financial
year 2021-22. It stands for Government Security Acquisition Program. Under this program the RBI
announced that it will purchase government bonds of worth 1 lakh crore rupees in the first quarter
of financial year 2021-22.
This program was almost similar to the Open Market Operations. But under G-SAP the central
bank used to promise earlier only, when and how much worth of bonds it will purchase from the
market.
Its objective was to provide comfort to the bond market. G-SAP almost fulfilled the long-time
demand of the OMO calendar. Through this program the difference between Repo Rate and the 10
Year Government Bond Yield can be reduced. Through this, by controlling the bond yield even the
rate of borrowing for the government can also be brought down. It was seen as the next step post
the Operation Twist.
However, in October 2021 Monetary Policy Committee Meet, the RBI governor announced the
discontinuation of G-SAP. Governor Shaktikanta Das said the there is liquidity overhang in the
market and also there is no need of fresh government borrowing. Hence, bond purchases are not
required at the moment. He mentioned that G-SAP has been successful in its objectives.
Bank Rate
Bank rate as a monetary tool had a different definition and application earlier. Bank rate now has
a completely new definition. Initially bank rate used to be that rate of interest at which the banks
borrowed for long term period (more than 90 days) from RBI. If the bank rate was increased it used
to become costlier for the banks to borrow from RBI. Hence, while providing loans to the consumers
even the banks used to charge a higher rate of interest. Because of this borrowing used to become
costlier and the borrowers were discouraged from borrowing. It was used to bring down the
demand and control the inflation. On the other hand if the bank rate was reduced, borrowing cost
for the banks used to fall down. Hence the banks used to provide loans to consumers at a lower
rate of interest. However the bank rate is not used in this way anymore.
In 1999 on experimental basis the RBI introduced Liquidity Adjustment Facility (LAF), which
included Repo Rate and Reverse Repo Rate. From 2000 onwards this LAF was made permanent.
After its introduction the bank rate as an instrument started losing its relevance. Hence the
function and definition of the bank rate was changed completely by the RBI. At present bank rate
serves as a benchmark for imposing penalty over the banks in case of non maintenance of CRR
and SLR by the RBI. Currently the bank rate in June 2022 is 5.15 %.
Repo Rate
Repo Rate refers to that rate of interest at which the banks borrow for short term period from the
RBI. In India it is for up to 90 days. Presently the repo rate in June 2022 is 4.90%. If the repo rate
is increased, it becomes costlier for the banks to borrow. Hence, while providing loans to the
consumers the banks start charging a higher rate of interest. This discourages the consumers
from borrowing and demand falls down. This brings down the inflation. On the other hand if the
repo rate is reduced, it becomes cheaper for the banks to borrow. Hence, the banks charge a lower
rate of interest while providing loans to the general consumers. This leads to increase in demand
and economic growth is witnessed.
The entire mechanism of Repo Rate is classified into two parts

(A) Overnight Repo (B) Term Repo.
Under Overnight Repo, the banks may borrow only for up to 24 hours. However under this a bank
can borrow a maximum amount which is not more than 0.25 % of its NDTL.
On the other hand, Term Repo in India may have a maturity period of 7 days, 14 days, 21 days
and so on but not more than 90 days. Through this a bank can borrow up to 0.75 % of its total
deposits (NDTL).
The word REPO stands for Repurchase Operation / Option. Under this mechanism when a bank
borrows from the RBI it has to pledge securities with the RBI. These securities are placed with a
promise that the banks will repurchase them at a fixed rate of interest on a fixed date. That is why
it is known as Repo Rate. However, the value of securities placed should be at least 105% of the
amount being borrowed. These securities which are being placed cannot be a part of the SLR of
that Bank.
Reverse Repo Rate

it is that rate of interest at which the RBI borrows from the commercial banks. At present in June
2022 RRR is 3.35%. If the Reverse Repo Rate is increased, it becomes attractive for the banks to
lend to the RBI. Hence the money which would have gone to the public in the form of loan starts
going towards the RBI. If the Reverse Repo Rate is reduced, then instead of giving loan to the RBI
the banks prefer lending to the general consumers. Earlier Reverse Repo Rate used to be 0.25%
lower than the Repo Rate. However this relationship does not exist anymore.
Under its Liquidity Adjustment Facility, the RBI borrows on a daily basis from those banks which
have surplus at the Reverse Repo Rate. The same money is given to the other banks in the form of
loan at the Repo Rate. As the Reverse Repo Rate is always less than Repo Rate, this process
automatically leads to profit for the RBI. From this profit the RBI pays dividend to the government
and also maintains it’s contingency.
Note:- However its role has been changed in Monetary policy Committee Meeting in April 2022.
Marginal Standing Facility

It was introduced by the RBI on 9th May 2011. When MSF was introduced, it was available only
to the commercial banks. MSF is an instrument of overnight borrowing available to the banks in
India. Through this facility a bank may borrow from the RBI for 24 hours. Presently MSF in June
2022 is 5.15%. However, at present the facility is not only available to the commercial banks but
also to those Cooperative banks who are able to maintain Capital Adequacy Ratio and whose
branches are connected through Core Banking Solution (CBS).
MSF is different from Overnight Repo. Through MSF a bank may borrow an amount which does
not exceed 2% of its total deposits (NDTL). In order to borrow through MSF a bank may pledge
even those securities which constitute a part of their SLR.
Note:- RBI had temporarily increased the borrowing limit under MSF to 3% of its NDTL in the year
2020 and 2021. RBI in December 2021 announced to brought it back to 2% of the total NDTL of
banks from 1st January 2022.
Standing Deposit Facility

This instrument is used in the USA and in Europe. The Urjit Patel committee recommended that
it should be introduced even in India. With this the RBI was given another instrument to manage
liquidity in the economy. It is similar to the Liquid Adjustment Facility. However, SDF is more
flexible as compared to LAF, so it can be more effective. In 2018, Section 17 of the RBI Act, 1934,
was amended to empower the RBI to introduce this instrument.

Under this facility the Central bank may borrow from a Commercial bank at a negotiable rate of
interest, which can be below or above the Reverse Repo Rate. The same money can be given to
another bank in the form of loan again at a negotiable rate which may be even below the Repo
Rate. Under this system the banks need not to pledge any government security with the central
bank in order to borrow.
Monetary Policy Committee in April 2022 added Standing Deposit Facility (SDF) as the floor in the
Liquidity Adjustment Facility corridor. With its introduction, the Reverse Repo Rate has ceased to
be the floor of the LAF corridor. However, the Reverse Repo Rate continues to remain in the toolkit
of the RBI as a monetary policy instrument and its operation will be at the discretion of the RBI
for purposes specified from time to time. Presently in June 2022, it is 4.65%.
Policy Corridor / Liquidity Adjustment Facility Corridor

The Policy Corridor or LAF Corridor is the difference between the rate at which the RBI accepts
money from banks and the rate at which it lends to banks, ultimately infusing money into the
economy. Earlier it used to be the difference between MSF and Reverse Repo Rate. Before COVID
pandemic the difference was symmetric with respect to Repo Rate exactly in between.
Repo Rate + 25 BPs = MSF and Repo Rate – 25 BPs = RRR.
(Corridor Ceiling) MSF 25 BPs + Repo Rate - 25 BPs RRR (Corridor Floor)
During COVID, the Policy Corridor became asymmetric as RRR was reduced 65 BPs from Repo
Rate. But as announced in April 2022 Monetary Policy Meet, the central bank will no longer accept
money for anything lower than SDF. So SDF rate became the floor for the policy corridor. The
ceiling for the corridor is MSF. With the introduction of SDF, the Policy Corridor again became
symmetric.
Basis Points (BPs)

The RBI in its monetary policy uses the term Basis Points in place of Percentage. This term is used
in place of percentage just in order to magnify the impact of the changes brought by the RBI in
the monetary system.
1% = 100 BPs
0.25% = 25 BPs
Liquidity Trap
It is a situation in which the liquidity in an economy remains trapped somewhere and it fails to
reach the consumer. For example – Through Monetary Easing or Cheap Money Policy the RBI may
ensure enough liquidity in the banking system. But because of adverse economic conditions the
banks may remain apprehensive and they may fail to provide sufficient amount of loans to the
consumers or borrowers. If an economy is suffering from recession because of low demand and
low production the people may start losing their jobs. Hence in order to enhance the demand and
to bring the economy out of recession the central bank may ensure optimum liquidity in the
banking system. However, the banks remain uncertain about the future of the borrowers and avoid
taking risk while providing loans. In this way the liquidity remains trapped in the banking system.
Haircut
The term Haircut in Economics can be defined in two different ways. If in case a borrower borrows
by pledging an asset such as Land ,Gold, Share, Government securities etc the amount borrowed
will always be less than the value of the asset which has been pledged. This difference between
the value of the asset and the amount borrowed is termed as Margin or Haircut. If the asset pledged
is highly volatile the margin or the haircut will be higher.
However, Haircut can also be defined in another way. If the value of the asset pledged, falls down
even below the amount borrowed and the borrower defaults on the repayment. The lender in order
to recover the amount which can be recovered will sell the asset even at a loss. This loss is also
termed as haircut which the lender has to be bear.
Cheap Money Policy and Dear Money Policy

When the RBI through its monetary policies tries to make the availability of loans easier and
cheaper, then overall the policy is known as cheap money policy. The objectives of such policies
are -
▪ To enhance the flow of money.
▪ To create more and more demand.
▪ To encourage investment.
▪ To ensure economic growth.
By reducing the rates the central bank makes availability of loan easier. It is also known as
Monetary Easing. Such policies are known as Expansionist Policy.
If in case, the RBI adopts a policy of a Wait and Watch with an intention towards Monetary Easing,
then it is termed as Dovish Policy.
On the other hand, RBI tries to reduce the flow of money in the economy by continuously
increasing the rates and the Reserve ratios. Through these policies RBI tries to make availability
of loan costlier. It is termed as the Dear Money Policy. It is also known as Contractionary Policy or
Monetary Tightening. Such policies are also known as a Hawkish Policy.
Fed Tapering
Here the term Fed stands for Federal Reserve which is the central bank of USA and Tapering
means Monetary Tightening. When the liquidity in US economy increases it leads to higher
inflation. In this scenario the US Fed increases the interest rates to make the availability of loans
costlier. This is known as Fed Tapering. It has huge impact on world economy.
Monetary Policy Committee

Prior to 2016 the monetary policies in India were formulated by the Technical Advisory Committee
of RBI. This committee was headed by the Governor of RBI and it also included other deputy
governors of RBI. However the role of this committee was only advisory in nature. Governor of RBI
was not bound to accept the recommendations of this committee. The RBI Governor enjoyed Veto
Power. Hence, the monetary policies in India were based on the views of a single individual only.
The participation of government in the formulation of monetary policies was completely absent.
Hence the cooperation which was expected between the RBI and the government was not seen.
In order to rectify these drawbacks a committee under the chairmanship of Urjit Patel was
constituted. This committee recommended that Monetary Policy Committee should be constituted.
This Committee should be given the responsibility to formulate the monetary policies. The veto
power of the governor should be taken away and the decision should be taken on the basis of
majority.
Based on the recommendations the government constituted the Monetary Policy Committee in
2016. This committee has 6 members including the governor of the RBI. This committee is also
chaired by the RBI governor. The committee consists of 6 members including the governor and
two other representatives from the RBI. The other three members are nominated by the
government of India. However, they cannot be politicians and should be economist or prominent

individual related to finance. Any decision is to be taken on the basis of majority. However in the
case of a tie the decision of the governor will be final.
The objective of the monetary policy committee is not to take away the autonomy of the RBI. It
also does not aim to increase the political interference. The prime objective is to make monetary
policies more transparent and effective by including the government as well in the process.
Qualitative Tools
When the quantitative tools of the monetary policy fail to yield a desirable result then the RBI or
any other Central bank may resort to qualitative tools. Through these tools they try to control
liquidity. For example - If the CRR is reduced, leaving more amount of money in the banking
system and even after that the banks fail to provide sufficient amount of loan then it can be said
that the impact of CRR is not visible on the economy. Similarly, if the Repo Rate is reduced by the
RBI and the banks do not pass on the benefits to the consumers, then it may be said that the
quantitative tools have failed. It is also a possibility that if the repo rate is increased the banks
may not pass on the burden to the consumers. In such situations RBI uses qualitative tools.
Qualitative tools of the RBI may include the following:-
1. Moral suasion
2. Direct action
3. Credit rationing
4. Margin requirement
Moral Suasion refers to reminding the banks of their moral responsibilities. The RBI may remind
them that the rates are being modified with an objective. Being a part of the system the banks also
have a moral responsibility to help RBI in achieving the objectives.
If the Moral Suasion does not work then the RBI may resort to Direct Action. Under Direct Action
the RBI may warn the banks. It may even penalise the banks or it may also come out with some
guidelines to compel the banks.
Credit Rationing means that the RBI may come out with rules that how much credit the bank
should provide to which particular sector and at which particular rate.
The RBI may also modify the Margin Requirement. It is the value of the securities which have to
be placed in order to borrow a certain amount.
Non Traditional Tools

When the traditional tools of monetary policies including quantitative as well as the qualitative
tools fail to yield a desirable result then the central bank of a country may resort to Non Traditional
Tools. Some of the non traditional tools are as follows:-
Helicopter Money / Helicopter Drop

The concept of Helicopter Money was propounded by an American Economist - Milton Friedman.
He was also a recipient of Nobel Prize in Economics. However it is very difficult to implement this
instrument in its true form. Conceptually it is difficult but practically it may be implemented in a
relatively different manner. This instrument can be used in the situation of liquidity trap. In this
situation even after having sufficient money, banks do not provide sufficient loans to the
consumers. In such a situation the central bank may set aside the banks and it may ask the
government to spend more and more money in the form of public expenditure. In order to provide
the money to the government the central bank may print fresh currency. It means money will be
infused in the economy without any role of the banks. In this whole process, it is monitored
properly that the inflation does not rise too much. Even the value of domestic currency does not
depreciate.

Helicopter Hoover
This can be used in order to reduce the liquidity in the economy. In case of using the normal
monetary tools like CRR, only that money can be taken away from the economy which is there in
the banking system. Hence in order to take away black money or the money which is hidden, the
normal tools cannot be effective. Therefore, for this purpose Helicopter Hoover in the form of
demonetisation can be used.
Negative Interest Rate

If we deposit money with a commercial bank and the commercial bank instead of providing
interest, starts charging interest from the depositor, then it will be termed as Negative Interest.
However this form of negative interest is not a part of the monetary policies. If negative interest is
made applicable by the central bank, then it will be termed as a part of the monetary policies.
On the deposits of the commercial banks with the central bank, if the central bank starts charging
interest instead of paying interest to the banks then it will be termed as a form of Negative Interest
Rate. Similarly If in case of Central Bank provide loan to the commercial bank and instead of
charging interest, it provides discount on repayment then it will also be termed as Negative Interest
Rate. For example- in case of Japan because of the ageing population the demand has fallen down.
Hence, the central bank has resorted to negative interest rate.
Prime Lending Rate, Base Rate, Marginal Cost of Funds Based Lending
Rate (MCLR) and External Benchmarking
Prime customers are those customers who have a very good credit history. They are those
customers who have never defaulted in the past. They also have a good source of income. Hence,
while providing loan to such customers the bank charges a lower interest rate. This rate of interest
is known as Prime Lending Rate. However, this rate was negotiable and in order to retain a good
customer the rates can be modified to any extent.
The system of prime lending rate was replaced in 2010 by RBI with another concept known as
Base Rate. Base rate is that lowest rate of interest below which banks cannot provide loans to any
customer. However the employees of the bank as well as the farmers can be provided loan at a
rate which is even lower than base rate. Base Rate was declared by banks every month in advance
and it was non-negotiable. To calculate the base rate, the following four factors were to be taken
into consideration.
1. Cost of deposit
2. Operational cost
3. Profit margin
4. Negative return on CRR.
When base rate as a mechanism was in place, the monetary tools like Repo Rate failed to create
an impact. It was mainly because in calculation of Base Rate, Repo Rate had no role. Hence, even
after Repo Rate was modified the banks did not use to modify their base rate. Hence in 2016 base
rate was replaced by Marginal Cost of Funds Based Lending Rate (MCLR). In order to calculate
MCLR in place of cost of deposit, cost of Fund was added. This was done in order to ensure that
while calculating MCLR even the impact of Repo Rate is considered. Once MCLR was introduced
it became the minimum rate of interest below which the banks cannot provide loan to any
customer except the bank employees and farmers.
Since, it was difficult for the banks to calculate MCLR. An internal study group was constituted to
study internal benchmarks like Base Rate, MCLR. The group found that internal benchmarks
failed in proper Monetary Policy Transmission. Monetary Policy Transmission means extending

the impact of changes in Monetary Policy tools to people at large. So, on 1st October 2019, the RBI
brought a circular listing the following external benchmarks for banks to follow:
• Reserve Bank of India policy repo rate.
• Government of India 3 Months Treasury Bill yield published by the Financial Benchmarks
India Private Ltd (FBIL).
• Government of India 6 Months Treasury Bill yield published by the FBIL.
• Any other benchmark market interest rate published by the FBIL.
Banks were provided free hand to decide the spread over the external benchmark. Here the term
‘spread’ means the higher interest rate that can be charged from a higher risk borrower.
After the introduction of external benchmarking more than 60 banks choose Repo Linked Lending
Rate (RLLR) as the external benchmark. Some other banks have chosen FBIL prepared benchmark
rates. Even some banks have linked different sectors to different benchmarks. The interest rate
under external benchmark shall be reset at least once in three months. According to the RBI, the
launch of external benchmarking has reduced the lending rates considerably.
Exchange Rate Determination of Domestic Currency

The domestic currency of a country keeps on fluctuating in terms of exchange rate as compared
to other currencies. For example, at present if one dollar is equals to 78 rupees, it can be said that
this is the exchange rate of dollar and Indian currency. It means that to buy one dollar, we need
to spend 78 rupees or when a dollar is sold, we will get 78 rupees. This exchange rate keeps on
fluctuating based on market forces. Sometimes rupee appreciates against dollar and sometimes it
may depreciate as well. Both Appreciation and Depreciation of domestic currency has its own
advantages and some disadvantages as well. Hence, it can be said that neither too much
appreciation nor too much depreciation is good. Therefore, the exchange rates should remain
optimum.
When domestic currency appreciates or becomes stronger the import becomes cheaper. As import
becomes cheaper, inflation falls down. Even our external debt declines automatically. However,
along with these benefits it can lead to some negative consequences as well. If rupee appreciates
our export becomes costlier. Appreciation of rupee also makes investment in India less attractive.
Even foreign tourism in India declines due to it.
If rupee depreciates our export becomes cheaper and it becomes more attractive for the foreign
buyers to buy from India. At the same time, since the foreign investors will get more amount of
money (rupees) for every single dollar, investment in India becomes attractive. However on the
other hand depreciation of Indian rupee will make our imports costlier. Inflation and external debt
will increases.
Throughout the world there are three important mechanism used by different countries to
determine the exchange rate of domestic currency
1. Clean float system / Free float system
2. Dirty float system / Managed float system
3. Pegged system
The Clean float system or the Free float system is mainly used by the developed countries. In
this system the exchange rate of two different currencies is left completely on the market forces
i.e. demand and supply. If the demand remains high for a currency its value appreciates and if the
demand remains low the value depreciates. The Central bank or the Government of the country
will not intervene at all.
In India or most of the developing countries Managed or Dirty float system is used. In this system
the exchange rate is left on the market forces i.e. demand and supply. But when required even the
Central bank may intervene. In case of India by taking into consideration the interest of Indian
economy, RBI sets a psychological range. Till the time based on market forces, the exchange rate
remains within this range the RBI would not intervene. However the moment this psychological
range is breached, the RBI will intervene and it will try to bring back the exchange rate within the
psychological range.
If the inflow of dollar is too much in India, dollar will depreciate and rupee will appreciate. If while
appreciating rupee breaches the range the RBI will intervene. In this process the RBI will start
buying dollar from the market taking away the surplus dollar from the economy. However, in this
process the RBI infuses Indian currency into the economy which leads to inflation. Hence in order
to neutralize the entire impact the RBI will sell Market Stabilization Securities and the surplus
Indian currency will be taken away. The market stabilization securities were introduced for this
purpose only. This entire process is known as Artificial Sterilization.
On the other hand if the outflow of dollar is too much, dollar will appreciate and rupee will
depreciate. While depreciating if rupee breaches the psychological range the RBI will intervene
again. In order to bring back the exchange rate within the given range following measures will be
adopted.
1. The RBI will start selling dollars from its Foreign Exchange Reserve. This will enhance the
supply of dollars in the economy. However for this purpose the RBI cannot use more than
6% of its foreign exchange reserve in one financial year.
2. The RBI will instruct the Indian banks to increase interest rate on NRI deposits. This will
make it attractive for the NRIs to deposit their dollars in Indian banks. Although this will
immediately lead to inflow of dollars but in longer run it will be harmful. On maturity of these
deposits the outflow will be along with the interest.
3. The RBI will enhance the limit for External Commercial Borrowing for the Indian corporate.
They will be able to borrow more from foreign banks in dollars. However, this is also an
immediate measure and in long run it will be harmful.
4. To attract foreign investment the Government may ease the rules related to foreign
investment.
5. To prevent the outflow of dollar import duties on non essential commodities like Gold will be
increased making it costlier.
6. SEBI may also ease the rules for promoting foreign investment in Indian share market.
In Pegged system the Central bank of a country fixes the exchange rate of its domestic currency
against US dollar. Either the domestic currency is not at all allowed to fluctuate based on the
market forces or the fluctuation is allowed to be very little. The central bank may modify the
exchange rate at their will. This is what China does. Because of this it is named as Currency
Manipulator. This is one of the most important reasons behind the ongoing trade war. In order to
enhance its export China deliberately devaluates its currency.
Long-Term Repo Operation (LTRO) / Targeted Long-Term Repo

Operation (TLTRO)
The concept of LTRO was introduced by European Central Bank in 2008 at the time of Euro Zone
crisis which emerged during the American Recession. In Europe it is known as Long Term
Refinance Operation. RBI borrowed this concept and introduced in India on 27th March 2020. It
was introduced in order to manage the financial crisis that was expected because of lockdown
imposed during the Covid-19 pandemic.
However in India and LTRO stands for Long-Term Repo Operation. Since it was introduced in
targeted manner it became Targeted Long-Term Repo Operation. Earlier the RBI used to provide
long term loan to the banks at an interest known as Bank Rate. However the Liquidity Adjustment
Facility introduced by the RBI replaced Bank Rate completely and the RBI discontinued providing

long term loans to bank at Bank Rate. The banks had to borrow from RBI for short term period
either at Repo Rate or through MSF. In order to secure long term loans the banks had to sell
debenture. However by the sale of debenture the banks had to borrow at a higher rate of interest.
Because of the Covid-19 crisis, it became obvious that the lockdowns imposed will also affect the
health of the companies operating in India. Due to loss of businesses they may find it difficult to
manage their expenses. Hence, in order to ensure that banks continue to provide loans to the
corporate for long term period at lower rate of interest to have sufficient working capital, Long
Term Repo Operation was introduced. Under this mechanism the banks can pledge long-term
Government security with the RBI and can borrow at Repo Rate for long-term period i.e. for one
year to three years. This borrowed amount can be given in the form of loan at lesser interest rate
by the banks to the borrowers. Since this instrument was introduced with an objective of providing
loan to the corporates, the term ‘targeted’ has been used.
*****

BANKING SYSTEM IN INDIA
In India the RBI is the apex authority in the Banking system. It was established on 1 April 1935 under the
RBI Act 1934. Since the RBI was set up by an act of parliament, it is termed as a statutory body. Hence its
responsibilities, authority and the tenure of members all have been defined by that Act of parliament.
After Independence, the RBI was nationalized and brought under the control of the Government of India.
For this purpose, RBI (Transfer to Public ownership) Act 1948 was passed. The nationalization took place
on 1 January 1949. Earlier RBI was headquartered at Kolkata but later on its headquarter was transferred
to Bombay. The RBI is headed by a governor and it also has four deputy Governors.
• The First Governor of RBI was Sir Osborne Smith.
• The first Indian Governor of RBI was C.D. Deshmukh.
At present Shaktikanta Das is the Governor of RBI. He became 25th Governor of RBI after Urjit Patel.
Responsibilities of RBI
The RBI‘s responsibilities can be broadly classified into two different types. These responsibilities are
Traditional and Non-traditional. Traditional responsibilities are permanent. They continue forever or till
the time they are taken away from the RBI. On the other hand, Non-Traditional responsibilities are
temporary and they are discontinued the moment they are completed.
For example- Financial Inclusion is a temporary (Non-Traditional) responsibility of the RBI. It refers to
connecting every citizens of the country with the Banking system. Similarly, even Financial Literacy is the
temporary responsibility of the RBI. Once the people become financially literate such responsibilities will
be automatically discontinued.
The traditional responsibilities of the RBI, which are permanent in nature are as follows: –
1. The RBI is the Banker to the Government. It means that the RBI provides banking facilities to the
Central Government as well as the State Governments. At present all the states except Sikkim avail
banking facilities from the RBI. It is based on the choice of a state that whether it wants banking
facility from the RBI or not. It means the RBI servers as the Banker to the Governments. The
Governments may deposit their surplus with the RBI and whenever required they can borrow from
the RBI.
2. The RBI is the Banker to the Banks. It means that the Banks may deposit their surplus money with
the RBI and whenever they are in need they can also borrow from the RBI. That is the reason why
the RBI is also termed as the lender of the last resort.
3. The RBI regulates the entire Banking System in India. A scheduled bank cannot be set up in India
without seeking license from the RBI. Even in case of expansion of branches an Indian Bank may set
up branches anywhere provided that 1/4th of the total branches are set up in unbanked rural areas.
For a foreign Bank, it is essential to seek permission from the RBI in order to set up a new branch.
The RBI also has interference in functioning of Banks in India.
4. The RBI also regulates some categories of Non-Banking Financial Company (NBFC) operating in
India.
5. The RBI formulates Monetary Policies in the country with the help of which it regulates the flow of
money supply in the economy. If the liquidity increases, it leads to increase in demand and results in
price rise (Inflation). If the money supply falls down, it affects the demand which adversely affects
the Economic Growth. Hence, it can be said that with the help of Monetary Policies the RBI controls
Inflation, manages Economic Growth and also maintains a stable Exchange Rate of Domestic
Currency.
6. The RBI is the custodian of Foreign Exchange Reserve in India. India prefers hard currencies such
as American Dollar, Euro, Yen and Pound in its foreign exchange reserve. Hard currencies are those
which are accepted by the entire world. Along with these even Gold and Special Drawing Rights
(SDR) are maintained as a part of Foreign Exchange Reserve. Gold is a liquid asset which can be
easily converted into cash and it is accepted by entire world. On the other hand, SDR is the currency
of IMF. At present India has Foreign Exchange Reserve of approx 580 billion dollar.
(1) Economics By : Kumar Amit Sir

7. The RBI issues currency Notes above the denomination of 1 rupee. The 1 rupee note and all the
coins are issued by GOI. However, the responsibility for circulating the coins as well as 1 rupee note
in the economy lies with the RBI.
Mechanism used in order to print fresh currency

While issuing fresh currency, the central Bank of a country keeps in mind the level of inflation, desired
rate the economic growth and the exchange rate of domestic currency. In India or anywhere in the world
two different types of mechanism are used in order to print fresh currency. These mechanisms are as
follow:
1. Minimum Reserve System
2. Proportional Reserve System
India follows Minimum Reserve System. The same system is followed in a number of developing
countries In India, under this mechanism the RBI maintains a reserve of Gold and Hard Currency worth
200 crore rupees. Out of this reserve gold is of worth 115 crore whereas hard currency is of worth 85
crore. This reserve is maintained by the RBI in order to fulfill the promise which is made by the governor
of RBI on the Indian currency.
Currency notes in India are printed at four different places –
Nasik (Maharashtra) and Dewas (Madhya Pradesh) [Both are Owned by the GOI].
Mysore (Karnataka) and Salboni (West Bengal) [These two are owned the RBI].
The highest denomination note that can be issued by RBI is of 10,000 rupees. 10,000 rupees note were in
circulation but were demonetized in 1978.
The one-rupee note has the signature of Finance Secretary rather than the governor of RBI. It has no
promise printed over it. Since the other currency notes have a promise printed over them, they become a
liability of the RBI.
The coins are minted at four different places in India -
1. Hyderabad 2. Noida 3. Mumbai 4. Kolkata
According to the Coinage Act, the highest denomination coin that can be minted in India is of 1000.
Lowest is of 50 Paisa. However, at present the highest denomination in circulation is of 20 rupees. 50
Paisa can only be used for a payment of up to 10 rupees.
Different from this system the Proportional Reserve System is mainly used in developed economies. In
this system, the maintained reserve increases along with the amount to be printed in a pre-determined
ratio. Hence, in proportional reserve system the reserve which is to be maintained is not fixed.
A Brief History of Banking in India

The first Bank to be established in India was 'Bank of Hindustan'. It was setup by Alexander and company
in 1770. However, the Bank did not survive for long. Thereafter, the East India Company (EIC) established
three banks one after the other. In 1806, Bank of Calcutta was setup which was renamed as Bank of
Bengal in 1809. In 1840, Bank of Bombay was setup. In 1843, Bank of Madras was established. These
three banks were merged with each other in 1921. With this merger the Imperial Bank of India was
created. The Imperial Bank of India used to provide the same services to the British Government, which
are being provided by the RBI to the GOI.
In 1865, Allahabad Bank was established. It is the oldest surviving Bank in India operating with the same
name. Recently it has been merged into Indian Bank. In 1881, Oudh Commercial Bank was setup which
was India's first Joint Stock Bank i.e. it had shareholders. In 1894, Punjab National Bank (PNB) was
setup. It was first completely Indian Bank in which no foreign investment was involved.
After independence in 1955, the Imperial Bank of India was brought under the control of GOI and it was
renamed as the State Bank of India (SBI). Since the origin of SBI is associated with the Bank of Calcutta,
it is termed as the oldest existing bank in India. However, the name SBI came into existence only in 1955.
In the subsequent years, seven more large banks were converted into the associates of SBI. These
associates were as follows:
1. State Bank of Hyderabad
2. State Bank of Mysore
3. State Bank of Patiala

4. State Bank of Bikaner and Jaipur
5. State Bank of Travancore
6. State Bank of Saurashtra
7. State Bank of Indore
All these associates were owned by the SBI and the SBI is owned by the GOI. However, the associates and
the SBI were competing with each other. It affected their profit and increased the operational cost. Hence it
was decided to merge the associates with the SBI.
In 2008, State Bank of Saurashtra was merged with SBI. In 2010, State Bank of Indore was merged with
the SBI. On 1st April 2017 even the remaining 5 associates were merged with the SBI. Hence, the
associates do not exist anymore. On the same date even the Bhartiya Mahila Bank was merged with the
SBI. This bank was setup on 19th Nov 2013.
History of Nationalization of Banks in India

Nationalisation refers to bringing a private entity under the control of Government. During independence
all the banks in India belonged to private sector. The fraudulent activities in the banking sector were at its
peak. The banks were expanding only in urban areas and they hardly had any presence in rural areas.
Only the upper class of the society was associated with the banking sector. The lowers class of the society
had no access to Banking. Hence, the government decided to nationalize the private sector banks. The
objective was to expand the banking system even in rural areas and to connect to the people of the bottom
of the hierarchy with the banking sector. It was done in order to safeguard the deposit of the depositors
Under this process in 1969, 14 large banks with a minimum deposit of 50 crore rupee each were
nationalized. Again in 1980, 6 more large banks with a minimum deposit of 200 crore rupee each were
nationalized. The number of nationalized banks went upto 20. However, in 1993 the New Bank of India
went Bankrupt and it was merged with the PNB. The number of nationalized banks came down to 19.
At present with huge amount of NPAs (Non-Performing Assets), the banking sector in India is in a state of
crisis. Hence, the weaker banks are being merged with the stronger banks. That is the reason why Dena
Bank and Vijaya Bank were merged with Bank of Baroda on 1st April 2019. Continuing the process of
merger, the Government has reduced the number of nationalized banks to 12, including the State Bank of
India.
1. State Bank of India.
2. Oriental Bank of Commerce and United Bank of India have been merged into Punjab
National Bank to form the nation’s second-largest lender.
3. Canara Bank and Syndicate Bank have been merged.
4. Union Bank of India has been amalgamated with Andhra Bank and Corporation Bank.
5. Indian Bank has been merged with Allahabad Bank.
6. Bank of India
7. Central Bank of India
8. Indian Overseas Bank
9. UCO Bank
10. Bank of Maharashtra
11. Bank of Baroda
12. Punjab and Sindh Bank
Classification of Banks
The Banks in India are broadly classified into two types -
1) Scheduled Banks
2) Non-Scheduled Banks
Scheduled Banks are those Banks which are listed in the second schedule of RBI act, 1934. This schedule
is dynamic in nature. It means that it is not fixed, and it keeps on changing according to the need. If a new
bank is established in India after seeking permission from the RBI, it will be added to the list. On the other
hand, if a bank winds up its business in India, it will be eliminated from the list. A scheduled bank has to
follow the following guidelines issued by the RBI:-
1. None of their activities should adversely affect the interest of customers.

2. Their minimum paid up capital should be 5 lakh rupees. For commercial Banks it has been raised
by the RBI to rupees 1000 crores. (Paid up capital is that capital which is invested during
establishment of the company by the promoter as well as other shareholders).
3. These Banks have to follow the monetary policies formulated by the RBI.
In return the scheduled Banks can seek financial assistance from the RBI whenever they are in need.
On the other hand, Non-Scheduled Banks can be set up anytime, anywhere by anybody. Hence, they may
also vanish anytime. The RBI formulates rules even for such Banks, but it is extremely difficult to make
these rules effective.
Commercial Banks are those banks which operate with an objective of making profits. If they are owned by
the government, they will be termed as a Public Sector Bank. If they are owned by a private entity, then
they will be termed as a Private Sector Banks.
Nationalised Banks are those Banks which were initially a private sector bank but later on they were
brought under the control of the government. Hence, every nationalised bank is a public sector bank, but
every public sector bank cannot be a nationalised bank. Example- Bhartiya Mahila Bank was set up by
the government itself. It was never a private sector bank. Hence it was termed as a public sector bank but
not a nationalised bank.
Note:- IDBI Bank was also a Public Sector Bank. But due to increasing NPA the Government sold its
shares to LIC. At present LIC holds 51% stake in this bank and government has become minority
stakeholder. Hence the RBI has categorised IDBI Bank as a private sector bank.
Note:- In the year of 2014 the RBI issued guidelines for setting up Payment Banks and Small Finance
Banks. Together these two Banks are termed as differentiated Banks and even they have been included in
the category of Scheduled Banks.
Based on the Market Value or Market Capitalisation HDFC Bank is the largest bank in India. However,
based on the Asset i.e. the total amount of the loans given and even on the basis of total number of
branches SBI is the largest bank in India. Based on the market value JP Morgan Chase is world's largest
bank. It is an American bank, having offices in India, but it does not provide banking services in India.
Based on the total asset or amount of loans given ICBC (Industrial and Commercial Bank of China) is
world's largest bank. It was the first Chinese Bank to start it business in India. Standard Chartered Bank
is a British bank operating in India and out of all the foreign banks, it has maximum number of branches
in India. Deutsche Bank is the largest German bank which also operates in India. BNP Paribas is the
largest French Bank. It also operates in India. HSBC (Hong Kong and Shanghai Banking Corporation) as
well as Barclay's both are British Banks operating in India.

Regional Rural Banks
Regional Rural Banks are also considered as a separate category of scheduled banks. Initially they were
not counted as the commercial banks but now the RBI has categorised them as commercial banks as well.
Regional Rural Banks are named so mainly because they are set up in rural areas. The main objective is to
provide access to banking system to the rural population in order to ensure the availability of loans for
agriculture as well as for setting of new businesses in rural areas.
When a regional rural Bank is set up 50% of the capital is invested by the government of India, 35% is
invested by a Public Sector Bank and the remaining 15% is invested by the state government. Although
these banks are sponsored by a public sector banks only but they can operate with a different name.
The RRB act was passed in 1976 but five RRBs were established in four states on 2nd October 1975
itself. These initial 5 RRBs were as follows-
1. Uttar Pradesh - Moradabad, Gorakhpur
2. West Bengal - Malda
3. Rajasthan - Jaipur
4. Haryana - Bhiwani
Gradually their number increased to 196 and they opened thousands of branches all over India. With
passage of time most of these banks had started to incur losses. Hence the government decided to
consolidate them by merging them with each other. Gradually they have been reduced to 56. Out of these
14 RRBs are sponsored by SBI. This is the highest number for any public sector bank. Gradually the
number will further be reduced to 36. Except Goa and Sikkim all the states in India have RRBs. New RRBs
will no longer be set up in India.
Note:- In 2020 to provide a relief to Regional Rural Banks (RRBs) regarding liquidity management, RBI
extended the Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) to Scheduled RRBs
following certain criteria. These include implementation of Core Banking Solution (CBS), holding minimum
CRAR of 9% etc.
Cooperative Banks
Cooperative Banks are also regarded as scheduled banks, but they are not commercial banks. They are set
up on the basis of mutual cooperation among the people and operate with an objective of no profit no loss.
Based on the mutual cooperation the members deposit their money in such banks and they may also
borrow from these banks. As the concept became popular some kind of regulation was required.. Prior to
1966 the cooperative banks were only regulated by the state governments. In 1966 they were brought
under the regulation of RBI. At present cooperative banks have dual regulation. The management is
regulated by the state government whereas the Banking businesses are regulated by the RBI. The
cooperative Banks are registered under the following two acts-
1. State Cooperative Societies Act
2. Multi State Cooperative Societies Act
The State Cooperative Banks are registered under the State Cooperative Societies Act. They can operate
within the same state. These banks cannot conduct a business outside that particular state. These banks
operate at two different levels. At a district level they are termed as Central Cooperative Banks. At Village
level they are termed as Primary Agricultural Credit Societies (PACS).
The Urban Cooperative Banks are mainly registered under Multi State Cooperative Societies Act. They may
operate in multiple states. Initially the urban cooperative Banks were not allowed to provide loan for
agriculture. However now even they may provide loan for agricultural activities.
Note:- Cooperative Banks are brought under the regulation of RBI through Banking Regulation
Amendment Bill 2020.
Note:- There is a Cooperative Bank in India which comes under Home Ministry. This is known as REPCO
Bank. Its full name is Repatriates Cooperative Finance and Development Bank. This bank only operates in
Tamilnadu and it’s headquarter is present in Chennai. This Bank was established in order to rehabilitate
the Tamils, who were affected by the LTTE problem.

Narasimham Committee on Banking Sector Reforms
The process of nationalisation of banks which was started in 1969 was completed by 1980. Though
nationalization had objective which were beneficial, this process of nationalization also had some negative
consequences.
Since all the existing banks became public sector banks the competition in the banking sector vanished
completely. It affected the quality of banking services. Hence the banking sector started stagnating. In
order to revive the banking sector a committee under the chairmanship of M. Narasimham, former
governor of RBI was constituted. This committee was constituted twice, first time in 1991 and second time
in 1998. The recommendations of the first Narasimham committee were as follows-
1. There should be no more nationalisation of banks.
2. Complete computerisation of all the branches of all the banks should be done.
3. Public sector banks and private sector banks both should be treated equally. There should be no
discrimination among them.
4. Weaker banks should not be merged with stronger banks. To revive the weaker banks separate
measures should be adopted.
5. Some of the Indian banks such as SBI should be promoted as global banks.
6. The interest given by the banks on savings bank account should be deregulated. It should be left to
the banks to decide how much interest they are willing to pay the depositors.
7. Those banks which are in profit and are in healthy conditions should be allowed to list themselves
on the stock exchanges. So that they may raise fund for their expansion.
8. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) should be reduced so that the banks
are left with more amount of money to conduct their business.
9. Asset reconstruction companies should be set up in order to recover the Non-Performing Assets of
the banks.
10. Priority sector lending should be rationalised and should be reduced to 10%.
Rules related to foreign investment in banking sector in India

To understand the rules related to foreign investment in the banking sector in India, the banks can be
classified into following three types
1. Public sector
2. Private sector
3. Foreign Banks operating in India
In a Public Sector Bank the government cannot bring down its holding below 51%. Out of the 49% stakes
sold, foreign investment cannot exceed 20%. No single investor can buy more than 10%. The insurance
company can buy up to 15% stake.
Note:- when IDBI Bank was sold to LIC the rules were modified and it became an exceptional case. IDBI
Bank has been declared as a Private Sector Bank because now LIC holds 51% stake in this bank.
However, when the condition of IDBI Bank improve LIC will reduce its holding gradually to 15%.
In a Private Sector Indian Bank initially, the promoter may hold 100% stake. However, within the period of
5 years the promoter may bring down his holding to 40%. The remaining 60% can be sold to other
investors. But no single investor can hold more than 10%. The insurance company can buy up to 15%.
During these first five years the bank should be Indian in nature. Hence, foreign investment cannot exceed
49% during this time period.
By the end of 15th year, earlier it was essential for promoter to bring down his holding to 15%. But as per
new norms announced in Nov 2021, promoter can hold up to 26% at the end of 15 years. During this
period a foreign investment may go up to 74% but no single investor other than the insurance company
can buy more than 10% stake. After the 15th year foreign investment may go up to 100%.
In the Foreign Banks operating in India the promoter may hold 100% stake. Hence it can be said that in
the banking sector in India, 100% foreign investment is also possible.

Guidelines related to establishment of Commercial Banks in India
In India, RBI announces guidelines for commercial banks. In 2004 banking licenses were given to Yes
Bank and Kotak Mahindra Bank. Again in 2014 two more licenses were issued, one to IDFC Bank and
other to Bandhan Bank. The guidelines were modified by the RBI in 2016. Earlier the interested applicants
were allowed to apply for license only when the notification was issued, however in 2016 it was made an
‘on tap’ process, which means that the applicant may apply anytime.
RBI constituted an Internal Working Group (IWG) headed by P. K. Mohanty in June, 2020 to review the
guidelines regarding ownership and corporate structure for Indian private sector banks. The Internal
Working Group had made 33 recommendations. The RBI in November, 2021 accepted 21
recommendations, some with partial modifications. The remaining recommendations are under RBI’s
scrutiny.
1. Only those investors who are resident of India may apply for a banking license. Existing NBFCs may
also apply. However, they should have a neat and clean history of at least 10 years in India.
2. A group of companies may not apply for license, but it may buy up to 10% stake in any existing
commercial bank. The IWG recommended that large corporates and industrial houses may
be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act,
1949.
3. If a license is issued to any interested party, it will remain valid for 18 months. During this period
the banking operation has to be started.
4. Earlier minimum capital investment of 500 crore rupees was needed for setting up a bank. It has
been increased to 1000 crore rupees after the recommendations of IWG.
5. During first five years the promoter may bring down his holding to 40%. However, during this period,
the bank should remain an Indian bank. Hence, foreign investment cannot exceed 49%. No single
investor other than the insurance companies can buy more than 10%.
6. Earlier after the completion of 5 years and by the end of 15 year it was mandatory for the promoter
to bring down his holding essentially to 15%. Recently this cap on promoters’ stake in long run of 15
years has been raised from the current levels of 15% to 26%. The promoters
can even bring down holding to below 26 per cent, any time after the lock in period of five years.
During this period foreign investment may go up to 74%. Again, no single investor other than
insurance companies can have more than 10% stake.
7. One fourth of the total branches should be set up in unbanked rural areas with population not less
than 9999 according to the census of 2011.
8. Within a period of six years the bank should be listed on the stock exchange.
Note:- Housing Finance Companies are governed and licensed by National Housing Bank. It is a statutory
body established under National Housing Bank Act 1987. It is under jurisdiction of government of India
(Ministry Of Finance). The National Housing Bank is 100% owned subsidiary of GOI.
Priority Sector Lending

Some sectors in India are given high priority by the RBI. It is considered that development of these sectors
is essential for overall development of the country. Hence, the credit flow (flow of loan advances) in these
sectors should be optimum. However, these sectors account for maximum loses for the banks. So the
banks do not want to provide loan to these sectors. Therefore, RBI introduced PSL guidelines.
The priority sectors include the following:
1. Agricultural and allied activities
2. Infrastructure
3. Export
4. Education
5. Low cost housing
6. Micro-finance institution
7. Weaker sections of the society including scheduled caste, scheduled tribe and even minorities.
8. Micro and small enterprises

Later on, the RBI added four more sectors to this list:
1. Social infrastructure such as - constructions of schools, colleges, Hospitals etc.
2. Renewable sources of energy
3. Medium Enterprises
4. Overdraft facility provided under Pradhan Mantri Jan Dhan Yojna.
For all the Indian Banks and Foreign Banks, it has been made mandatory by the RBI that out of the total
loan given by banks 40% has to be given to these sectors only. Out of this 18% has to be given for
agriculture and allied activities. Before Financial Year 2019-2020, PSL was 32% for those Foreign Banks
which have less than 20 branches in India.
Since these sectors account for maximum loses for these banks, they were not willing to provide loan to
these sectors. Hence, the Narasimham committee had suggested that in place of 40%, it should be
reduced to 10%. However, the recommendation was not accepted.
As per the amended guidelines of September 2020 new sectors have been added. Financial assistance of
up to 50 crore rupees for startups, loans to farmers in order to establish Solar Power Plants and Bio Gas
Plant were added to the list. The provision of enhanced credit limit for Farm Produce Organizations was
also added.
Note:- For RRBs out of the total loan given 75% should go towards Priority Sector Lending.
Priority Sector Lending Certificate (PSLC)

PSLC was introduced in India on the recommendations of Raghuram Rajan Committee. It was introduced
in order to encourage the banks for lending to priority sector. Under this, if a bank exceeds the target of
priority sector lending then it will be allowed to issue PSLC worth equal to the amount exceeding the
target. The certificate can be auctioned by this bank to the other banks which have failed to achieve the
target. These certificates will be auctioned at a price which is higher than the actual value of the
certificates. The bank which has bought the certificate can show it as a part of priority sector lending and
prevent itself from paying penalty.
Once the audit is completed by the RBI, the certificate expires automatically. The bank which had issued
the certificate will return the amount equal to the actual values of the certificate to the other banks which
had bought that certificate. Buying of PSLC don’t transfer the loan to buyer of PSLC. PSLC is bought and
sold by the banks in electronic form on an online platform created by the RBI known as E-Kuber. In any
financial year these certificates remain valid till 31 st march, they automatically expire on 1stapril of the
next financial year.
Non-Performing Asset (NPA)

The banks conduct their business with the help of the deposits of the depositors. However, the deposits
are termed as the liability of the banks. On the other hand, the loan given by the banks is termed as their
asset. The assets that stops performing for a bank, is termed as Non-Performing Asset. In other words,
NPA is that loan on which a borrower fails to repay interest as well as principal consecutively for 90 days.
It means that the banks wait for 90 days before declaring such loans as NPA. Earlier Non-Banking
Financial Companies were allowed to wait for 180 days to declare such a loan as NPA. But now they are
being brought at par with Banks. However, according to the rules the moment a loan is defaulted the
banks have to inform the RBI within a period of 30 days.
The NPAs are broadly classified into following 3 types:
1. Sub-Standard Asset
2. Doubtful Asset
3. Loss Asset
The moment a loan becomes NPA it is placed by the bank in the category of Sub-Standard Asset. It
remains in the same category continuously for 12 months.
If the NPA becomes older than 12 months, it is categorised as Doubtful Asset. The NPA remains in the
same category continuously for up to 3 years.
If the NPA becomes older than 3 years then it is categorised as Loss Asset. As the NPA becomes older, the
chances of recovery decline.

If a loan becomes NPA the banks have to ensure that the deposits of the depositors remain safe. Hence for
this purpose against the NPA the banks have to maintain Provision. Provision is an amount which is equal
to a fixed percentage of the NPA which the bank has to set aside from its profit. It cannot be used by the
bank for any other purpose.
If the loan which has become NPA is a Secured Loan, the provision will be 15% of the NPA, till the time it
is in the form of Sub-Standard Asset. If it is an Unsecured Loan the provision will be 25% of the NPA. If
the NPA becomes a Doubtful Asset then whether it is a secured loan or it is an unsecured loan the
provision has to be 40% of the NPA. The moment the NPA becomes Loss Asset the provision has to be
100% of the NPA.
The provision which is maintained by the banks is set aside from its profit. Hence, even it is also the asset
of the banks. However, since the provisions cannot be used by the banks for any other purpose even this
becomes a Non-Performing Asset.
The amount of loan which was given and the NPA which was to be recovered is termed as the Net NPA of
the Bank. When even the Provision is added to the Net NPA the Gross NPA of the Bank is derived.
Net NPA + Provision = Gross NPA
Since the NPAs of the public sector banks are continuously increasing, to ensure that the banks are able
to maintain sufficient amount of Provision, the government is recapitalising the public sector banks. As
the NPA of the bank transforms into Loss Asset, the chances of recovery decline. In such a situation even
the provision increases to 100%. Since the Banks are not able to recover the loan and they are also not
able to use the money maintained in the form of provision, the Balance Sheet of the banks has to be
cleaned. In order to do that the Net NPA is shown as a Loss. This is referred as Writing Off of a Loan. Even
after the loan is written off, the recovery continues. The movement the Net NPA is written off the provision
maintained against it gets free. This can now be used by the bank in order to provide fresh loans.
In case of agriculture related loans, the calculation of NPA differs. The crops are of two different types –
1. Short Term Crops, which mature within a period of 6 months.
2. Long Term Crops, which mature within a period of 1 year.
In case of short term crop, the banks wait for at least 2 seasons before the loan is declared as NPA. In case
of long term crop, the banks wait for 1 complete season, and then only the loan is declared as NPA.
Twin Balance sheet problem

Balance sheet refers to the financial report card of a company. It shows the asset, liability etc of a
company. If in case because of the adverse conditions in the balance sheet of a company the balance sheet
of another company is affected then it is termed as Twin Balance Sheet Problem. During the phase of
Economic Boom i.e. rapid economic growth, the companies try to earn more and more profit. For this
purpose, they need to expand themselves in order to produce more. So, the companies borrow from the
banks. However, if suddenly the slowdown occurs. The balance sheet of such companies gets affected.
They may fail to repay the loans.
In such situations they may default. This affects even the balance sheet of banks. This is referred to as
Twin Balance Sheet Problem. This is presently affecting the banking sectors in India leading to increase in
their NPAs.
Hence, the cooperate loan defaults can be termed as the major reason behind the increasing NPAs in
India.
In order to resolve this twin balance sheet problem, following measures can be adopted –
1. By restructuring the loan
2. By recapitalising the banks
3. By making the Insolvency and Bankruptcy Code more effective
4. By writing off the NPAs of the banks
5. By selling the NPAs to Asset Reconstruction Companies.

Note:- Every economy moves in a cyclic manner i.e. Economic growth cannot sustain itself for ever. After
the period of Economic Growth, Recession/Economic Slowdown is bound to happen. This is known as
Trade Cycle.
CIBIL {Credit information Bureau (India) Ltd.} and PCR (Public Credit
Registry)
In every country, there are agencies which maintain the database of all the borrowers in that country. The
amount borrowed, the rate of interest, the size of instalments as well as the personal information of the
borrowers such as address, date of birth etc. are made available on the website maintained by such
agencies.
CIBIL owned by an American company Trans Union is one such agency set up in India in the year 2000.
Whenever a borrower borrows, the lender updates this information on the CIBIL’s website. The score card
of the borrower is prepared out of the total score of 900. If the score comes down below 700, it becomes
extremely difficult for the borrower to borrow again in future. If the CIBIL score is -1, then it means that
borrower has no credit history.
On the recommendations of, Y.M. Deosthalee Committee, the RBI has set up a not-for-profit agency known
as Public Credit Registry. It can be used by the banks, financial institutions, the individual and the
corporate themselves in order to cross-examine credit history of an individual or a corporate. Since it is
not-for-profit' agency, the charges will remain low. The database will also be connected with income tax
department as well as the department of indirect tax. Even the defaults over tax can be taxed. Hence,
Public Credit Registry is much more effective. However, American companies like Trans Union are
opposing it.
Wilful Defaulters
If a borrower borrows and fails to repay because of economic uncertainties, the banks and financial
institutions will not be able to take any action against the defaulter, provided, the borrower has no asset
which can be foreclosed. However, if the borrower is declared a wilful defaulter, criminal proceedings can
be initiated against him. A wilful defaulter is that borrower who has deliberately defaulted even after
having resources. The following types of borrowers can be placed under the category of wilful defaulters –
1. If a borrower has borrowed with a purpose but the money has been used by him for some other
purpose, and thereafter he has defaulted.
2. If the fund or the resources are deliberately diverted.
3. If the borrower borrows by pledging an asset and the asset is displaced or disposed off without
informing the lender.
4. If the borrower has money but he deliberately hides it.
Note:- Companies like Kingfisher airline and the company owned by Nirav Modi fall under this category.
According to the rules implemented by amending the Indian Passport Act, the wilful defaulter who have
defaulted over on amount exceeding 50 crore will be prohibited from travelling aboard. In 2018, Fugitive
Economic Offender Act was passed to confiscate the properties of economic offenders who have left the
country and refused to return to face prosecution.
Asset Reconstruction Companies (ARC)

ARCs were set up in India under the SARFAESI Act, 2002 (Securitization and Reconstruction of Financial
Asset and Enforcement of Securities Interest Act, 2002). This act empowered the banks to foreclose an
asset pledged by the borrowers in case of default. The asset can be foreclosed and auctioned in order to
recover the amount. However, this can be done only in case of secured loans. The same SARFAESI ACT
paved the way for setting up Asset Reconstruction Companies in India.
The 1st ARC to be set up in India was ARCIL (Asset Reconstruction Company India Ltd). It was set up by
SBI, PNB, ICICI and IDBI together. Such ARCs can be set up by two or more banks together and even by
individual investors after seeking permission from the RBI. These ARCs buy the NPAs of the banks at a
discounted price and try to recover it with the help of their trained employees. It can be seen as an

important tool in order to reduce the bad debt (NPA) of the bank. It can also be used as an instrument to
clean the balance sheet of the banks.
Because of the increasing NPAs of the banks, the government decided to set up a Bad Bank. Bad Bank is
another name used for an ARC sponsored by the government. It was decided that the Bad Bank will be
provided sufficient amount of funds by the government and with the help of that amount the NPAs of the
banks will be bought at a discounted price and those bad loans can be recovered. It was also proposed
mainly because the private sector ARCs may not have sufficient fund to buy the huge NPAs of the banks
even at a discounted price. However, the RBI was completely against the idea. The RBI headed by
Raghuram Rajan said that this may not be a solution. It will only shift the problem from the banks to the
newly created Bad Banks. Because of opposition from the RBI, the government dropped the idea.
When the governor was replaced and Urjit Patel became the new governor the idea was reviewed again.
However, it was renamed as Public Sector Asset Rehabilitation Agency (PARA). PARA is another name for
the same bad bank which was to be constituted in order to recover the NPAs. However, it was decided that
PARA will raise fund from the public and the profit made by PARA will be shared with the same public who
have invested in it. Initially, PARA will buy the NPAs of the public sector banks only and gradually its
scope will be enhanced. If in case PARA fails, the government will provide a backup. However, in the
meantime Insolvency and Bankruptcy Code 2016 was passed which became extremely effective and the
idea of PARA was dropped.
The Government in Budget 2021-22 announced setting up Asset Reconstruction Company and Asset
Management Company to deal with stressed assets in the Indian banking system. The government has set
up two new organisations to deal with the heavy NPA problem.
1. National Asset Reconstruction Company Limited (NARCL)
2. Indian Debt Resolution Company Limited (IDRCL)
NARCL has been incorporated under the Companies Act - 2013, as an Asset Reconstruction Company.
Public Sector Banks hold 51% ownership in NARCL. NARCL will acquire the identified NPA accounts from
banks. It will be done through proper negotiation and bargaining between the members of bank and
NARCL.
IDRCL is another company in which Private Sector Banks hold majority stake of 51%. It will then try
to manage the stressed assets in the market after being transferred to them from NARCL. It will try to
resolve and manage the stressed assets with the help of experts.
The working of two entity system will begin with buying of NPA accounts from banks by NARCL. NARCL
will purchase these NPA accounts under 15: 85 structure, where it will pay 15 per cent of the agreed
amount in cash to the bank and will issue security receipts for the remaining 85 per cent. These security
receipts will be guaranteed by the government with maximum maturity of 5 years. Then these NPA
accounts will be transferred to IDRCL, which will then try to resolve it using the superior resolution
techniques. Then the rest 85% will be paid to the banks.
The government approved a 5-year guarantee of up to Rs 30,600 crore for security receipts to be issued by
NARCL.
Prompt Corrective Action

As the regulator of banking sector, the RBI keeps a close watch over the functioning of the banks in India.
For this purpose, the revenue, the expenditure, the profit and loss, the asset as well as liability etc of the
banks are evaluated by the RBI. If the banks do not perform upto the expectation Prompt Corrective
Action is taken by the RBI in order to improve its health. Under this process the bank is initially placed in
the category-I of the Prompt Corrective Action.
The moment a bank is placed under this category the RBI prevents the bank from distributing dividends.If
it is a foreign Bank operating in India the RBI will ask the promoters to infuse additional amount of capital
in the bank. With these actions if the health of the bank improves it will be taken out of this category.
However, if it does not improve the bank will be placed in the category-II of Prompt Corrective Action.

A bank which is placed in category-II of prompt corrective action it will have to follow the initial
restrictions imposed by the RBI. Along with that new restrictions will be imposed. The RBI will ask such
banks to not open new branches. The RBI will also ask such banks to shut down those branches which
are running in losses. If the health of the Bank improves with these actions, it will initially be placed again
in category-I. If the health does not improve the Bank will be placed in category-III.
The banks which are placed in category-III of prompt corrective action will have to follow the initial
restrictions imposed by the RBI and along with that some new restrictions will also be imposed. The banks
will be compelled by the RBI to reduce the remuneration of the higher officials including directors. The
bank will also be prevented from accepting large deposits from the depositors. It will also be prevented
from providing loans to the riskier sectors.
If all these measures fail, then only merger, acquisition and shutdown etc are considered as options. Since
the RBI under Urjit Patel had placed 11 public sector banks under prompt corrective action this became
an issue behind conflict between the Finance Ministry and the RBI. Even the merger of the banks is being
ensured by the government to prevent such actions against the public sector banks.
Corporate Debt Restructuring

To provide a lifeline to the corporates in India the RBI initiated the arrangement of Corporate Debt
Restructuring. Under this in situation of adverse economic condition if a corporate is not able to repay its
debt then it can be restructured by the banks after seeking permission from the RBI. Since, this
mechanism failed to yield a desirable result it was discontinued by the RBI via a notification issued in
February 2018.
Under this arrangement of Corporate Debt Restructuring, three important instruments were issued-
1. 5:25 scheme.
2. Strategic Debt Restructuring.
3. S4A (Scheme for Sustainable Structuring Of Stressed Asset).
Under the first instrument the term period of the loan was increased to 25 years.
Under the second instrument the banks used to acquire 51% stake in such cooperates and within a period
of 18 months they had to sell the stake to some other investor.
Under the third instrument within the term period the borrower had to repay only 50% of the amount.
If a loan was re-structured the banks were not required to show the asset as NPA. Hence, they did not had
to provision maintain for such asset.]
Mission Indradhanush 2.0

To improve the health of public sector banks on the recommendation of P.J. Nayak Committee Report,
Mission Indradhanush was initiated by the Finance Ministry. Since another Mission Indradhanush was
initiated by Ministry of Health in order to avoid any confusion this mission was renamed as mission
Indradhanush 2.0. The Mission Indradhanush initiated by the Ministry of Health and Family Welfare was
related to complete immunization. However, this Mission Indradhanush is related to banking sector
reform. It is renamed as Indradhanush because it has 7 Provisions. Since the provisions start with A and
end with G, it is also known as A to G of the banking sector reform. The Provisions are as follows: -
A = Appointment.
B = Bank Board Bureau.
C = Capitalisation.
D = De-stressing.
E = Empowerment.
F = Framework of Accountability.
G = Governance Reforms.
Since, in the beginning the public sector banks in India were headed by a CMD (Chairman and Managing
Director). It was one single position held by one single official. It was decided that under mission
Indradhanush this post will be divided into two. The position of chairman will be held by one official and
the position of managing director will be held by another. A new position of the non-executive chairman
will be created, and a public sector bank will be led by these three people. So far, the officials from the

same bank were promoted and placed at this position. However, under mission Indradhanush even people
from outside the bank will also be appointed if they are efficient.
Bank Board Bureau came into existence on 1st of April 2016. This body was created, in order to prevent
interference of the government in the process of appointment. It has 7 members including the chairman.
The term period of the member is of two years. This bureau is responsible for identifying and suggesting
suitable candidates for recruitment at the topmost position in public sector banks. This office isn’t Office
of Profit. The first Chairman of Bank board Bureau was Vinod Rai. He retired in 2018 and was replaced by
Bhanu Pratap Sharma.
Capitalization means infusing additional amount of funds in the public sector banks. The NPAs of the
public sector banks have continuously increased. In order to ensure that they have enough money to
maintain provision the government infuses additional capital. This additional capital is also required in
order to ensure fulfillment of Basel norms.
De-stressing means bringing down the stress of public sector banks. Because of high NPAs, the public
sector banks are under stress. Hence, they are not able to provide enough loans in the economy.
Therefore, it has been decided that more and more loans which are in the form of NPAs will be sold to the
ARCs. That is the reason why the idea of Bad Bank as well as PARA was coined.
Empowerment means making the public sector banks autonomous with respect to middle level and lower
level recruitments.
Framework of accountability means that for every decision somebody has to be answerable, then only a
sense of responsibility can be developed.
Governance reforms means carrying out those reforms which may ensure that the banks in India do not
face the same problem again and again in the future. Hence it was decided that Gyan Sangam will be
organised every year. In this Prime minister, Finance minister, Governor of RBI, the Chairmen and
Managing Directors of all the public sector banks will participate.
Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies are also known as Shadow Banks. It is mainly because they act as a
bank, but they are not exactly a bank. Non-Banking financial companies are engaged in financial
transactions, but they cannot perform all activities which can be performed by the banks. NBFCs such as
insurance companies, mutual funds etc. are not regulated by the RBI. However, those NBFCs which are
regulated by the RBI are broadly classified into two types-
1. Non-deposit taking Non-Banking financial companies.
2. Deposit taking Non-Banking financial companies.
In order to get registered the Non-deposit taking NBFCs should have net owned fund of at least 100 crore
rupees. Non-deposit taking NBFCs cannot accept deposits in any form. They use their own money in order
to provide loan to the borrowers and they can also borrow from the banks as well as other NBFCs. Since
they cannot accept deposits, they are also not allowed to issue Debit cards or Cheque book. However, they
can issue credit cards.
In order to get registered the deposit taking NBFC should have net owned fund of at least 200 crore
rupees. Such NBFCs can accept the deposits but with the maturity of not less than 12 months and not
more than 60 months. It means they cannot accept current and saving account deposits (demand
deposits). Since they cannot accept demand deposits, they cannot issue Debit cards as well as Cheque
book. However, they can issue credit cards. Deposit taking NBFC are again classified into two types-
1. Which are rated by credit rating agencies.
2. Which are not rated by credit rating agencies.
The rated NBFCs can accept a maximum deposit of up to four times of their net owned funds. On the
other hand, a non-rated NBFC can accept deposits of up to 1.5 times of their net owned funds. However,
on the accepted deposits the rate of interest paid by both of them cannot be lower than 3.5% and more
than 12.5%.
Although the Banks are there in the country to provide loan to the borrowers and to accept deposits but
the NBFCs still remain important. The banks alone cannot fulfill the needs of the borrowers as well as the
depositors. Hence the NBFCs serve as an option in the financial sector.

Islamic Bank
Islamic Banks are common in all the Islamic countries. However, in India it is a completely new concept.
The first Islamic bank to be given license in India by the RBI was Cheraman Financial Services Limited,
set up in Kerala in 2013. Cheraman financial services limited is termed as Islamic Bank but it functions
as NBFC. The RBI had made it mandatory for the NBFCs that the minimum capital investment should be
of rupees 100 crore. With 11% stake in this NBFC, Kerala State Industrial Development Corporation is the
single largest stakeholder. No other stakeholder can have more than 9% of the stake. The first foreign
Islamic bank to set up its branch in India was Islamic Development Bank from Jeddah Saudi Arabia. The
branch was established in Ahmedabad as a part of memorandum of understanding signed with Exim
Bank (Exim = Export/Import).
Islamic Banks are an important instrument of financial inclusion even. According to the belief of Islam,
receiving interest and paying interest both are considered to be illegitimate. Hence the entire banking
system becomes a illegitimate. Therefore, in order to connect the Muslim population with the financial
system Islamic Banks became important.
The Islamic Banks follow the Islamic rules and do not engage themselves in any activity which is
considered to be non-Islamic. They will get money from the interested parties not in the form of deposit
but in the form of investment. This money will be provided to the interested parties engaged in
manufacturing services, mining, construction etc. Instead of getting interest they will receive a part of the
profit. It will be distributed among those who had contributed towards the Islamic Bank. Hence it involves
risk. The Islamic Bank may incur losses as well as profits. It will not engage itself in any economic activity
which is related to betting, gambling, liquor etc. which are considered to be illegitimate in Islam.
Sometimes back the RBI had proposed that even in conventional banks in India, Islamic window will be
set up. The purpose will be to provide Islamic banking facilities. However, the banks in India showed their
apprehension and said that they do not have any experience of providing Islamic banking services, hence
the plan was dropped.
Note:- RBI had decided that minimum paid up capital of 1000 crore is required for the establishment of
an Islamic bank.
Digital Banking Units

The Finance Minister in her Budget Speech 2022-23 pointed on the rapid growth of digital banking, digital
payments and fintech innovations in recent years in India. She said that the government is encouraging
these sectors to ensure the benefits of digital banking at grass root level of the country in a consumer-
friendly manner. In order to take forward this agenda, and to mark 75 years of independence, it is
proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled
Commercial Banks.
A digital banking unit is a specialised fixed point business unit providing banking and financial products
and services digitally in self-service mode at any time.
The RBI in April 2022 announced the guidelines for DBUs, All Domestic Commercial banks except RRBs,
Payment Banks and Local Area Banks with past digital banking experience are permitted to open DBUs in
tier 1 to tier 6 centres. DBUs will offer certain minimum digital banking products and services both on the
asset (loan) and liabilities (deposits) side. Services include savings bank accounts under various schemes,
current accounts, fixed deposits and recurring deposit accounts, mobile banking, Internet banking, debit
cards, credit cards and mass transit system cards, digital kit for merchants and customers, UPI QR code,
BHIM Aadhaar and point of sale (PoS).
Other services include end-to-end digital processing of such loans, starting from online application to
disbursal and identified government sponsored schemes that are covered under the national portal.
According to Indian Banks’ Association, all state-run banks, 10 private-sector banks and one small
finance bank have started work to operationalize 75 digital banking units (DBUs) by July 2022. State Bank
of India will set up the highest number of DBUs i.e. 12, followed by Punjab National Bank and Union Bank

of India-8 each, Bank of Baroda-7, Canara Bank-6 and India Bank-3. Among private banks, ICICI
Bank and Axis Bank will establish 3 DBUs each and HDFC Bank 2 DBUs.
Self Help Groups (SHGs) and Micro Finance Institutions (MFIs)

SHGs do not have any universal structure and objective. However, they have a universal nature. This
universal nature is that they function on the basis of Mutual Corporation. It has no universal structure
means it may have many members. SHGs are voluntary associations whose members come together,
associate with each other and try to fulfill a common interest through mutual cooperation. However, the
most common type of SHG is the group of 5 to 15 women, active in rural areas. They associate with each
other in order to set up a Micro Enterprise to earn their livelihood. Since such women do not have a credit
history it becomes difficult for them to borrow from the banks. The banks may also not have presence in
every rural part of India. Hence, the Micro Finance Institutions become important.
MFIs initially were not regulated by the RBI. Since they provided small amount of loan to the member of
SHGs they are termed as Micro Finance Institutions. Although, the loan is given to the individual the
responsibility of repayment lies with the entire group. Hence, under social pressure the repayment is
ensured. The members of SHG borrow from the MFIs and create a pool of entire amount. They invest and
set up a micro enterprise. The objective is to earn their livelihood. However, for a SHG it is extremely
difficult to transform itself in a micro enterprise.
The MFIs do not have enough resources so they borrow from the banks and provide future loans. Because
of this, the rate of interest remains high. In rural areas due to lack of infrastructures, transportation and
communication facilities, it becomes difficult to set up a successful enterprise. Indian society especially
the rural areas are strictly male – dominated. Hence, the women hardly get support from the male
members. Under family pressure, the money which is borrowed for the purpose of investment is consumed
sometimes. Since the amount of loan provided is less, the members of single SHG borrow from a number
of MFIs. Because of all such reasons, the repayment becomes difficult. Therefore the MFIs started forceful
recovery of loans. It brought down their popularity and this entire arrangement failed miserably.
In 1992, NABARD took an initiative to connect the SHGs with the banks. It was termed as SHG-Bank
Linkage Program. It was a pilot project in which initially only 500 SHGs were connected with the banking
sector. Gradually, it was expanded. In 1998, for the same purpose NABARD created Micro Credit
Innovation Department. NABARD claims that more than 100 million families have benefited from this
initiative. Micro Credit Innovation Department initiated a project known as e-Shakti. Initially it was
created only in 2 districts but gradually expanded in 100 districts. e-Shakti aims at computerization of the
accounting system of the SHGs.
In order to strengthen the SHGs and the MFIs, the RBI constituted a committee headed by Y.H. Malegam.
RBI in March 2022 announced new guidelines for MFIs. The main recommendations of the Malegam
committee are as follows:
1. It was suggested that a new category of NBFCs known as NBFC-MFI should be created and the Micro
Finance Institutions should be bought under the regulation of the RBI.
2. A single individual should be allowed to become a member of any one SHG.
3. An individual living in the rural areas should be allowed to borrow from MFIs only if in case his
annual family income does not exceed Rs. 3 Lakhs. Earlier it was 50 thousands which was raised to
1.25 lakhs for rural areas and 2 lakh for other areas. The new limit has been announced in March
2022.
4. Any member of SHG should be allowed to borrow only from two MFIs. Including both the MFIs an
individual cannot borrow an amount more than Rs.1.25 Lakhs. Earlier even this limit was also 50
thousands.
5. RBI has also put a limit on the maximum repayment value to 50% of the monthly household income
to curtail over-lending to customers. Thus, if the household income is Rs. 3 lakh, the maximum loan
instalment that a borrower needs to pay cannot exceed Rs. 1.5 lakh per year.
6. Recently the RBI has removed the cap of interest rate to be charged by MFIs. Earlier the maximum
Interest charged by MFI were capped at 26%. For a large MFI which had provided a total loan of not
less than 100 crore rupees, the profit margin was capped at 10%. For smaller MFIs the profit margin
was capped at 12%. Although RBI mentioned that MFIs should have an interest rate of either

maximum 10% of the cost of fund or 2.75 times the average base rate of 5 largest commercial banks
of India on the basis of asset, whichever is less.
7. In case of any forceful recovery, the company (MFI) will be held liable.
8. There cannot be any hidden charges other than the interest and the processing fee.
9. The loan given to the members of self-help group by MFIs cannot be consumed. It has to be invested
in order to setup a micro enterprise.
10. Micro finance institutions (MFIs) will remain a part of priority sector lending for the banks.
Earlier 85% of the total loan given by MFIs were to be based on these guidelines. The remaining 15% could
have been given in any manner to any borrower at any rate of interest. RBI in March 2022 liberalized this
ratio to 75:25.
Financial Inclusion
The finance sector is the most important sector in any economy. It is mainly because without finance no
developmental activity can happen. Financial inclusion refers to connecting each and every citizen of the
country with the banking system. Although the process of financial inclusion started right after the
independence, it gained momentum only in 2008. The term “Financial Inclusion” was used for the first
time by H.R. Khan Committee.
Mangalam village in Tamil Nadu became the first village in which every household was provided with at
least one bank amount. It became possible due to the efforts of K. C. Chakrabarty who was then the
Chairman of Indian bank. Kerala became the first state in India where every household was provided with
at least one bank account. The process of financial inclusion has following objective:
1. To provide access to institutionalized banking so that a habit of saving can be developed.
2. To provide Access to institutionalized credit, so that dependency on money lenders can be reduced.
3. To provide face-to-face and no cost financial consultancy.
4. To provide financial literacy.
5. To promote cashless transactions.
6. To ensure direct benefit transfer in account of the beneficiaries.
7. To ensure social security by providing insurance cover, etc.
Measures adopted to achieve the goal of financial inclusion

1. Post-independence in order to expand the banking system even in rural areas and to connect the
people at the bottom of the society with the banking system. The process of Nationalization of Banks
was initiated.
2. In 1969, the concept of Lead Bank was introduced. It is also known as Service Area Approach. Under
this, a bank with maximum number of branches in a district has to adopt that district for the
purpose of financial inclusion.
3. In 1975, RRBs were set up in order to connect the rural population with the banking system.
4. In 1982, NABARD was set up for the purpose of rural development.
5. In 1998, Kisan Credit Card (KCC) was introduced on the recommendation of R.V. Gupta committee
report. Based on KCC a farmer may avail subsidized loan for agriculture. KCC also provides
insurance cover to the farmer which is upto 50,000 at an annual premium of Rs. 15. It can be
issued by commercial banks, RRBs or cooperative banks. Gradually this KCC which was in the form
of paper is being converted into plastic credit card.
6. Even the concept of Priority Sector Lending has been made mandatory for the banks. it was also
aimed at achieving the goal of financial inclusion.
7. The concept of No-Frills Account or Basic Saving Account with minimum Zero balance was also
introduced.
8. The concept of Islamic Bank to connect even the Muslim population with the banking system is also
aimed at achieving the goal of financial inclusion.
9. In order to provide door to door Banking services the Concept of Bank correspondence was
introduced.
10. MUDRA Yojana was introduced to provide loan for setting up small businesses.

11. Micro finance institutions and the idea of Self-help groups also aim at achieving the goal of
financial inclusion.
12. Committee headed by Nachiket Mor was constituted, which suggested establishment of Payments
Banks and Small Finance Banks.
13. Pradhan Mantri Jan Dhan Yojna was initiated in 2014.
MUDRA (Micro Units Development and Refinance Agency) SCHEME

MUDRA stands for Micro Units Development and Refinance agency. It was started on 8th April 2015.
Under this scheme, MUDRA Bank was set up on this date. MUDRA Bank is functioning under SIDBI
(Small Industries Development Bank of India), whose headquarter is in LUCKNOW. It is funded by the
government and it provides loan to the banks and financial institutions which further provide loan for the
purpose of setting up micro enterprises. Hence, MUDRA Bank is termed as a re-finance agency. MUDRA
bank was set up with the capital investment of 20,000 crore rupees and with an additional credit
guarantee corpus of Rs. 3000 crores.
Under the MUDRA scheme, three types of loan can be given to the borrowers:
1. If the amount is of upto 50,000 it is termed as Sishu.
2. If the amount is of more than 50,000 and upto Rs.5 lakh, it is termed as Kishor. &
3. If the amount is of more than 5 lakh and upto 10 lakh, it is termed as Tarun. X
F
MUDRA Yojna is aimed at promoting self-employment. Since, micro and small enterprises are labour
intensive they may create more and more employment opportunities. Under MUDRA Yojna in order to
borrow no collateral is required. So the rate of default remained high. Hence, the scheme did not succeed
the way it was expected.
Micro, Small and Medium Enterprises

MSMEs are highly labour intensive sectors. They provide sufficient employment opportunity. Since, the
sector is highly important they should be given attention. In India, out of the total companies 99% belong
to this category. India has more than 7 crore MSMEs which not only serve as an important Instrument of
self-employment but also create maximum employment opportunities for others. However, the MSMEs in
India are not in healthy position. They lack resources and at the same time they fail to compete with the
large corporate. Hence, in order to provide support to the MSMEs, from time to time the government
comes out with several schemes. However, in order to ensure that these schemes should reach the real
beneficiaries it became essential to define the MSMEs.
Hence, in the year 2006, MSME act was passed. The MSMEs were initially defined on the basis of capital
investment in machine and tools. The definitions for the companies belonging to service sector and
manufacturing sector were different. Therefore, in order to simplify the definition of the MSMEs, in 2018
the definition was modified. According to the new definition MSMEs were classified on the basis of annual
turnover or revenue. The new definition is common for service sector and manufacturing sector.
During the announcement of Aatma Nirbhar Bharat Package a new definition was given last year.
1. If the annual revenue of a company is upto 5 crore rupees and investment is up to 1 crore rupees
then it will be termed as a Micro Enterprise.
2. If the annual revenue of a company is up to 50 crore rupees and investment is up to 10 crore rupees
then it will be termed as a Small Enterprise.
3. If the annual revenue of a company is up to 250 crore rupees and investment is up to 50 crore
rupees then it will be termed as a Medium Enterprise.
In order to calculate the annual revenue income from export is not added. Those units or enterprises
which do not fall under any of these categories they will be termed as a large enterprise.
Pradhan Mantri Jan Dhan Yojna

Pradhan Mantri Jan Dhan Yojna can be considered as the most important scheme initiated by the
government in order to achieve the goal of financial inclusion. Under this scheme the public sector as well
as the private sector banks, both have to provide bank account to every single individual of the age 18 or
above. The scheme was initiated on 28th August 2014.

On the first day itself 77 thousand camps were set up throughout the country and 1.5 crore bank
accounts were opened. It was a World Record. More than 33 crore bank accounts have been opened under
this scheme.
In order to ensure that every individual is provided with a bank account, Know Your Customer (KYC)
norms were eased. Along with the traditional identity proofs and address proofs even the job cards
provided under 'Mahatma Gandhi National Employment Guarantee Act’ was considered as a valid proof. If
even the MGNREGA job card is not available, a written proof from the Gram Panchayat was also
considered as a valid proof.
In order to ensure that even the people at the bottom of the rank order are given a bank account, under
Pradhan Mantri Jan Dhan Yojna Basic Savings Accounts are provided. It is a bank account in which no
minimum balance is to be maintained. The account holder will be provided with a Debit card issued by
Rupay. Rupay is an Indian payment gateway service provider setup by National Payment Cooperation of
India (NPCI). Since, it is an Indian payment gateway service provider the annual charge will be less as
compared to what is charged by 'Visa' or 'Master Card'. In order to make the scheme more attractive,
certain provisions have been included.
The account holder will be given an accidental insurance of Rs.1 lakh. Now it is increased to Rs. 2 Lakh.
The insurance cover is being provided by HDFC. If the account has been opened before 26th January 2015,
an additional insurance cover of Rs.30,000 will be provided. This insurance of Rs.30, 000 is being
provided by LIC. Since, the benefit of insurance always involves payment of premium, under this scheme
the premium will be paid by Rupay from the amount deducted by it as an annual debit card charge.
If the account remains active continuously for six months and it is connected with Aadhar, then an
overdraft facility of up to Rs. 5,000 will be provided. It has also been increased to Rs. 10,000. Overdraft is
a kind of loan which is provided by the bank to the customer.
Pradhan Mantri Jan Dhan Yojna is a part of the JAM Trinity of the government. Here ‘J’ stands for Jan
Dhan, ‘A’ stands for Aadhar and ‘M’ stands for Mobile. It is to ensure that every individual is provided with
a bank account, which is connected with an Aadhar as well as a mobile number. All the benefits in future
provided by the government will be transferred directly to the account of the beneficiary. Jan Dhan Yojna
in this manner is preventing diversion of funds. It also promotes a habit of saving in the banks which
would ensure that the money lying at home goes into the economy in the form of loans. It also promotes
cashless transactions since the account holders are provided with debit card, cheque book and online
banking facility. It also ensures social security in form of insurance cover. Even the overdraft will serve as
an institutionalized credit facility.
However, this scheme also has same negative consequences. Out of the total bank accounts opened, a
large number of bank accounts have remained dormant. It has led to financial burden over the banks,
even the debit card and the passbook issued to such customers, proved to be wastage of resource.
Although the number of depositors increased suddenly, the number of branches of banks, ATMs and even
employees did not increase in the same manner. Hence, it is leading to burden over the banking system.
Nachiket Mor Committee Report, Payments Banks and Small Financial

Banks
Nachiket Mor Committee was constituted by the RBI in order to suggest measures to promote financial
inclusion in the country. Nachiket Mor was the chairman of ICICI foundation. He had global experience
and it was expected that he will come out with certain suggestions based on this experience.
The committee said that financial inclusion is important but not at the cost of financial stability of the
country. Hence, the committee suggested that the Aadhar should be made most important document for
providing the bank accounts. The committee recommended that from the beginning of 2014, within a
period of 12 months 50% of the population of the age 18 and above should be provided with a bank
account. The remaining 50% should be given a bank account during the next 12 months. The committee
suggested that in rural areas at a walking distance of 15 minutes banking facility should be provided.
The committee said that the commercial banks aim at making profit. Hence, they may not be able to
achieve the goal of financial inclusion. Therefore, dedicated banks should be set up which would be
responsible for only achieving the goal of financial inclusion. These dedicated banks should be termed as
Differentiated Banks. So, Payments Banks and Small Finance Banks should be established.

In order to provide license for establishing Payments Banks and Small Finance Banks the RBI came out
with guidelines in Nov, 2014.
Guidelines for establishment of Payments Banks

▪ Minimum capital investment should be of 100 crore rupees.
▪ Within 1st five years the promoter has to bring down his holding to 40%. By the end of 12th year the
promoter will have to bring down his holding essentially to 26%.
▪ Payments banks can set up their branches only in rural areas. In urban areas they can only have
physical excess point or service centers.
▪ Payments banks can accept deposit only in the form of saving account and current account. Hence,
they can issue debit card as well as cheque books.
▪ They cannot provide loans. Hence, they cannot issue credit cards.
▪ Earlier they were not allowed to accept a deposit of more than 1 lakh from a single depositor. RBI in
April 2021 increased this limit to 2 lakh rupees.
▪ They have to maintain CRR equal to the CRR maintained by the commercial banks.
▪ Unlike the Commercial Banks, the Payments Bank has to maintain SLR of 75% of their total deposit.
The SLR maintained by them has to be maintained only in the form government securities with the
maturity of not more than 1 year. The interest earned will be the main source of income.
▪ After maintaining CRR and SLR from the total deposit, even the remaining money cannot be kept by
the Payments Banks with themselves. A part of this has to be kept in the form of current account
deposit with other commercial banks. The remaining has to be kept with other commercial bank in
the form of fixed deposit. The interest earned on these deposits will be another source of income.
▪ The Payments Banks can act as agents for insurance companies as well as for Mutual Fund
companies. They may earn commission from them.
▪ In order to keep the cost of operation low they will have to use more and more technology.
Since, the margin of the Payments Banks is extremely low, it will be very difficult for them to survive.
Hence, a controversy took place between Raghuram Rajan and K.C. Chakravarti. K.C. Chakravarti
believed that Payments Bank may not be able to survive. In the beginning itself some of interested parties
surrendered their license and some failed later on. Airtel Payments Banks was the first Payments Bank to
be set up in India. Even India Post has been given license to set up Payments Banks.
The guidelines for establishment of Small Finance Banks

• A minimum capital investment of 100 crore rupees will be required for setting up SFBs. (Amended
guidelines is mentioned at the end of topic)
• During the first 5 years, the promoter may bring down his holding to 40% and by the end of 12 th
year the promoter will have to bring down his holding essentially to 26%.
• They can set up branches in rural as well as urban areas. However at least one fourth of the total
branches must be set up in rural areas.
• They can accept deposit in any form and hence, they can issue debit card as well as cheque book.
• They can also provide loan and hence they can issue credit card.
• They have to maintain CRR & SLR same as maintained by the commercial Banks.
• Out of the total loan provided by the Small Financial Banks, 75% should go to Priority Sector.
• Out of the total loan given by them 50% should go in such a manner that from this amount no single
borrower is able to borrow more than Rs.25 Lakh.
Note:- In Sept, 2019 the RBI has proposed certain amendments in these guidelines:
• ‘ON TAP’ Banking License facility for setting up small financial Banks has been facilitated.
• The minimum capital investment was raised to 200 crore rupees.
• Within a period of 15 years, the promoters will have to bring down their holding to 15%.
• Once a Small Finance Bank attains a net worth of more than Rs. 500 crore, within a period of 3 yrs,
it will have to be listed on the stock exchanges.
• All the existing Payments Banks can apply for license in order to transform into a Small Finance
Bank.
• The rules related to foreign investment applicable over the commercial banks will be applicable even
over the Small Finance Banks.
Note:- In Nov, 2021 the RBI has proposed certain amendments which were based on the
recommendations of Internal Working Group formed by RBI in 2020.
• A minimum capital investment of 300 crore rupees will be required for setting up SFBs.
• The SFBs to be set up in future will have to be listed within eight years from the date of
commencement of operations.
Sovereign Gold Bond Scheme and Gold Monetization Scheme

In the year 2015, the government introduced Sovereign Gold Bond scheme as well as Gold Monetization
Scheme. These were aimed at bringing down the import of gold in physical form so that the outflow of
foreign currencies can be prevented.
Sovereign Gold Bond Scheme

Sovereign Gold Bond scheme was introduced in order to bring down investment in gold in physical form.
Investment in gold in physical form suffers from some basic risks. First of all, the risk is related to the
purity of gold in physical form. Secondly the risk is related to its safety. If it is kept in a locker, it will incur
cost. If it is kept at home the risk involved will be high. Hence, investment in gold which is in the form of
bond is always beneficial.
This scheme has following provisions -
1. The bond is issued in the form of paper and even in digital form by the RBI through the permission
of Government of India.
2. It is issued with the face value of minimum 1 gram of gold and thereafter in multiple of that.
3. The bond will be considered as 99.99% pure gold.
4. The bond can be sold through the post offices and through commercial banks and even through the
stock exchanges.
5. While buying the bond the applicable price will be the average price of physical gold during the last
three working days of the previous week.
6. If the bond is bought in cash, then maximum amount will be of 20,000 rupees or else in order to buy
it with an amount which is more than that online payment or payment in the form of cheque etc.
has to be done.
7. If online payment is done, on every gram of bond a discount of rupees 50 will be given.
8. An individual or a family can buy a minimum of 1 gram of gold bond and maximum of 4 kg gold
bond in one financial year. A university or a trust can buy bond of minimum 1 gram of gold and
maximum 20 kg of gold in one financial year.
9. The value of the bond will fluctuate along with the value of gold in physical form.
10. The bond will have a maturity period of 8 years, but it can be surrendered at any time after 5 years.
In digital form the bond can be sold on stock exchanges any time after 15 days of being bought.
11. An interest of 2.5 % will be paid to the investor on the initial value of investment. Although it is
annual rate of interest it will be divided into two parts and will be paid semi-annually.
12. The bond can be pledged by the buyer and he may borrow against it.
13. When the bond is surrendered or sold, capital gain tax will not be applicable on the profit . However,
the interest received is taxable. When it is surrendered the price applicable will be equal to the
average price of gold in the physical form during the last three working days of the previous week.
14. Even the banks can show the sovereign gold bond as the part of their SLR.
15. The post offices and the banks which sell this bond will get a commission which is 1% of the value of
the bond.
16. If the post offices or the banks use an agent in order to sell the bond, then 50% of that 1% will go to
the agent in the form of commission.
But it was seen with respect to India that investment in gold is done mainly through Black money. So this
scheme could not succeed as per expectations.

Gold Monetization Scheme
Gold Monetization scheme was aimed at ensuring that the requirement of gold in physical form is fulfilled
through domestic resources. In Indian households and temples more than 20,000 tons of surplus gold is
lying without use. Even after that India remains the largest importer of gold in the entire world. Hence,
Gold Monetization Scheme was aimed at ensuring availability of gold in the market through domestic
sources. Although the value of gold lying at home as well as in temples fluctuates along with the price of
gold in the market but there are no additional benefits associated with it. Gold Monetization Scheme not
only provides safety to the gold of the depositors but it also ensures additional benefit in the form of
interest. Under this scheme an interested individual or a temple will have to open a gold monetization
account with commercial banks. Gold can be deposited in every form, but it will be melted and converted
into bars. A minimum of 30 gram of pure gold has to be deposited. There is no ceiling over the maximum
quantity of gold deposited.
Under this scheme three different types of accounts can be opened.
1. With a maturity period of 1 year to 3 years
2. With a maturity period of 5 years to 7 years
2. With a maturity period of 12 years to 15 years
Under the first account, deposits will be considered as the liability of the bank or in other words it will be
considered as deposits of the bank. Hence the bank will have to maintain CRR and SLR over it. While
depositing the gold the depositors has to give it in written that on maturity, he wants back gold or cash.
Once it is given in written it cannot be changed. The gold will be valued at current price of the gold. Once
the bank receives the gold it can be sold to the jewelers and the money received can be used by the bank
in order to provide loan to the consumers. The depositors of gold will receive interest of approximately 2%
annually. Even the interest can be received in the form of gold or cash. This also has to be given by the
depositor in the written form.
The gold deposited in the second and third account will not be considered as a liability of the bank. Hence
the bank need not maintain CRR and SLR against it. In these two accounts the banks act only as
mediator, the gold deposited is considered as the liability of the government. Hence the gold received by
the banks under these two accounts will go to Metal and Mineral Trading Corporation (MMTC). It will be
sold to the jewelers and the money will go to the government in the form of loan. In the account with the
maturity period of 5 to 7 years the annual interest paid by the government to the depositors will be 2.25%.
In the account with the maturity period of 12 to 15 years the annual interest paid by the government will
be 2.50%. Even in the case of second and third account it will be taken in written from the deposited that
on maturity whether he wants gold or money. This money which the government receives by the sale of
gold ensure availability of loan to the government at extremely low interest rate and the gold sold in the
market ensure availability of gold in physical form without being imported.
Note:- In February 2021 Revamped Gold Monetization Scheme was started. Under this the minimum
deposit limit of gold was reduced from earlier 30 grams to 10 grams. At least one third of public sector
bank branches in all towns will have to provide revamped gold deposit scheme on demand with special
designated officers.
80:20 Scheme
This scheme was introduced by RBI with respect to import of gold by the Indian importers. Under this
scheme of the total gold imported by an importer only 80% can be sold in the domestic market. The rest of
20% by value addition has to be converted into jewelry and it is to be exported. If an importer fails to
adhere to the guideline he will not be allowed to import gold next time. Through this scheme small
importers got eliminated from the market only the large importers, who were able to export, survived in
the market. However, in 2014 this scheme was discontinued.
Domestic Systemically Important Banks and NBFCs

Not even a single bank from India is in the list of Global Systemically Important Banks. These are those
banks which are extremely large and if they collapse the global economic collapses as well. The list of
global systemically important Banks is published by BASEL committee on banking supervision.
The RBI has prepared a list of Domestic Systemically Important Banks. They are those banks which are
largest in India and have provided total loan of not less than 2% of our GDP. Hence if they collapse, the
Indian economy will be affected adversely. Initially only SBI and ICICI Bank were in this list. Later on,
even HDFC Bank was added.
On the other hand, all the NBFCs which have given a loan of not less than 500 crore rupees are in the list
of Domestic Systemically Important NBFCs.
Core Banking Solution (CBS)

It is a technological platform through which all the branches of a bank are connected with each other. This
facility is given by the RBI under which through a centralized server the branches of a bank are connected.
It facilitates banking facility anywhere. It means that any customer of that bank may avail banking
services from any branch of that bank. Even if money has to be transferred from one account to another
account of the same bank, online CBS is used. The transfer of fund takes place immediately without any
charges.
RTGS, NEFT, IMPS, UPI (BHIM)
All these facilities are used for transferring fund online from an account of a bank to another account of
some other bank.
RTGS stands for Real Time Gross Settlement. This facility is provided by the RBI. This facility is now
available 24X7. It is a real time settlement means the fund is instantly transferred. It is gross settlement
means an amount of not less than 2 lakhs can be transferred through RTGS. There is no maximum ceiling
with respect to transfer through RTGS. However, the customer of the bank or the bank itself may impose a
maximum ceiling.
NEFT stands for National Electronic Fund Transfer. Even this facility is provided by the RBI. However,
NEFT is not real time settlement. Hence the settlement may take even up to 24 hours. It is not gross
settlement, which means that there is no minimum ceiling on transfer of fund through NEFT. Even
maximum ceiling is not there. But the bank may impose maximum ceiling. NEFT is now available 24X7.
Both RTGS and NEFT were paid services but the RBI has made them free.
IMPS stands for Immediate Payment Service. This facility is provided by NPCI (National Payment
Corporation of India). IMPS as a service remains available 24X7. It is a paid service but SBI has made it
free of cost for its own customers. It is a retail payment system.
Earlier, through IMPS an amount of only up to 2 lakh rupees was transferred. In October 2021 RBI has
increased this limit to 5 lakhs.
UPI stands for Unified Payment Interface. BHIM stands for Bharat Interface for Money. It is a platform
created by NPCI in order to transfer funds online. When UPI was being created 19 banks were connected
with it initially. However, the number of banks increased gradually. It is not a wallet. Hence money cannot
be kept in BHIM. It is a platform which facilitates transfer of funds from one account to another
immediately. For using UPI, a customer has to create a unique identity number which may be his phone
number, email id, PAN or even Aadhar card number. In order to transfer fund, complete bank detail of the
beneficiary will not be required. The money can be transferred using the unique ID. Through UPI an
amount up to 1 lakh rupee can be transferred.
National Payment Corporation of India (NPCI)

NPCI was set up as an umbrella organization for the purpose of retail payments and settlements. It was
set up under the Payment and Settlement Systems Act 2007 by an initiative of the RBI and the Indian
Banks Association. It is not-for-profit organization registered under section 8 of Companies Act 1956
(amended in 2013). Initially only 10 large Banks were the core promoter of NPCI which included SBI, Bank
of Baroda, Canara Bank, Union Bank of India, Punjab National Bank, ICICI, HDFC, Citi Bank and HSBC.
However, at present it has 56 banks as shareholders. Payment facilities such as Rupay, IMPS, and
UPI/BHIM etc. have been created by NPCI. NPCI also connects all the ATMs in India.

New Umbrella Entity (NUE)
RBI has come out with notification to establish New Umbrella Entities in order to boost the retail payment
system in India. As per the circular, such entity may be incorporated as a ‘for-profit’ company or as a ‘not-
for-profit’ company under section 8 of Companies Act 2013. RBI will authorize them under section 4 of the
Payment and Settlement Act 2007.
In its circular RBI said that a minimum paid up capital of 500 crore rupees is required for establishment
of such NUEs (New Umbrella Entities). Entities owned and controlled by Indian citizens having at least 3
years of experience in the payment sector can become promoters of these NUES. Foreign investment in
these companies will have to comply with the FDI policy guidelines of Government and policies of DIPP
(Department of Industrial Policy & Promotion) and FEMA (Foreign Exchange Management Act).
They are being established with an objective of reducing the burden of NPCI. With its establishment,
service quality will improve through healthy competition in payment management sector. These entities
will develop and monitor payment methods, technologies and standards related to ATMs, Aadhar based
payment services, white label PoS etc. They will work to avoid economic frauds and solve concerns related
to economic issues. 6 consortiums have applied for the establishment of these NUEs. These include Tata
group, Reliance industries, Paytm etc.
Merchant Discount Rate (MDR)

When a purchase is made using Credit or Debit card then a part of payment is deducted from the
shopkeeper’s share. It goes to companies providing banking services. This part is known as Merchant
Discount Rate. To promote digital transactions by cards, the government has decided that on payments up
to rupees 2000 the MDR will be paid by the government on the behalf of shopkeeper.
Different types of ATMs

ATMs can be classified into several types based on their nature and usage. They are of following types -
1. Brown label ATM
2. White label ATM
3. Green label ATM
4. Pink label ATM
5. Yellow label ATM
6. Orange label ATM
• Brown label ATMs are those ATMs which operate in the name of a bank. They may be set up by the
bank directly or they may be set up by a third-party vendor. However even if it is set up by a third
party, it will still operate in the name of the bank. If such ATMs are set up within a branch of that
bank, it will be termed as on-site ATM. If the ATM is set up away from the branch, then it will be
termed as off-site ATM.
• White label ATMs are set up by NBFCs. Although NBFCs do not issue debit cards, they can set up an
ATM after seeking permission from the RBI for the customers of different banks. It is a source of income
for the NBFC when the machine is used by the customers of different banks.
● Green label ATMs are although not very popular but these are for agricultural purpose.
● Pink label ATMs are for women only and they should not be used by men.
● Yellow label ATMs is for E-Commerce i.e. online shopping can be done using such ATMs.
● Orange label ATMs is used for share trading.
Basel Norms
Basel is a place located in Switzerland. Here the office of the Basel Committee on Banking Supervision is
located. From time to time the Basel committee has come out with suggestions to reduce the risk involved
in banking. However, the suggestions are not mandatory for a member country. It is only the central bank
of the country which may make the Basel norms effective. Even modification can be done by the central
bank. So far, the Basel committee has three times come out with suggestions. They have been termed as
Basel- I, Basel- II and Basel- III. The risks involved in banking system are of three different types.
1. Credit risk 2. Market risk 3. Operational risk

Initially the Basel committee was concerned only with credit risk. Hence it suggested some action only in
order to reduce the credit risk. Under Basel- I, the committee suggested that the banks should maintain
Capital Adequacy Ratio (CAR) of 8%. It is also known as Capital to Risk Weighted Asset Ratio. CAR is that
asset which a bank has to maintain in a particular proportion of the total risky loan given by it. This can
be used by the bank only in case of emergency. Initially the loan given to the government was not
considered as riskier asset. Hence CAR was to be maintained against the remaining loan given by the
bank. While implementing CAR in India the RBI increased it to 9%.
In Basel- II, the Basel committee came out with three suggestions which came to be known as three pillars
of Basel- II.
1. It was decided that Basel committee will come out with suggestions even in order to resolve the other
two risks.
2. The Central Bank should increase its intervention in regulating the banks.
3. The banks should disclose their asset quality in a more transparent manner.
During the American recession it was realized that even the government may default. Hence under Basel-
III, it was decided that the banks should maintain CAR against loan given to the government also. Hence
now the banks maintain CAR over the entire amount of the loan given by them. Under Basel- III, CAR was
increased by 2.5 % and this increment came to be known as Capital Conservation Buffer. In those
financial years when the credit off take is exceptionally high as compared to the previous years, an
additional 2.5 % of the total loans given has to be maintained which is termed as Counter Cyclic Buffer.
The Basel- III norms are being implemented in India in a gradual manner, the implementation started in
2013 and it was to be completed by 31st March 2019. However, on request from the government that date
had been extended to 31st March 2020. The government made this request to the RBI mainly because of
the fact that, in public sector banks it is the government which has to infuse additional fund so that they
may be able to fulfill Basel- III norms. Due to economic instability caused by COVID pandemic Basel
committee has extended this deadline till January 2023.
Note:- NBFCs in India have to maintain CAR of 15 %.
Society for World-Wide Interbank Financial Telecommunication

(SWIFT)
SWIFT is an information technology platform developed in 1973 by 7 Banks. It became active after 4 years
of continuous researches. After becoming active it replaced the existing platform known as TELEX. The
centralized server of SWIFT is located in Brussels, Belgium. SWIFT is used for sending and receiving
messages and instructions among banks internationally.
Every branch of any bank connected to SWIFT has a unique SWIFT Code which is 8 to 11 digits
alphanumeric code. It is an international identity of that branch. It is used in more than 200 countries
and regions. More than 11000 banks and financial institutions are connected with SWIFT. Once an
instruction is sent from a branch to any other branch of a foreign bank using it, the instruction is
accepted and the fund is transferred. The messages are in encrypted form which can neither be
intercepted in between nor can be modified.
In Nirav Modi case SWIFT platform was used in order to send Letter of Undertaking (LoU) on behalf of
Nirav Modi. PNB acted as the gauranteer and hence it had to repay the amount borrowed by Nirav Modi.
Recently after the Russian attack on Ukraine, USA and EU has removed several Russian banks from
SWIFT System. The step has been taken to alienate Russia from global financial system.
National Bank for Agriculture & Rural Development (NABARD)

NABARD Act was passed in 1981 but it was set up in 1982. It was set up as a Development Bank under
Sivaraman Committee recommendation. It was set up as a 50-50 joint venture by RBI and Government of
India. The total capital investment was of rupees 100 crore. However, the RBI has brought down its
holding in NABARD in 2018. Now the Government of India holds 100% stake in NABARD.
It acts as a refinance agency. It means that the government of India infuses money in NABARD and
NABARD provides loans to those banks which provide loan for agriculture and rural development.

However, NABARD can also do direct lending to state governments, corporates, cooperative society etc. for
setting up food processing units, food parks etc. and also for developmental activities.
NABARD has it’s headquarter located in Mumbai and it mainly has its branches in state capitals. The
minute details of even Kisan Credit Card have also been prepared by NABARD only. It supervises State
Cooperative Banks (SCBs), District Cooperative Central Banks (DCCBs), and Regional Rural Banks
(RRBs) and conducts statutory inspections of these banks. NABARD has played an important role in rural
development by providing credit facility. It provides credit to financial institutions for a wide range of
activities including farm and non-farm activities with tenure of 18 months to more than 5 years. NABARD
manages and controls the Rural Infrastructure Development Fund (RIDF). Warehouse Infrastructure Fund
(WIF), Food Processing Fund, Producer Organization Development Fund (PODF) for Producer
Organizations and Primary Agriculture Credit Society (PACS) etc also comes under NABARD.
NABARD started SHG-Bank Linkage Programme to encourage Indian banks for lending to self-help groups
(SHGs). Through KCC, Rupay Kisan Card etc it has made availability of institutional credit easier. By
promoting Incubation Centers, Skill Development, Climate Resilient Agriculture etc it is supporting
innovation in agriculture sector.
Through NABARD (Amendment) Act 2017, the Central Government has increased the capital for NABARD
to 30,000 crore rupees from earlier 5000 crore rupees. By this act the shares of NABARD was transferred
from RBI to Government of India. The amended act has given the responsibility of providing loans and
support regarding machinery and instruments for manufacturing sector with up to 10 crore investment
and service sector with up to 5 crore investment.
Kishan Credit Card (KCC)

This scheme was introduced in 1998. The objective was to link farmers with formal credit system. It has
played a great role in relieving farmers from the grasp of money lenders. The scheme aims at providing
adequate and timely credit for the comprehensive credit requirements of farmers under single window for
their cultivation and other needs as indicated below:
• To meet the short-term credit requirements for cultivation of crops.
• Post-harvest expenses.
• Produce Marketing loan.
• Consumption requirements of farmer household.
• Working capital for maintenance of farm assets, activities allied to agriculture, like dairy animals,
inland fishery and also working capital required for floriculture, horticulture etc.
• Investment credit requirement for agriculture and allied activities like pump sets, sprayers, dairy
animals, floriculture, horticulture etc.
• Short term credit requirements of rearing of animals, birds, fish, shrimp, other aquatic organisms,
capture of fish.
Loan at fixed rate of interest, Floating rate of interest and Teaser loan
In case of loan at fixed rate of interest, the rate of interest remains the same all throughout the term
period and cannot be modified. On the other hand, in case of loan at floating rate of interest, the interest
rate keeps on fluctuating with the passage of time. In this type of loan whenever the bank modifies the
rate of interest for new customers, the rate of interest even for the existing customers changes accordingly.
Hence, whenever the rate of interest is already high and the probability of interest coming down remains
high then a borrower should refer borrowing at floating rate of interest. Whereas if the rate of interest is
already low and the probability of interest going up is high then one should borrow at fixed rate of interest.
Teaser loans are prohibited in India by RBI. In this type of loan, the rate of interest shown by banks
initially remains low and many terms and conditions are attached to it. With the passage of time it is
transformed into floating rate of interest and the rate of interest becomes very high. It is done just in order
to attract the borrower.
*****

MONEY MARKET
Money market refers to lending and borrowing of short-term funds with a maturity of up to 365 days.
Money market may be organized and it may be even unorganized.
 Organized or formal money market has rules, regulations and even a regulator. The participants are
well-defined. The rules regarding borrowing are also well-defined. For example- Formal money
market in India is regulated by the RBI.
 Unorganized or informal money market has no rules, no regulations, and even no regulator.
In Money Market, no collateral is required while borrowing, it means the borrower needs not to pledge
anything in order to borrow. The borrowing is based on the goodwill of the borrower. If the goodwill is high,
the borrower can borrow easily and at a lower rate of interest. If the borrower does not enjoy goodwill, it
will be very difficult for him to borrow. Even if he is able to borrow, the rate of interest will remain high.
The rate of interest in the money market is not fixed. It depends upon demand and supply of money and
even the goodwill of the borrower. If the money supply remains high, the rate of interest remains low. If the
money supply remains low, and the demand for money is high then the rate of interest will also remain
high.
The participants of the money market in India are as follows-
1) The RBI on behalf of the Government.
2) Banks operating in India (Including RRBs).
3) All India Financial institutions.
4) Top-rated Corporate (They are those corporate which have a net worth of more than 4 crore rupees.
The net worth of a company is equal to ‘Asset – liability’.)
5) Individual investor.
Out of these participants whosoever is in the need of short term fund to meet its short term expenses, can
borrow from the other participants who have a surplus.
The RBI did not use to deal directly with the top-rated corporate and the individual investors. But in 2021,
RBI allowed individual investors to directly invest in Government Securities. Now, individual investors can
directly buy Government Securities by opening a Retail Direct Gilt account with RBI.
Note:- In year 2020, RBI allowed RRBs to participate in money market as lender as well as borrower. The
conditions regarding participation for RRBs is similar to that for Scheduled Commercial Banks.
Individual investors can only lend in the money market, they can not borrow from this market.
Types of Borrowing in Money Market

In the money market, if the maturity period of borrowing is of only up to 24 hours, it is termed as
Overnight Call Money.
If the maturity is of more than 1 day and up to 14 days, then it is termed as Short Term Notice Money.
If the maturity is of more than 14 days and up to 365 days, then it is termed as Term Money.
In the money market to borrow and to lend money various instruments are used. These instruments are
termed as the instruments of the money market. These are as follows-
1) Government securities in the form of Bills.
2) Certificate of Deposit.
3) Commercial papers.
Government Securities in the form of Bills

When the government is in need of short term funds to meet its temporary expenses, then the RBI borrows
from the money market on the behalf of the government. For this purpose, the government issues
Government Securities (G- Sec) in the form of Bills.
Bills are short term debt instrument or money market instruments which have a maturity period of up to
365 days. Here, in this case, such Government Securities are issued by the government of India. They are
1 Economics By : Kumar Amit Sir
sold to other eligible participants of money market by the RBI. The short term loan comes to the RBI and
from the RBI it goes to the government. At present in India these bills are issued with a maturity of either,
91 days, 182 days or 364 days. These are issued in two different forms-
1. The Normal Government Securities
2. Treasury Bills
The Normal Government Securities in the forms of Bills are sold at face value. The buyer is entitled to
receive interest from the RBI.
On the other hand, Treasury Bills are those government securities that are issued at a discounted price
but they are redeemed at par. In other words these are sold at price which is lower than the face value and
on the maturity, the lender is entitled to receive an amount which is equal to the face value of the bill. The
banks in India prefer Treasury Bills to maintain their SLR. They are also known as Promissory Note.
Note:- Although the states do not issue Treasury Bills, in special circumstances they may be allowed by
the RBI to issue Treasury Bills.
Certificate of Deposit
As an instrument Certificate of Deposit (CoD) was introduced by the RBI in 1989. Certificate of Deposit is a
money market instrument which is issued by the banks operating in India. These CoD can be sold to the
other participants of the money market (except RBI) and borrowing can be done by the banks to meet its
short term expenses.
CoD has a maturity period of not less than 7 days and not more than 365 days. They are issued with a
minimum value of 1 lakh rupee and thereafter in a multiple of 1 lakh.
On CoD interest can be paid and it may also be sold at a discounted price. The rate of interest depends
upon the demand and supply of money and the goodwill of the borrower. If the goodwill of the bank
declines, it will become difficult even for the banks to borrow. If in case, due to any reason the depositors
rush to their bank and start withdrawing their money instantly leading to stampede like situation, then it
is termed as Bank run.
The rate of interest at which the banks in India lend to each other for a short term period is termed as
MIBOR (Mumbai Inter-Bank Offer Rate). We borrowed this concept from England, where it is termed as
LIBOR (London Inter-Bank Offer Rate). In Japan, it is known as TIBOR (Tokyo Inter-Bank Offer Rate) and
in Eurozone it is known as EURIBOR.
Note:- There is an exception in the money market, the NBFCs may issue Certificate of Deposit but it
cannot have a maturity period of less than 1 year and more than 3 years.
Commercial Paper
This instrument was introduced by the RBI in 1990. If a top-rated corporate is in need of short term loans
to meet its short term expenses, it may issue commercial paper. These commercial papers are short term
money market instruments with a maturity period of not less than 7 days and not more than 365 days.
These are issued with a minimum value of 5 lakh and thereafter in a multiple of 5 lakh. According to the
present rule, only those top-rated corporate may issue commercial papers which have a net worth of not
less than 100 crore. Commercial papers can be sold at a discounted price or the interest can be paid over
them.
In a financial year, if a corporate issues commercial papers worth more than 1000 crore rupees then it has
to be rated by at least two credit rating agencies. Out of these two ratings the lower rating will be
considered as the actual rating.
Note:- Out of these three debt instruments i.e., government securities in the form of bills, CoD and
commercial papers, the riskiest instrument is commercial paper. Hence, the interest earned on
commercial paper is higher as compared to government securities in the form of bills or CoD.

Velocity of Money
The money which is hoarded may not have any impact in the economy i.e., it may not be able to give rise
to economic activities. Hence, money should change hands it means it should move from one hand to
another. The frequency at which money changes hands i.e., money moves from one hand to another is
termed as the Velocity of Money.
If the velocity of money is high then transaction is high, if velocity of money is low then transaction is low.
Calculation of Liquidity
The RBI in India is well aware of the fact that how much currency it has printed and infused in the
economy. It is also aware of the fact that how much coin it has infused in the economy after being minted.
However, in order to evaluate how much money is lying where in the economy the RBI uses the following
way-
M0 = Currency and Coins with the Public + The other reserves with the RBI.
M1 = M0 + Demand deposits with the Banks.
M2 = M1 + Saving deposits with the Post Offices.
M3 = M1 + Term deposits with the Banks.
M4 = M3 + All the deposits with the Post Offices (Except NSCs, KVPs, etc.)
M0 is known as Reserve Money. It is also known as High Powered Money.

As we move downward the liquidity decreases and as we move upward the liquidity increases. Hence it can
be said that out of these M0 is the most liquid, whereas M4 is the least liquid.
As we move downward the amount becomes broader and as we move upwards it becomes narrower. So M0
and M1 are considered as Narrow money. On the other hand, M3 and M4 are considered as Broad money.
*****

CAPITAL MARKET
It refers to the lending and borrowing of long-term funds. If it is in the form of a loan then it will
have a maturity of more than 365 days. Even in the capital market, there are participants, who
can borrow and who can provide loans. These participants are-
 RBI on behalf of the government.
 Banks operating in India (Except RRBs).
 All India Financial institutions
 Top-rated corporates.
 Individual investors.
Out of these participants whosoever is in need of long-term funds to meet long-term term
expenses may borrow from the other participants who have a surplus. Here as well individual
investors can directly buy Government Securities by opening a Retail Direct Gilt account with
RBI. In this market also, individual investors can only lend, they cannot borrow from this
market.
In India, the capital market is not completely regulated by the RBI. The process of lending and
borrowing is regulated by the RBI. The part of the capital market that deals with Shares and
Debentures is regulated by SEBI. Even in the capital market various instruments are used in
order to raise funds. These instruments are as follows-
1) Government securities in the form of bonds.
2) Industrial securities in the form of shares and debentures.
Government Securities in the form of Bonds

If the government is in need of long-term term funds to meet its long-term expenditure, the RBI
would borrow it on its behalf. For this purpose, the RBI would sell Government Securities in the
form of bonds to the other participants of the capital market. These government securities in the
form of bonds are also known as Guilt-Edged Securities. It is named so because during the
British period, these securities had a golden colour border around it. In case of bond, benefit to
the buyer is ensured in the form of either interest or discount. If the securities are issued with
interest then they are known as Dated Securities. On the other hand, if the securities are issued
at a discounted price in the form of bond and are redeemed at par then they are known as Zero-
Coupon Bond. In other words, such securities are sold at a discounted price i.e. below the face
value and on maturity, the buyer is entitled to receive an amount equal to the face value. In
economics, coupon refers to interests. Hence zero-coupon refers to zero interests. On the other
hand if the securities are issued at face value and on maturity an interest is paid on them, then
it is called Normal Bond.
Note:- When the fiscal deficit of the government increases, in order to get long term funds more
and more government bonds are sold in the market. In this situation the supply of bonds in the
market increases. This leads to fall in price of these bonds. So even the discount and interest on
these bonds increase. Banks and financial institutions get more benefits investing in these
bonds. So it can be said that as the price of bonds fall down the benefits on these bonds
increase.
Industrial Securities in the form of Shares and Debentures

If a company including the bank and other financial institutions is in need of long-term funds to
meet their long-term expenditures, they can issue Industrial securities in the form of shares and
debentures.

Debentures are debt instruments with the help of which long-term borrowing is done. The
buyers of these debentures are known as debenture holders. They get interest from the company
and after the maturity, they are entitled to get the principle as well.
Shares, on the other hand, are not debt instruments. Shares are the parts of the company. The
buyers of the shares became a shareholder. They are partial owners of the company who own the
company in the same proportion in which they hold shares. Shareholders are entitled to receive
the dividend, rather than interest. The dividend is that part of the profit of a company that the
company distributes among its shareholders.
In order to raise funds by selling the shares, permission has to be taken from SEBI. SEBI
regulates the entire Stock Market/Share Market in India. It also checks fraudulent activities in
the stock market. SEBI came into existence in 1988 but the SEBI Act was passed in 1992. Once
the Act was passed, SEBI became a statutory body. Its headquarters is located in Mumbai and
the Chairman of SEBI at present is Madhabi Puri Buch. She replaced Ajay Tyagi to become the
first women to hold this position. She is also the first person to reach here from the private
sector.
Stock Exchange
Once a company has sold its shares directly to the interested investors, the investors will require
a platform over which these shares can be sold to the other interested buyers. This platform is
called Stock Exchange. Hence, the stock exchange can be termed as a link between the
interested sellers and the interested buyers which facilitate buying and selling of shares. The
largest stock exchange in the world is New York Stock Exchange. The oldest stock exchange in
the world is Amsterdam Stock Exchange, which was set up in 1602. In the year 2000, it was
merged with Brussels Stock Exchange and Paris Stock Exchange and the name was changed to
Euronext Amsterdam.
The two main exchanges of India are National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE). - India INX (International Exchange) is the newest stock exchange in India.
Established in 2017 it is India’s first international stock exchange. It is located at the
International Financial Service Centre (IFSC), GIFT city in Gujarat.
NSE and BSE

National Stock Exchange (NSE) was set up in 1992 in Mumbai. It was recognized in 1993 as a
stock exchange and started functioning in 1994. It is located in Mumbai. It has been the first
fully computerised stock exchange of India. In terms of the total value and volume of the shares
traded per day, it is India’s largest stock exchange. Whereas on the basis of the total number of
companies listed, it is India’s 2nd largest stock exchange. NIFTY-50 is the most important index
of NSE.
Bombay Stock Exchange (BSE) on the other hand, was set up in 1875. It is the oldest stock
exchange of Asia. In terms of total value and volume of shares traded per day, it is India’s 2nd
largest stock exchange. Whereas in the terms of the total number of companies listed it is India’s
largest stock exchange. SENSEX is the most important index of BSE.
NIFTY-50 and SENSEX

They both are the main indices. NIFTY-50 is the main index of NSE, whereas SENSEX is the
main index of BSE. Indices are the measuring scales used to find out the direction of the market
that whether it is going upward or downward. They track the movement of the market and give a
rough idea of the direction.

In NIFTY-50, 50 different stocks are present. They belong to different companies which are best
in their own respective sector. NIFTY-50 tracks the average price movement of the shares of
these 50 companies only and gives a rough idea of the direction of the entire market.
On the other hand, SENSEX includes the shares of only the top 30 companies belonging to
different sectors of companies which are listed on BSE. SENSEX tracks the price movement of
the shares of only these 30 companies and gives a rough idea of the direction of the entire
market. The 30 companies of SENSEX are also included in NIFTY-50.
Classification of Stock Market

Stock market is broadly classified into two parts –
1) Primary Market
2) Secondary Market
Primary Market
When a company sells its shares to the interested investors directly without any role of the stock
exchanges, then it is termed as Primary Market. In order to sell the shares in the primary market
various instruments are used. The main instruments are as follows-
a) Initial Public Offering (IPO)
b) Follow on Public Offer (FPO)
c) Rights Issue
Initial Public Offering (IPO)

If a closely held company i.e. a company in which all the shares are held by the promoter wants
to raise funds for the first time by selling its shares to the interested investor then it is termed as
IPO of that company. For this purpose an application known as Draft Red Herring Prospectus is
filed to get the permission with SEBI. The prospectus is named so because the cover page of the
prospectus is printed in red. This concept was borrowed from the American Stock Market.
Once the permission is granted the company hires merchant banking companies or investment
banking companies that evaluate the financial health of the company and even its future
prospects. Based on that it is decided that over the value of the share how much premium can
be added while selling the shares. Thereafter the company comes out with advertisements. The
interested investors transfer money from their bank account directly and the shares are
transferred to their Demat account directly by the company without any role of the stock
exchange. Demat Account – Dematerialized account is an electronic account in which shares are
stored in an electronic form.
Once the shares are sold to the interested investors a date is decided from when these shares of
the company can be traded even on the stock exchange. This is referred to as a Listing of the
Company on the stock exchange. The shares which have been sold by the promoter and which
can be traded freely on the stock exchange are termed as free float shares of the company.
If in the case through IPO shares that have been offered have been oversubscribed then in that
case a company may issue an additional 15% of the shares which were being offered initially.
This is referred to as the Greenshoe Option. It is named so because it was used for the first time
by a British shoe manufacturing company Greenshoe. If in case the shares remain
undersubscribed then one of the merchant banking companies will be responsible for buying
those undersubscribed shares. This is known as the Underwriting of Shares. This merchant
banking company will be termed as the lead manager in this process. So far the largest IPO in
India has been of LIC (Life Insurance Corporation). Paytm (One97 Communications Ltd.) is the
second-largest IPO in India. The largest IPO in the world is Saudi Aramco.

Follow on Public Offering (FPO)
If an already listed company wants to sell some additional shares in order to raise additional
funds from the capital market then it can be done either through FPO or through Rights Issue.
Through FPO an already listed company may sell its additional shares to any interested investor
at a price that is below the market price of the shares. But generally, the FPO of a company fails
because investors try to sell the existing share at market price and buy shares through FPO at a
discounted price. So, the market price of the share of that company falls down to the discounted
FPO price. In order to get rid of this problem a company uses Rights Issues as an instrument.
Even in this case, no role is played by the stock exchange.
Rights Issue
If an already listed company wants to sell an additional share in order to raise additional funds
even Rights Issue can be used as an instrument. Under the rights issue, the company may sell
additional shares at a discounted price only to the existing shareholders of the company.
Secondary Market
A company sells its shares to the interested investor through the primary market. After a
particular date, those shares can be traded on the stock exchanges. When the trading i.e. buying
and selling of shares takes place on the stock exchanges then it is termed a Secondary Market.
So in the secondary market, Free Float Shares of a company are traded.
Social Stock Exchange (SSE)

The Union Budget 2019-20 proposed setting up of first of its kind Social Stock Exchange in
India. It will function as a common platform where social enterprises can raise funds from the
public. Social Stock Exchange is a platform that allows investors to buy shares in social
enterprises through an official exchange. Social enterprise can be defined as a company created
and designed to address a social problem. Maximizing profit is not their goal.
Social Stock Exchange functions on the lines of major stock exchanges like BSE and NSE.
However, the purpose of this exchange is social welfare not earning profit. Under the regulatory
ambit of SEBI, a listing of social enterprises and voluntary organizations will be undertaken so
that they can raise capital as equity, debt, or as units like a mutual fund. Through this process,
Social enterprises can get funds for their activities and even the expenses can be shared
transparently with the public at large.
Social Stock Exchange already exists in countries such as Singapore, UK, and Canada among
others. These countries allow firms operating in sectors such as health, environment, and
transportation to raise capital through such exchanges.
Few terms related to Share Market

Market Capitalization
It refers to the total market value of a company. It is derived by multiplying the price of one
share of the company by the total number of shares of the company.
Market capitalization = The price of one share X Total number of shares of the company
Hence, market capitalization fluctuates continuously till the time the market remains open.
Market capitalization determines the size of a company. In terms of market capitalization
Reliance Industries Limited is India’s largest company. Apple is the world’s largest companies.

Blue Chip Companies
They are those companies that are large in size and have a long history of continuous growth.
They have continuously made a profit and they also distribute dividends from time to time.
Investment in the shares of such companies is relatively less risky. All the companies which are
there in the Index are Blue Chip companies. However, the companies which are there in the
Index are not the only Blue chip companies i.e. some blue chip companies may not be part of the
index.
Bulls and Bears

Bulls and Bears, both are investors. The Bulls believe that the market is going to move in
upward direction, hence they are optimistic. So the bulls engage themselves in the buying of
shares. On the other hand, the bears believe that the market is going to move in downward
direction, hence they are pessimistic. That is why the bears engage themselves in the selling of
shares. When the market continuously moves upward in direction it is said that the market is
Bullish. When the market continuously moves downward in direction it is said that the market is
Bearish.
Stag
Stags are also investors in the share market. However, they are extremely short term investors.
They also speculate the movement of market. They believe that the share price of a company will
move upward instantly so they try to make short term profit. Hence they normally do intraday
trade or they invest in the IPOs and try to make a profit on the day the company is listed. It is
mainly because on the day of listing no restriction is applied on the movement of the shares of
that listed company.
Insider Trading
It is an illegal act and punishable offense in the share market. An individual by virtue of his
position in the company or his relationship with the company has access to confidential
information of the company and based on that if he trades in the shares of that company then it
will be termed as Insider trading. SEBI regulates insider trading.
Circular Trading
It is another illegal act in the stock market. In this, some traders who are known to each other
buy and sell the shares of a company among themselves and manipulate the price of the shares
of that company. Once the share price is taken to a certain height it may attract even other
buyers who are not a part of that group. At this point, these circular traders may sell the shares
to other interested traders and may come out of the shares of that company making a huge
profit.
Front Running
It is another illegal and unethical act in the share market. It is jumping into a trade based on
prior information of some big deals or forecast by rating firms, having the ability to affect the
price of asset. It is also known as Tailgating. It is generally done by stock brokers, fund
managers etc. They ‘front-run’ to buy stocks in their own account before buying shares for their
client, when they get huge orders from any client. In this process, they make profit for
themselves. Brokers also front-run to buy or sell stocks on the prior information of their own
firm’s buy or sell recommendation to clients.
Hostile Bidding
When the owner of a company does not have the majority stakes/shares of his own company
then, it is possible that any other investor may buy the majority shares (51%) in the company
even without the will of the owner of that company. In such a situation the investor with the
majority stake (51%) will enjoy ownership and control of that company. This kind of takeover is
known as Hostile Bidding/Takeover. This is not illegal but is considered to be Unethical.
IPO Financing
IPO financing is providing loan to an individual for the purpose of subscribing an IPO. It is
generaly used by High Networth Individuals (HNIs) to make profits from the IPO listing. It is a
very short period loan, only till the listing date of share with certain interest rate. The shares, if
allotted are taken as collateral for the loan. The borrower has to sell the shares on listing and
return the amount borrowed with interest. The rest will be borrowers profit or he may even end
up in loss. As IPOs in last few years have been getting multiple times subscription. So even IPO
financing is used to increase borrower’s chances by subscribing for a much higher quantity.
IPO financing came into lime light due to tussle between BharatPe’s former MD Ashneer Grover
and Kotak Wealth Management. Due to IPO financing some of the IPOs last few year saw the HNI
portion getting subscribed between 500 times and 900 times. In October 2021, the RBI through
a notification announced that there shall be a ceiling of Rs 1 crore per borrower for financing
subscription to Initial Public Offer (IPO). After few months even SEBI revised the allocation
methodology for HNIs. It announced that one-third of the HNI portion would be reserved for
applicants with a bid size of more than Rs 2 lakh and up to Rs 10 lakh, while the remaining two-
thirds would be reserved for applicants with a bid size of over Rs 10 lakh.
Rolling Settlement
In the Indian share market when trading takes place the trade is reflected in the Demat account
on the same day. However, in reality, the trade used to be settled only on the 3rd day which was
called T+2 Settlement or Rolling Settlement. If shares were sold from a Demat account the
availability of cash was reflected in that account on the same day. However, in reality, the cash
used to be available only on the 3rd day which was T+2. Then only the cash can be withdrawn.
Here, T = day of trade and 2 refers to 2 Additional days.
Observing the demand to reduce the time taken for settlement in the stock market, SEBI
introduced T+1 settlement system. In this system, the money comes to the account of the
investors on the next day after selling the shares. The shares also come into the demat account
one day after buying the shares. Initially, 100 companies with the lowest valuation were included
under this system, in Feb 2022. Shares of 500 companies are being included in this list every
month.
Beta Value
Beta value shows the degree of volatility of the shares of a company. If the shares are highly
volatile then it will be termed as high beta Stock and if it is less volatile then it is termed as low
beta Stock. In order to find out the degree of volatility, the movement of the shares of a company
is compared to the index movement.
Employees Stock Ownership Plan (ESOP)

A company rewards its employees in return for the contributions done by the employees towards
the company. This reward may be in the form of cash or kind. However, if the incentive or
reward is in the form of shares of the company then it will be termed ESOP. The shares can be
allotted free of cost or they may be allotted at a discounted price. However, there will be always a
lock-in period during which the employees cannot sell the share. Reward in the form of ESOP
results in a sense of belongingness. The employees believe that he is also a partial owner of the
company.
Sweat Equity
The promoter of a company establishes the company with capital investment. However, through
his hard work and labor, he adds value to the company i.e. the company expands in size. This
additional value added to the company with the help of hard work is known as Sweat Equity.
For example- A company has been set up with a capital investment of Rs 100. If within a period
of 2 years if the promoter is able to sell 10% of the company for Rs 100 then it can be said that
the company is worth Rs 1000 now. In this company, the value addition is Rs 900. This value
addition is Sweat Equity.
Equity Shares and Preferential Shares

Equity shares are normally shares of a company that are held by the promoter as well as the
other shareholders. They are bought and sold at market price. Equity shareholders enjoy voting
right. But equity shareholders are entitled to receive dividends only when a company decides to
distribute dividends.
On the other hand, Preferential shares are issued by the company in a preferred way and sold to
big investors in bulk at a price higher than the market price. The preferential shareholders do
not enjoy voting right. However, they get a fixed percentage of the profit of the company as a
dividend at regular intervals.
Angel Investors and Venture Capitalists

A start-up company is a company that recently came into existence. It is a company that is yet to
establish itself on its feet. It is generally related to innovative business activities such as E-
Commerce, IT and Software, Biotechnology, etc. Such companies may not be able to raise funds
by selling their share through IPO. Hence, they may raise funds from Angel Investors and
Venture Capitalists.
Angel investors are individual investors with a significant amount of money, who have a high-
risk appetite. They normally buy the shares of a non-listed company and hold them for a long
period of time. On the other hand, Venture Capitalists are institutional investors who create a
pool of amounts by collecting money from a number of interested investors. The entire amount is
invested in start-up companies. Angel investors give preference to the goodwill of the promoter of
the company whereas venture capitalist gives preference to the nature of business while
investing.
In India, under the Start-Up scheme, start-up companies have been defined in the following
manner-
1) It should be a non-traditional, innovative business (such as E-Commerce, IT and software,
and Biotechnology).
2) It should not be older than 7 years. For companies related to Biotechnology, this time limit
was 10 years.
3) In the last 7 years (For companies related to Biotechnology in 10 years) the turnover of the
company shall not exceed Rs 25 crore in any financial year.
In February 2019 this definition was modified and the time limit for every type of Start-Up was
made 10 years only. The limit related to turnover was raised to 100 crores.
Anchor Investors

The Anchor Investors in an IPO are Qualified Institutional Buyers (QIBs) like Foreign Portfolio
Investors, Mutual Funds, Insurance companies, etc. As per SEBI regulations, they invest before
the IPO is made available to the public. They can sell their shares only after 30 days of getting an
allotment. Which means they have a lock-in period of 30 days. Generally, an Anchor investor
must bid for at least 10 crores in an IPO. A company needs at least two anchor investors if its
issue size is less than 250 crores. For larger issue sizes five anchor investors are required.
These investors help in the price discovery of an IPO. They anchor an IPO to the public. Their
interest in an IPO confirms the authenticity of the issue. It is compulsory for the company to
publicly share the detail of anchor investors before the opening of the IPO.
Arbitrage
In the share market, there is a possibility that the price of the same share may vary on different
stock exchanges. On one stock exchange, the price may be relatively low whereas, on the other
stock exchange, the price may be relatively high. The trader may derive the benefit from these
price differences. The share may be bought on the stock exchange where the price may be low
and can be sold on the stock exchange within a second where the price is high. This is called
Arbitrage.
Algo Trading
If the trading takes place through computer programming with the help of software that has
been given clear-cut instructions in an automated manner, it is called Algorithmic Trading also
known as Algo Trading. Algorithmic Trading is very fast and manual trading may not match the
pace.
Mutual Fund
Mutual fund companies are also known as Asset Management Companies. An investment in the
share market is always riskier and the individual may not be able to invest on his own. Hence,
investment through a mutual fund is done. They collect money from a number of interested
investors and create a pool of that entire amount of money. The entire money is invested in a
diversified manner in the debentures, bonds, and shares of different companies belonging to
different sectors. The entire investment is managed by trained fund managers. In India, a
mutual fund is regulated by SEBI.
Whenever a mutual fund company comes out with a new scheme it is known as New Fund Offer.
The entire investment under a mutual fund scheme is divided into units with a face value of Rs
10 each. The ratio in which the invested money moves up and down, in the same way even the
value of units move. The value of one unit on a particular day is known as Net Asset Value
(NAV). Investing in mutual funds for the purpose of saving is also known as Equity-Linked
Saving and such schemes are known as Equity-Linked Saving Schemes (ELSS).
Mutual funds can be broadly classified into two types-
1) Close Ended
2) Open-Ended
In the case of the Close-Ended Mutual Fund Scheme, investment is possible only when the new
fund offer has been announced. Investment during a fixed time period is allowed in such
schemes. Hence, the number of units cannot increase in the future.
On the other hand in Open-Ended Mutual Fund Schemes investment can be done any time. As
investment is added on, even the number of units will increase accordingly.
There are two ways through which investment in Mutual Fund can be done.
1. Lump Sum Investment
2. Systematic Investment Plan (SIP)

In Lump Sum Investment a huge amount is invested at once. In the Systematic Investment Plan
investment is done on a monthly basis. A certain amount is invested every month. So SIP is not
possible in a close-ended mutual fund scheme.
Exchange Traded Fund (ETF)

It is like a mutual fund only. The only difference is that the units of this fund can be traded
directly on the stock exchanges just like shares on real time basis at current market price. It is a
basket of securities (stocks, bonds etc) that reflects some index. It can even track some
commodity, sector or any asset. They are like passively managed funds just replicating the
returns of the benchmark which they follow. CPSE ETFs are pool of government owned entities’
shares. It is a method of disinvestment. Even the shares of private sector companies or even
mixture of both public and private companies can be pooled in ETF. For Example – Bharat 22
ETF was mixture of many PSE’s and some Private companies’ shares. In India NIFTY-50 index is
the most popular benchmark for ETFs. The number of ETFs in India crossed 100 in 2021.
Real Estate Investment Trusts (REITs) and Infrastructure

Investment Trusts (InvITs)
REITs are just like mutual funds. However, it is the mutual fund of the Real Estate Sector.
InvITs on the other hand is the mutual fund of the Infrastructure sector. They both are also
regulated by SEBI. SEBI in 2021 decided to lower the minimum application value in REITs and
InvITs in the range of Rs 10,000 to Rs 15,000, at par with the minimum investment amount
applicable to equity Initial Public Offers (IPOs). They are established in the form of trust hence,
they are not taxable. REIT collects money from a number of interested investors creating a pool
of money. This money is then invested in a diversified way in different real estate projects. They
can invest in those projects which have been already completed or even in those projects which
are under construction. Out of the total profit, the REIT takes 10%. This is used to meet their
expenditure and also their profit. The remaining 90% part of the profit is distributed among the
investors. InvITs function similarly to REITs, except that they own infrastructure companies
(power generation, telecommunications, road construction etc.) instead of real estate.
Foreign Portfolio Investment

It refers to foreign investment which comes to the Indian stock market. A huge amount of money
is invested and shares are bought in large numbers in a diversified manner by these big
investors. However, even after buying shares in large quantity, these investors are not at all
interested in the management of the company. Their only intuition is to make instant profit
based on movement in the Stock Market. The money brought by FPI into a country never
remains stable in one country. It moves from one country to another. Hence, this money is
referred to as Hot money.
FPI is broadly divided into 2 types-
1) Foreign Institutional Investment (FII)
2) Qualified Foreign Investment (QFI)
Foreign Institutional Investment (FII)

They are foreign mutual fund companies or insurance companies. They collect money from a
number of interested investors and invest that entire pool of money in the stock market of
different countries.
Qualified Foreign Investment (QFI)

QFIs are individual investors who are citizens of any of the country. The citizens of such
countries which are member of the Financial Action Task Force (FATF) on Money Laundering
and Terror Financing can invest in the Indian share market. They can invest directly on their
own without any role of the FIIs.
Financial Action Taskforce (FATF) is an inter-governmental body that checks money laundering
and terrorist financing among the member countries. It has its headquarters located in Paris. At
present, it has 39 members including India. These 39 members include 2 regional organizations
i.e. European Union (EU) and Gulf Cooperation Council (GCC).
Participatory Notes (P-Notes)

It is a financial instrument introduced by SEBI in order to encourage foreign investments in the
Indian share market. Prior to its introduction only those FIIs were allowed to invest in the Indian
share market which was either registered in India or in Mauritius.
P-Notes ensure investment even by the unregistered FIIs. They are issued by registered FIIs and
are signed by unregistered FIIs. Through this instrument the money collected by the
unregistered FIIs from its clients can be invested in the Indian share market through the
registered FIIs. The registered FIIs will deduct a commission and the entire amount will be
invested in the Indian share market. In order to make the instrument even more attractive, few
additional benefits were also ensured. The profits made by such investment through P-Notes
were exempted from Capital Gain Tax. At the same time, it was stated that the Indian authorities
will not seek any information from the unregistered FIIs with respect to the source of the fund.
The rules related to P-Notes made the instruments more and more attractive for institutional
investors. In fact, by the year 2008 out of the total foreign investment in Indian share market,
more than 50% was done through P-Notes. However, it also resulted in some serious problems.
Since the investment was exempted from tax even those FIIs, which were capable of getting
registered in India preferred investing through P-Notes. It resulted in a continuous loss of
revenue to the country. At the same time since the Indian authorities were not authorized to
seek details of the source of funds raised by the unregistered FIIs, it became a source of
investment of black money in the Indian share market. The black money generated in other
countries and even the money of the terrorist organization was channelized into the Indian share
market through P-Notes. Even the black money generated in India used to go out of the country
and again came back to the country in the form of foreign investment through P-Notes. When the
black money generated in the country goes out of the country and comes back to the same
country in the form of foreign investment, it is termed as Round Tripping.
Government became aware of this problem and initiatives were taken in order to rectify the
problem. However, it became difficult mainly because the moment rules were modified, the share
market used to react. At present, it has been decided that the profit made by such investment
will be taxed by India and Indian authorities may seek information regarding the source of the
fund raised by the unregistered FIIs. Gradually, the investment through P-notes had fallen down
to 20%.
American Depository Receipt (ADR), Global Depository

Receipt (GDR), and Indian Depository Receipt (IDR)
If a Non-American company wants to raise funds, by listing itself on any American stock
exchange then the shares of that Non-American company on that American stock exchange will
be termed as the ADR of that company. A Non-American company combines a number of shares
to create one ADR. These ADR are sold to American financial institutions and that foreign
institutions will sell the ADR to interested investors on American stock exchanges. The ADR

holders are entitled to receive a dividend from the global business of the company. It is mainly
because in the form of ADR the global business of the company is listed on American stock
exchange. However, the ADR holders are not entitled to vote in any decision of the company. The
first Indian company to be listed on American stock exchange was Infosys it was listed on
NASDAQ (National Association of Securities Dealers Automated). The 2nd Indian company was
ICICI bank but it was listed on NYSE (New York Stock Exchange).
Similarly, if a Non-European company wants to raise funds by listing itself on any European
Stock exchange then the shares of that company on that European Stock Exchange will be
termed as the GDR of that company. A number of shares are combined in order to create one
GDR. The GDR holders are entitled to receive a dividend from the global business of that
company but they do not enjoy voting rights. The first Indian company to be listed in the form of
GDR was Reliance Industries Limited. It was listed on the London stock exchange.
If a Non-Indian company lists its global business on any Indian Stock exchange then the shares
of that company will be termed as the IDR of that company. The IDR holders will be entitled to
receive a dividend from its global profit but they will not have voting rights. The first and so far
the last i.e. the only foreign company to be listed on the Indian Stock Exchange in the form of
IDR was Standard Chartered Bank. It got itself delisted from the Indian stock market in July
2020.
Some Important Indices in the entire world

The two major stock exchanges of USA are NYSE (New York Stock Exchange) and NASDAQ
(National Association of Securities Dealers Automated Quotations). In terms of the total value of
trade per day, New York Stock Exchange is the world's largest stock exchange. It has been
bought by Intercontinental exchange. Dow Jones Industrial 30 and S&P 500 are its major
indices. Dow Jones is most widely followed index throughout the world. NASDAQ is the world’s
first fully computerized stock exchange. Most Popular index of NASDAQ is NASDAQ Composite.
Some other important indices across the world are as follows-
France - CAC Britain - FTSE Germany - DAX

Italy - MIBTEL Australia - All Ordinaries Brazil - BOVESPA
Japan - NIKKEI China - Shanghai Composite Hong Kong - Hang Seng
South Korea - KOSPI Singapore - Straits Times Russia - MOEX
Debenture
Debentures are capital market instrument that are issued in the form of bond. They are debt
instruments with a maturity period of more than 365 days. Debentures are industrial securities
which can be issued by top-rated corporates, banks and FIIs in order to raise long term fund to
meet their long term expenditure. The issuer (who issues) becomes a borrower whereas the
debenture holder becomes lender/creditor. The fund raised is in the form of a loan and hence
interest is paid to the debenture holder. They get interest from the company and after the
maturity they are entitled to get the principle as well. Debenture of various companies has
different level of risk associated with them, so Credit Rating Agencies rates them accordingly.
Debentures can be of 2 different types-
1) Secured
2) Non-Secured
Against secured debentures, assets of the company are pledged whereas against non-secured
debentures nothing is pledged. Whether the debenture is secured or non-secured they are
further classified into 3 different types-
1) Non-Convertible Debentures
2) Fully-Convertible Debentures
3) Semi-Convertible Debentures
The Non-convertible debentures remain in the form of debentures throughout the term period.
They cannot be converted into shares of that company.
The fully-convertible debentures on the other hand, can be converted completely in the form of
shares of the company after a fixed period of time. The debenture holders will become a
shareholder and thereafter he will be entitled to receive dividend rather than interest.
Semi-convertible debentures may be partially converted into shares of the company and partially
remains in the form of debenture only.
Bharat Bond Exchange Traded Fund

Bharat Bond Exchange Traded Fund is the first Corporate Bond ETF in the country. Bharat
Bond ETF created an additional source of funding for Central Public Sector Undertakings
(CPSUs), Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs)
and other Government organizations. It is a basket of bonds issued by CPSEs, CPSUs, CPFIs and
any other Government organization. It includes mostly AAA-rated bonds. Every unit is priced at
Rs.1000 with an investment cost of 0.0005% to attract retail investors. As of now, it has 2 two
series with maturity periods of 3 and 10 years. The Bharat Bond ETF is being managed by
Edelweiss Mutual Fund.
Perpetual Bond
Perpetual bonds are those bonds that do not have a maturity period. The bondholder will
continue to hold the bond all throughout and will continue to receive interest, whereas the
issuer will not have to repay the principal. However, they will have a lock-in period after which
both parties may renegotiate and the bond can be returned on a fixed date.
Perpetual bond was in the news in 2020 mainly because SBI issued such bonds worth Rs 2100
crore and they were sold to Yes bank.
Additional Tier-1 (AT1) Bond

The Bombay High Court recently quashed the write-off of Additional Tier-1 (AT1) bonds worth Rs
8,415 crore issued by Yes Bank Ltd. AT1 bonds are a type of perpetual bond that does not have
any fixed maturity. The banks if they want can buy these bonds back from investors. AT1 bonds
are unsecured bonds. They were introduced under the 2010 Basel III norms. Being a higher-risk
investment, they offer relatively higher interest rates. As in the case of a crisis, the RBI can
instruct the troubled bank to write off this bond without consulting the investors. Even the
banks can skip the interest payouts without answering the creditors. To regulate and supervise
the banking sector after the global financial crisis of 2008 the banks were required to maintain a
set level of capital as an emergency fund. AT1 bond is one such instrument to provide funding to
banks.
Sovereign Green Bond

Union Finance minister in her budget 2022-23 speech announced Sovereign Green Bond. She
said as a part of the government’s overall market borrowings in 2022-23, Sovereign Green Bonds
will be issued for mobilizing resources for green infrastructure. The proceeds will be deployed in
public sector projects which help in reducing the carbon intensity of the economy.
The Reserve Bank of India is going to auction 160 billion rupees (1.93 billion $) worth of
sovereign green bonds in two tranches in 2023. In the government's first-ever debt the RBI will

auction 5-year and 10-year green bonds worth 40 billion rupees each on 25 January and on 9
February.
Inflation-Indexed Bond
Inflation-indexed bonds are such bonds whose rate of interest is linked to some index calculating
inflation in the country. Returns on these bonds are always more than the rate of inflation. It
ensures that price rise due to inflation does not erode the value of investors' savings. The real
interest rate on these bonds is fixed, but the bond’s principal amount is linked to the inflation
rate. The investor gets the principal and the interest amount adjusted for inflation on maturity.
For example, if you invest 100 rupees in these bonds with a fixed interest rate of 5% and if
inflation in the economy is 10% then your principal after adjusting for inflation reaches 110.
Now you will get 5% interest on 110 rupees.
Inflation-Indexed Bonds in India were announced in budget 2013. They had a maturity period of
10 years. Although they were allowed to be traded in secondary market. The interest, as well as
capital gains, are taxed by the authorities. Since 2013, RBI used to issue Inflation-Indexed
Bonds, indexed to the Wholesale Price Index. However, as Consumer Price Index has been
accepted as the main index for calculating inflation in India, IIBs linked to WPI started losing its
popularity among investors. So, RBI was forced to buy back these bonds. RBI in near future can
come out with new IIBs linked to CPI.
Municipal Bond
A municipal bond or Muni Bond is a debt instrument issued by municipal corporations or
associated bodies in India. These local governmental bodies utilize the funds raised through
these bonds to finance projects for socio-economic development through building bridges,
schools, and hospitals, providing proper amenities to households.
They are mainly two types of Municipal Bonds in India
General Obligation Bonds are issued to raise finances for general projects such as improving the
infrastructure of a region.
Revenue bonds are issued to raise finance for specific projects, such as the construction of a
particular project.
Masala Bonds
Masala Bonds are industrial securities that can be issued by the private sector or public sector
companies in order to raise funds from abroad.
Normal bonds that are issued in order to raise funds from a foreign source are mainly dollar
denomination, euro denomination, yen, or pound denomination bonds. They are sold to an
interested investor and the fund is raised in the form of foreign currency. It means that if the
domestic currency depreciates the outstanding debt will automatically increase. In the case of
normal bonds, this risk has to be borne by the borrower or the issuer.
However, in the case of Masala Bonds, it is just the opposite. Masala Bonds are rupee
denomination bonds i.e., the value is printed in the form of the rupee. When they are sold, a
fund in the form of a dollar or any other hard currency equivalent to the face value printed can
be raised. When on maturity, repayment has to be done then again hard currency equivalent to
the face value printed in the form of rupee has to be given back based on the current exchange
rate. Hence, there the risk rooted in the exchange rate is borne by the lender. So it is popular
among Indian companies.
Insurance Sector
In India when the insurance sector was opened up for private and foreign investment the need
for a market regulator was felt. Hence, the Insurance Regulatory and Development Authority of
India (IRDAI) was created. In 1999, IRDAI Act was passed and it was made a statutory body. At
present IRDAI is headed by Debashish Panda and its headquarters is located in Hyderabad. The
insurance sector is broadly divided into 2 types-
1) Life Insurance
2) General Insurance
Life insurance provides life cover i.e. economic security to dependents after death. All other
insurance including theft insurance, car insurance, health Insurance are general insurance. In
both, the sectors of the insurance in India, foreign investment of upto 49% was allowed. This
limit was raised to 74% in Budget 2021-22. That is the reason why every foreign investment
company in India has an Indian partner. Life Insurance can again be classified into the following
2 types-
1) Traditional/Conventional Insurance
2) ULIPs (Unit Linked Insurance Plans)
In traditional plans, the money collected in the form of premium by the insurance company is
mainly invested in debt instruments such as government securities in the form of bills, bonds
and industrial securities in the form of a certificate of deposit (CoD), commercial papers and
debentures. The money is not at all invested in the share market hence the return is fixed.
On the other hand, the premium collected in the form of ULIPs is mainly invested by Insurance
companies in the share market and hence the return is based on the movement of the share
market, therefore it is not fixed.
Controversy between IRDAI and SEBI

In the year 2010, a controversy between SEBI and IRDAI emerged. The controversy was mainly
related to ULIPs. SEBI suddenly prohibited the insurance companies in India form selling ULIPs.
SEBI was of the view that ULIPs is just like Mutual funds, hence, like mutual funds even ULIPs
should be regulated by SEBI only. On the other hand, IRDAI was of the view that in ULIPs
insurance cover is provided, hence they are Insurance schemes. Therefore they should be
regulated by IRDAI only.
The entire controversy was between two market regulators which functions under the Ministry of
Finance, so the government had to intervene. Since the parliament was not in the session, an
ordinance was issued and it was decided in favour of IRDAI. Once the parliament came into
session a law was enacted and the matter was settled in favour of IRDAI. However, the
government realized that because of the existence of numerous smaller market regulators, the
overlapping of authority will continue to result in conflict. Therefore in order to derive a solution
to the problem, Financial Sector Legislative Reform Commission (FSLRC) was set up. It was
headed by Justice B.N Srikrishna.
Commodity Trading
Commodity trading is a mechanism of price determination of commodities at international level.
In commodity exchanges, commodities are virtually traded between the buyers and the sellers. It
means that they are not bought or sold in physical form. They are traded virtually on the basis of
speculation. It is a future contract between the buyer and the seller. Based on this buying and
selling in virtual form the price of that commodity will fluctuate. This fluctuation will be reflected
even in the physical market.
The largest commodity exchange in the world is NYMEX (New York Mercantile Exchange). In
India, the largest commodity exchange is MCX (Multi Commodity Exchange). The 2nd largest
commodity exchange in India is NCDEX (National Commodity and Derivative Exchange). NCDEX
is promoted by NSE. In India, commodity trading was regulated by Forward Market Commission
(FMC). However, it has been merged with SEBI and it does not exist anymore.
NCDEX has launched the first agricultural index of India, it is known as Agridex. There are 10
commodities included in this index. These products represent both kharif and rabi season.
Derivatives
Derivatives are financial instruments, which do not have their own value. Their value is derived
from some underlying asset. As the value of the asset changes even the value of the derivatives
keeps on changing. If trading is done in such derivatives, then it is termed derivative trading.
Unicorn
A unicorn is a start-up with a valuation of at least 1 billion $. The term was first coined by Eileen
Lee, the founder of Cowboy Ventures. He used the term for startups that were valued at more
than 1 billion $.
Some successful Indian unicorns:
 One Card
 Blinkit
 Swiggy
 lenskart
 Mesho
 PharmEasy
There has been a phenomenal growth of unicorns in India in the last two years. India had 17
unicorns in 2018 which increased to 38 in 2020 and increased to 71 in 2021. After peaking at
105 in mid-2022 it fell down to 84 in 2022 end.
Negative Oil Prices

Last year the prices of West Texas Intermediate (WTI) crude oil in the world fell to minus $40.32
a barrel. It means that the seller of crude oil would be paying the buyer $40 for each barrel that
is bought. Although this fall was seen in future contracts, it was the lowest crude oil price ever
recorded. WTI is the best quality of crude oil in the world. It is used as a benchmark for crude oil
in USA. Reasons behind the fall in price were as follows-
Crude oil prices were already falling before the global lockdown due to higher supply and lower
demand. Problems arose when Saudi Arabia and Russia disagreed over the production
cuts, required to keep prices stable. Consequently, Saudi Arabia-led oil-exporting countries
started undercutting each other on price while producing the same quantities of oil. This
strategy was unsustainable on its own. The global spread of Covid-19 made it even worse as it
sharply reduced economic activity and the oil demand. Oil-exporting countries decided to cut
production by 10 million barrels a day (the highest production cuts) and yet the demand for oil
was reduced even further
Bitcoin
Bitcoin is a virtual currency or coin which is issued in an electronic form. It came into existence
in 2008, and it is believed to be invented by the Japanese Software Engineer Satoshi Nakamoto.
But it is not clear whether it is the name of a person or a group. Another Australian software
engineer Craig Wright is also associated with it. It is also known as a Crypto Currency mainly
because Bitcoins are mined through a technology called Cryptography. Blockchain technology is
used for buying and selling Bitcoins. This Blockchain technology also tracks the movement of
Bitcoins from one account to another. The entire system has mathematical puzzles, the moment
a puzzle has been solved a Bitcoin is created. For this purpose hardware and software are
needed and anybody can connect to this Blockchain system via the Internet. Since only 21
million such mathematical puzzles are there, a maximum of 21 million Bitcoins can be mined,
out of which 15.2 million Bitcoins have already been mined. Since the difficulty level of the
mathematical puzzles has continuously increased, it is expected that the last Bitcoin will be
mined around 2040. These Bitcoins can be either created by a user or they can be bought from
other holders. This virtual buying and selling results into fluctuation of the price of Bitcoins.
Since the number is fixed but the demand can be unlimited it is expected that the price of
Bitcoins will continuously rise but it is mere speculation. The moment the internet users stop
accepting the Bitcoins, the value is bound to fall. It may even fall down to zero. Japan and
Russia have recently legitimized it as a mode of payment for those who are willing to accept it,
but it has not been made a legal tender.
LIBRA is a Crypto currency backed by Facebook. In 2020 it has been renamed as DIEM. Some
other popular Crypto currencies are Ethereum, Litecoin, Dogecoin etc.
Central government of India brought Cryptocurrencies under the tax bracket, terming them as
Virtual Digital Asset In the budget 2022-23. The government proposed issuing a virtual digital
currency backed by RBI.
El-Slavador and Central African Republic are two countries who adopted bitcoin as legal tender.
Central Bank Digital Currency (CBDC)

The RBI has issued a concept note on Central Bank Digital Currency (CBDC) on October 7,
2022. The RBI has launched pilot projects of CBDC in both the Wholesale and Retail segments.
The pilot in the wholesale segment, known as the Digital Rupee -Wholesale (e₹-W). It was
launched on November 1, 2022, being limited to the settlement of secondary market transactions
in government securities. The use of e₹-W, is expected to make the inter-bank market more
efficient. Settlement in central bank money would reduce transaction costs.
The pilot project in the retail segment, known as digital Rupee-Retail (e₹-R), was launched on
December 01, 2022, within a closed user group comprising participating customers and
merchants. The e₹-R exists as a digital token that represents legal tender. It is being issued in
the same denominations as paper currency and coins. It is being distributed through financial
intermediaries like banks. Users will be able to transact with e₹- R through a digital wallet
offered by the participating banks. Transactions can be both Person to Person (P2P) and Person
to Merchant (P2M). The e₹-R offers features of physical cash like trust, safety, and settlement
finality. Like cash, the CBDC will not earn any interest and can be converted to other forms of
money, like deposits with banks.
Eight banks have been chosen by the RBI to participate in the retail pilot project in stages. Four
banks namely the SBI, ICICI Bank, Yes Bank, and IDFC First Bank are included in the first
phase. Following that, the Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak
Mahindra Bank will also join in the retail project.
Reasons behind the popularity of Crypto Currencies

1. The price of gold has remained stagnant due to which investment in Crypto currency has
become lucrative.
2. Share markets around the world have reached their all-time high due to which the
investment in the share market is seen as risk now days.
3. Increase in the internet penetration in the developing countries.
4. Presence of a significant amount of liquidity in the major economies of the world in the
aftermath of USA Subprime Crisis.

5. No tax has been imposed by any country on the profits made by investment in the Crypto
currencies.
6. Absence of any centralized regulator.
7. Privacy Protection: The use of pseudonyms conceals the identities, information and details
of the parties to the transaction.
8. Cost-effectiveness: They have single valuation globally, and the transaction fee is extremely
low, being as low as 1% of the transaction amount. Crypto currencies eliminate third party
clearinghouses or gateways, cutting down the costs and time delay. All the transactions
over crypto currency platforms, whether domestic or international, are equal.
9. Lower Entry Barriers: Crypto currencies lowers entry barriers, they are free to join, high on
usability and the users do not require any disclosure or proof for income, address or
identity.
10. Alternative to Banking Systems and Fiat Currencies: Crypto currencies offer the user a
reliable and secure means of exchange of money outside the direct control of national or
private banking systems.
11. Fast and efficient: Fund transfer is easier and faster with Crypto currencies as compared to
conventional methods.
12. Open Source Methodology and Public Participation: Majority of the Crypto currencies are
based on open source methodology, their software source code is publicly available for
review, further development, enhancement, and scrutiny.
13. Immunity to Government-led Financial Retribution: Governments have the authority and
means to freeze or seize a bank account, but it is infeasible to do so in the case of Crypto
currencies. For citizens in repressive countries, where governments can easily freeze or
seize the bank accounts, Cryptocurrencies are immune to any such seizure by the state.
14. Counterfeiting: It is created by Cryptography and uses Blockchain technology and hence is
much harder to counterfeit than paper currency.
Concerns associated with Crypto Currencies

Despite these numerous advantages and user-friendly processes, Crypto currencies have their
own set of associated risks in the form of volatility in valuation, lack of liquidity, security and
many more.
1. Crypto currencies have seen very high fluctuation in their values because it depends on
supply and demand. This results in fluctuation in the wealth of crypto currency holders.
2. Crypto currencies are being denounced in many countries because of their use in grey and
black markets.
3. They also have the potential use for Illicit Trade and Criminal Activities and can be used for
Terror Financing.
4. They also have the potential for Tax Evasion.
5. With an increase in mining of Crypto currencies, there has been an increase in energy
consumption as well. It was reported that in November 2017, the power consumed by the
entire Bitcoin network was higher than that of Ireland. This will have an impact on power
production, consumption, power prices, global warming, etc.
Non-Fungible Token (NFT)

Non-Fungible Token (NFT) is a digital asset that represents objects like art, music, videos, in-
game products etc. It is like you buy a suit or weapon for your in-game character in PUBG,
Freefire, or even earlier in GTA Vice City. But an NFT is different only in one aspect that, it is
Non-Fungible. It means that the digital asset is unique and no other person can have the same
asset in the world.
A 100 rupees note or a bitcoin can be exchanged for other 100 rupees note or another bitcoin
respectively. But no two NFTs can be exchanged, as they are not equal. So they cannot be used
as a medium of transaction. Like in real-world the bat used by M.S.Dhoni to hit the winning six
in 2011 world Cup is Non-Fungible. If that bat of M.S.D. is represented in digital form as a
unique cryptographic token then it will be NFT of the winning bat.
NFTs are traded online using cryptocurrency and are generally encoded with some underlying
software created on blockchain. They contain built-in authentication, which serves as proof of
ownership.
You might be able to see them, screenshot them or even download them for free, but to have that
right of ownership you will have to buy them by negotiating to the owner.
P2P Lending
P2P lending is a form of crowd funding. It is the process of borrowing and lending without an
intervention of a mediator. It operates through an online platform that matches lenders with
borrowers in order to provide unsecured loans. The borrower can either be an individual or a
business requiring a loan. A fee is paid to the platform by both the lender and the borrower.
The Reserve Bank of India (RBI) has released a consultation paper on Peer-to-Peer (P2P) lending
and proposed to bring such platforms under its purview by defining them as Non-Banking
Finance Companies (NBFCs).
RBI’s proposal:-
1. A lender can lend up to maximum of Rs.50 Lakh (including all the P2P platforms).
2. A borrower can borrow up to maximum of Rs.10 Lakh (including all P2P platforms).
3. A single lender can lend maximum of Rs. 50,000 to one borrower (including all P2P
platforms).
4. Maximum maturity of loan will be of 3 years.
Credit Rating Agencies

Credit Rating Agencies are companies or institutions which evaluate the credit health of a
country or corporates and provide rating to them accordingly. The rating can be termed as the
opinion or the view of that agency with respect to the credibility or the creditworthiness of the
country or the company. In India, Credit Rating Agencies are regulated by SEBI. There are more
than 70 Credit Rating Agencies which accounts for more than 91% of the credit rating activities
in the entire world. There are 3 major Credit Rating Agencies, which are as follows -
1) S&P (Standard and Poor)
2) Moody’s
3) Fitch
The rating varies from AAA to D in which AAA being the highest rating whereas D being the
lowest rating. The methodology used by the different credit rating agencies in order to evaluate
the credit health of a company and a country may differ from each other.
In the case of a country, the fiscal health of the country and the monetary health of the country
are mainly taken as the basis. Fiscal health includes the difference between the earning and
expenditure of the government i.e. the public debt as compared to the GDP of the country (Debt
to GDP ratio). whereas the monetary health refers to the condition of liquidity, inflation, demand
& supply and economic growth of the country. If both these factors are healthy enough the credit
rating of the country will remain high. If it is bad then credit rating will remain low. On the other
hand in the case of a corporate/company the credit rating depends upon the asset, liability,
revenues, expenditure, profit or loss of the company.
Credit Rating is important for a country and a company because of the following reasons-

1) The rating serves as the motivating force and in order to achieve a higher credit rating, a
country tries to maintain fiscal and monetary discipline.
2) India being a developing country requires funds in order to develop infrastructure. For this
external borrowing is an important source. A country with a higher credit rating may able
to borrow at an interest rate as low as below 2.5%. If the credit rating is low the rate of
interest may even go beyond 8%.
3) Since domestic investment in India is not sufficient, the country requires foreign
investment for the purpose of industrialization and economic growth, investment may take
place at a rapid pace only if the country is credit worthy.
4) When a foreign company borrows in order to invest in a country, the rate of interest for the
company changes according to the credit rating of the country.
5) In the case of a company if the rating is high, the company will be able to borrow easily at a
lower rate of interest. The financial instruments issued by such companies are termed as
less risky.
6) Even the investors invest in the shares of such companies resulting into an increase in its
market capitalization.
Although the rating of India is above investment grade it is as low as BBB. S&P Global Ratings
retained the 'BBB (-)' rating for India for the 13th year in a row. Even after being in good health
with respect to fiscal and monetary conditions the rating being so low shows the biasness of the
credit rating agencies against India, below BBB the rating is called Junk Rating.
Insolvency and Bankruptcy Code (IBC)

IBC was enacted on the 1st of June 2016. It is being considered an economic reform that will
enhance the ease of doing business in India. It replaces the existing laws related to Insolvency
and Bankruptcy in the country. The code makes the entire process more uniform and effective
making it easier to exit a business in India. Because of the complex laws, getting into a business
has always been difficult in the country but because of the same complexities getting out of the
business has been even more difficult.
Earlier only the borrower was authorized to seek bankruptcy but under the new code, even the
creditors can approach the designated authority to declare a borrower to be bankrupt. The new
code provides for the settlement of the entire matter in a time-bound manner preventing delays
and ensuring reconstruction or liquidation as early as possible. The process of appeal has been
streamlined and designated authorities have been established. Even the sequence in which the
liability has to be cleared has been modified.
Insolvency refers to a financial condition in which an individual or a corporate is not able to meet
his/its financial obligations (liability). In other words, they are not able to clear their liabilities.
When a court or a designated agency is approached by the borrower in order to legally declare
him/it insolvent then, it is termed bankruptcy. Hence, every bankruptcy is a result of insolvency
but every insolvency may not necessarily result in bankruptcy. Insolvency is involuntary because
such financial conditions may occur automatically due to economic failures. However,
bankruptcy is always voluntary.
Prior to this code, bankruptcy cases of a company were allowed to be filed with Company Law
Board (CLB), Board for Industrial and Financial Reconstruction (BIFR) and even with High court.
However, this entire process has been made uniform. For this purpose, National Company Law
Tribunal (NCLT) has been constituted which came into force on 1st June 2016. It can be
approached by the borrower as well as the creditor. NCLT is a quasi-judicial body that has been
created under Companies Act 2013. It has 16 benches throughout the country including a
principle bench in Delhi. The NCLT has replaced the Company Law Board and all the cases
pending with CLB, BIFR or in different courts are gradually being transferred to NCLT.
Once the case is filed, the bankruptcy process will not start immediately. The NCLT will initiate
an Insolvency Resolution Process (IRP). It is a process of evaluation to decide whether the
company can be revived, restructured or not. For this purpose insolvency professionals are
hired, whether they are working ethically or not, it is supervised by Insolvency and Bankruptcy
Board of India. Once the resolution fails then only the process of bankruptcy will be initiated. In
the case of a large company the matter has to be completed during a period of 180 days and with
an additional extension of not more than 90 days. In the case of MSMEs the matter has to be
completed within 90 days with an additional extension of not more than 45 days. In case the
bankruptcy is completed then only the liquidation will take place. It refers to the sale of the asset
of the company. The liabilities will be cleared according to the following sequence under the new
code.
1) Workmen/Employees dues of the last 24 months and secured lenders (debenture holders).
2) Unsecured lenders such as commercial paper holders or unsecured debenture holders.
3) The dues of states and central government
4) Preferential shareholders
5) Equity shareholders
Any decision taken by the NCLT can be challenged only in National Company Law Appellate
Tribunal (NCLAT). A decision taken by NCLAT can only be challenged in Supreme Court.
In case of liquidation of a company, the promoter of the company is not allowed to bid. Even an
individual related to the promoter is not allowed to bid. If the promoter of a company is willing to
bid in the insolvency process of another company, then there should not be any such loan on his
company or the promoter himself that he is not able to repay. In case of bankruptcy of a real
estate company, the home buyers will be treated as financial creditors and they will be placed at
the topmost position along with the employees of the company and the debenture holders.
It was also seen that many creditors were criticizing the decisions taken under IBC which
resulted in unnecessary delay in the process. Hence, Inter Creditors Agreement has been signed.
This is an agreement between creditors, under which if between those creditors who accounts for
at least 66% of the total loan. If they sign an agreement, then the same agreement will be
applicable on all the creditors.
With the success of this code, RBI had decided to end the restructuring of the corporate loans by
issuing a notification on 12th February 2018. Time period of 180 days was given to banks and
corporate. It was decided that if such corporates were able to pay at least 20% of the total due
amount then, such corporates won’t be declared bankrupt. Otherwise the process of bankruptcy
would begin against such corporates.
Special Provisions for MSME:- Now the promoters of MSMEs are allowed to bid for their
companies as long as they are not willful defaulters and don’t attract any other related
disqualification.
Provisions for individuals:- In the case related to bankruptcy of individuals the Debt Recovery
Tribunal (DRT) can be approached. The decision of DRT can be challenged only in Debt Recovery
Appellate Tribunal (DRAT). The decision of the DRAT can be challenged only in the Supreme
Court.
All these provisions have made the insolvency process easier, but they have many challenges.
The establishment of these tribunals have affected the authority of High courts in India. Along
with this even those cases which were already going in front of other authorities, they are again
brought under NCLT. It will lead to delay in these cases. As now the creditor can also apply for
bankruptcy, the misuse of these provisions is bound to increase. Still this code will help in
reducing the NPAs of the banks in India.
Finance Minister in her budget speech of 2022-23 proposed that the government will bring
necessary amendments in the Insolvency and Bankruptcy Code to enhance corporate resolution.
She also announced facilitate cross-border insolvency process as well under the present IBC
regime.
Earlier during pandemic, in order to provide relief to the firms facing grave stress, the
government had suspended the initiation of the corporate insolvency process under IBC for one
year starting from 25 March 2020 to 24 March 2021. It also increased the minimum threshold
for insolvency initiation from 1 lakh to 1 crore.
The Economic Survey 2021-22 noted that the IBC has brought behavioural changes among
corporate debtors as thousands of them opting to resolve the distress at early stages as they feel
default is imminent. The Survey pointed that 421 cases of corporate debtors were resolved under
the IBC by September 2021. It helped recover Rs 2.55 lakh crore against the total debt of Rs
7.94 lakh crore, reflecting a success rate of over 32 per cent. The Survey has also advocated for
the simplification of the voluntary liquidation process as well as to create a single window for the
entire process.
NATIONAL INCOME
In order to calculate the National Income of a country the most common method which is used is the
production method. Through this method, while calculating the GDP, GNP, etc. of the country total
production of goods and services in a particular financial year is taken into account. Finally, with the help
of GDP, GNP the National Income of a country is derived.
Gross Domestic Product (GDP)

GDP refers to the total value of the finally marketable goods and services produced within the boundary of
a country in one financial year. Hence, while calculating GDP it does not matter, by whom goods and
services are being produced, it only matters where goods and services are being produced. So even if
something is produced by a foreign company within India, its value will be added to the Indian GDP. The
GDP of a country shapes its economy. The more the GDP, the larger the size of the economy. An increase
in the GDP is termed Economic Growth.
While calculating GDP, it is the value of the finally marketable product or service which is taken into
consideration. It means that the value of raw material or input is not taken into consideration. It is mainly
because the value of the raw material or the input will already be there in the value of the final product.
For example- If a company produces a car, the tyre bought from another company will serve as an input.
The value of the car which is the finally marketable product will include even the price of the tyre and
hence the value of the tyre will not be added separately to the GDP.
While calculating GDP, the resale value of a product is not taken into consideration. Similarly, the transfer
payment is not added to the calculation of GDP. Transfer Payment refers to that type of payment for which
no service has been delivered. For example - Scholarships, Pensions, etc. Even the care economy is not
added to the GDP. Care economy refers to that part of the economy where services are provided but no
payment is done.
While calculating the GDP it becomes difficult to calculate the value of economic activities in an
unorganized sector. Hence, the contribution of the unorganized sector is estimated instead of being
calculated accurately. The GDP of a country is calculated on a quarterly basis and when the GDP of all the
four-quarters are combined the annual GDP is derived.
Based on the value of the nominal GDP, the USA is the world’s largest economy. Its GDP reached approx.
25.3 trillion $ in the financial year 2022-23 from 23 trillion $ in the year 2021-22. The GDP of the USA is
about 25% of the global GDP. It is even more than the GDP of the European Union. Therefore, it has a
significant influence on the global economy. China is the world’s second-largest economy with a GDP of
approx. 20 trillion $ in 2022-23. With a GDP of 4.9 trillion $, Japan is at 3rd position. Germany is at 4th
position. India surpassed UK in 2022 reaching at 5th position with 3.3 trillion $ GDP. UK is at 6th and
France is at 7th position. The smallest economy is of Tuvalu with 66 million $.
In terms of the rate of increase in GDP, India has been the fastest growing economy in 2022 with 6.8%
growth rate as per the IMF. The IMF predicted in its World Economic Outlook, Jan 2023 that india will
grow at a rate of 6.1 per cent in 2023. In this report the global growth is projected to fall from an estimated
3.4 percent in 2022 to 2.9 percent in 2023.

The GDP of a country is calculated in three different ways-
1) GDP at Market Price/GDP at Current Price/Nominal GDP.
2) GDP at Base Price/GDP at Constant Price/Real GDP.
3) GDP at factor cost.
Nominal GDP
While calculating Nominal GDP the current price of the goods and services are taken into consideration. It
means that it includes the impact of inflation, deflation, subsidies, and even indirect taxes. Hence even if
the production does not increase or decrease, due to the impact of inflation, deflation, subsidies, and
indirect taxes the nominal GDP will fluctuate.
Real GDP
While calculating Real GDP the price remains constant. It means that it does not include the impact of
inflation, deflation, or indirect taxes. For this purpose, a base year is maintained and the price in the base
year is taken into consideration year after year. Hence, real GDP fluctuates only when production
fluctuates. The current base year is 2011-2012. The Ministry of Statistics and Programme Implementation
(MoSPI) has recently announced that the government is planning to change the base year for the
calculation of Real GDP to 2020-21.
GDP at factor cost

It is calculated from the Nominal GDP of a country. The prices of goods and services are impacted by
indirect taxes and subsidies. The indirect taxes pull the GDP upwards whereas the subsidies pull the GDP
downwards. Therefore in order to calculate GDP at factor cost the impact of the indirect taxes and the
subsidies have to be eliminated. For this purpose, the indirect taxes are subtracted from the nominal GDP
whereas the subsidies are added to the nominal GDP.
GDP at factor cost = Nominal GDP – Indirect Taxes + Subsidies

Note:- In May 2019 NSO has been created by merging NSSO with CSO. This new organization is headed
by the secretary of MOSPI (Ministry of Statistics and Program Implementation). As per NSO, Indian GDP is
estimated to decline by -7.7% in the financial year 2020-21 due to Corona Pandemic. Indian GDP declined
by -23.09% in the first quarter of the financial year 2020-21. It was the sharpest fall in the quarterly GDP
growth rate since 1996, the year since when we started calculating GDP on a quarterly basis. Apart from
Agriculture (+3.4%), all the sectors have shown a negative growth rate. The construction sector has
suffered the most (-50.3%).
According to Economic Survey 2022-23, the agriculture sector grew at 3.0% in the financial year 2021-22.
The growth for the industrial sector is 10.3% last year. After getting affected the most by corona pandemic
the service sector has shown a growth rate of 8.4% in the year 2021-22.
Technical Recession
If the growth rate of an economy remains negative for two consecutive quarters then it is said that the
economy is in a Technical Recession. The growth rate of the Indian economy for the first two quarters of
the fiscal year 2020-21 were -23.9% and -7.5% respectively. Therefore, the Indian economy was in a
Technical Recession in the Fiscal year 2020-21. However, it came out of this technical recession in the
third quarter of the fiscal year 2020-21 with a growth rate of +0.4%.
Gross National Product (GNP)

It refers to the total value of the finally marketable products and services produced by the nationals of a
country throughout the world. Hence while calculating, GNP it does not matter, where the goods and
services are being produced. It only matters that the goods and services are being produced by whom.
However, in reality, the GNP of a country is calculated differently.
The companies or the nationals belonging to a country may function or do business even in other
countries. Whatever, as a part of their earnings, is sent back home by them will be termed as Net Inflow
into their country. On the other hand, the companies from abroad, working in their country may send
some part of their earnings back to their own country (the company’s origin country), this will be termed
as Net Outflow. From the GDP of a country when the net outflow is deducted and the net inflow is added
then the GNP of the country is derived.
GNP = Nominal GDP – Net outflow + Net inflow
Note:- The Embassy or the High Commission of any country located in a country will be considered to be
foreign territory. Hence, whatever resource is generated within an Embassy or High Commission will be a
part of the country to which the embassy belongs. Therefore, it cannot be added to the GDP of the country
where it is located.
Net National Product (NNP)

In the process of production of goods and services, machines and tools are used. These machines and
tools get wear and tear. Hence, they are needed to be replaced in the future. In order to replace them in
the future, the companies set aside some part of their revenue every year. The amount which is set aside
is known as depreciation. When this depreciation is deducted from the GDP we derived NDP (Net Domestic
Product). However, when depreciation is deducted from GNP then the Net National Product is derived.
NNP = GNP – Depreciation
National Income
When NNP is calculated at factor cost then National Income can be derived. In order to calculate National
Income from the NNP, indirect taxes are deducted and subsidies are added.
National Income = NNP – Indirect taxes + Subsidies
Per Capita Income

Per Capita Income = National Income / Population of the country
Per Capita GDP

Per Capita GDP = GDP / Population of the country
Green GDP
In the process of production of goods and services, environmental consequences can be seen. For example-
deforestation, pollution, etc. When this effect on the environment is given a monetary value and this value
is deducted from the GDP then the remaining GDP is called Green GDP. If it is deducted from the GNP
then the remaining GNP is called Green GNP
Note:- Bhutan uses Gross National Happiness (GNH) instead of GDP to measure its economic growth.
Purchasing Power Parity (PPP)
Every country calculates its GDP in its own currency. However, in order to compare the GDP of every
different country with each other, they are transformed into a common currency which is the US dollar. It
can be done in 2 ways –
 Exchange Rate.
 Based on the Purchasing power of the currency.
When the nominal GDP is calculated the conversion is based on Exchange Rate. However, when the GDP
at PPP is calculated, the conversion is based on the purchasing power of the currency.
PPP of a currency refers to the purchasing power of the domestic currency of a country in comparison with
the purchasing power of the US dollar in the US. For this purpose 2 baskets are maintained which include
the same essential commodities in the same quantities. One basket will be bought with the help of Indian
currency in India and the other basket will be bought with the help of the US dollar in the US. Since India
is a relatively poor country the cost of living in India is low, hence the purchasing power of Indian
currency will be high. Therefore, automatically the GDP at PPP increases. Based on purchasing power
parity with a GDP of 10.19 trillion $ for year 2021 according to World Bank, India is the 3rd largest
economy in the world. China with a GDP of more than 27.31 trillion $ in 2021 is the largest economy in
the world on the basisi of PPP. The USA with a GDP of 23 trillion $ is the 2nd largest economy in the world
according to World Bank data of 2021.
Controversy over the new method of calculating GDP

India adopted this new method of GDP calculation in the year 2015. Since then, the controversy regarding
this new method continues. This controversy was seen mainly on three grounds. One issue was related to
changes in the Base Year. The second issue was related to the use of CPI in place of WPI. The third issue
was with respect to the collection of data from the organized and unorganized sectors.
Prior to 2015, 2004-05 was the base year for the calculation of GDP. In 2015, this base year was changed
to 2011-12. Whenever there is a change in the base year, the new price of goods and services are included
in the calculation of GDP. This leads to an increase in GDP at the base rate/price.
The effect of inflation is also included in the calculation of GDP at Market Price. Prior to 2014, WPI was the
main index for calculating inflation in India. But since 2014, CPI has been made the main index for
calculating inflation. In general, retail inflation grows at a faster rate than wholesale inflation. Therefore,
when CPI is included in the calculation of GDP, then GDP appears to be growing at a faster rate.
Prior to 2015, direct contact was established with different corporate units to collect data regarding the
production of the organized sector. But in 2015, a new method was brought in place, which was based on
MCA-21. That is, the Ministry of Corporate Affairs assigns a 21-digit code to all registered companies.
These registered companies upload their balance sheet using this code. This is from where NSO gets the
data for the purpose of calculating GDP. But in a survey, it was found that about 36% of these registered
companies go extinct every three years. Some of these companies shut down. Whereas most of the
companies are Shell Corporations, which are opened only on paper for laundering black money. Therefore,
in the calculation of GDP, the income shown by such companies is also added.
It is extremely difficult to collect data from the unorganized sector. Therefore, a survey of the unorganized
sector is conducted every 5 years. In the following years, it is assumed that the rate at which the GDP of
the unorganized sector has increased at the same pace at which the GDP of the organized sector has
increased. Therefore, in this process, the economic shocks arising out of demonetization, GST, Covid
crisis, etc., which have been inflicted upon the unorganized sector from time to time, get overlooked.
Therefore, it can be said that there have been errors in the contribution of the unorganized sector in the
calculation of GDP.
FISCAL SYSTEM
Fiscal system refers to the total receipt and the total expenditure of the government. The policies which are
formulated to enhance the receipt of the government and to manage its expenditure are known as Fiscal
Policies. Fiscal policies are the responsibility of the Ministry of Finance of the country. In India or any
other part of the world, the complete detail of the receipt and the expenditure of the current financial year
and the estimated details of the receipt and expenditure of the next financial year is presented in the
parliament in the form of the Budget. In India, the budget is officially known as the Annual Financial
Statement. It is presented in the name of the President of India in the parliament. The passage of the
budget in the Parliament authorizes the Central Government to withdraw fund from the Consolidated
Fund of India.
In Budget 2017-18, three major changes were introduced by the government.
1) Earlier the Budget was presented on the last working day of February but from 2017-18 it is being
presented on the first working day of February. This change has been done mainly because even
after the Budget being presented on the last working day of February, the discussion and its passage
required approximately two months. Without the budget being passed the government was not
authorized to withdraw money from the Consolidated Fund to meet the expenditure of first few
weeks of the next financial year. So the government simultaneously had to present Vote on
Account, which was a tiring process. If the budget is presented on the 1st working day of February
the government will be able to get it passed even before the financial year starts. To reduce the time
period, even the provision of recess after the budget being presented has been discontinued.
2) The calculation of Planned and Non-planned expenditure was discontinued. It was also
recommended by the 14th finance commission. Planned expenditures were those expenditures that
were planned under the 5-year plan. Since the planning commission was dismantled on 1st January
2015 and even the recommendations of the 12th Five-year plan came to an end on 31st March 2017
the calculation of Planned and Non-Planned Expenditure became meaningless.
3) The Rail Budget and the General Budget both were merged.
The receipts of the government are classified into two types:-

1. Revenue Receipt 2. Capital Receipt
Similarly, even the expenditures of the government can be classified into two types:-
1. Revenue Expenditure 2. Capital Expenditure

Revenue Receipt
Revenue Receipts are those receipts of the government which neither create a liability over the government
nor reduce its asset. It includes the following:-
(a) Taxes collected by the government (Direct and Indirect taxes.)
(b) Penalties collected by the government.
(c) Dividend received from public sector companies.
(d) Interest received on the loans given by the government.
(e) Income from rent and lease etc.
(f) User service charges for services such as water supply, electricity supply, transportation,
communication etc.
Hence the Revenue Receipts can be further divided into tax and non-tax receipts.
Capital Receipt
Capital Receipts are those receipts of the government which either creates a liability over the government
or reduce the asset of the government. It includes the followings:-
(a) Borrowings in any form by the government.
(b) Sale of a minority stake in public sector companies in the form of disinvestment.
(c) Sale of a majority stake in public sector companies in the form of privatization.
(d) Recovery of the principal of the loan given by the government.
(e) Sale of an asset such as land, building, etc.
Revenue Expenditure
The Revenue Expenditures are those expenditures of the government which do not create any asset. They
are mainly for consumption purpose. They include the followings:-
(a) Grants given to the states.
(b) The interest payment done by the government over its borrowings.
(c) Defence expenditure.
(d) Welfare schemes.
(e) Subsidies given by the government.

(f) Salary and pension payment of government employees.
(g) Maintenance cost of the created assets.
(h) Law and order and public administration
(i) Expenditure to meet any natural calamity
Capital Expenditure
Capital Expenditures are those expenditures of the government which create an asset. It includes the
followings:-
(a) Infrastructure development such as the construction of roads, dams, bridges, power plants, ports,
airports, etc.
(b) Social infrastructure development such as the construction of schools, colleges, hospital, etc.
(c) Industrialization and procurement of machines.
(d) Loan given by the government to the states or any other entity.
Several expenditures include both revenue as well as the capital aspect. For example:- defence
procurement of fighter planes, warships etc will be a part of capital expenditure. Whereas their
maintenance cost and operational cost etc will be a part of revenue expenditure.
Out of all the areas of expenditure of the government, grants given to the states are the single largest
expenditure. Interest paid by the government over-borrowing is the 2nd highest expenditure.
1. Fiscal Deficit
If the receipt of the government is less than its expenditure then the government is said to be in deficit.
Fiscal Deficit refers to the difference between the total receipt and total expenditure of the government.
However, while calculating Fiscal Deficit the borrowings of the government for that financial year are not
counted as a part of the receipt. This loan is taken by the government to fulfil the gap between receipt and
deficit. In other words, it can be said that the fiscal deficit of the government for a particular financial year
is equal to the total borrowing of the government in that financial year.
The whole world faced economic challenges due to Covid Pandemic in fiscal year 2020-21. Because of the
lockdowns, the government had to borrow heavily to provide stimulus to the economy. This increased the
Fiscal Deficit. Hence, the fiscal deficit of Indian government stood at 9.2% as per actual estimates of
budget 2020-21. The fiscal deficit for the financial year 2021-22 was 6.7% of the GDP. As per budget
estimates of 2022-23, fiscal deficit was expected to remain at 6.4% of GDP in the financial year 2022-23.
The Revised Estimates in Budget 2023-24 for FY 2022-23 showed Fiscal deficit adhering to the estimated
target of 6.4%.
The Fiscal Deficit for Fiscal Year 2023-24 is estimated to be at 5.9% of GDP as per Budget 2023-24. The
revised target of government in the aftermath of Covid Pandemic is to bring Fiscal Deficit to 4.5% of GDp
by 2025-26.

The fiscal deficit or any other deficit of the government may not have a direct relationship with the GDP,
but the deficit is shown in terms of percentage in comparison with the GDP of the country. The Fiscal
Deficit can be reduced either by enhancing the receipts or by reducing the expenditure. However, even if
the GDP increases at a rapid pace, in terms of percentage the deficit will decline automatically as
compared to the GDP.
2. Revenue Deficit
It refers to the difference between the revenue receipt and the revenue expenditure of the government.
Hence, while calculating revenue deficit the capital receipt and capital expenditure are not taken into
consideration. Due to covid pandemic, the tax and non-tax receits declined, whereas the expenditure to
support health, food, livelihood, etc increased. Hence, the revenue deficit remained at 7.5% of GDP
according to the final estimates of fiscal year 2020-21. The Revenue Deficit remained at 4.4% of GDP in FY
2021-22. As per budget estimates of 2022-23 the revenue deficit was expected to be at 3.8% of GDP. But
the revised estimates show it to be at 4.1% in FY 2022-23. The Budget estimates for FY 2023-24 expectes
Revenue Deficit to be at 2.9% of GDP in Budget 2023-24.
A high revenue deficit shows that the revenue receipt of the government is not able to meet the expenses
for consumption purposes. Hence, the government is borrowing for consumption purpose which is not a
good sign. It also shows that tax compliance in the country is low. The Golden rule of fiscal consolidation
states that revenue deficit should be brought down to zero and borrowing should take place only for
capital formation.
3. Primary Deficit
The Primary Deficit is calculated by subtracting the interest payment part from the Fiscal Deficit of the
government. It helps in calculating that if the burden of interest payment over the previous borrowings
was not there then what exactly would have been the deficit of the government. For the financial year
2020-21, the primary deficit remained at 5.8% of GDP. In fiscal year 2021-22, as per actual estimates it
remained at 3.3% of the GDP. According to budget 2022-23, it was expected to be at 2.8% of GDP in fiscal
year 2022-23. But the revised estimates show it to be at 3% of GDP in fiscal year 2022-23. The Budget
estimates for FY 2023-24 expectes Primary Deficit to be at 2.3% of GDP in Budget 2023-24.
4. Effective Revenue Deficit

The concept of Effective Revenue Deficit was introduced in India by amending the FRBM Act 2003 in the
fiscal year 2011-12. It was brought on the recommendations of the 13th Finance Commission. However,
the 14th Finance Commission recommended that the government should discontinue its calculation.
The grants given to the states by the centre are considered as a part of the revenue expenditure of the
centre. They are considered as a part of the revenue receipt of the states. Hence, the grants contribute to
the Revenue Deficit of the centre. However, a large part of the grants given to the states is used by the
states for capital formation (capital expenditure). Hence from the revenue deficit of the centre when that
part of the grant, which is used by the state for capital formation is deducted the remaining revenue deficit
is termed as an Effective Revenue Deficit. In financial year 2020-21 it remained at 6.2% of the GDP. In
financial year 2021-22 it remained at 3.3% of the GDP according to actual estimates. The revised
estimates for Fiscal Year 2022-23 show 2.9% of GDP. The Budget Estimates for Fiscal Year 2023-24
expects Effective Revenue Deficit to be at 1.7% of GDP in Budget 2023-24.
5. Monetized Deficit
The calculation of monetized deficit was discontinued in 1997. Till 1997 to bridge the deficit of the
government, the RBI used to borrow from the banking system to some extent and thereafter it used to
issue fresh currency to bridge the remaining deficit. That part of the deficit which was fulfilled by printing
fresh currency was termed as Monetized Deficit.
Deficit Financing
When the expenditure of the Government is more than its receipt then the Government is said to be in
deficit. The mechanism used to bridge this gap between receipt and expenditure is known as Deficit
Financing. Before 1997, in India, under this mechanism the Government used to borrow from the banking
system with the help of RBI by issuing Government securities. However, if the RBI borrows continuously
from the banking system on behalf of the Government to bridge its deficit then the banking system may
not be left with a sufficient amount of money to lend to the private sector. This may push private
investment out of the economy. This phenomenon is known as Crowding Out. Hence simultaneously the
Government borrows even from the public and even from external sources. Even after that if the deficit
was not fully bridged the Government used to borrow directly from the RBI by issuing Ad hoc Treasury
Bills. In return for these bills, the RBI used to print fresh currency notes to lend to the Government.
Although, it helped in bridging the deficit, the fresh currency notes lead to high inflationary pressure.
Since this mechanism easily provided fund to the Government, it was not very much concerned about the
widening fiscal deficit. Hence to ensure fiscal discipline the central Government and the RBI mutually
decided to discontinue this mechanism of Deficit Financing. Hence this mechanism was replaced by WMA
(Ways and Means Advances).
Ways and Means Advances (WMA)

Under section 17(5) of the RBI Act 1934, this mechanism was introduced by the RBI for the centre on 1st
April 1997. Ways and Means Advances was brought by replacing the then existing mechanism of Deficit
Financing. Along with the centre, this facility is also provided by the RBI to all the states except Sikkim.
Under this mechanism, it was decided that fresh currency will not be issued by the RBI to bridge the
deficit of the government. It was also decided that Ad hoc Treasury Bills will be discontinued. All the states
which are provided WMA facility by the RBI have to open a current account with the RBI. Even the Centre
is required to do so. For this purpose, they all have to maintain a minimum balance with the RBI which is
based on the average GDP of the states in the last 3 years. This minimum balance acts as a resource lying
with the RBI.
At the beginning of the financial year itself, the RBI and the Government of India mutually decide that
after borrowing from the public and the banking system by selling the government securities how much
amount of maximum loan can be given by the RBI to the Government of India to bridge its temporary
mismatch between the receipt and expenditure. This amount which is mutually decided is the WMA
facility. The amount is decided every 6 months and is given by the RBI to the government in the form of
short term loan whenever it is required. Under WMA the loan which is provided has a maturity period of
90 days. The rate of interest is equal to the Repo Rate.
If the WMA is exhausted the government may further borrow from RBI but it will be termed as an
Overdraft. If the amount borrowed in the form of overdraft is not more than 100% of WMA then the rate of
interest will be 2% higher than the Repo Rate. If in case the overdraft exceeds 100% of WMA an interest of
5% higher than the Repo Rate will be applicable. The amount borrowed in the form of an overdraft has to
be repaid within 12 consecutive working days (earlier 10 days). If the government fails to repay, the RBI
will stop all the financial assistance till the time it is cleared.
To avail this facility the Centre has to maintain a minimum balance of Rs 100 crore on every Friday as well
as on the last day of the financial year of the RBI and on the last day of the financial year of the
Government of India i.e. 31st March, in the current account with RBI. On any other days, the Centre has
to maintain a minimum balance of Rs 10 crore.
In line with the recommendations of the Vimal Jalan Panel, the RBI has decided to align its Financial Year
with the Fiscal Year of the Government of India. Therefore the Financial Year 2021-22 of RBI started on 1st
April 2021 (Earlier it started from 1st of July). Due to this the financial year 2020-21 of RBI was of 9
months only i.e. from 1st July 2020 to 31st March 2021.
For better management and prevention of Covid pandemic, the RBI increased the limit of WMA for states
upto 60% as compared to the last year.

Fiscal Responsibility and Budget Management Act 2003
During the 1990s the fiscal health of the government was continuously declining. Hence to follow the path
of fiscal consolidation in a targeted manner the government constituted a committee headed by Vijay
Kelkar. The Kelkar Task Force came out with certain suggestions that were passed in the parliament in
the form of the FRBM Act 2003. It became effective in 2004. The major provisions of the FRBM Act 2003
were as follows-
1. From the financial year 2004-05, the fiscal deficit should be brought down by 0.3% every year. By
31st March 2009, the fiscal deficit should be brought down to 3% of the GDP.
2. From the financial year 2004-05, the revenue deficit should be brought down by 0.5% every year. By
31st March 2009 revenue deficit should be brought down to zero.
3. As compared to the previous financial year, the borrowing of the government in any financial year
should not exceed by more than 9%.
4. The government should present the complete information regarding the health of the fiscal system in
parliament quarterly basis.
5. In any economic uncertainty, the Act can be amended and the targets can be modified.
Since, because of several reasons the governments one after another, kept on modifying the target by
amending the FRBM Act, 2003. Because of this, the Act became irrelevant. Hence, it became a matter of
debate that whether the FRBM Act should remain in place or should be eliminated. With respect to
targeted fiscal consolidation, another debate in the country has been present continuously. One argument
in the favour of targeted fiscal consolidation is that targets act as a constraint over the government and
they compel the government to maintain fiscal discipline. According to the other argument the economy
suffers from uncertainties. Because of this, it may not be easier to achieve such fiscal targets. Lack of
flexibility also takes away the freedom of the government to spend on welfare activities as well as
development purposes.
Hence, to settle the debate, the FRBM Review Committee was constituted under the chairmanship of N.K.
Singh in May 2016. The committee came out with its recommendations in January 2017 and the report of
the committee was titled “Responsible Growth- A Debt and Fiscal Framework for 21st Century India”. The
major recommendations of this committee are as follows-
1. Fiscal consolidation should be done in a targeted manner but flexibility should be there with respect
to the targets.
2. From 2017, by the year 2023 fiscal deficit should be brought down to 2.5% of the GDP from 3.5%.
3. From 2017 till 2023 revenue deficit should be reduced by 0.25% every year and from 2.3% of the
GDP, the revenue deficit should be brought to 0.8% of the GDP.
4. At present, the combined debt of the centre and the states is 70% of the GDP of which the centre
contributes 49% and the states contribute 21%. However, this debt to GDP ratio should remain at
60%. Hence the Centre should bring down its outstanding debt to 40% and the states should bring it
down to 20%.
5. To ensure flexibility with respect to the targets during economic uncertainties, the committee
recommended an Escape Clause. Under this, the flexibility of 0.5% over the target should be
provided.
6. To make effective fiscal policies, a Fiscal Council should be created.
While presenting the Budget 2021-22, Finance Minister Nirmala Sitharaman had said that the government
proposes to bring down the fiscal deficit below 4.5% of GDP by 2025-26.
Fiscal Activism
This concept of Fiscal Activism was mentioned and explained in the Economic Survey 2016-17. It refers to
the proactive fiscal policies formulated by a government. When in an economy, the liquidity declines
(because of any reason), the demand declines automatically. This decline in demand will affect production
and an economic slowdown may be seen. In such a situation to revive the economy, the government of a
country may resort to Fiscal Activism.
Under fiscal activism, the government may reduce the direct taxes leaving the surplus amount of money
with the consumer. This will enhance consumption. The government may also reduce indirect taxes such
as GST which will make goods and services cheaper and consumption will become more attractive. At the
same time, the government may enhance public expenditure (expenditure done by the government) in the
form of welfare schemes and developmental activities. This will infuse additional liquidity in the economy.
This fiscal activism may help in the revival of the economy but it will have negative consequences. The
increase in public expenditure and a decline in the tax collection will widen the fiscal deficit leading to an
increase in the borrowings of the government. This increase in borrowings will lead to an increase in
interest payment because of which the revenue deficit will further increase and the government may not
have sufficient funds for developmental activities.
It is often stated that in developed economies since the demand is stagnant, to tackle economic slowdown
fiscal activism can be adopted as a tool. However, in countries like India which are developing and which
have a huge domestic market, demand exists naturally here. Hence, any temporary slowdown may not be
tackled through fiscal activism.
Terms of Reference of 15th Finance Commission

Article 280 of the constitution provides for a Finance Commission. The finance commission plays an
important role in the centre-state financial relationship. The first finance commission was constituted in
1951. The 15th Finance Commission had been constituted under the chairmanship of N.K.Singh. The
important terms of reference of the 15th finance commission are as follows-
1. It had to review the receipt/revenue of the government.
2. It had to review the expenditure of the government.
3. By reviewing the receipt and expenditure a road map for fiscal consolidation was to be prepared.
4. The outstanding debt of the states, as well as the centre as compared to the GDP, was to be reviewed
and a road map was to be prepared to bring them down.
5. The state devolution of 42% of the total tax receipt of the centre was to be reviewed.
6. Some of the states are also given a revenue deficit grant by the centre. Even this was to be reviewed
whether it should be there or not.
7. The impact of GST was to be reviewed and even the mechanism of compensating the states for any
revenue loss due to GST was to be reviewed.
8. Art 293 (3) of the constitution says that if a state has borrowed from the centre and is yet to repay,
then to borrow fresh the state will have to seek permission from the centre. Even this provision was
to be reviewed.
9. In the case of Disaster Management, the share of the centre and states was to be reviewed.
10. The commission was required to examine whether a separate funding mechanism for defence and
internal security should be set up and if so, how it can be operationalised.
11. While deciding that out of the total tax receipt of the centre how much amount will go to which state.
The census data of 2011 will be taken into consideration. The data of 1971 will no longer be
considered. (It was the most controversial provision which was being opposed by the South Indian
States. They believed that it is a kind of incentive being given by the centre to states which have
failed to control population growth.
Recommendations of 15th Finance Commission

The 15th Finance Commission was required to submit two reports. The first report consisted of
recommendations for the financial year 2020-21. The second report had the recommendations for the
2021-26 period. The 15th Finance Commission used the following criteria while determining the share of
states:-
(i) 45% for the income distance (ii) 15% for the population in 2011 (iii) 15% for the area
(iv) 10% for forest and ecology (v) 12.5% for demographic performance (vi) 2.5% for tax effort
Based on this Uttar Pradesh and Bihar have received the largest devolutions for 2020-21, receiving Rs
1,53,342 crore, and Rs 86,039 crore respectively. Karnataka and Kerala saw the largest decreases in the
share of the divisible pool with a decrease of 0.49% and 0.25% respectively.
The recommendations of the 15th Finance Commissionare as follows:-
1. The share of states in the centre’s taxes is recommended to be decreased from 42% to 41% for
period 2020-21 and 2021-26. The 1% decrease is regarding the allocation for the newly formed
union territories of Jammu & Kashmir and Ladakh from the resources of the central government.

2. The commission noted that recommending a credible fiscal and debt trajectory roadmap remains
problematic due to uncertainty around the economy. It recommended that both central and state
governments should focus on debt consolidation and comply with their respective targets of fiscal
deficit and debt levels as per Fiscal Responsibility and Budget Management (FRBM) Acts.
3. The Commission observed that financing capital expenditure through Off-Budget Borrowings
detracts from compliance with the FRBM Act. It recommended that both the central and state
governments should make full disclosure of Extra-Budgetary Borrowings.
4. In 2018-19, the tax revenue of state governments and central government together stood at around
17.5% of GDP. The commission noted that tax revenue is far below the estimated tax capacity of
the country. Further, India’s tax capacity has largely remained unchanged since the early 1990s.
In contrast, tax revenue has been rising in other emerging markets. The commission recommended
of:-
(a) Broadening the tax base.
(b) Streamlining tax rates.
(c) Increasing capacity and expertise of tax administration in all tiers of the government.
5. The Commission highlighted some challenges with the implementation of the GST. These include:-
(a) Large shortfall in collections as compared to the original forecast.
(b) High volatility in collections.
(c) Accumulation of large integrated GST credit.
(d) Glitches in invoice and input tax matching.
(e) Delay in refunds.
6. The commission observed that the continuing dependence of states on compensation from the
central government is a concern. In its second report for the period 2021-26 the commission has
recommended post-devolution revenue deficit grants amounting to about Rs. 3 trillion over the five-
year period. According to the commission, the number of states qualifying for the revenue deficit
grants will decrease from 17 in Fiscal Year 2022 (the first year of the award period) to 6 in Fiscal
Year 2026 (the last year).
7. Regarding separate funding mechanism for defence and internal security, the commission suggests
to constitute an expert group comprising representatives of the Ministries of Defence, Home Affairs,
and Finance. The commission noted that the Ministry of Defence proposed the following measures
for this purpose:
(a) Setting up of a non-lapsable fund.
(b) Levy a cess.
(c) The monetisation of surplus land and other assets.
(d) Tax-free defence bonds.
(e) Utilising proceeds of disinvestment of defence public sector undertakings.
The expert group is expected to examine these proposals or suggest alternative funding mechanisms.

Fiscal Consolidation
It refers to a process through which the government reduces its deficits. In a country, fiscal consolidation
becomes essential mainly because the high deficit will lead to high borrowings, which will increase the
burden of interest payment by the government. If the burden of interest payment remains high the
government will be left with lesser resources for developmental activities. High borrowing also affects the
credit rating of the country which has an adverse impact on foreign investment and at the same time the
cost of borrowing for the government from international sources increases. Hence deficits may not be good
for a country.
In a country like India, the capital and revenue expenditure both have remained high for the government.
Post Independence due to the lack of private investors the government had to play the role of an investor.
Industrialization and infrastructure development have been other important responsibilities of the
government.
In the case of revenue expenditure, education and health-care remained the responsibility of the
government. Because of economic disparity in India, in order to ensure social justice the government had
to initiate several welfare schemes. At the same time since poverty remained high, to ensure the
availability of essential commodities and services, subsidies were used as an instrument.
Along with it due to lack of awareness and prevalence of corrupt practices the tax compliance remained
low in the country. Out of the total voters only 7% file income tax return which means that out of the total
population in the country not even 2% file income tax return. Apart from it to achieve certain policy
objective the Tax Expenditure of the government remained high. Tax Expenditures refers to the tax
exemptions given by the government.
The deficits in the country are not always bad. However, the revenue deficit overall is not good for the
economy. The ‘Golden Rule of Fiscal Consolidation’ states that revenue deficit should be brought down to
zero and borrowing should only take place for capital formation. To reduce the deficit, the income and
expenditure both should be taken care of. Under fiscal consolidation following measures can be adopted-
(1) Downsizing of the Ministries
(2) Downsizing of the Bureaucracy.
(3) Discontinuing those welfare schemes which are socially and economically no more beneficial.
(4) Rationalizing the subsidies i.e. either discontinuing them or by preventing diversion through DBT
(Direct Benefit Transfer).
(5) By simplifying the taxes and the procedure of filing the taxes.
(6) By making the tax laws stringent.
(7) By creating awareness among the taxpayers with respect to their duties.
(8) By gradually shifting towards a less-cash economy and promoting online transactions.
(9) By making demonetization a frequent process.
(10) By enhancing the tax base rather than increasing the tax rate.
At present, the combined outstanding debt of the Centre and the state is 70% of the GDP. It should be
brought down to 60%. Even the process of Budgeting has to be made more effective and for the same
purpose, the government adopted Zero-Based Budgeting, Performance Budget, and even Outcome Budget.
Fiscal Prudence
Fiscal prudence is also a concept related to fiscal consolidation. Fiscal prudence is often used to indicate,
whether fiscal policies are leading to a stable financial position? Although the precise definition of fiscal
prudence has not been determined. It is determined by whether a country's fiscal policies are appropriate
to support economic growth and achieve other social objectives, without falling into financial crisis.
The recent order of the Ministry of Finance to cut expenditure of various central ministries, departments
and institutions by 20 percent can be seen as a step in this direction. Abolition of parliamentary canteen
subsidy can be considered as another step.
Financial Sector Legislative Reform Commission (FSLRC)

Because of the controversy which took place between SEBI and IRDAI with respect to the control of ULIPs
In the year 2010, the government constituted FSLRC under the chairmanship of Justice B.N. Srikrishna in
March 2011. The responsibility of this commission was to suggest measures to prevent conflict of

authority among the regulators. The commission studied the Indian financial system thoroughly and came
out with some important recommendation in 2013. The report of the commission was published in 2
volumes. The 1st volume included a comprehensive explanation with respect to the functioning of the
Indian financial system and the regulators. The 2nd volume was known as the Indian Financial Code.
Under the 2nd volume, the following recommendations were given-
1. The responsibilities of the RBI should be reduced and the responsibility to borrow on behalf of the
government by the sale of securities should be given to a new authority, which will be named as
Public Debt Management Agency (PDMA).
2. The smaller regulators such as SEBI, Forward Market Commission (FMC), IRDAI, Pension Fund
Regulatory and Development Authority (PFRDA) should be merged and a super-regulator termed as
Unified financial Agency (UFA) should be created.
3. To settle any dispute, Financial Sector Appellate Tribunal should be constituted.
4. Regulators should ensure that financial firms are doing enough for consumer protection.
5. Regulators should monitor and reduce the probability of failure of a financial firm.
However, the RBI was completely against the idea of constituting PDMA. According to them, government
securities are not only an instrument for borrowing but are also used by RBI as a monetary tool. Because
of the resistance shown by the RBI, the Government has set aside the idea of PDMA for the time being. To
constitute UFA, in September 2015 FMC was merged with SEBI and gradually the remaining regulators
will also be merged.
Public Debt Management Cell

The Public Debt Management Cell is an interim arrangement before the establishment of an independent
and statutory debt management agency i.e. Public Debt Management Agency (PDMA). To achieve the
objective of streamlining the government's debt and better management of cash, the Ministry of Finance
set up a Public Debt Management Cell in 2016. This is an interim arrangement within the RBI itself,
although it is to be given a separate statutory status from the RBI. Its purpose is to allocate the debt
management function of RBI to an independent agency.
Work
 Preparation of government borrowing plans including market borrowings, other domestic
borrowings, Sovereign Gold Bonds (SGBs) etc.
 To manage the liabilities of the Central Government including contingent liabilities.
 Monitoring the cash balances of the government, improving cash forecasting and promoting
efficient cash management practices.
 To advise other divisions on matters related to external borrowings.
 To promote an efficient and liquid market for government securities.
 Advice on matters relating to investment and operation of capital markets.
 To undertake research related to new product development, market development, risk
management, credit stability appraisal, other debt management functions etc.
 Develop a database system to collect and maintain a comprehensive database of the liabilities of
the Government of India as well as publish relevant information from time to time.
 Preparing the ground for setting up an independent PDMA.
Eleventh Edition of 'Status Paper on Government Debt'

Since the year 2010, the Central Government has been publishing an Annual Status Paper on
Government Debt. It provides a detailed account of the overall debt position of the country. The eleventh
edition of the Status Paper on Government Debt was released in the year 2022. Along with the debt
positions, the paper also covered the Debt Management Strategy (DMS) of the central government.
The main points of this letter are as follows:-
 At the end of March 2021, the central government's debt was 59.2% of GDP. It was 49.1% at end of
March 2020.
 The total government debt (including the state governments) was 87.8% of the GDP, at the end of
March 2021 as compared to 73.7% in March 2020.
 At the end of March 2021, 94.7% of the total debt of the central government was domestic debt.
 The sovereign external debt was 5.3%, which means the Indian government's debt portfolio has
less currency risk.
The Debt Management Strategy, first published in 2015, has been articulated for the medium term of
three years. It is reviewed annually with a roll-over period of the next three years. The DMS revolves
around three broad pillars: -
1. Reducing the cost of credit - Increasing the maturity period of the loan. Rationalization of interest
rate in small saving schemes.
2. Risk Mitigation - Setting benchmarks for certain indicators of government debt.
3. Market Development - To promote transparency in the system of collection of loans from the
domestic market. To increase the attractiveness of government securities among domestic and
external investors by removing the uncertainties of the debt market. Programs like G-SAP and
Retail Direct Gilt have been brought for this purpose.
The Government’s borrowing programme is planned and executed in terms of Medium Term Debt Strategy,
which in the 11th report is for the period 2021-24.
The debt profile of the Central Government as of March end 2021 has been analysed with regard to cost,
maturity and potential risk factors under this 11th report. The risk analysis contains metrics such as
average time to maturity, analysis of the redemption profile, average time to re-fixing, percentage of
outstanding debt maturing in the next 12 months, etc. The outcome of this exercise for the debt portfolio
of the Central Government as of March end 2021 reveals that it is stable with low risk.
Off Budget Borrowings

The Off Budget Borrowing is use to keep the fiscal deficit of the government low. The fiscal deficit presents
the fiscal health of a country. So, the credit rating agencies within and outside the country continuously
keeps an eye on it.
Off budget borrowings are loans that are taken not directly by the centre, but by another public institution
on the directions of the central government. Such borrowings are used to fulfil the government’s
expenditure needs. Since the liability of the loan is not formally on the centre, the loan is not included in
the fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.
But in the long term, it affects the fiscal health of the country. Government uses this mechanism to evade
the Parliamentary control over it in the form of Budget. Due to these issues, the CAG in its report has
asked to bring this entire mechanism under the institutionalized formal policy. Even the 15th Finance
Commission has asked about its complete disclosure.
The Off Budget Borrowings are done in following way:-
 Implementing agencies: The government can ask an implementing agency to raise the required funds
from the market through loans or by issuing bonds.
o For example, food subsidy is one of the major expenditures of the centre. The government does not
pay full budgeted amount for the food subsidy bill to the Food Corporation of India.
o The shortfall is met through a loan by FCI.
 Other PSUs: Other public sector undertakings have also borrowed for the government.
o For instance, public sector oil marketing companies are asked to pay for subsidised gas cylinders
for Pradhan Mantri Ujjwala Yojana beneficiaries in the past.
 PSBs: Public sector banks are also used to fund off-budget expenses.
o For example, loans from PSU banks are used to make up for the shortfall in the release of fertiliser
subsidy.
Line Item Budget, Performance Budget and Outcome Budget

Line Item Budget is the traditional form of budgeting which was followed by India since the beginning. In
this type of budgeting the fund allocated for a financial year is based on the allocations done for the same
purposes in the previous years. Year on year the allocation is increased without evaluating the return on
investment. This form of budgeting was not based on evaluation and analysis of the actual needs. It was
rigid because the fund can be utilized only for the purpose it was allocated, even if the circumstances
required a change. In this type of budgeting, the government was mainly concerned about the fund being
allocated rather than the efficiency with which the fund was utilized.

As a reform, India borrowed the concept of Performance Budget from the USA. Even in the USA, the
government borrowed this concept from an automobile company General Motors, which used this
budgeting to manage its finances. In India, Performance Budget is also known as Planning Programming
Based Budgeting System. It is named so mainly because through the 5-year plans the country used to set
targets for a long term period. To achieve these targets programs were initiated and to ensure the
functioning of those programs budgetary allocations were done. However, in this type of budgeting not
only allocation of the fund was important but even after the fund being spent, it was evaluated that
whether it has been spent efficiently or not.
The Outcome Budget was another modification. Under this, through Budget it is declared that how much
funds will be allocated for which particular purpose. However, the disbursement of the fund is not done
immediately. The different departments are given a time period of three months during which they have to
prepare a blueprint to show how much will be spent for a particular purpose. The fund is finally disbursed
only after the blueprint is analyzed. However, after the financial year is over, further evaluation is done to
see that the expenditure has taken place according to the prepared blueprint or not. The Outcome Budget
evaluates quantitative as well as qualitative outputs.
Zero Base Budgeting

The concept of Zero Base Budgeting was introduced in the country to reduce the reckless expenditure of
the government and its departments. India borrowed this concept from the USA. It was adopted in 1983
for the 1st time by the Department of Science and Technology. In 1986 this Zero Base Budgeting was
introduced in all the departments under all the ministries.
Under this, all the programs and the projects in the country which are partially or fully funded by the
government are evaluated every year afresh. Only after being evaluated, additional funds are allocated.
After evaluation, if it is realized that the project or the program is no longer financially and socially
beneficial then the funding is discontinued immediately even if a large part of the total fund has been
utilized already in the previous years.
As the name suggests, a Zero Base Budget refers to planning and preparing the budget from scratch or
‘Zero Base’. It is different from a traditional budget which is based on previous budgets. The process of
Zero-Base Budgeting involves the review of every ministry’s expenditure at the beginning of each financial
year in order to receive funding. In this budget, no balances are carried forward, or there are no pre-
committed expenses. Simply put, it is a procedure for preparing a budget with Zero prior bases. This
concept emphasizes the identification of a task and funding of costs irrespective of the current structure of
expenditure. A Zero Base Budget is built around what is needed for the upcoming period, regardless of
whether each budget is higher or lower than the previous one. Under this budgeting process, all
budgeting begins from a ‘Zero Base’ every year. Which means expenses must be justified afresh each year,
no matter what was spent in the year before. While traditional budgeting calls for incremental increases
over the previous year and tends to perpetuate waste, this form of budgeting puts pressure on spenders to
justify expenses each time, and reduce costs.
Gender Budgeting
Gender is a neutral term. It means that the term can be used for men, women and even for transgenders
as well. Gender Budgeting refers to evaluating the provisions of the budget to analyze its impact on a
particular gender.
Indian society has been a patriarchal society in which the authority lies with the male members and
traditional property and title both are transferred from father to son. Hence, women in India are not only
subjugated to male dominance but are also deprived economically. The gender based norms have
traditionally confined women to domestic responsibilities. It has led to the economic dependency of
women. Their health care as well as education, is hardly taken care of. Hence, the incidence of poverty is
maximum among women in India. This can also be termed as the Feminization of Poverty.
Because of the socio-economic deprivation of women, the Gender Budget in India becomes an instrument
of social justice. The term Gender Budgeting was used for the first time by the Ministry of Finance in the
year 2001. The Budget 2001-02 was evaluated to analyze its impact on women in the country. The
responsibility of this Gender Budgeting was given to the National Institute of Public Finance and Policy. In
the financial year, 2002-03 a similar evaluation of the budget was done by a number of states. In 2003 the
cabinet secretary ordered that all the departments under all the ministries should publish a separate
chapter in their annual report to specify the measures adopted by the particular department for women's
upliftment. In the year 2004, the ministry of finance instructed that all the ministries should have a
gender budgeting cell by January 1st, 2005. This gender budgeting cell is responsible for evaluating those
welfare schemes which are 100% dedicated to women empowerment and those welfare schemes in which
at least 30% of the provisions are for women upliftment. Hence from there onwards, this gender budgeting
has become an instrument in the country for ensuring social justice.
The merger of Rail Budget and General Budget

Before 1924 the rail budget and the general budget both were presented together. However, in this general
budget, the share of railways was much higher as compared to the receipts and expenditure of the
government then the other sectors of the economy. Hence, during this period the contribution of the
railways prevented the failure of the government from being exposed. Hence, in order to bring
transparency East Indian Railway Committee under the chairmanship of Sir William Acworth was
constituted. This committee was constituted in 1920 and on its recommendation, the rail budget and the
general budget were separated from 1924. Post-Independence the condition was reviewed again. However,
even during Independence, the Rail Budget was 6% higher than the general budget. Therefore, it was
decided to continue the same mechanism.
This mechanism of presenting the rail budget as well as the general budget separately continued for 92
years and finally, in the Budget 2017-18, they both were merged again. The merger of the rail budget and
the general budget had become obvious and inevitable. The railways in India were not able to change
themselves according to the changing circumstances. The market share of railways in the transportation
sector used to be as high as 89%. However, because of competition from the roadways and civil aviation its
market share has fallen to 30%. The market share of the roadways has gone up to 65% and the market
share of civil aviation is 5%. The roadways have much wider penetration as compared to the railways. At
the same time, the roadways provide door to door services that cannot be provided by railways. Even with
respect to the transportation of oil and gas the market share of railways was more than 90%, which has
come down to 10%. It is mainly because of the tough competition from the pipeline sector.
The railways have also witnessed a lack of political will. Since the rail budget was presented separately it
was considered to be a matter of pride to have railway ministry as a portfolio. Hence in the era of coalition
politics, the railways became an instrument of political blackmailing. In the last 30 years, the railway
ministry was hardly with the mainstream political parties. The regional political parties used railways as
an instrument of appeasement. Hence more and more services were introduced without improving the
infrastructure. Reckless recruitments resulted in an increase in the workforce even beyond the desirable
limit. The burden of salary payment as well as pension remained high. Even the cost due to wear and tear
has always been high. Several routes are yet to be electrified which made operation in these routes more
costly. The railways make profit on freight services but with respect to the passenger services, out of every
100 Rs spent the railways can recover only 57 Rs. Hence, the profit from freight services is used as a
cross-subsidy for providing passenger services. The railways in India had to depend on budgetary
allocation for capital formation. Because of this it had to pay an amount of approx. 9000 crore Rs to the
Finance Ministry from its revenue every year. It affected the financial health of railways further.
At present, during the time of the merger, the rail budget was not even 6% of the GDP. It was even smaller
than the budget for agriculture and defence. Since we do not have a separate budget for defence,
agriculture, etc, there is no point in having a separate budget for railways. At the same time if the rail
budget and general budget are combined the railways need not repay the Ministry of Finance for the
budgetary allocation done for capital formation.
Hence on the recommendation of the Bibek Debroy Committee the rail budget and the general budget have
been merged.

TAXATION
It is said that the citizens and the state both have a muted invisible contract with each other.
They both have certain rights over each other and they also have certain duties towards each
other. Payment of taxes can be termed as a duty of citizens towards the state. The collection of
taxes by the state can be termed as the right of the state over the citizens. Providing facilities
such as infrastructure, water supply, electricity supply, transportation, communication, etc to
the citizens can be termed as a duty of the state towards the citizens and the rights of the
citizens over the state. So the taxes are the responsibility of the citizens and have to be paid.
Tax can be defined as a compulsory collection done by the government over income as well as
consumption. Taxes such as Income tax, Corporate tax, etc can be termed as tax over income.
Whereas, GST will be an example of tax over consumption. Taxes are the most important source
of income for any government.
Taxes can be broadly classified into two types-
1) Direct Taxes
2) Indirect Taxes
Direct taxes are those taxes in which the real burden of the tax falls over on the same entity from
whom it is collected for example:- Income tax, Corporate tax, Capital gain tax, MAT, etc.
On the other hand, Indirect taxes are those taxes in which the real burden of the tax falls over
the consumer but is collected by the government from some other entity. for example:- GST and
Custom duty. (Some other taxes such as excise duty, service tax, central sales tax, VAT, octroi,

entry tax, entertainment tax, etc which were subsumed into GST were also examples of indirect
taxes).
Out of direct and indirect taxes, direct taxes have been contributing more than indirect taxes to
the income of the central government for the last few years. Out of all the different types of taxes
GST had the maximum contribution to central tax revenue.
In India, taxes can be collected by the central government as well as the state government, and
even by local bodies. This division is clearly specified or defined. for example- Income tax,
corporate tax, capital gain tax, customs duty, securities transaction tax, etc can be collected only
by the central government. Income tax over agricultural income can be collected only by the
state government. However, in none of the states in India agricultural incomes are taxed. GST is
divided between the center and states. However, before the implementation of GST taxes such as
VAT, state sales tax, entertainment tax, central sales tax, entry tax, etc were collected by the
states. Stamp duty is an indirect tax collected by the states.
Tax and Duty

Tax and duty both are compulsory payments collected by the government. Hence their nature
remains the same. However, they both have some basic differences.
Tax can be collected over income, over the sale of services as well as goods whereas duties are
collected only over goods. Taxes can be direct as well as indirect whereas duties are mainly
indirect.
Cess and Surcharge

They both are tax over tax. It means they both are collected over a particular tax. They are a kind
of instrument through which the central government ensures some additional income. Cess is
always collected for a specific purpose and hence, it can be used only for the same specified
purpose. for example- Education cess, Krishi Kalyan cess, Swachh Bharat cess, etc.
Prior to budget 2018-19 education cess which was also applicable to income tax was 3% which
was used by the government for the development of primary education, secondary education,
and higher education. However, in Budget 2018-19, this education cess has been increased to
4% and renamed as Health and Education cess. This additional 1% generates revenue of
additional Rs. 11000 crore which is used by the government for the National Health Protection
scheme under the Ayushman Bharat Programme.

On other hand, the receipts made through surcharge can be used by the government for any
purpose without any restriction. For example- surcharge over corporate tax, surcharge over
income tax.
However, the receipts made by the government in the form of cess and surcharge are not
necessarily shared with the states.
In budget 2022-23 the Finance Minister made it clear that any type of cess or surcharge levied
on the income or profit of the company will not be considered part of the company's expenditure.
Budget 2023-24:- The Finance Minister announced the reduction of the highest surcharge rate
in country from 37% to 25% in the new tax regime. She mentioned that the highest tax rate in
our country is 42.74% including cess and surcharges over income tax. This is among the highest
in the world. This announcement would result in reduction of the maximum tax rate to 39%.
Ad- Valorem Duty and Specific Duty

Ad valorem is a Latin term which means according to the value. Hence, when duty over a
commodity is imposed according to the value of the commodity, it is termed as Ad- Valorem
duty.
On the other hand, if a duty is imposed according to the weight or volume then it is termed a
specific duty.
Tax Planning, Tax Avoidance, and Tax Evasion

Income tax in India has been progressive in nature. As income increases tax also increases. Tax
Planning and Tax Avoidance are legal whereas Tax Evasion is illegal. Under the Income Tax Act,
the GOI provides a number of financial instruments by investing in which a taxpayer may bring
down his tax liability.
For example- Under provision 80C of the Income Tax act an investment of up to Rs. 1.5 lakh can
be done in instruments such as NSC, insurance, provident fund, Sukanya Samridhi Yojana, etc.
And the invested amount will remain exempted from tax. It is Tax Planning.
When a taxpayer uses the loopholes present in the Tax Laws and brings down his tax liability
then it is Tax Avoidance.
On the other hand, if income is misappropriated or hidden and no tax is paid over taxable
income then it will be termed as Tax evasion. Even a legitimate income over which no tax has
been paid and all the income made through illegitimate sources together constitutes Black
Money. That part of the economy which moves on black money is called Parallel Economy or
Grey Economy. If black money is converted into white money through any means then it is
termed Money Laundering. If for the purpose of money laundering a fake company is set up and
the income is shown as being generated from that fake company, then such companies will be
termed Shell Corporations. If it becomes difficult to launder money within the country, it is a
possibility that the money is transferred to an account belonging to some other country and it
can be brought again to the same country in the form of foreign investment. For example,
through participatory notes. If the black money goes out of the country and comes back to the
same country in the form of foreign investment then it is termed as Round Tripping.
In budget 2022-23 with the aim of controlling tax evasion, it was made clear in this year's
budget that the undisclosed income found in the investigation or search operation cannot be set
off with any kind of loss.
Tax Deducted at Source (TDS) Or Withholding Tax

It refers to a mechanism in which whenever a payment is made to an entity, whether an
individual or a corporate. Some part of the payment is deducted at the source of the payment
itself and it is paid to the government in the name of the beneficiary by the entity which has
made a payment. It helps the government in meeting its immediate expenses and also helps in
keeping track of the payments made by one entity to another. As it is regulated by the Central
Board of Direct Taxes- CBDT, so it is considered to be under the category of direct taxes.
Budget 2022-23:- Incentives given to agents to promote business have also been brought under
the purview of TDS. If such incentives exceed 20,000 in a financial year, then the employer will
pay them only after deducting the tax.
Direct Taxes
Income Tax
Income tax in India is a progressive tax. It is collected by the center. It is progressive because as
the income increases the rate of tax also increases. At present, the old tax slabs with respect to
Income Tax are as follows-
 If the income is of up to Rs 2.5 lakh, nil tax is applicable.
 If the income is above Rs 2.5 lakh and up to Rs 5 lakh it will be taxed at a rate of 5%.
 If the income is above Rs 5 lakh and up to Rs 10 lakh the rate is of 20%.
 If the income is of above 10 lakh the tax is 30%.
In the interim Budget of 2019, the government exempted individuals having income up to Rs 5
Lakh from paying any income tax. In old tax regime, an individual pays 20% on income between
Rs 5 Lakh to Rs 10 Lakh and 30% on income above Rs 10 Lakh as a tax. In this old system, the
Income Tax Act is riddled with various exemptions and deductions which make compliance by
the taxpayers and administration of the Income Tax by the tax authorities a burdensome
process.
To provide significant relief to individual taxpayers and to simplify the Income-tax law, Budget
2020-21 proposed to bring a new and simplified personal income tax regime wherein income tax
rates was significantly reduced for individual taxpayers who forgo certain deductions and
exemptions.
New Tax Regime

 Under the new regime, an individual is required to pay tax at the reduced rate of 10% for
income between Rs 5 Lakhs to Rs 7. 5 Lakhs against the current rate of 20%.
 For income between Rs 7.5 Lakhs to Rs 10 Lakhs, he has to pay at the reduced rate of 15%
against the current rate of 20 %.
 Similarly for the income between Rs 10 Lakhs to Rs 12.5 Lakhs the taxpayer pays at the
reduced rate of 20% against the current rate of 30 %.
 The income between Rs 12.5 Lakhs to Rs 15 Lakhs is taxed at the reduced rate of 25%
against the existing rate of 30 %.
 Incomes above Rs 15 Lakhs are continued to be taxed at the rate of 30 %.
 Those earning up to Rs 5 Lakhs do not have to pay any income tax either in the old regime
or in the new regime.
The proposed tax structure provided significant relief to taxpayers and more so to those in the
middle class. The new tax regime was optional for taxpayers. An individual who was currently
availing more deductions & exemptions under the Income Tax Act may choose to avail them and
continue to pay tax in the old regime. This new personal income tax rates entailed an estimated
revenue forgone of Rs 40,000 crores per year.

New Tax Regime Revised
In Budget 2023-24 the New Tax regime has been further revised with the announced objective
of providing relief to the taxpayer middle class. The finance minister announced that the persons
with an annual income of upto 7 lakh will not have to pay any Income Tax in New Tax Regime.
In the revised system the government reduced the tax slabs in new tax regime from 6 to 5. Even
the tax exemption limit was increased from 2.5 lakhs to 3 lakh.
The Govt proposed to make the new tax regime as the default Tax regime. However, the citizens
have the option to avail the benefits of old tax regime as well, if opted for. The government
mentioned that this new revised new tax regime will lead to a revenue forgone of 37000 crore
annually.
Standard deduction of Rs 50000 is allowed to salaried class. Standard deduction is an amount
that is not counted as a part of taxable income.
The Budget 2023-24 mentioned that each salaried person with an income of 15.5 lakh or more
will have the standard deduction of 52500.
Over the tax amount, Health and Education Cess of 4% is applicable. If the income is high then
Surcharge is also collected on the income tax. The rates of surcharges are as follows:-
Income Rs. 50 Lakhs Rs. 1 Crore to Rs. 2 Crores to Rs. 5 crores Exceeding
to Rs. 1 Crore Rs. 2 Crores Rs. 5 Crores to Rs. 10 Rs. 10
Crores Crores
Rate of Surcharge 10% 15% 25% 37% 37%
till FY 2022-23
Surcharge Rate
announced in 10% 15% 25% 25% 25%
Budget 2023-24
The income tax slabs remained unchanged in budget 2021-22. The government provided relief to
senior citizens. Senior citizens of age 75 and above, whose source of income is confined only to
either pension or interest, will not have to file an income tax return. The income tax will be
debited from their bank account on its own. But it has not been made clear yet whether the
income through dividends will come under this or not, as senior citizens invest in shares as well.

Income tax slabs were left unchanged even in budget 2022-23. The government had provided
some relief to disabled people in the budget. If a parent or guardian of a disabled person bought
an insurance policy as a beneficiary, the premiums paid for the same can be claimed as a
deduction from the gross income. This tax exemption can also be claimed in cases where the
buyer of the policy is still alive at the time the policy starts paying off.
However the push towards New tax regime in Budget 2023-24 is seen as an adverse effect on
Insurance companies.
Fiscal Drag
It refers to a situation, when the income of an entity increases and it falls under a higher tax
bracket because of which the burden of tax goes even beyond the increment witnessed in the
income.
Corporate Tax
It is a direct tax collected by the center over the income of the corporates i.e. profit of the
corporate. It used to be the largest source of tax collection by the center. But in 2020-21 due to
Corona Crisis the economic status of companies got affected. This led to a fall in corporate tax
collection. So, in the financial year 2020-21 it fell below the GST collection. For Indian
companies, the rate of corporate tax is normally 30% whereas for foreign companies it is 40%.
If the profit of an Indian company is more than Rs 1 crore and upto 10 crores then it has to pay
a surcharge of 7% over the corporate tax. If the profit is more than 10 crore, the surcharge
becomes 12%. If the profit of a foreign company is of more than 1 crore and up to 10 crores then
the surcharge collected is 2% of the corporate tax. If the profit is more than 10 crores, the
surcharge is 5%. Along with the surcharge, the Health and Education Cess of 4% is also
applicable.
However, in September 2019, the centre reduced corporate tax for newly set up manufacturing
companies. For the existing Indian companies, corporate tax has been reduced to 22% plus cess
and surcharge as applicable. However, the companies opting for the new rate of tax cannot avail
of other tax exemptions.
In the budget 2022-23, the upper limit of surcharge for consortium of companies has been fixed
at 15%. This has been done mainly keeping in mind the globalized nature of businesses. At
present, many contracts are taken only by the consortium, on which the surcharge reaches upto
37%.
For newly set up manufacturing companies on or after October 1, 2019, the corporate tax is 15%
plus cess and surcharge as applicable. However, these companies will have to start operations
before March 31, 2023.
In the Budget 2022-23, this deadline has been extended by 1 year to 31 March 2024 for newly
established manufacturing companies. Therefore, the companies in the manufacturing sector
which are set up by 31st March 2024 will also be entitled to pay corporation tax at the rate of
15% only.
Eligible startups, established before 31 March 2022, were provided tax incentives for three
consecutive years out of ten years from its incorporation. Due to Covid pandemic, the Finance
Minister has proposed to extend the period of incorporation of eligible startups by one more year,
till March 31, 2023, to provide such tax incentives. The Budget 2023-24 further extended it till
March 31, 2024.
Minimum Alternative Tax (MAT)

In India, the corporates pay corporate tax under the provision of the Income Tax Act. However,
these companies also maintain their profit and loss account under the provision of the
Companies Act. Corporate tax is to be paid only on the profit which has been realized. However,
in India, several companies used to show losses or zero profit under the provision of the Income
Tax Act and did not pay corporate tax. Such companies are termed as Zero Tax Companies. At
the same time, these companies used to show book profit under the provision of the companies
act. Book Profit is a profit that has been made but it is yet to be realized. On the book profit of
such companies, the government has imposed MAT of 18.5%. It has been reduced to 15% in
2019. However, the infrastructure companies are exempted. When the book profit is realized in
the future, within the period of 15 years the tax collected in the form of MAT will be credited and
the corporate tax will be collected. If the book profit is realized after 15 years, corporate tax will
be collected but MAT credit will not take place.
The government has reduced the rate of minimum alternate tax for cooperatives from 18.5% to
15% in budget 2022-23. Along with this, it has also been announced to reduce the surcharge
from 12% to 7% on co-operative societies with a total income of Rs 1 crore to Rs 10 crore. This
will give an equal opportunity to cooperatives and companies. This decision will help in
increasing the income of co-operative societies and its members who mostly belong to rural -
farming communities.
Capital Gain Tax

When an asset is bought and sold the profit made is termed as a capital gain. On this capital
gain, the tax which is collected is termed as Capital Gain Tax. It is a direct tax which is collected
by the centre. Here asset includes immoveable and moveable assets such as land, house, gold,
silver (Bullion) and shares. In case of land and house when they are sold within a period of 2
years, in case of gold and silver if they are sold within a period of 3 years and in case of shares if
they are sold within a period of 1 year then the profit is termed as Short Term Capital Gain
(STCG). Over this gain STCG tax at a rate of 15% is applicable.
In case of land and house being sold after 2 years, in case of gold and silver being sold after 3
years and in case of shares being sold after 1 year the profit made is termed as Long Term
Capital Gain (LTCG). On this profit, LTCG tax is applicable at a rate of 20%. However, on shares,
LTCG tax was discontinued from the financial year 2004-05, and to compensate itself the
government had introduced Securities Transaction Tax (STT) from the same financial year.
However, on the LTCG tax calculated over the other assets, indexation is done. It means that
from the profit the impact of inflation is subtracted and only the remaining profit is taxed at a
rate of 20%. On agricultural land neither STCG tax nor LTCG tax is applicable.
In the budget 2018-19 LTCG tax has been re-introduced on the sale of shares. The rate is 10% of
the profit and indexation is not done. In one financial year, long-term capital gain of upto Rs 1
lakh is exempted from tax.
In the Budget 2022-23, the government had fixed the upper limit of surcharge on the long-term
capital gains received from transfer of any type of asset to 15%. Before that listed equity shares
attracted a surcharge at the rate of 15% on long-term capital gains, while the surcharge on other
long-term capital gains reached upto 37%.

Dividend Distribution Tax
Earlier, companies were required to pay Dividend Distribution Tax (DDT) on the dividend paid to
its shareholders at the rate of 15% plus applicable surcharge and cess in addition to the tax
payable by the company on its profits.
It had been argued that the system of levying DDT results in an increase in tax burden for
investors and especially on those who were liable to pay tax less than the rate of DDT if the
dividend income is included in their income.
Further, the non-availability of credit of DDT to most of the foreign investors in their home
country resulted in the reduction of the return on equity capital for them. To increase the
attractiveness of the Indian Equity Market and to provide relief to a large class of investors,
Budget 2020-21 proposed to remove the DDT and adopt the classical system of dividend taxation
under which the companies would not be required to pay DDT. The dividend now is taxed only in
the hands of the recipients at their applicable rate.
Securities Transaction Tax (STT)

It was introduced in the financial year 2004-05. It is collected by the centre. Since it is regulated
by CBDT technically it becomes a direct tax. As tax STT is collected on the total value of trade
irrespective of profit or loss. It is collected from the buyer on the value of trade and it is also
collected from the seller on the same value of trade.
Vivad Se Vishwas Scheme

The finance minister announced this scheme during her budget speech of 2020- 21. It has been
initiated in the light of the success of Sabka Vishwas Scheme which was launched in its previous
year. The objective of this new scheme was to solve the cases related to direct taxes in fastrack
manner. Under this scheme it was proposed that if the taxpayer pays 100% of the disputed tax
money then they will get complete relief in interest and penalty. Even the case will be dropped
permanently. Due to Covid Pandemic the timeline for this scheme has been extended again and
again. Last deadline was fixed at 30 Sept 2021. Along with some pre announced interests,
taxpayers were given the facility to pay there taxes till 31 Oct 2021. Minister of state for finance
in Aug 2021 said in Lok Sabha that Rs 99,756 crore of disputed tax amount was settled under
the Vivad Se Vishwas Scheme. He further said that 1,46,701 number of disputes were addressed
and 1,32,353 cases were settled under this scheme. According to him the government received
53,684 crore as payments against disputed tax.
Double Taxation Avoidance Agreement- DTAA

When the same income is taxed twice, then it is termed as double taxation. To avoid this double
taxation two countries may sign DTAA. These are bilateral agreements that ensure that an
income is taxed only once. Under this, if an investment comes to India from another country
with which India has signed DTAA then the income generated from that investment will be taxed
by the country from where the investment originated. Such agreements are signed between the 2
countries to improve bilateral ties. They ensure foreign investment, increase in production and
employment generation but lead to losses because of non-collection of corporate tax and capital
gain tax.
India has signed such agreements with 89 different countries. However, with all the countries
the limitation of the benefit clause is different. Some of the countries such as Mauritius,
Singapore, etc are given maximum benefit. That is the reason why till 2016 out of the foreign
investment which had come to India, Mauritius, and Singapore together contributed 50% (34%
by Mauritius and 16% by Singapore). However, the investment coming to India from Singapore
and Mauritius is not exactly the investment done by companies belonging to these countries.
Even the companies belonging to other countries set up their unit in Mauritius or Singapore and
channelize their investment into India from these two routes. This mechanism is termed as
treaty shopping, in which the benefit of a treaty signed by two countries is taken away by a
company belonging to a third country.
Because of such losses especially in the light of the deal between Vodafone and Hutch, the
government decided to implement General Anti Avoidance Rule- GAAR and at the same time, the
government decided to amend such agreements signed with different countries, so that they may
not conflict with the provision of GAAR.
To prevent further loss to the Govt. in the form of such avoidance the DTAA signed by India with
Singapore, Cyprus and Mauritius have been amended. Now, only those companies from these
countries will be able to derive the benefit of DTAA which have their headquarter located in these
countries. In the case of Singapore a provision was already in place that to avail the benefit, the
company should be at least 2 years old in Singapore. In the case of Mauritius, it has been
decided that the company should be at least one year old and in the last financial year, the
company should have spent at least 27 lakh in its operation. Corporate tax on any profit made
by such companies will be collected by the country from where the investment has originated
(Same as earlier). However, on any capital gain emerging from any investment from such
countries the Capital Gain (CG) tax will be collected by India. If shares of a listed company are
bought and sold the CG will be taxed at a flat rate of 15%. If the shares of an unlisted company
are bought and sold then CG will be taxed at a rate of 40%. If there is any conflict between the
provisions of DTAA and GAAR then GAAR will be given priority. These changes have been made
applicable from 1st April 2017. However, till 31st March 2019, the taxes were applicable at half of
the prescribed rate. Only from 1st April 2019, these changes have been made fully effective.

General Anti Avoidance Rule- GAAR
GAAR is a tax law that was introduced for the first time in Germany. Thereafter it has been
adopted by more than 100 countries. It is a tax law that empowers the tax authorities even
more. Under GAAR all such financial transaction which takes place mainly for tax avoidance to
cause loss to the exchequer may be categorized as a case of tax evasion. It can be investigated
and a penalty can be imposed. Under GAAR it was decided that those cases in which
investigation has been completed and the final decision has been taken will not be reopened.
Only those cases will be brought under the preview of GAAR in which there is a possibility of
recovering at least Rs 3 crores. Participatory notes will be kept out of the preview of GAAR. To
settle any dispute GAAR council has been set up which is headed by the chairman of CBDT. The
council has other two members. One of the members should not be lower than the rank of Joint
Secretary in the ministry of law and the other member will be independent. In case of any
dispute between the provisions of GAAR and DTAA, GAAR will be given priority. Since GAAR in
India was introduced in the light of the deal between Hutch and Vodafone; the previous
government had decided that GAAR will be made effective retrospectively from 30th August 2010.
The Parthsarathi Shome committee suggested that GAAR is an efficient law but it should not be
implemented retrospectively. Retrospective tax laws result in a trust deficit among the investors
and they adversely affect the investment environment within the country. The next government
accepted the recommendation and GAAR was implemented and made effective from 1st April
2017.
Tax Administration Reform Commission- TARC
TARC was the first commission setup in India to suggest changes in the Administrative aspect of
the taxation system in the country. It was headed by Parthsarathi Shome. This committee came
out with some revolutionary suggestions to reform the tax administration in the country. At
present, the taxation system is under the MoF. Under MoF, the Department of Revenue exists.
This Deptt. Of Revenue is headed by the Revenue Secretary who is from Indian Administrative
Services. Below the Deptt. Of Revenue, the entire arrangement is divided into 2 parts.
 Central Board of Direct Taxes
 Central Board of Indirect Taxes and Customs [Earlier CBEC (Central Board of Excise and
Customs) was renamed in the Budget 2018-19].
This CBDT is responsible for Direct taxes and CBIT&C is responsible for indirect taxes. They
both are headed by 2 different chairmen who are from Indian Revenue Services. Both these
depts. Are separate from each other. Hence, they lack proper coordination.
TARC suggested that the Department of Revenue should be discontinued and hence even the
post of Revenue Secretary. CBDT and CBIT&C should be merged and they both should be
headed by one single chairman. To make the tax officials more sensitive towards the taxpayers
relevant changes in the training should be ensured. To provide more facilities to the taxpayers
the government should ensure that out of the total money spent for the purpose of tax collection
at least 10% should be spent for providing facilities to the taxpayers. For this purpose the
government should use Information Technology, e-payment of taxes should be made
compulsory, single-window clearance should be provided, documentation should be reduced,
24X7 custom clearance should be made available at 17 different airports and 18 different
seaports. It also suggested that tax laws such as GAAR should not be made effective
retrospectively.
“Transparent Taxation - Honouring the Honest” Platform

The Prime Minister launched this platform in August 2020. This platform includes major reforms
like faceless assessment, faceless appeal and taxpayer charter. The prime objective is the
empowerment of the taxpayers and to make the income tax system more transparent.
The Taxpayers Charter draws the outline of rights and duties of the tax officers and the
taxpayers. It ensures rational and polite behaviour with the taxpayers.
Budget 2022-23, said that in cases where the question of a law is identical and is pending in the
High Court or Supreme Court, no further appeal will be filed by the Income Tax Department
anywhere until the court decides on that legal issue. This provision will go a long way in
reducing the frequent litigation between the taxpayers and the Income Tax Department.
In the Budget 2022-23, the Finance Minister permitted the taxpayers to file an updated IT return
by correcting the mistakes related to tax filing. The period of revised tax filing will be two years
from the relevant year. This will give an opportunity to the taxpayers to rectify their mistakes
and omissions. It will also reduce the burden on the courts. This can be considered as a positive
step towards voluntary tax compliance.
In Budget 2023-24, deployment of 100 Joint Commissioners has been proposed for disposal of
appeals related to direct taxes.
Transfer Pricing, Base Erosion and Profit Shifting

When a company sells a raw material or any other input including technology to any of its
subsidiaries operating in some other country then the applicable price is termed as transfer
pricing. Such companies to avoid higher taxes sell those inputs or raw material in such a
manner that the country in which the tax rate is high, the realized profit will be low, and the
country in which the tax rate is low the realized profit will be high. It is called as profit shifting.
The profit is shifted to that country where the tax rate remains low. It benefits the company but
leads to losses to the country where lesser profit is realized. To prevent such things the countries
apply the arm’s length rule.
Under Arm’s length rule such companies are compelled to maintain equal distance with their
own subsidiary and with other clients which are not related. This leads to fair pricing. However,
this Arm’s length rule can be applied only when a company not only supplies such inputs to its
own subsidiary but also to some unrelated other companies. If in case a company supplies such
inputs only to its own subsidiary and not to other companies then the Arm’s length rule may not
be used. Hence, in such a situation to prevent avoidance Advance Pricing Agreements (APA) are
signed.
APA is an agreement between a taxpayer which is mainly a company and a tax Authority which
is mainly a country. Under such agreement, it is decided in advance that for the next few years
what exactly will be the price at which the company will supply raw material to its known
subsidiaries.
It is also seen that to avoid taxes the companies shift their headquarters to those countries
where the tax rate remains low and the countries which have signed DTAA with several other
countries. Such countries are termed as Tax Havens. This is called Base Erosion. This concept of
Base erosion and profit shifting was propounded and discussed for the first time by OECD
(Organisation for economic cooperation and Development).
Direct Tax Code- DTC

It was a proposed tax reform in the field of Direct Taxes. Once implemented it was supposed to
replace the existing Income Tax Act. However, since several provisions proposed under DTC were
not very popular, the government decided that the major provisions will be implemented by
amending the Income Tax act gradually rather than by replacing the entire Income Tax Act.
The major recommendations under DTC were as follows-
 So far in India most of the financial instruments which are available under Tax planning
with the help of which a taxpayer may bring down his tax liability function based on EEE
(Exempt, Exempt, Exempt) Mechanism. Under this mechanism, the amount invested
remains exempted from tax in the year of investment. It remains exempt from tax
throughout the term period of investment. Even on maturity on withdrawal the principle as
well as the profit which may be even in the form of interest remains exempted. However,
under DTC it was proposed that this EEE mechanism will be replaced with EET (Exempt
Exempt Tax) Mechanism. Under this, the investment will remain exempted in the year of
investment. It will remain exempted throughout the term period of investment. However on
maturity when the investment is withdrawn at least the profit part will be taxed.
 It was proposed that if the EET mechanism is introduced the income exempted from the tax
will be raised.
 It was also proposed that if the EET mechanism is introduced the investment limit for
exemption under provision 80C will be raised.
 Corporate Tax for Indian companies will be brought down to 25%.
 MAT will be made applicable to all companies. It will not be collected on book profit. It will
be collected on the total value of the asset of a company. For all the companies the rate of
MAT will be 2% and for banking companies, it will be 0.25%.
 It was proposed that the distinction between short-term and long-term capital gain will be
discontinued and all the capital gains will be taxed at one single rate.
Google Tax/Equalisation levy

It is also known as Amazon tax. It is a type of withholding tax. It also falls under the control of
CBDT and is a direct tax. This tax was proposed by OECD while discussing the issue related to
base erosion and profit shifting. In India, it is officially known as Equalisation Levy and was
introduced in the Budget 2016-17.
The internet companies such as Google, Facebook, etc are located in the USA but through the
internet, their presence is even in India. Several Indian companies pay huge amounts of the sum
to those companies for publishing their advertisements on these websites. Since these internet
giants are located outside India, the Indian authorities cannot tax their income. Therefore under
equalization levy, it has been decided that if in a financial year a company located in India pays
an amount of more than Rs 1 Lakh for such advertisements then 6% of the amount will be
deducted from that payment by the company and it will be paid to Indian authorities in the form
of tax.
Global Minimum Corporate Tax
The Organization for Economic Co-operation and Development (OECD) in October 2021 reported
that 136 countries have jointly agreed to ensure that large multi national companies have to pay
a minimum tax rate of 15%. These 136 countries included in the agreement, contribute more
than 90% to the global economy. India is also among these 136 countries.
The countries involved in this agreement have been asked to give it the form of domestic
legislation in the year 2022, so that this global minimum tax agreement can be implemented
from 2023.
There are mainly 3 objectives of this global agreement:-
First- Stopping the payment of low tax or zero tax by multinational companies. The
multinational companies do this by booking the profits of their global business in tax haven
countries.
Second- Forcing these multinational companies to pay taxes in countries where these companies
earn profit by doing business but do not have physical presence in that country.
Third- To end decades of tax competition between governments to attract foreign investment.
Proposed two pillar solution:-

The purpose of Pillar One is to ensure the distribution of tax levying rights for fair distribution of
profits among different countries regarding the largest multinational companies who have been
taking the most advantage of globalization.
The right to levy tax on 25% of profits of the largest and most profitable multinational
enterprises above a set profit margin (residual profits) be reallocated to the countries where the
customers and users of that company are located.
Tax certainty is a key aspect of the new rules. For this a mandatory and binding dispute
resolution process has been included. But for developing countries an alternative mechanism
will be made available in some cases.
In recent years, countries that have imposed taxes, such as the National Digital Services Tax,
will have to repeal all those taxes. For example - Google tax or equalization levy levied in India.
The Second Pillar sets a limit on tax competition related to corporation tax through a minimum
global corporation tax rate of 15% that countries can use to protect their tax bases.
Governments can still set their own local corporate tax rate. But if the company pays lower rates
in a particular country, the domestic government of that company can increase its taxes on that
company by a minimum of 15%. thereby eliminating the benefit of transferring profits.
After the Covid-19 crisis, almost all the governments of the world are facing the problem related
tofinance. In such situation, most governments want to discourage the tendency of MNCs to shift
their profits. Income from intangible sources such as royalties on drug patents, softwares and
intellectual properties are increasingly shifting to tax havens. Due to which these companies are
avoiding paying taxes in their home countries.

Tax on virtual digital assets
The government in the budget announced the imposition of tax on virtual digital assets such as
Cryptocurrencies, NFTs etc. Finance Minister Nirmala Sitharaman said that gains arising from
transfer of virtual digital assets of any kind will be taxed at the rate of 30%.
While computing profit, no deduction shall be allowed in respect of any expenditure other than
the cost of acquisition of virtual digital asset. Loss arising from the transfer of virtual digital
assets cannot be set off against any other income.
To obtain the details of the transaction, 1% TDS has been imposed on payments made in
connection with the transfer of virtual digital assets, above a monetary limit. It will be deducted
by the service provider and given to the government.
Tax will be charged to the recipient, if the virtual digital asset is given as a gift.
Windfall Tax
A Windfall Tax is a higher tax levied by the government on particular industries when they enjoy
unexpected and above-average profits. Here the term ‘Windfall’ refers to a big and unexpected
rise in profit and the term ‘Tax’ suggests an imposition made on this significant rise in revenue.
The concept of Windfall Tax in India was introduced in the 1970s with the objective to tax the
profits of businesses when they experienced unusually high revenue.
The Ministry of Finance implementated the Windfall Tax on domestic crude oil producers in July
2022. The ministry said that the decision was made after thorough consultation with the sector
and was not sudden. The energy price rose in the aftermath of Russia-Ukraine conflict leading to
profit for crude companies in India.
The government in Jan 2023 reduced the windfall tax on crude oil to 1900 rupee per tonne from
2100 rupee per tonne.
Tax Buoyancy
It refers to a situation in which the rate of increase in tax collection as compared to the previous
year is more than the rate of increase in the GDP of a country as compared to the previous year.
Laffer Curve
Laffer curve is the relationship between the tax rate and the revenue through taxes. This
relationship was shown with the help of a curve by an American economist Arthur Laffer.
According to him, when the tax rate is gradually increased even an increase in revenue will be
witnessed. However, if the rate is further increased beyond a certain point it will start pinching
the taxpayer, payment of taxes will become a burden which will lead to tax evasion. Hence the
collection from taxes remains maximum only when the rate of tax remains moderate.
Indirect Taxes
Custom Duty
It is an indirect tax collected by the central government. It is collected only on international trade
in goods. It means that custom duty is not collected over services. It is only collected over export
and import of goods. Hence, custom duty is broadly classified into 2 parts-
1. Import duty
2. Export duty
Custom duty is not only a source of revenue but is also an instrument with the help of which the
government controls the inflow and outflow of essential and non-essential commodities. High
Import Duty also compels foreign companies to invest in India and set up their unit so that they
can produce locally. Custom duty has not been subsumed under GST. Hence, it continues to
exist as it existed before the implementation of GST.
Service Tax
It has been an Indirect Tax collected by the centre on the sale of services. However, under GST,
service tax has been subsumed.
Excise Duty
It is an indirect tax that is collected only on manufactured goods. It is collected when such
manufactured goods come out of the gate of a factory. Excise duty is broadly classified into 2
parts-
1. Central Excise Duty
2. State Excise Duty
Central excise is collected by the centre whereas state excise is collected by the state. Only on
opium products and liquor, the states are allowed to collect excise duty and on all other
manufactured products, the center had the right to collect excise duty. However, all those
manufactured goods over which GST has been implemented excise duty cannot be collected.
Since alcohol for human consumption is still outside the purview of GST, over it state excise is
still collected. Similarly, since petroleum products are still outside the purview of GST, central
excise is collected on them.
State Sales Tax- SST and Value Added Tax- VAT

SST was an indirect tax collected by the states over the sale of goods. Under the mechanism of
SST, the states were completely free to decide which product should be taxed at which particular
rate. Because of this widespread price variation was seen with respect to the rate of goods
throughout the country. The states with high consumption used to keep the rate of sales taxes
low, attracting consumers from even the neighboring states which affected the revenue collection
of the states with lower consumption levels having a higher rate of sale tax. In the case of sales
tax, on every stage of production, the tax was collected over the entire value of the product
resulting in ‘double taxation as well as ‘cascading effect of tax over tax’. It used to make the
commodities costlier affecting consumption, investment as well as production.
As a reform to bring down this cascading effect and the problem of double taxation, VAT was
introduced which replaced SST. Under the mechanism of VAT in the process of production and
sale of input, only the value-added part is to be taxed by the state preventing double taxation
and cascading effect. However, at the point of consumption, the entire value is taxed because of
which this mechanism failed to eliminate the problem of double taxation and cascading effect of
tax over tax to some extent. At the same time, if a product is produced in a state but consumed
in another state, the producer state will suffer from some loss because the final VAT will go to
the state where the consumption takes place. Hence, CST (central sales tax) was imposed by the
centre which was collected by the state from where the commodity moved to another state.
Hence CST collected by the producer state resulted in double taxation and cascading effect of the
tax-over-tax (CST was imposed by the centre and collected by the states because states were not
authorized to impose a tax on their own over inter-state trade). To prevent the entry of goods into
a state and to encourage investment and production in the same state even the consumer states
sometimes used to collect ‘Entry-tax’. This again affected the main objectives of the
implementation of VAT.
However, under VAT different tax slabs were created and commodities were placed under a
particular slab ensuring the same commodity being taxed at the same rate throughout the
country. Since VAT was not able to rectify the problem of indirect taxes that already existed in
the country, GST as tax reform has been brought in place.
Goods and Services Tax- GST

GST can be seen as comprehensive tax reform in the field of indirect taxes in India. France was
the 1st country to implement GST thereafter approximately 150 countries have adopted GST. In
India, GST came into the limelight in the year 2003. The ‘Kelkar task force’ constituted under the
chairmanship of Vijay Kelkar recommended for the 1st time that GST should be implemented by
the year 2009-10. For this purpose, an empowered committee of state finance ministers was
constituted to study the process of implementation of GST. Earlier 115th constitutional
Amendment Bill was presented to implement GST. However, the Bill did not pass. Since GST
should have affected even the revenue of the states, to implement it Constitutional amendment
was to be done with a special majority along with ratification by at least half of the states, which
was not an easy task. Again 122nd Amendment Bill was presented, which was passed in both the
houses as 101st Amendment Act.
GST is a comprehensive indirect tax that subsumes several existing indirect taxes which were
imposed and collected by the states as well as the centre on production and sale of goods and
service. As an indirect tax, GST came into force on 1st July 2017. It has the following objectives.
1) To eliminate multiple indirect taxes and to ensure one single indirect tax only at the point
of consumption.
2) It simplifies the entire mechanism of indirect taxes.
3) To eliminate cascading effect of tax-over-tax with the mechanism of input tax credit under
which the tax paid by the manufacturer or the service providers over the purchase of input
is refunded.
4) To bring all the goods and services under a few tax slabs and gradually under one single
slab to ensure “One Nation One tax”.
5) To bring down the price of goods to ensure an increase in consumption, investment, and
production. In other words to boost ease of doing business in India.
6) To make the filing of indirect tax completely digital i.e. online through the GST-N portal, to
ensure convenience and prevent corruption.
7) To develop a chain/mechanism, this will prevent tax evasion in the process of
manufacturing and sale of goods as well as supply of services.
Prior to the implementation of GST, several indirect taxes were in place in the country. Some of
these taxes were collected by the centre whereas some by the states. Under GST some of the
indirect taxes collected by the centre such as central excise, service tax, etc have been
subsumed. Customs duty has been kept out of GST. Some of the indirect taxes such as VAT,
central sales tax, entry tax, Octroi (Collected by local bodies) entertainment tax, etc, collected by
the states have also been subsumed. GST is a tax that is applicable only at the point of
consumption. Hence most of the taxes paid in the form of GST over the purchase of input have
to be credited.
Under GST there are slabs of 5%, 12%, 18%, and 28%. Some goods and services are kept out of
the purview of GST eg. Fruits, vegetables, food grains, etc. Gold jewelry is an exception over
which GST of 3% has been imposed. Since the states were apprehensive about the loss of
revenue because of the implementation of GST they demanded a revenue-neutral rate. It refers
to that rate of GST which would ensure that from the 1st day itself neither the states nor the
center would suffer any loss of revenue. However the demand was rejected. In order to set aside
this apprehension, it was decided that the state will be compensated 100% for 5 years. To
mobilise funds for this purpose, over luxurious goods and sin goods such as cold drink,
cigarette, etc an additional ‘CESS’ is applicable. It has been also decided that some of the items
which have been the main source of income for the state will be kept out of the purview of GST
for the first few years. The states will be free to collect tax over these items as they have been
collecting. These items include petroleum products, electricity, liquor, opium products, etc.
Since GST subsumes the indirect taxes collected by the centre as well as states, it has to be
divided into 2 parts. One part will be paid to the central government which will be termed as
CGST and the other part will be paid to the state where consumption takes place which will be
termed as SGST. If consumption takes place in a union territory then the tax will be divided into
2 parts CGST and UTGST. In the case of Inter-state trade, where the production takes place in
one state and consumption in another state, then it will cause loss to the producer state and will

benefit the consumer state. Hence to prevent this, on inter-state trade IGST is collected, half of
which goes to the center whereas half of it is used to compensate the states in the loss.
On most of the items, the taxes are bound to come down and it is to be ensured that the benefit
is entirely passed on to the consumers, for this purpose Anti-profiteering clause has been
introduced.
To protect the federal structure of the country GST Council has been created which is headed by
the Union Finance Minister. The other members are the Minister of State for Finance at the
centre and the Finance Ministers of all the states and UT’s (which have assemblies). Any
modification in GST or its slabs is done by the GST Council. However, the proposal is passed
only if in case 75% of the votes are in favour of the proposal. The weightage of the votes of the 2
representatives of the centre will be 1/3rd of the total weightage, whereas the combined
weightage of the votes of the states and UT’s will be 2/3rd of the total weightage, which means
neither the centre nor the states can unilaterally take any decision.
Although GST has several positive objectives and consequences it also has certain challenges as
well as few negative consequences. GST prevents evasion of indirect taxes and the e-filing makes
the entire process more convenient. However, since the increase in consumption was not
accompanied by an increase in production it led to demand-pull inflation for the initial months.
Since petroleum products and electricity have been kept out of GST higher rate of tax imposed
by the states on these items would keep the cost of production high. Even after a reduction in
the taxes, it is a possibility that instead of shifting the benefit to the consumers the producer
may jack up the prices to maximize their profits. Due to a reduction in the taxes, the products
produced by the organised sector became cheaper, the local products produced by the
unorganised sector are not able to compete, and hence they are adversely affected. Although GST
seems to be a simplified tax, the compliance is highly complex; hence it has to be supported by
the GST-N portal which initially had several drawbacks. In the quarter prior to implementation
of GST and in few subsequent quarters due to lack of clarity the GDP growth suffered. It was
mainly because the companies were aware that after the implementation of GST, benefit in the
form of the input tax credit is to be made available by the government, in the quarter prior to its
implementation, instead of producing more and more they tried to clear their inventory. Even in
the subsequent quarters, the tax rate was modified frequently because of which the producers
kept the production low.
15th finance commission also pointed out many drawbacks in proper implementation of GST.
There is a huge fluctuation in tax collection under GST. Tax collection under GST has been
below the expectation. Delay in refund in the form of input tax credit is another major issue. The
mismatch in invoice and input tax has been another problem. The 15th finance commission
pointed that the dependency of states over centre for compensation is matter of concern.
Due to covid crisis in the year year 2020 21 a huge drop in GST collection was seen. So
providing the compensation to the states became a concern for the centre. The minister of a state
for finances said in lok sabha that the total due on centre for the period April to November 2020
was 2.06 lakh crore. The Government of India I will take loan through a special window for this
purpose.
According to Economic Survey 2022-23 the average GST collection for the financial year has
been 1.50 lakh crore per month. GST has been the highest contributer in union tax collection.
E-Way Bill
In the case of intra-state as well as inter-state trade in goods, logistics or transportation services
play an important role. E-way Bill which has become effective from 1st April 2018 tries to ease
this process of transportation of goods within a state or in between two or more states. Prior to
its implementation physical documents issued manually were to be carried by the transporter
which was supposed to be evaluated on every check post, that existed in different states in the
entire route. It resulted in procedural delays, inconvenience, and traffic jams. According to the
Ministry of Road Transportation due to manual checking and inspections transportation of goods
in India resulted in delay up to 20%. On average on a single check post in states like
Maharashtra, a transporter had to spend 20 minutes whereas in a state like Bihar and
Jharkhand the time taken was as high as up to 2 hours. According to a report by McKinsey
delays in transportation cost the Indian economy approx $45 Billion every year. According to the
Logistics Performance Index published by World Bank, in India out of the total cost of a product,
the cost of transportation is as high as 14% whereas in developed countries it is just 6% to 8%.
The introduction of the E-Way Bill will eliminate these problems. E-Way Bill which is an
electronic document will replace the physical document which was needed for transportation. It
means it will be an electronically generated transportation bill. It is required for Intra-state
transportation as well as inter-state transportation. It can be generated by the consignor (sender)
or it can be generated by the recipient and if in case none of these two generate the E-Way Bill
even the transporter can generate it. While generating it some basic descriptions in the form of
pin code, the registered number of the vehicle, invoice no, etc have to be given.
E-way Bill will be in the form of a number. Once it became fully operational all the manual check
posts will be dismantled. However, the transporter can be intercepted anywhere throughout the
route and the E-Way bill in the form of a number can be examined by the authorities with the
help of a radio frequency identification device. If the consignment is caught without an E-Way
Bill a penalty of Rs 10,000 or the amount of tax evaded (whichever is higher) will be recovered.
An e-way bill is essential if the value of the commodity is Rs 50,000 or more.
Sabka Vishwas scheme

The finance minister announced this scheme in budget 2019- 2020. The government’s objective
was to solve the disputes related to indirect taxes, mainly service tax and central excise duty.
Both of these taxes have been brought under GST. Under this scheme the parties of disputes
were given attractive offers. The taxpayers were given the opportunity of paying the disputed tax
with some discounts. A complete relief in interest and penalty was given under this scheme.

Along with all this, a provision of permanent drop of court case was also added. The government
got 38000 crore worth of tax money under this scheme, which was effective from 1st September
2019 to 15th January 2020.
Pigovian Tax
It is known as the Pigovian tax because it was proposed by economist Arthur Pigov. He
suggested that any positive activity leading to negative consequences should be taxed. Eg. In the
process of production of iron and steel pollution will be termed as a negative consequence.
Similarly using a vehicle leading to emission can be also termed as a negative consequence. If
such activities are taxed then the tax imposed will be termed as Pigovian tax.
Tobin Tax
It was proposed by James Tobin, an economist. He was also awarded Nobel Prize in economics.
He suggested that to prevent sudden inflow and sudden outflow of foreign currency the
government of a country may impose a tax on transactions that take place in foreign currency.
Such taxes are Tobin tax.
Tax Expenditure
It can be defined as the exemptions given by the government to the taxpayers. In other words,
these are those taxes that were supposed to come to the government but the government
renounces them. It is mainly because through tax expenditure the government tries to fulfill
certain social as well as economic objectives. Tax expenditures are the instrument in the hands
of the government through which it tries to achieve certain policy objectives. Eg. The poor are
exempted from income tax, which ensures social justice. Similarly to ensure industrialization of
the hilly regions tax exemptions is given. To enhance export from India SEZs were set up and the
units within are given several tax exemptions to attract investments in the SEZs.To ensure
housing for all the interest part on the home loan remains exempted from the tax. Hence, tax
expenditure may fulfill many objectives.
In India, the Tax to GDP ratio has remained low not because the rate of tax in the country is low.
It is mainly because tax evasion is high and secondly tax expenditure of the government also
remains high.
Demonetisation
Money is a medium of exchange. Currency or coin which is legally accepted as a medium of
exchange is known as Legal Tender Money. If the central bank of a country or the central
government withdraws this legal support or legitimacy associated with a particular denomination
of currency note or coin then it is termed as demonetisation.
Demonetisation by the central bank of a country is a common phenomenon but demonetisation
done by the government of a country has been seen in India only thrice. Once in 1946, again in
1978, and recently on 8 November 2016. However, the nature and purpose of the process of
demonetisation done in 2016 were different from the earlier ones. Clause 26(2) of RBI Act 1934
authorises even the central government to withdraw its guarantee from any denomination note.
The RBI mentioned that the soil rate of higher denomination currencies were higher. It is that
rate at which notes are considered to be too damaged to be used and returned to the central
bank. According to data from the RBI, the soil rate for smaller denomination notes in India is
33% annually. The soil rate for the Rs. 1000 note was only 11%, whereas it was 22% for the Rs.
500 note. Assuming that all of these notes would degrade at the same pace if they were actually
being used for transactions is one method of estimating black money.
The officially declared objectives of demonetisation were as follows-
1. To curb Black money
2. To curb corruption
3. To eliminate fake/counterfeit currency notes
4. To prevent terror financing
Other than the officially declared objectives of demonetization this process of demonetization
may fulfill some additional objectives. If a certain part of the currency notes lying in the economy
is in the form of 500 rupee notes and 1000 rupee notes fail to come back to the RBI then the
liability of RBI would come down to the same extent.
However, out of 15.41 lakh crore rupees, 15.31 lakh crore came back to the RBI. Hence, this
objective was not fulfilled according to the expectations. Even after that once the process of
demonetisation is complete, it is for sure that the fresh currency note will not be issued in the
same proportion. Hence, in any case, the liability of the RBI will come down. This becomes an
important basis for the improvement in the sovereign rating of India. Demonetization also
encouraged cash-less transactions ensuring that the Indian economy gradually moves towards a
‘less-cash economy’. When transactions are conducted in a cashless form, it becomes easier to
track the movement of money from one hand to another. The money lying at home or being
hoarded doesn’t contribute to the economic activities. However, after demonetization, the
liquidity in the banking system increased making the availability of loans cheaper. In the long
run, this would enhance consumption and investment. A number of the hoarders used several
loopholes to launder their black money. A huge amount of money being deposited in Bank
Accounts doesn’t certify that it is not black money. Any amount of money deposited in accounts
will always leave behind its footprints, making it easier for authorities to track it. Even in case
black money is invested in some asset and finally, it comes to the account of the entity which
sold the asset, somebody in this entire chain will have to bear the burden of the tax. That is the
reason why in the Fiscal Year that ended on 31st March 2017, the tax receipt of the government
increased by 38%. The collection of Central Excise went up by 33.9%. At the same time, the
Service tax collection increased by 20.2%. A sharp jump in the filing of IT-return was witnessed.
Advance personal income tax collection increased by 41.7%. 1.8 million bank accounts have
been identified in which the cash deposit was not in line with the income shown by them in
previous years. Thousands of shell corporations have been identified which were set up just to
launder black money. Out of these 1.8 million accounts, half of the accounts have together
witnessed a total deposit of 2.9 lakh crore rupees.
However, demonetization also had its negative consequences. In India, more than 86% of the
total employment is in the unorganized sector. It is mainly a cash-deriver sector. The sudden
outflow of cash from the economy adversely affected employment in this sector. It had an
immediate impact on the GDP of a country. Demonetization also resulted in the sudden increase
in burden over the banking system. A large section of the society is still not connected with the
banking system which makes it difficult for them to deposit the old currency notes. The RBI
failed to ensure the availability of sufficient cash (new currency) in the rural and interior parts
leading to an extreme decline in liquidity. The introduction of the currency note with the
denomination of Rupees 2000 will encourage its hoarding in the future. Hence, even it should be
demonetized as soon as possible. It means that the implementation of demonetization could have
been more smooth. However, these all problems are temporary.

FOREIGN INVESTMENT AND TRADE
Any investment that comes to a country from any other country can be termed as a Foreign Investment.
Foreign investment in India can be classified into two types:-
1) Foreign Direct Investment (FDI)
2) Foreign Portfolio Investment (FPI)
Foreign Direct Investment

FDI comes to a country from any other country mainly to set up a business. It always has a long-term
objective of doing business in a country and making profit. Hence, it remains stable in a country. FDI in
India can be classified into two types:-
1) Greenfield FDI
2) Brownfield FDI
If through FDI a completely new business is set up, then it is termed as Greenfield FDI. On the other
hand, if FDI comes in an already existing company then it is termed as Brownfield FDI. FDI in India may
come through two different routes.
1) Automatic Route \ Mumbai Route
2) Government Route \ Delhi Route
Those sectors in which investment through automatic route is allowed, prior permission from the
authorities is not required while investing in them. The investor may invest on its own and will have to
inform the authorities within 30 days.
On the other hand in case of investment through the government route, prior permission is required.
Untill few years back for a foreign investment of upto Rs 5000 crore, permission from FIPB was
mandatory. If the foreign investment was of worth more than Rs 5000 crore then the permission was to be
taken from Cabinet Committee on Economic Affairs. However, during the Budget speech of 2017-18 the
Finance Minister, Arun Jaitley declared the abolishment of FIPB. Since then Foreign Investment through
government route comes under the purview of Department for Promotion of Industry and Internal Trade
(DPIIT).
Presently, in order to apply through government route a foreign entity has to file an application on Foreign
Investment Facilitation Portal (FIFP). FIFP comes under DPIIT and provides Single Window Clearance.
After this, DPIIT sends these applications to the appropriate departmernts of various ministries. Where the
departments ofter consultion with DPIIT either accept or reject the application.
In India there are different ceilings for maximum foreign investment in different sectors. In some sectors,
no FDI is allowed and in some 100% FDI is allowed. In other sectors, FDI of upto 26% or 49% or 51% or
74% is allowed.

The Government of India has amended the existing FDI policy in April 2020 for curbing opportunistic
takeovers/acquisition of Indian companies from neighbouring nations during the COVID-19 pandemic. As
per the notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT), ‘an
entity of a country, which shares land border with India or where the beneficial owner of an investment
into India is situated in or is a citizen of any such country, can invest only under the government route’.
The new rules will also apply to the transfer of ownership of any existing or future FDI in an entity in
India, directly or indirectly, resulting in the beneficial ownership falling within the above criteria. The rule
change was necessary in the light of investments by foreign companies amid weak markets and company
valuations. During that time China's central bank had bought a 1.01 percent stake in HDFC.
Positive and Negative consequences of FDI

The positive consequences of FDI are as follows-
1. It ensures the inflow of foreign currency which remains stable in a country for a longer period of
time.
2. It establishes business and hence also creates infrastructure.
3. It enhances the production of goods and services, hence it adds to the GDP of the country.
4. Whatever surplus is produced is exported, which further ensures the inflow of foreign currency and
increases the share of the country in World Trade.
5. It enhances competition which brings down the prices and improves the quality of goods and
services.
6. It also leads to technology transfer which makes the domestic partner self-reliant.
7. It also improves work culture.
However, MNCs have huge resources which they may use to kill competition and may adversely affect the
domestic companies. They make the domestic economy more and more dependent which can be termed as
Neo-Imperialism. They start acting as a pressure group and influence the policies of the government. They
bring foreign currency for investment but once they start making a profit, a large part of the profit is sent
back home continuously leading to the outflow of foreign currency.
FDI in Multi-Brand Retailing

If the products of one single brand are sold from an outlet at the retail level then it is termed single-brand
retailing. In this sector 100% FDI is allowed. On the other hand, if products belonging to different brands
are sold at the wholesale level under the same roof then it is termed as 'Multi-Brand cash and carry
wholesale business'. Even in this sector 100% FDI is allowed. However, if from one single outlet the
products belonging to different brands are sold at the retail level, then it is termed as Multi-brand
retailing. In this sector, the Manmohan Singh government had allowed 51% FDI. However, because of
resistance and protests from the opposition as well as the small retailers, it was left to the state
governments to decide that whether they would allow such investment in their respective states or not.
In India after agriculture, the retail sector is the single largest source of livelihood. The resistance was
mainly because the small retailers were apprehensive that if the MNC's were allowed to enter this sector,
they may be thrown out of competition. However, the provisions of the rules related to FDI in this sector
were largely beneficial for the entire country.
The main provisions were as follows-
1. The minimum investment should be 100 million dollars.
2. Half of the total investment should be used in infrastructure development such as the construction
of godowns, cold storages, and procurement centers in the rural areas. It would have ensured capital
formation through private investment bringing down the financial burden of the government.
3. Such outlets can be set up only in those cities which have a population of not less than 1 million as
per census 2011. Such cities in India are only 53 hence; it is obvious that competition in the rural
areas, as well as the smaller cities, would not have increased. Even if competition increases in large
cities, it would improve the quality of services and even the prices would have fallen.
4. Out of total goods sold by these retailers, 30% had to be procured from the small-scale industries. It
would have revived the small-scale industries in India which are highly labour intensive. Hence, it
would have added to the employment opportunities.

5. While procuring agricultural products these retailers are not allowed to use middlemen. Hence, it
would have benefitted the farmers and at the same time even the consumers.
6. The first right of procurement in the case of essential food grains remained with the government. It
would have ensured that the government may procure sufficient food grains to ensure food security
and the entry of the MNC's should not have affected the government's social responsibilities.
FDI in Multi-Brand retailing will organize the retail sector because of which even the employees in the
sector will be able to get the benefit of all the social security schemes such as provident fund, insurance,
etc. which are available to the employees of the organized sector. It may lead to high job security. Multi-
brand retailing will also lead to uniformity in the prices, making it easier to collect price data for
calculating retail inflation (CPI).
FDI in the e-Commerce Sector

The e-retailers or the e-commerce companies which sell product belonging to different brands at retail
level act as a multi-brand retailer only. They compete with those domestic retailers who sell from physical
outlets (Brick and Mortar stores). This sector is witnessing rapid growth and by end of the year 2020 in
the entire retail business in India, they will have a market share of approx 11%. In absence of specified
rules in this sector, foreign investment had already started coming. Therefore because of protests from
retailers, the government came out with certain guidelines.
The e-commerce companies were classified into the following two types-
1) Marketplace Based 2) Inventory Based
Marketplace based e-commerce companies are those which serve as a platform or a market over which
different sellers may sell their products online to the consumer. For example- Flipkart, Amazon, Snapdeal,
etc. In such e-commerce companies, 100% FDI is allowed. These companies may also have their own
inventory but it should not exceed 40% of the total products sold over the platform. Inventory of a vendor
will be deemed controlled by the e-commerce entity if more than 25% of purchases of such vendor are
from the marketplace entity or its group companies. The Marketplace based e-commerce companies
cannot compel the sellers to sell their product exclusively on their platform. They cannot even compel the
sellers directly or indirectly to provide deep discounts.
Inventory Based e-commerce companies are those which do not serve as a platform. They procure
products from many producers and directly sell the products through their website or app. In such e-
commerce companies, FDI is not allowed.
Note:- There was a Draft Proposal to ban e-Commerce companies from owning equity in the companies
that sell product on their platform back in 2018 itself. But even today, many products of such companies
which are partially or wholly owned by e-Commerce companies can be found on their own e-Commerce
websites. For example- Roadster is owned by Myntra and its products are very much flooded on Myntra.
Amazon india owns majority stake of 76% in Cloudtail, its products can be seen on Amazon e-Commerce
website.
Foreign Portfolio Investment- FPI

FPIs are those foreign investments that come to India mainly in the stock market. These investors buy
shares in large quantities in companies belonging to different sectors. However, they are not at all
interested in the management of the company. If an FPI investor procures 10% or more shares of a
particular company then it is treated as FDI and not as FPI. Since their objective is to make a quick profit,
the money bought by FPI never remains stable in one country. The moment they make a profit, they exit a
country and invest in some other country. Hence, the money brought by the FPI is known as Hot Money.
FPI is further classified into two parts:
1) Foreign Institutional Investment (FII)
2) Qualified Foreign Investment (QFI)
If a financial institution such as Mutual Fund Company or Insurance Company belongs to some other
country, collects money from a number of interested investors, and invests that entire amount of money in
the Indian share market then for India it will be termed as FII.

On the other hand, if a foreign individual invests in the Indian share market directly and if they are
eligible to do so then for India it will be termed as QFI. In India, the citizens of those countries which are a
member of Financial Action Task Force (FATF) can invest as QFI.
BALANCE OF PAYMENT
Balance of payment refers to the total financial transaction of a country with the entire world. Hence, it
includes the total inflow and total outflow of foreign currency in one financial year. If the inflow is more
than the outflow, then it is termed as Balance of Payment Surplus. On the other hand, if the outflow is
more than the inflow then it is termed as Balance of Payment Deficit. If in case a country has sufficient
foreign exchange reserve to bridge this deficit then it is not a problem for the country. However, if the
country does not have sufficient foreign exchange reserve to bridge this deficit then it may become a
Balance of Payment Crisis. This is the only situation in which a member country may borrow from IMF.
The inflow and outflow of foreign currency is calculated in a country under 2 different accounts-
1) Current account
2) Capital account
Current Account includes inflow and outflow related to the following items-
a) Export and Import
b) Invisibles-
i. Services
ii. Income (dividend from companies operating abroad and interest receipt)
iii. Transfers i.e, Remittances.
On the other hand, the capital account includes the following:-
a) Short term lending and borrowing.
b) Long term lending and borrowing.
c) Medium-term lending and borrowing (Even the NRI deposits in India will be counted as a part of
our external debt/borrowing).
d) Financial Account- FDI and FPI.
When the inflow and the outflow only in the current account of a country is calculated and the inflow is
more than the outflow then the country is said to be in the current account surplus. On the other hand, if
the outflow is more than the inflow in the current account then it is termed as the current account deficit.
If a country suffers from a fiscal deficit as well as a current account deficit then it is term as Twin Deficit.
India is the largest recipient of remittance in the entire world, hence, the current account deficit in India is
mainly because of the outflow of foreign exchange due to import being more than our export.

According to Economic Survey 2021-22, India reported a current account surplus after 17 years in year
2020-21. India recorded a current account surplus of 0.9% of GDP in year 2020-21. Current account
surplus was observed in the last quarter of financial year 2019-20 itself. It is mainly due to fall in trade
deficit and steep increase in gain of invisibles. But according to economic survey 2021-22, India again fell
into current account deficit of 0.2% of GDP in the first two quarters of fiscal year 2021-22. The average
current account deficit of India for last 10 years has been 2.2% of the GDP. According to economic survey
2022-23 in the first two quarters of fiscal year 2022-23, India recorded a CAD of 3.3% of GDP.
If only inflow and outflow with respect to export and import is calculated then it is termed as Balance of
Trade. If the inflow because of export is more than the outflow of foreign currency because of import, then
it is termed as Balance of Trade Surplus. On the other hand, if the outflow is more than the inflow then it
is termed as Balance of Trade Deficit. The balance of trade of a country is calculated with the entire world
and also with every single country. With the entire world, India has been in balance of trade deficit for last
two decades. It has been mainly because of the import of gold and crude oil. But after 18 years India
achieved balance of trade surplus in June 2020. In June 2020 the country reported a trade surplus of
0.79 billion dollars. It appeared due to steep rise in exports in comparison with imports in post lockdown
phase.
With countries like the USA, India is in the balance of trade surplus, but with china, India has always
been in balance of trade deficit. In terms of export, the USA is India's largest trading partner and in terms
of imports, china is India's largest trading partner.
The other countries where we export maximum are UAE, Netherland and China respectively. On the other
hand, the other countries from where we import maximum are UAE, USA and Russia. A country always
tries to maintain sufficient foreign exchange reserves to meet its import requirement for at least 3 months.
This is termed as Import Cover.

To fulfil any of the objectives under the current account or capital account foreign currency must be
converted into domestic currency or domestic currency must be converted into foreign currency. The ease
with which a domestic currency can be converted into foreign currency and foreign currency can be
converted into domestic currency is termed as Convertibility of Currency. If it is for the current account
it will be termed as current account convertibility. In India, current account convertibility is completely
allowed with certain ceilings. However, capital account convertibility is not completely allowed and it has
numerous restrictions. These restrictions are to prevent the sudden flight of capital. But these restrictions
also affect foreign investment in the country. A committee headed by S. S. Tarapore was set up twice to
suggest that how complete capital account convertibility can be adopted in India? but it is yet to be done.
American Recession
When the GDP of a country declines continuously for two or more quarters then the country is said to be
in Recession. In America, the recession which was witnessed in 2008 was also termed as "Sub-prime
crisis" and "Housing crisis". Since the entire crisis took place because of home loans given to the sub-
prime customers the term sub-prime crisis was used. Sub-prime customers are those customers who do
not have a very good credit history. They are those customers who have defaulted in past. Since a home
loan is considered to be a secured loan, the banks in the USA started providing home loans even to the
sub-prime customers at a higher state of interest. Because of this, the demand for property increased, and
even the prices.
Another instrument was created by the banks to maximize their profit. It was in the form of a mortgage
loan i.e., the same property was mortgaged/pledged again and an additional loan was provided. It
increased the burden of repayment. Hence, the sub-prime customers started defaulting. The banks
foreclosed such properties. However, such defaults were in millions, and when the banks tried to auction
these properties to recover their money, they failed to find suitable buyers. Hence the supply increased but
the demand for properties was low. Hence the price of such properties started coming down and the banks
went into losses. The credit flow in the economy was affected. Because of this, the demand in the economy
declined which affected production. This continuous decline in the GDP pushed the USA into recession. To
maintain their profit or reduce their losses, the companies started reducing the workforce. This led to an
increase in unemployment which further brought down the demand and the recession became even more
severe.
Whenever a country suffers from a recession, the government of the country as well as the Central Bank
both become active. The government reduces direct taxes (income tax) leaving surplus in the hands of the
consumers. Even the indirect taxes (GST) are also reduced making goods and services cheaper. The
government also increases public expenditure. They all result in increased consumption. This external
support provided by the government to the economy is termed as "Fiscal Activism" which is also known as
“Fiscal Stimulus”. The central bank reduces the interest rates so that the banks may borrow at a lower
rate of interest and may provide loans to the consumers at a lower rate. It will further enhance demand.
This support provided by the central bank is termed as "Quantitative Easing". However, if the income of
the government comes down and expenditure increases, due to the shortage of liquidity in its own
economy the government borrows from external sources. If it borrows continuously, there may be a
situation when the government itself may not be in a position to repay. It can be termed as a situation of
Balance of Payment crisis to be more precise Sovereign Debt Crisis. Because of this government may be
compelled to withdraw its support given to the economy. If it is done and as a result, the economy falls
again then it will be termed a “Double-dip Recession”. However, this situation was not witnessed in the
USA.
The recession did not affect India severely. It was mainly because the Indian economy is a domestically
driven economy with a huge domestic market where the demand never came down. However, the sectors
which were export-oriented suffered adversely. Foreign investment was affected and a sudden flight of
capital from the share market was witnessed. Because of this, the share market went down sharply. This
sharp and sudden decline in the share market is termed a Financial Meltdown. However, the impact of the
American recession was extremely seen in the European economies, especially the smaller ones such as
Portugal, Italy, Ireland, Greece, and Spain (PI2GS).
In Post Pandemic scenario, the Economic crisis is looming in front of the USA. The Inflation rates are at an
all-time high. Companies are reducing their workforce. The GDP recorded a negative growth rate in the
first two quarters of 2022 putting the USA technically under recession. However, in the last quarter, the
USA gave a positive growth rate. But other economic indicators are still showing pain for the USA and
eventually for the World.
Euro Zone Crisis and Brexit

The American recession had a widespread impact on the European economies, especially the smaller ones
including Portugal, Ireland, Italy, Greece, and Spain (PI2GS). However, the main reason behind their
problem was not the American recession but the establishment of the European Union as well ass Euro
Zone itself. The smaller European economies were already weak. The American recession exposed their
weakness even more. Including Britain, the European Union had 28 members. This European Union has
been a ‘Free trade Area’ which ensures restriction-free trade in goods as well as services. Hence the
barriers on the export of goods and services remained low. Even the movement of human resource was
encouraged without any restriction. Because of this, the trade among the member countries remained
high. But the maximum benefit was derived by the larger economies such as Germany, Britain, and
France. To further strengthen trade relations common currency “Euro” was introduced. However,
including Germany and France, only 19 countries out of 28 countries had accepted this common currency
“Euro”. These 19 countries constitute the “Euro Zone”. Britain was never a part of this Euro zone. This
common currency Euro has been seen as a substitute or alternative to the ‘US Dollar’. Prior to the use of
this common currency, the smaller economies of the European Union, as well as the larger economies,
used their respective currencies. Hence, due to the weak domestic currency of the smaller economies,
these countries had some edge over the other larger economies with respect to export. However, with the
introduction of the Euro as a common currency, this edge was lost. It benefited France and Germany the
most. But this benefit was at the cost of the smaller economies. Secondly, after the constitution of the
‘Eurozone,’ a common ECB (European Central Bank) was created. Its main responsibility is to formulate
Monetary Policies for the entire Euro Zone. However, the fiscal policies were formulated by the
governments of the respective countries. Because of this mismatch between the monetary policies and the
fiscal policies was seen which affected the fiscal health of smaller economies. The larger economies also
enjoyed the benefit of an “economy of scale”. With the American, recession the demand in the American
economy declined and the export of the PIIGS countries declined further. It made them even more
vulnerable and they went into recession. Some of the countries also suffered from a situation of “Sovereign
debt crisis”. To help them a TROIKA was constituted which included the European Commission, European
Central Bank (ECB), and the IMF. To recuse these economies even Britain had to contribute, which
became a political issue in Britain. Even the economic opportunities which were being created in countries
like Britain were being taken away by the migrants from the smaller economies. Being a member of the
European Union, Britain was not able to restrict the inflow of migrants. Even this was an important issue.
Whenever IMF provides a loan to a member country, it imposes certain restrictions on the borrower to
reduce its wasteful expenditure. However, even after borrowing, Greece failed to adopt such restrictions
and defaulted on repayment in 2015 becoming the first developed economy to do so. It was realized even
in Britain that the problems are not going to end soon. Hence to decide whether Britain should remain a
part of the European Union or not, a referendum was conducted in which Britain finally decided to
existing European Union. This exit finally took place on 31 January 2020. The consequences of BREXIT
can be felt at 3 different levels- over European Union, over Britain, and over the entire world.
BREXIT impact on European Union
1) It lost a large trading partner in the form of Britain.
2) Britain’s exit will make the EU weaker and relatively less important in the world economy.
3) With Britain’s exit even among the other dissatisfied member countries, the demand for exit will
increase making the EU unstable.
4) EU was also a symbol of common European culture. The exit of Britain is seen as the beginning of
the end of this common culture.
BREXIT impact on Britain-
1) It is a protectionist policy adopted by Britain. Hence, the employment opportunities created within
the country will mainly remain with the British people.
2) Because of BREXIT, the pound has started weakening which will enhance Britain's export to other
parts of the world.
3) However, being no more members of the European Union. Britain will not be able to export goods
and services to these 27 countries without any restriction. Hence, Britain’s export to other members
of the European Union will decline.
4) Several companies from other parts of the world had invested in Britain to get the benefit of its
membership in the European Union, now these companies will start shifting to other parts of the
EU.
5) Even to export to the EU; Britain will have to compete with companies from countries like India and
China.
6) In the referendum, Scotland wanted to remain within European Union. But because of the overall
majority voting in favor of exit, discontentment among the people of Scotland increased. Now even
Scotland is demanding a referendum to exit from Great Britain. So that it may separately acquire
membership in the European Union. It may lead to the disintegration of Britain.
According to experts, earlier the negative effects of Brexit were hidden by COVID-19. But now the negative
effects of Brexit are more obvious as Britain's economic problem moves from rising inflation and a high
cost of living to low productivity. The domestic currency Pound Sterling has witnessed decline and Forex
Reserve is draining day by day.
BREXIT Global Consequence-
1) It is a protectionist policy adopted by Britain which is being followed by other developed countries
like the USA. It will affect investment in emerging economies like India. It will also affect trade in
goods and services globally.
2) It is also being termed as the beginning of the process of de-globalization making multilateral
organizations like WTO meaningless.
3) It may also create an opportunity for countries like India and China to enhance their trade with the
EU and Britain separately.
Sri-Lankan Crisis
Sri Lanka has been in a serious crisis as a result of an unparalleled economic collapse. Due to its
depleting forex reserves and crushing debt, the island had struggled to import basic commodities for its 22
million citizens. It had led to anti-government protests. India emerged as the largest contributor to the
island nation.
Tourism had been the third-largest source of foreign exchange for the nation. After the 2019 Easter
Sunday suicide attacks, which claimed more than 250 lives tourism got affected. The number of visitors
decreased by as much as 70%. The tourism sector was severely harmed by the Covid-19 pandemic. Even
the exports of tea, rubber, spices and garments suffered.
The government’s ban on chemical fertilizers in order to make Srilanka an organic nation heavily
backfired. Production fell and inflation soared. The Chinese debt trap diplomacy affected the nation very
badly. The Fiscal deficit reached double digit as percentage to GDP. The Debt to GDP ratio surpassed
100% level. All these led to economic crisis in Sri Lanka.
Late Convergence Trap

The concept was mentioned in the economic survey 2017-18. Here, convergence refers to reducing the
income gap between a developed country and a developing country. Prior to the American recession when
the world economy was growing, even the other developing economies were growing at a decent pace and
had started bridging the gap with the developed economies. Those economies which started the process of
economic reform early were able to achieve the goal of convergence within a short span of time. In this
regard, globalization played an important role. However, India started late and it had to face several
hurdles. After the Industrial Policy Resolution of 1956, India witnessed policy paralysis till 1990. The
process of economic reform started in India in 1991. However, the entire decade witnessed high political
instability. The American recession in 2008 and onwards affected the world economy. The developed
countries have resorted to protectionist policies to favor the domestic producers, which has led to a
process of de-globalization and even a trade war. This is another challenge being faced by the Indian
economy. Hence, since we started late we are trapped in hurdles because of which the convergence has
become difficult. This is a late convergence trap.
Decoupling of Economy-
When two or more economies are coupled with each other, they move in tandem, i.e in the same direction.
However, when two different economies move in different directions or at different paces, it is termed the
decoupling of the economies. The Indian economy has recently witnessed similar decoupling with the
world economy. Before demonetization and GST, the Indian economy was moving along with the world
economy. However, demonetization, as well as GST, decoupled India from the world economy because of a
temporary slowdown. When the Indian economy started growing again, the world economy started
faltering. So the decoupling continues.
Special Economic Zone

SEZs are specially demarcated areas within which the tax laws of the land i.e. country may not be
applicable in the same form. It means that for SEZs, different tax laws are formulated. In India, SEZ Act
was passed in 2005, But it became effective in 2006. India borrowed this concept from china. SEZs aim at
enhancing India’s export. The applicable tax laws have been formulated in such a manner that they will
automatically provide an edge to Indian exporters.
In this entire arrangement, a developer will be there. It can be a private party, the government, or even a
public-private partnership. The developer has to acquire land and has to develop the entire zone with all
the basic facilities such as water supply, electricity supply, transportation, communications, etc. The
developer has to operate the zone at least for 15 years. During the first 10 years, the developer need not
pay any corporate tax. Once the zone is developed space will be given on lease to the units which are
interested in operating from the zone.
The units set up within the zone can be from the service sector and can even be from the manufacturing
sector. All the units may be associated with the same type of business or they may be associated with
different types of businesses. These units need not pay any duty on the procurement of capital goods as
well as raw materials. Supplies to SEZs are zero-rated under IGST Act, 2017. Single window clearance for
Central and State level approvals. Even while exporting, they need not pay export duty. For the first five
years, they will remain 100% exempted from corporate tax. During the next 5 years, they need to pay
corporate tax at half of the rate. During the next 5 years, they need to pay corporate tax at a normal rate
but over the plowed back profit (that part of the profit which is invested in the same business) corporate
tax will be at half of the rate.
These units have to follow some restrictions. Whatever they produce can only be exported and cannot be
sold in the domestic market. Secondly, they have to become net foreign exchange earners within a time
period of 3 years. If they sell their products in the domestic market, all the benefits will be taken away.
India has more than 350 SEZs at present.
The objectives are-
 To enhance India’s export & increase India’s share in world trade.
 To add to the GDP of the country and to create employment opportunities.
 To attract domestic as well as foreign investment.
However, the biggest challenge is land acquisition.
In Budget 2022-23, the government has announced that the Special Economic Zones Act will be replaced
by a new law that will enable states to be partners in the development of enterprise and service hubs. This
will cover all major existing and new industrial enclaves to make better use of the available infrastructure
and enhance the competitiveness of exports.
In FY21, exports from SEZ fell from 112.3 billion $ of FY20 to 102.3 billion $.
The Act has been reconsidered after the government last year adopted a sunset clause regarding SEZ,
declaring that only those units which have started production on or before June 30, 2020, will be given a
phased tax holiday for 5 years.
The Baba Kalyani committee set up in 2019 suggested that SEZ should be converted into Employment
and Economic Enclaves – 3Es by providing basic infrastructure like efficient transport, uninterrupted
water, power supply, etc.

The committee also favored the speedy resolution of disputes through arbitration. It supported flexibility in
dual-use norms for non-processing sectors, an extension of sunset clauses, simplification of procedures,
tax benefits to the service sector, and expansion of MSME schemes in these areas.
Regional Comprehensive Economic Partnership

The Regional Comprehensive Economic Partnership (RCEP) is a proposed agreement between the member
states of the Association of Southeast Asian Nations (ASEAN) and its free trade agreement (FTA) partners.
The pact aims to cover trade in goods and services, intellectual property, etc.
The Regional Comprehensive Economic Partnership was introduced during the 19th ASEAN meet held in
November 2011. The RCEP negotiations were kick-started during the 21st ASEAN Summit in Cambodia in
November 2012.
RCEP aims to create an integrated market with 15 countries, making it easier for products and services of
each of these countries to be available across this region. The negotiations were focused on the following:
Trade in goods and services, investment, intellectual property, dispute settlement, e-commerce, small and
medium enterprises, and economic cooperation.
Why has India not signed it-
1) India wants all RCEP countries to have the right to protect data & prohibit cross-border data flow in
the national interest. For this reason, India even refused to sign the G20 Osaka declaration on cross-
border data flow.
2) India already has over a $100 billion trade deficit with RCEP countries. Out of this, China alone
accounts for a $54 billion trade deficit (101 B $ at present). So India had apprehensions about
signing this agreement. Moreover, RCEP would have resulted in the increased flow of (Cheap)
Chinese manufactured & electronic goods into the Indian market, and Indian MSMEs, automobile,
and steel industries had have not been able to compete. So, India wanted separate levels of customs
duty against Chinese imports, which was rejected.
3) India is among the largest producers of milk but its specialty is mostly in liquid products whereas
New Zealand is renowned for its solid products (milk powder, butter, cheese, etc.) These solid dairy
products have a longer shelf-life & easier to transport over long distances. So if trade barriers were
removed, the Indian market would have been flooded with cheap dairy products which might have
led to the suffering of Indian farmers & dairy entrepreneurs.
4) Southern India’s plantation farmers were afraid of cheaper tea, coffee, rubber, cardamom, and
pepper from Malaysia, Indonesia & other RCEP nations.
5) India wanted an Automatic Trigger Safeguard Mechanism (ATSM) to protect itself from the surge in
imports.
6) Ratchet Obligation: It means a nation cannot go back/undo its commitments under the RCEP
agreement. India wanted certain exemptions on it.
7) India wanted the base year for tax cuts fixed at 2019 instead of 2014. Because since 2014, India has
raised customs duties on over 3,500 products.

AGRICULTURE
Economic activities evolve with passage of time. For example - initially man was associated with
hunting and gathering. Then we switched over to herding i.e., animal husbandry. There after we
shifted to horticulture i.e., production of fruits and vegetables. From horticultural a society shifts
to agriculture and from there to irrigated agriculture. After irrigated agriculture, an economy
moves toword industry and from industry to service sector.
Emergence of one economic activity may not replace an existing economic activity completely.
Hence, a number of economic activities may coexist in a society. It is also not necessary that an
economic activity completely loses its importance because of emergence of any other economic
activity. For example - even after emergence of industry the importance of agriculture remains in
place. It is mainly because agriculture ensures availability of food, without which life may not be
possible. However, due to emergence of an economic activity the contribution of an existing
economic activity to the GDP may fall down.
The economic activities in any society or a country may be broadly classified into following three
types:-
1. Agriculture and allied activities
2. Industries
3. Services
Agriculture and allied activities include horticulture, animal husbandry, sericulture, pisciculture
etc. In India based on nominal GDP, agriculture contributes between 15 to 20%. According to
the Economic Survey 2021-22, in the financial year 2021-22, the contribution of agriculture and
allied activities in country’s GVA (Gross Value Added) was 18.8%. According to the estimates, it
reached nearly 20% in the financial year 2020-21. According to the Economic Survey 2020-21,
this was seen mainly because on the one hand, the entire country's GVA growth rate fell by 7.2%
(GDP growth rate fell 7.7%), while the growth of 3.3% was seen in agriculture and allied sectors.
According to the Economic Survey 2022-23, in the year 2022-23, the agriculture and allied
sector is expected to register a growth rate of 3.5%, on the basis of Gross Value Added.
Post independence although in terms of absolute value the contribution of agriculture has
continuously increased but in terms of percentage it has continuously fallen down. It is mainly
because the contribution of other two sectors especially service sector has increased at a rapid
pace. During independence agriculture contributed approx 50% to the GDP and about 2/3rd of
the total population were dependent upon agriculture and allied activities. Although contribution
of agriculture has fallen down to 15 to 20% but dependence over agriculture is still very high.
Approximately 50% of India’s population still depend on agriculture. It shows that the workforce
dependent upon agriculture and allied activities is far more than what is required. Hence the
marginal productivity in agriculture in India remains zero. This overwhelming dependency is also
a sign of impoverishment.
During independence India was a net importer of food grains, it means that India imported more
food grains as compared to what it used to export. However, gradually the export of food grains
from India started surpassing the import. At present India is not only a food sufficient country
but it is also a net exporter of food grains. It means that India exports more food grains as
compared to what it imports. The most important factor that made India net exporter of food
grains are as follows:-
1. Continuous increase in net sown area post-independence.
2. Financial inclusion, which ensured the availability of institutionalized credit to the farmers,
reducing their dependency over the moneylenders.
3. The subsidies provided by the government on inputs such as fertilizers, seeds, pesticides,
fuel etc.
4. The introduction of MSP (Minimum Support Price) in order to ensure financial security to
the farmers.
5. Land reform measures adopted by the country post independence.
6. Green revolution which encouraged use of technology in agriculture activities.
According to the Economic Survey 2021-22, the production of food grains in our country has
crossed the record 300 million tonnes milestone in the year 2020-21 itself.
Factors affecting agriculture in India

Post independence the factors which helped in increasing agricultural production, the gradual
failure of same factors adversely affected agriculture in India. These factors are as follows:-
1. After continuous increase in the net sown area it is gradually declining. Due to rapid
increase in population the land under cultivation is being used for the purpose of
construction of residences. The agricultural land is being acquired by government as well
as private agencies even for industrialisation and infrastructural development.
2. Although financial inclusion was initiated it is yet to be completed. According to the report
of C. Rangarajan committee few years back, only 49% of the farm household had access to
credit. Out of this 49% only 12% it has access to institutionalized credit and 37% still
depend on the moneylenders.
3. The subsidies provided by the government made the farmer more and more dependent
rather than making them selfdependent. Since the cost of subsidy remained high the
government failed in the process of capital formation in agricultural sector. For example

construction of dams, canals, cold storages, godowns, mandis etc. would have made the
farmers more and more self-dependent.
4. Even the introduction of MSP had a negative impact. Since, MSP did not cover all the
agricultural products the farmer showed interest only in the production of those
agricultural products over which MSP was applicable.
5. Land reform measures also failed miserably. Few states such as West Bengal, Kerala etc.
succeeded in implementing land reform to some extent but it failed in other parts of India.
6. Even Green Revolution had some negative consequences. Since green revolution resulted in
capitalist transformation of agriculture it increased the cost of investment. Large farmers
were able to afford it but the small farmers had to borrow, resulting in their indebtedness
and finally led to land alienation. Excessive use of chemical fertilizers, pesticides and
underground water also affected agriculture and environment.
7. Due to industrialisation migration towards the urban areas increased. It resulted in
disintegration of the joint families. Because of this fragmentation of land increased which
further affected agriculture.
8. The educated youth in India has always remained away from agricultural activities. Due
tothis agriculture in India suffers from high level of illiteracy. So agriculture sector in india
always lacked innovation and modern technologies.
9. Since some of the fertilizers in India are subsidized they were excessively used by the
farmers. It affected the nutritional value of soil. Nutrients such as Nitrogen (N),
Phosphorous (P) and Potasium (K) should be in a definite proportion of 4 : 2 : 1 but in India
the ratio is 6.7 : 2.4 : 1.
10. Even today Indian agriculture is highly dependent on monsoon. Approx 85 million hectare
of land in India which is under cultivation depends on monsoon.
Classification of farm households in India

Any household which is directly or indirectly dependent on agriculture for its livelihood is termed
as Farm Household. Hence even the landless labourers who do not own any piece of land but sell
their labour on someone else's land will fall under the category of farm households.
The final data of Agriculture Census 2015-16 was published in January 2020. According to
which the total number of operational holdings in the country has increased to 146.45 millions.
The total operated area in country has decreased to 157.82 million hectares.
Based on the ownership or non ownership of land farm households can be classified into six
different types:-
1. The household which does not own any piece of land and sell their labour to cultivate
other’s land are termed as a family of landless labourers.
2. Those households which have land upto 1 hectare are termed as the family of marginal
farmers. As per data of agriculture census 2015-16 they are 68.5% of total farm households
in numbers. But they collectively own only 24% of total farm land holdings.
3. Those farm households which have control over more than 1 hectare but upto 2 hectare of
land are termed as family of small farmers. They constitute 17.6% of the total farm
households. They collectively own 22.9% of total operated area.
4. The families which have control over more than 2 hectares and upto 4 hectares of land are
known as family of semi-medium farmer. They are 9.6% of total farm households. They
collectively own 23.8% of total operated farm land.
5. Those farm households which have control over more than 4 hectares of land and upto 10
hectares of land are termed as family of medium farmers. They are merely 3.8% in numbers
but have control over 20.2% of total farm land.

6. Those farm household which own more than 10 hectare of land are termed as a family of
large farmers. They constitute only 0.57% of total farm households but together they own
9.1% of complete operated area.
As per 10th agriculture census 2015-16 the average farm land holding in India is just 1.08
hectare. This makes agriculture in India economically non viable.
It shows that the majority of farm households in India are at the bottom of the Agrarian Class
Structure. 86% of total farmers are marginal and small farmers, having only 47.3% of total
agriculture land holdings, shows the vast Economic Inequality. It also shows that in India
agriculture suffer from poverty.
Maximum migration is witnessed among landless labourers, who suffer from Seasonal
Unemployment. They migrate to urban areas due to compulsion in search of livelihood. Even the
rate of migration in the family of large farmers is high but it is mainly because of pull factors.
Since they have resources their children migrate to urban areas for the purpose of better
education and higher jobs.
Measures adopted in order to improve health of agriculture in India

1. In India since independence the policies formulated by the government have always been
Production Centric. However the recent policies, formulated by the government are mainly
Income Centric.
2. Under these income centric policies it has been decided by the government that the
Minimum Support Price (MSP) will be 50% higher than cost of agriculture. Even MSP has
been gradually extended to 25 different agricultural products.
3. Under the same income centric policies and government introduced Pradhanmantri fasal
Bima Yojana in 2016 to eliminate uncertainities related to agriculture and provide
economic security to farmers. This sceme has been revamped again in 2020 to remove
some issues related to it.
4. In the interim budget of 2019-20 Pradhan Mantri Kisan Samman Nidhi Yojana was
introduced. It ensures a cash transfer of rupees 6000 per year to every farm households.
5. The government is committed to double the income of farmers by the year 2022.
6. After Green Revolution the country is concentrating on Evergreen Revolution. It will be
based on biotechnology.
7. In order to increase the net sown area satellite-based mapping is being done.
8. Animal husbandry is being promoted as a complimentary economic activity.
9. Food processing industry is being promoted in order to support agriculture. For this
purpose Pradhan Mantri Kisan Sampada Yojana was introduced in 2016.
10. In order to reduce the volatility with respect to price of Tomato, Onion and Potato Operation
Green was introduced with a total expenditure of rupees 500 crore. It will enhance
production, storage as well as transportation of these three vegetables. In Budget 2021-22
it has been announced that Operation Green will be expanded by adding 22 perishable
agricultural items to it.
11. Bamboo which is known as Green Gold has been categorised as a grass, if it is grown
outside the forest areas. It can be cultivated and sold by the farmers in order to enhance
their income.
12. India 2007, Food Security Mission was introduced. It was aimed at enhancing the
production of Rice, Wheat and Pulses. During the 12th five year plan, food security mission
was modified and even the the coarse grains were added to it.
13. In 2004, National Commission on Farmers was constituted under the chairmanship of M.S.
Swaminathan. The main objective of this commission was to suggest measures to enhance

income of farmers to make agriculture more profitable and to encourage the educated
youth to join agricultural activities.
14. The process of Financial Inclusion is gaining momentum continuously. The Kisan Credit
Card Scheme was introduced in 1998 and now it is being converted into plastic credit card.
In Financial Year 2021-22 the agriculture credit limit has been increased to 16.5 lakh crore
rupees.
15. In order to ensure irrigation facilities in those areas which depend upon the monsoon
National Rainfed Area Authority was constituted in 2006. Under this the coordination was
established among five different ministries Ministry of Agriculture, Ministry of Rural
Development Ministry of Jal Shakti, Ministry of Panchayati Raj and Ministry of
Environment and Forest. In this direction with the objective of ‘Per Drop More Crop’
Pradhan Mantri Krishi Sinchai Yojana was started in the year 2015.
16. In order to set up Mandis, Model APMC Act was passed by the parliament. It has been
again modified in 2017. In the budget 2018-19 the concept of GrAMs (Gramin Agricultural
Markets) has been introduced. Under this with the total expenditure of 2000 crore rupees
22,000 grameen haats are to be converted into Gramin Agricultural Markets. In the year
2016 the concept of e-NAM (electronic-National Agricultural Market) was introduced. In
budget 2021-22, linking of 1000 new mandis with e-NAM is proposed.
17. In order to provide information to the farmers dedicated Radio, TV channels and even call
centres have been established.
18. To provide information regarding the health of their soil a scheme known as Soil Health
Card was introduced.
19. In order to ensure the reach of farm products in international market Agriculture Export
Policy was introduced. Along with supply chain management innitiatives such as Kisan Rail
and Krishi Udaan were also announced in budget 2020-21.
20. In 2008 Land Record Modernisation Programme was innitiated by Ministry of Rural
Development. It can reduce court cases related to sale and purchase of land. Last year
Swamitva Yojana was launched to give Record of Rights to rural population, in form of
Property Cards. In budget 2021-22 it was proposed to expand it in whole country.
21. In the budget 2022-23, the government also announced to work towards making digital
technology and hi-tech services accessible to the farmers. In this context, schemes will be
brought under public-private partnership model.
22. The government announced that the use of 'Kisan Drones' for assessment of crops,
digitization of land leases, spraying of pesticides and nutrients will be promoted in recent
budget.
23. According to budget 2022-23, states will be encouraged to revise the syllabi of agricultural
universities as per the needs like modern agriculture, zero budget natural farming, supply
chain management, organic farming, etc.
24. Govt has proposed a plan to encourage chemical free natural farming in the country. Under
this, in the first phase chemical free natural farming in 5 km wide corridor along river
Ganga in farmers’ land will be innitiated.
25. The budget stated that the government will bring policies and necessary legal changes to
promote agro-forestry and private forestry. Financial assistance will be provided to those
farmers of Scheduled Castes and Scheduled Tribes who want to adopt agro-forestry.
In this direction, many suggestions have also been made in the Economic Survey 2021-22,
which are as follows:-

Law of Diminishing Return
Agriculture suffers from the law of diminishing return. It means that with passage of time the
profit from agriculture starts declining. With the passage of time due to inflation the cost of
investment in agriculture increases. Seeds, labour, fuel, fertilizers etc. they all become costlier.
Although the price of final product also increases, but not at the same rate. Hence the return
from agriculture declines, when compared to the time money and energy invested. Such
economic activities can never provide sufficient employment opportunities.
Land Reform in India

In any agrarian society agriculture becomes most important economic activity whereas land
becomes the most important asset. Even the economic disparity is based on ownership and non
ownership of land. Hence, redistribution of land is considered as the most important tool to
reduce this disparity. Therefore, in order to reduce this disparity all major political parties in
India had started claiming even before independence that post independence surplus land will
be identified and will be redistributed among the tillers. With this objective land reform
measures were adopted in India. It had following objectives:-
1. To abolish Zamindari.
2. To impose land ceiling.
3. To introduce land consolidation.
4. To modify the tenancy laws.
5. To prepare proper land ownership record throughout the country.
Under the tenancy laws it was decided that if a piece of land is rented out the landlord can only
take away 1\4th of the total produce and remaining will go to the tillers.
Land consolidation and land ceiling were the most important provisions. Under land
consolidation scattered pieces of land were to be brought together in order to make cultivation
easier, cost-effective and more profitable. Under this, if a family or an individual owns different
pieces of land lying in different directions they were to be brought together. However this can be
done only by taking away someone else's land adjacent to the land of that individual or the
family. In a rural area it was very difficult task mainly because land is associated with a family's
honour and prestige. It is also connected with emotions. At the same time all the pieces of land
may not be equally fertile. Hence land consolidation succeeded only in few regions such as
Punjab, Haryana, Western UP and Coastal Andhra Pradesh. It failed in other parts of the
country.
Under land ceiling, limit was to be imposed with respect to land holding. This limit was different
in different areas based on the fertility of the soil. Any piece of land held by a family beyond that
limit was identified as a surplus. It was to be forcefully acquired by the government and
redistribution was to be done among the tillers.
In order to prevent frequent interference of the judiciary in the entire process the constitution
was amended and ninth schedule was added. Right to property no longer remained a
fundamental right and was converted to a legal right. However land ceiling also succeeded only
in few states such as West Bengal and Kerala. It failed in other parts of the country. The reasons
behind failure were as follows:-
1. The entire process lacked bureaucratic as well as political will. It was mainly because the
Political Elite of the country which was responsible for formulating these laws and the
Bureaucratic Elite of the country which was responsible for implementing these laws
belong to the same landowning section of the society.
2. Even the concept of Benami Property came into existence. Under this in order to bring
down the land ceiling within the prescribed limit the surplus land was registered in the
name of such people who did not even exist.
3. Sometimes the landlords used to allocate some part of their land to the landless labourers
but the effective control over the land remained with the landlords only.
4. The part of lands given to the authorities, by the landlords were mainly barren lands.
Hence, even if such pieces of land were distributed to the tillers they were of no use.
The failure of the land reform measures in India resulted in agrarian unrest. It became a cause
behind conflict between the landlords and the landless labourers. All the agrarian movements
witnessed in India post independence can be seen as a result of the failure of land reform
measures.
Negative consequences of Green Revolution in India

In India M.S. Swaminathan is regarded as the father of Green Revolution. All over the world it
was Norman Borlaug, an American Agronomist who is regarded as father of Green Revolution.
Green revolution in India brought about revolutionary change in agricultural sector. The term
revolution has been used here in a symbolic manner. Under green revolution technology was
introduced in Indian agriculture and with the use of chemical fertilizers, pesticides, artificial
sources of irrigation, machines and tools etc. agricultural production was enhanced. However,
green revolution also had serious negative consequences. These negative consequences were as
follows:-
1. It resulted in capitalistic transformation of Indian agriculture. The cost of investment
increased due to use of technology. The large farmers were able to bear the cost easily.
However the small and marginal farmers had to borrow from the money lenders which
resulted in their indebtedness and finally land alienation was witnessed. It can be said that
green revolution resulted in economic disparity in the areas where it succeeded. The large
farmers were able to maximize the profit whereas the small and marginal farmers were
completely ruined.
2. Green revolution succeeded only in few areas such as Punjab, Haryana, Western UP and
Coastal Andhra Pradesh. It failed in other parts of the country. Hence it became a reason
behind regional disparity in rural India.

3. The areas where green revolution succeeded become overwhelmingly agrarian. Hence they
lagged behind in the process of industrialisation. Agriculture suffers from the law of
diminishing return, hence it can never provide sufficient employment opportunities. Due to
low industrialisation the rate of unemployment increased in these areas. It lead to youth
unrest which was one of the most important reasons behind and drug addiction in Punjab
and even the Khalistan movement.
4. Because of green revolution in these areas agriculture became the most important activity.
Hence, land became the most important asset. In order to prevent fragmentation of land, joint
families were given preference. Indian society has been a patrilineal society under which
property is transferred from the father to the son. (Only the Amended Hindu Succession Act
has ensured the daughter’s right over father's property.) Hence in joint families land was to
be transferred from the father to the son. The preference for male child increased and the
importance of daughter declined. The daughter became and economic burden because of
which female infanticide increased in these areas. These areas still have highly adverse sex
ratio.
5. Green revolution encouraged production of rice and wheat. Due to which other food grains
were ignored.
6. Excessive use of chemical fertilizers, pesticides affected the fertility of the soil and it also
resulted in water and soil pollution.
7. Excessive use of groundwater for the purpose of irrigation affected the water table.
8. Accumulation of water on the surface of land for cultivation of rice leds to emission of
methane, which is a cause behind global warming.
Failure of Green Revolution in the Eastern States

The Green Revolution mainly failed in the eastern states like Bihar, Assam, West Bengal etc.
This was due to the following reasons:-
1. Absence of artificial irrigation facilities.
2. Lack of visionary political leadership and bureaucracy.
3. Continuity of natural calamities like floods.
4. High level of illiteracy among farmers.
5. Land fragmentation, which made agriculture less profitable.
6. Due to the poor economic condition of the farmers they were unable to invest in
agricultural machinery and advanced practices of agriculture.
7. The problem of Naxalism in states like Bihar, Jharkhand and West Bengal and Separatism
in Assam.
8. Negative mentality of people due to which they do not work hard at home while when
outside they are the hardest workers.
Minimum Support Price (MSP)

The concept of MSP was introduced by the centre in 1965. For this purpose Agricultural Price
Commission was the set up in the same year. It was later renamed as Commission for
Agricultural Cost and Prices (CACP) in the year 1985. Under MSP, the minimum price at which a
particular agricultural product will be procured is decided even before the sowing season. This
minimum price has to be paid by the government agencies as well as the private agencies, while
procuring that particular agricultural product. The cost at which the product has to be procured
can be equal to the MSP or can be higher than the MSP but it cannot be lower than the MSP. It
is the CACP which recommends MSP, but it is implemented by the Cabinet Committee on
Economic Affairs (CCEA).
MSP serves as a kind of economic security for the farmers. Even if production is high the price
may not fall below the MSP. It encourages the farmers to produce more and more.
In the budget 2018-19 it was declared by the government that the MSP over agricultural
products will be 50% higher than the cost of production. At the same time it was also decided
that the cost of production will be calculated on the basis of A2 + FL. There are three different
ways in which cost of production can be calculated. It can be A2, A2 + FL or C2. A2 includes all
the direct expenses such as cost of seeds, fertilizers, pesticides, labour, fuel, transportation etc.
However it is a possibility that the marginal and the small farmers may not be able to hire labour
and may use their family labour. A monetary value of family labour is derived and is termed as
FL. Hence A2 + FL also include the cost of family labour. C2 is known as comprehensive cost. It
includes A2, FL and even the burden of interest payment over the farmers. Out of the three at
present A2 + FL is taken as the basis.
However, MSP also has a certain drawbacks. Even if the production remains high the price may
not come down. Due to continuously increase in MSP the inflation will remain high as well. It
affects the consumers. At the same time if government agencies buy the agricultural products at
an increased MSP to distribute at a subsidized price through Public Distribution System then
the financial health of the government gets affected. It increases the fiscal deficit. The benefit of
MSP is generally taken by big farmers of sates like Punjab, Haryana, Western UP. So it leads to
economic and regional disparity. Political influence is also witnessed in estimation and
declaration of MSP.
MSP also has other negative consequences. The government implements MSP over 23
agricultural products. It comprise 7 cereals (paddy, wheat, maize, sorghum, pearl millet, barley
and ragi), 5 pulses (gram, tur, moong, urad, lentil), 7 oilseeds (groundnut, rapeseed-mustard,
soyabean, seasmum, sunflower, safflower, nigerseed), and 4 commercial crops (copra,
sugarcane, cotton and raw jute). The perishable items such as fruits and vegetables are not
included in it. So the farmers may resort to production of only those agricultural products over
which MSP is applicable. The other agricultural products are completely ignored due to this.
Over sugarcane MSP is not applicable. In case of sugarcane State Advised Price- SAP is
applicable. It is decided by the states where sugarcane is produced. This price has to be paid to
the farmers buy this Sugar Mills, while procuring sugarcane. However during election season in
order to please the farmers SAP has been increased continuously. This affects the financial
health of sugar producers. Hence in 2009, the central government introduced the concept of Fair
and Remunerative Price- FRP. If the SAP is higher than FRP, the sugar mills had to pay FRP to
the farmers whereas the difference between SAP and FRP was to be paid to the farmers by the
state government. However it was protested by the state governments and the centre made it
optional. Now the FRP is announced but its implementation is optional for the states. They may
or may not implement it.
In her budget speech, the Finance Minister told that in the financial year 2021-22, wheat and
paddy were bought from 163 lakh farmers under the MSP. For which direct payment of 2.37
lakh crores has been made to the farmers’ account.
Public Distribution System (PDS)

PDS was introduced in India for the first time by the British government in 1939. However it was
named as rationing system. It was a period of Second World War, because of which the price of
wheat and rice were continuously increasing. Hence in order to make these two commodities
available to the general public at an affordable price rationing system was introduced. However
once the Second World War was over the rationing system was discontinued.
Post independence the same system was introduced by the government in the name of PDS.
During the first five year plan only rice and wheat were made available at a subsidized price
under this system. Gradually other essential commodities like sugar, kerosene oil, coal etc. were
added to the list of items.

In India even after independence the socio economic condition remained adverse. Income
disparity was widespread. People were suffering from poverty and starvation. Hence in order to
reduce the impact of poverty PDS was used as an instrument. It ensured the availability of
essential commodities at subsidised price.
However these subsidies make the people dependent upon the government. It also affects the
financial health of the government. In India under PDS three different entities are involved
1. The central government
2. State governments
3. The PDS stores
It is the responsibility of the centre to make these essential commodities available at a
subsidized price. The cost of transportation, storage within the state and the margin of the PDS
store has to be borne by the states.
It is the Food Corporation of India- FCI, which is responsible for procuring rice and wheat from
the farmers. When the production is high wheat and rice are procured by the FCI at the MSP.
Through this the FCI increases its buffer stock in those years when the production remains high.
The buffer stock is created with two objectives. First of all in order to ensure availability of wheat
and rice through PDS at a subsidized price and secondly to ensure availability of wheat and rice
in adequate quantity in open market when the production remains low. The cost of procurement
is borne by the centre.
Kerosene oil through PDS is made available at a subsidized price by the oil marketing
companies. For this, they are again compensated by the centre. In order to compensate the
downstream oil companies, some part of profit of upstream and middle stream oil companies is
taken away by the central government.
Coal India limited is responsible for distributing coal at a subsidized price. Coal India limited is
also a central public sector undertaking. Hence even this cost is ultimately borne by the centre.
In order to distribute sugar at a subsidized price the sugar producers in India have to set aside
10% of their total produce. It is termed as levy sugar. It is procured by the centre at a price lower
than the market price. Although through this process, the centre is able to save some money.
But it causes loss to the sugar producers.
Pulses and edible oil are not regularly supplied through PDS. Only in those times when the price
of these two commodities starts going beyond the reach of consumers their import is increased
and they are supplied through PDS at a price at which goverments incurs no profit no loss.
PDS can be of two different types
1. Targeted PDS (TPDS).
2. Universal PDS (UPDS).
In case of Targeted PDS, the benefit has to be provided only to a particular category of people. In
this the beneficiaries are identified on the basis of socio-economic conditions and the benefit of
PDS is provided only to them. On the other hand Universal PDS is that PDS under which every
member of the society is covered irrespective of their socio-economic condition. Both these
systems have their own advantages and disadvantages. In case of TPDS it becomes difficult to
set a benchmark based on which the beneficiaries can be identified. In such situation it is a
possibility that some actual beneficiaries may be left aside. However it saves resources. On the
other hand UPDS ensures that not even a single beneficiary is left behind. However under this,
even those may derive the benefits, those who do not actually deserve it. It leads to wastage of
resources.
India is a food sufficient country but it is yet to become a food secure. Hence in order to ensure
food security, Food Security Act was passed in 2013. Under this 50% of the urban population
and 75% of the rural population has been given the benefits. It is a form of TPDS. It means that
it is not available to all. However the scheme is not confined only to the people below poverty

line. Under this scheme 5 kg food grains is made available to each member per month. It is up to
the individual and the family, whether they want rice, wheat or coarse grain. Rice is made
available at a rate of 3 rupees per kg, wheat at 2 rupees per kg and the coarse grains at 1 rupee
per kg. The Antyodaya Anna Yojana which provides 35 kg of food grains per family per month to
the poorest of poor family has been merged with the food security act. Keeping in mind the
female empowerment, ration card under this scheme is issued in the name of the eldest female
member of the family, who should be at least 18 years in age.
PDS in India has not been a great success. It suffers from a number of drawbacks. First of all
proper coordination between the centre- states and the states- PDS stores remain missing. FCI
which is responsible for procurement, storage and distribution of rice and wheat has been
inefficient. Sometimes inferior food grains are procured. The quantity supplied to the
transporters may be less than what is mentioned. Huge part of the food grains is wasted due to
lack of a proper storage facility. A large part is damaged buy rodents. Even in the process of
transportation theft and diversion is a common problem. The problem of fake ration card and
black marketing of these essential commodities are serious issues. Because of these issues a
number of solutions are being adopted.
Widespread use of technology can be seen. For example- end to end computerisation, installation
of CCTV cameras for surveillance, GPS fitted vehicles for the purpose of transportation are being
used. PDS is being gradually transformed into e-PDS in which biometric ration cards and
impressions are being used. Ensuring participation of local people may be useful. Direct benefit
transfer may also be of great help. Regarding PDS Chattisgarh model has been commendable.
In the year 2020, the finance minister announced 1.7 lakh crore worth of relief package under
Pradhan Mantri Gareeb Kalyan Yojana. During the fight against Covid pandemic Pradhan Mantri
Gareeb Kalyan Anna Yojana was launched under this package. Under this, extra 5 kg of free food
grains and 1 kg of pulses were given to the 80 crore ration card holders. The timeline of this
scheme was expanded many times. In january 2023, this PMGKAY has been merged with PDS.
Budget 2023-24 announced that 5 kg food grains will be given free of cost to all Antyodya and
PDS family till 31 dec 2023.
Electronic - Point of Sale (E-POS) and One Nation One Ration Card
Under PDS, machines with biometric identification are being provided to all fair price shops.
Along with this, the Aadhaar cards of the beneficiaries are being linked with their ration cards.
This ensures that only the actual beneficiaries are getting the benefit and no one else is taking
their share. This will make PDS more effective and transparent.
The concept of 'One Nation One Ration Card' is related to the concept of E-POS. Both these
platforms are based on IMPDS. It means Integrated Management - PDS. This will ensure inter-
state portability or usage of ration card. If a beneficiary migrates to another state, still he will be
able to use the same ration card in that state too. This will mainly help the migrant laborers and
their families. A migrant can get food grains up to 50% of the approved quota for his family
through this. Under this, a person can get only subsidized food grains supported by the central
government. It has been implemented across the country since July 2020.
Many reforms have been introduced from time to time to make the PDS and Food Security Act
more effective. For example, during the COVID-19 pandemic, the Center directed all states to
include all persons with disabilities in the Food Security Act. Section 38 of this Act empowers the
Center to give such directions to the States and Union Territories.
Model Agriculturel Produce Market Committee (APMC) Act 2003 and

the amendments done in 2017
In agricultural sector in India construction of Mandis and formation of rules regarding it have
been the responsibilities of the states. Hence the parliament can only pass in model act in this
regard. Based on this model act the states can pass there own act.
Model Agriculture Produce and Market Committee Act 2003 was passed by the centre. A number
of states followed it and passed their separe laws. Based on this more than 6000 Mandis were
established throughout the country.
The Model APMC Act provided for establishment of such mandis, through which the farmers can
sell their agricultural produces directly to the buyers. According to the model act middleman
should not be used in the entire process. The mandi was to be set up by the state government
but it was to be managed and maintained by the farmers. For this purpose office bearers were to
be elected directly by the farmers. In the election only those farmers were allowed participate
who were associated with that mandi. The farmers belonging to an area which comes under the
purview of that particular mandi can sell their product only through the same mandi. Even a
farmer may sell his agricultural products even without using mandi, but after that he may not
be able to participate in the election of the mandi.
Mandi should have all the facilities i.e., it should have godowns, cold storages, post offices, police
stations, auction hall, weighing machines etc. All these facilities can be availed by the farmers.
Although the concept was good enough but the APMC act passed by the states was not same as
the model act. Many states appointed commission agent officially. In a number of states Mandi
tax was imposed. In order to use any facility including godowns, cold storages and even weighing
machine etc. the farmers had to pay. Because of these charges ultimately the farmers were not
even able to recover an amount equal to the MSP. Hence in 2017 the model APMC act was
amended again. Now the act was named as Agricultural Produce and Livestock Market
Committee Act. It means that along with agricultural products now even livestocks can be
bought and sold through these mandis. Private investment was allowed in the process of
construction of these mandis. The mandi tax has been fixed. In case of sale of fruits and
vegetables, the mandi tax will be applicable at a rate of 2%, whereas in case of food grains it will
be applicable at the rate of 1%. The commission of the commission agents has also been fixed at
a rate of 2%.
The aim of doubling farmers' income

The government aims to double the income of farmers. For this purpose, the government is not
only formulating policies related to increasing production, but is also emphasizing on increasing
the income of farmers through other policies. However, the objectives can be achieved only by
the effective implementation of these policies. In this context the following steps have been taken
and can be taken:-
1. By reducing dependence on agriculture through creating opportunities in other sectors. If
dependency decreases, income will automatically increase.
2. By linking the food processing industry with agriculture not only opportunities will be
created but the income of the farmers will also increase. For this purpose, Mega Food Parks
are being set up under the Pradhan Mantri Kisan Sampada Yojna.
3. Animal husbandry can be encouraged as a supplementary economic activity along with
agriculture. It does not require separate infrastructure. At the same time, it reduces the
uncertainties related to agriculture by generating additional income. For this purpose, the
National Livestock Mission was started. A scheme was introduced to provide Kisan Credit
Card to 1.5 crore milk-producing farmers.
4. The objective of Per Drop More Crop can be achieved through the development of irrigation
facilities in areas highly dependent on monsoon.
5. To ensure that farmers get a fair price for their agricultural produce, the system of MSP has
been started and now it has been increased to 1.5 times of the cost of agriculture.
6. An effective insurance policy in the form of Pradhan Mantri Fasal Bima Yojna was
introduced to ensure financial security and to overcome the challenges related to
agriculture. In the year 2020, it has been modified as Pradhan Mantri Fasal Bima Yojna
2.0.
7. The Model Contract Farming Act was passed in 2018 to increase the income of farmers.
8. Bamboo which is known as green gold, was recognized as grass if it is grown outside the
forest. It will be another source of income for farmers.
9. Rural haats are also being converted into mandis to ensure the availability of an adequate
number of mandis for the farmers. Simultaneously, the concept of e-NAM is also being
implemented. Linking 1000 new mandis with e-NAM was announced in Budget 2021-22.
10. It was announced in the Budget 2022-23 that Indian Railways will create new products to
develop efficient logistic services for small and medium enterprises and small farmers.
11. The government in the budget told that a fund of blended capital raised under co-
investment model would be facilitated through NABARD. It will provide finance to such
agricultural and rural startups which are working in farm produce value chain system. The
activities of these startups should include support to FPOs, machinery on rent for farmers
and IT-technology based support etc.
12. According to the Finance Minister, 5-7% biomass obtained from agricultural residues will
be used in thermal power plants resulting in reduction of CO2 emissions of 38 million
metric tons annually. This will provide additional income to the farmers, job opportunities
to the local people as well as solve the problem of stubble burning in the agricultural fields.
This years budget provides various provisions in this direction. They are as follows:-
Pradhanmantri Kisan Samman Nidhi Yojana

This scheme was proposed under the interim budget 2019-20 presented by the government.
However the scheme had been made effective retrospectively from 1st December 2018. Under
this scheme the government is providing a fixed income of rupees 6000 per year to the every
farm households. Earlier it was only for the farmers having upto 2 hectares of land. The amount
is being transferred in three different installments of 2000 each at a gap of 4 months. Budget
2023-24 says that till now 2.2 lakh crore to 11.4 crore farmers have been transferred.
Pradhan Mantri Fasal Bima Yojana 2.0
Whenever a new policy is implemented, its success depends on its popularity. Popularity can be
achieved by making people aware. Only when a policy is implemented, its shortcomings are
exposed over time. These shortcomings have to be rectified from time to time for the policy to be
successful. Although the Pradhan Mantri Fasal Bima Yojana, which was launched in 2016 has
been a successful scheme. But Pradhan Mantri Fasal Bima Yojana 2.0, announced in February
2020 tries to overcome the shortcomings of the earlier scheme.
In this revised scheme, the Pradhan Mantri Fasal Bima Yojana has been made completely
voluntary. This means whether a farmer takes a loan under Kisan Credit Card (KCC) or not, crop
insurance has been made optional for him. This has been done on the demand of the farmers.
Due to the availability of adequate irrigation facilities in areas like Punjab and Haryana, the
challenges related to agriculture are less. Hence crop insurance is not required in these areas.
But under the previous scheme, if these farmers used Kisan Credit Card (KCC) to take the loan,
then it became mandatory for them to take the crop insurance. In many cases, farmers who used
KCC were not even aware that they would have to pay the insurance premium in the process of
loan repayment. This premium was automatically added to the principal amount. Therefore now,
this provision in the scheme has been made optional.
When this benefit was given automatically on taking a loan with the help of KCC, then no
separate paper or certificate was given to the farmers regarding insurance cover. Therefore, in
the event of the closure of the insurance company, it used to become difficult for the farmers to
take legal action against that company.
Under this restructured Pradhan Mantri Fasal Bima Yojana, 6-7 districts are being linked to
make a cluster. For the selection of insurance providers by the government, a tender for 3 years
is being floated. Therefore, to increase their business, insurance companies will have to spread
awareness among the farmers.
Here too, the farmers will participate in the premium payment like in the earlier scheme. This
share will be 2% for Kharif crops, 1.5% for Rabi crops, and 5% for Horticulture and Commercial
crops. The remaining premium amount will be paid by the Central Government and the State
Government. Both of them will pay 50-50% of the remaining premium. In this restructured
scheme, wide exemptions have been given to the states. If a state does not give its share on time,
then that state will not be given the benefit of the scheme in the next season. Therefore, it
becomes obligatory for the states to make timely payments. Insurance companies will now have
to compulsorily spend 0.5% of the total premiums deposited in information, education and
communication activities.
Food Processing in India

Food processing refers to modifying a raw food into a new form with an objective of value
addition. For example corn can be modified into popcorn, milk into ice cream and so on.
Food processing can be done with respect to five different types of food items:-
1. Food grains
2. Fruit and vegetables
3. Milk
4. Poultry products
5. Beverages
With respect to production of processed food India is at the 5th place in the world. Even with
respect to consumption and export of processed food, India is at the 5th position only. However
the scope with respect to food processing industry remains very high in the country. At present
only 2% of the total raw food produced is processed in India. However, this 2% of processed food
contributes 32% of the total final value of food produced in India. This sector has a share of
11.6% in the total employment of India. The sector is the thirteenth largest recipient of FDI in
India. At 2011-12 prices, this sector contributes 9.87% in the Gross Value Added (GVA) of
manufacturing sector and 11.38% in agriculture sector’s GVA. It shows that the scope of value
addition is enormous. According to CII in next 10 years India is expecting for an investment of
approx 33 billion dollars in this sector. Out of all the raw food processed in India maximum
processing is done with respect to milk. Out of the total milk produced in India 30% is
processed.
At present the government in India is serious about the possibilities associated with food
processing in the country. This is why there is a separate ministry for food processing industry.
The scope in this regard remains high mainly because of following reasons:-
1. India is an overwhelmingly agrarian society. The dependence on agriculture remains high.
Food processing industry may become complementary to agriculture in India. Agriculture
may ensure availability of raw material as input to these industries. It may help in
industrialisation of rural parts of the country.
2. India has sufficient human resources, which can be trained in order to fulfill the need of
food processing sector. It will reduce the disguised unemployement in agriculture sector.
3. With respect to climatic conditions India is highly diversified. Therefore almost every type of
flora and fauna can be seen in India.
4. With respect to livestocks, India is at the top most position in the world.
5. With respect to production of milk, India is again at the 1st position.
6. With respect to production of food grains the country is among the top three producers of
the world.
7. With respect to production of fruits and vegetables India is at second position.
8. With respect to production of a spices India is again at the top.
Although the condition are conducive enough, food processing in India suffers from the problems
related to Backward-Forward Linkages. It can also be termed as problems associated with
Upstream-Downstream Management or Supply Chain Management. Upstream-Downstream
management refers to connecting the point of production of raw material to the point of
consumption. It not only includes production and consumption of raw materials but also
includes its preservation, transportation, processing, packaging and marketing.
Even the Multinational Companies which invest in this sector in India remains apprehensive
because of these problems. Hence most of the times, instead of investing in processing, they
confine themselves only to marketing. These products are produced by local producers. After
quality assessment, branding is done and finally marketed by the MNCs. However such foreign
investment may not be stable.
In order to get rid of these problems the government came out with a scheme known as Pradhan
Mantri Kisan Sampada Yojana. Here SAMPADA stands for Scheme for Agro Marine Processing
And the Development of Agro processing clusters. The scheme was introduced in 2016.
PM Kisan SAMPADA Yojana is a comprehensive package which will result in creation of modern
infrastructure with efficient supply chain management from farm gate to retail outlet. It will not
only provide a big boost to the growth of food processing sector in the country but also help in
providing better returns to farmers and is a big step towards doubling of farmers income,
creating huge employment opportunities especially in the rural areas, reducing wastage of

agricultural produce, increasing the processing level and enhancing the export of the processed
foods. It has 7 important objectives.
1. Establishment of Mega Food Parks.
2. Integrated Cold Chain and Value Addition Infrastructure.
3. Creation and Expansion of Food Processing and Preservation Capacities.
4. Infrastructure for Agro Processing Clusters.
5. Creation of Backward Forward Linkages.
6. Food safety and quality assurance infrastructure.
7. Human Resources and Institutions.
Since raw materials which are used in food processing industry are perishable, their
preservation becomes a major challenge. Even the processed food may not last for very long.
Hence the supply chain management has to be made effective. In this regard the Mega Food
Parks and the Supermarkets play an important role. Mega Food Parks are food processing
centres with all the facilities needed for food processing activities. Even the government
contributes in their establishment. In order to set up a Mega Food Park, minimum 50 acres of
land is required. In plain areas, setting aside the value of land, out of total investment the
government contributes 50 crore rupees or 50% of the total investment whichever is lower. In
case of a hilly area setting aside the value of land to government's contribution is either 50 crore
rupees or 75% of the total investment whichever is lower. The Supermarkets help in connecting
the Mega Food Parks with the consumers.
Model Contract Farming Act-2018

Just like model APMC act passed in 2003 and modified in 2017, the central government came
out with Model Contract Farming Act 2018. Since agriculture is a part of state list, only the
states can formulate laws regarding agriculture. So, the centre passed the model law. This Model
Act was not regulatory in nature, it was just a guiding principle based on which the state had to
pass their own contract farming act, in their respective assemblies. Hence, this model act only
served as a blueprint.
Contract farming so far is not very popular in India but it is gradually being popularised. It
serves as a kind of security for the seller (farmer) as well as the buyer. In contract farming the
farmer and the buyer sign an agreement even before the cultivation takes place. Under this
agreement a part of the produce or the total produce is to be bought by the buyer at pre-decided
price. Because of such agreements the farmer is financially secured as he needs not have to
search a buyer for his produce. The buyer who may be an individual or even an organisation is
protected from any kind of price fluctuation or from any uncertainty related to availability of
product in the market.
The model contract farming act had following important provisions:-
The Act considered the farmers to be the weaker entity in between the seller and the buyer.
Hence the policies were inclined towards the farmers and were concerned about their safeguard.
Farmers Produce Organisations (FPOs) which are association of a number of local farmers were
to be promoted. An individual farmer or any such organisation was to be a party to the
agreement.
1. For online registration of such agreements, officers will be appointed at block level,
district level and so on.
2. The agreement will cover provisions related to pre-production, during production as well
as post-production phase.
3. The buyers will have to buy the entire agreed amount of the produce under the contract.
4. It will not only include agricultural products but also livestocks.
5. Even after such agreements, if agricultural insurance cover is availed, then it will remain
valid. The buyer cannot erect any permanent structure on the land of the farmer.
6. In any case the buyer will have no right over the land of the farmer.
7. A dispute redressal mechanism has to be developed which should be simple.
8. This contract farming will remain outside the purview of APMC Act.
Agricultural Laws: Controversies and Requirements

For the last several years, many important steps are being taken by the government to reform
the agriculture sector and double the income of the farmers. In this sequence, in June 2020, the
government issued three ordinances. Later in September 2020 three laws were passed to give
statutory recognition to these ordinances. These laws are as follows:-
1. Farmer Produce Trade and Commerce (Promotion and Facilitation) Act, 2020
2. Farmers (Empowerment and Protection) Agreement on Price Assurance and Agricultural
Services Act, 2020
3. The Essential Commodities (Amendment) Act, 2020
Under the First law, provisions have been made that farmers can now sell their produce outside
the APMC mandis or other notified markets. This law proposes barrier free intra-state and inter-
state trade of agricultural products. Even electronic trading of notified agricultural products is
being encouraged by the act. It also prohibits the imposition of any kind of charges or duty on
business outside the APMC.
Opponents of this law argue that it will end the significance of APMC mandis. The trade outside
APMC can lead to exploitation due to the absence of any regulation. They are also concerned
about the prices of agricultural products falling below the MSP. Many state governments are
concerned about the loss of revenue from taxes, previously levied on APMC mandis. On the other
hand, the central government views it as a new option and freedom of sale given to the farmers.
With the implementation of this law the farmers will get rid of the exploitations of the licensed
middlemen and various mandi taxes. The concept of 'One Nation One Agriculture Market' will be
realized through inter-state and online trading. This new law does not repeal the APMC Act.
Hence, it will also encourage reforms in APMCs.
The second law supports agriculture based on an agreement between farmers and private
companies. It is known as contract farming. It provides an agreement for agricultural produce or
animal husbandry. It contains the following provisions:
 The price should be clearly mentioned in the agreement.
 There should also be a provision for a guaranteed price plus an additional amount over and
above that price, especially for the products whose price fluctuate.
 Provision has also been made for the establishment of a Conciliation Board for dispute
resolution.
 This law determines the payment liability of the company and prevents the company/
individual from making any permanent changes in farmer’s land ownership rights or in
land through settlement.
Critics argue that the Indian farmers are not capable of the judicial battle against private
companies. Nor are they able to understand the hidden provisions of these agreements. This law
has kept the civil courts out of this entire system, which is another cause for concern. The other
doubt in the minds of critics is that this law will pave the way for the end of the MSP system.
Another reason is the absence of a clear mechanism or regulatory regime for product pricing.
On the contrary, the central government expects many benefits from this law. This will eliminate
the risk of market volatility for the farmers. This will lead to the incorporation of new technology
in the agriculture sector and an increase in research and investment. Farmers will be freed from
the marketing cost. A clear time-frame-based dispute resolution mechanism will enable quick
resolution. Contract relations will develop between producers and entrepreneurs, which will
boost the economic development of the country.

Through the third law, certain amendments have been made to the Essential Commodities Act of
1955. This Act of 1955 empowers the Central Government to regulate the production, trade and
storage of certain commodities by declaring them as essential commodities. Through this, the
availability of these goods to the common consumers at reasonable prices is ensured. Now there
will no longer be any limit on the storage of agricultural produce under the amended law. In case
of high inflation, when the retail price of horticulture produce will increase by 100% and the
retail price of non-perishable agricultural food products by 50%, only then the government will
impose a stock limit.
However, a section of the population believes that this will give legal support to hoarding and
black marketing. This will create a hindrance in the food chain of the country and an increase in
prices. At the same time, the government argues that this will attract private investment in the
construction of infrastructure like cold storage facilities, godown, etc. It will reduce the wastage
of agricultural products. The relaxation of storage will reduce the fear among traders, which will
increase agro-processing and agricultural exports.
In November 2021, Prime Minister Narendra Modi announced in an address to the nation that
the government had decided to repeal all three farm laws. He said that his government could not
convince a section of farmers on the merits of the new farm laws. Later, in the winter session, in
December 2021, Parliament passed a bill and abolished all the three farm laws.
Kisan Rail and Krishi Udaan Scheme

With respect to agriculture in India, transportation is another major issue especially regarding
perishable items such as fruits and vegetables. There are regions in India which produce surplus
and there are areas which have huge deficient of food products. Hence, connecting the food
surplus regions with the food deficient ones will not only reduce hunger, it will also prevent
wastage of perishable items. This will also enhance the income of the farmer. Kisan Rail and
Krishi Udaan scheme which were introduced in the budget 2020-21, have the same objective.
These are being implemented in phased manner.
Under Kisan Rail scheme the Indian Railways will operate a dedicated express train with
refrigerated coaches, in order to transport perishable items such as fruits and vegetables. It will
also have other normal coaches for transporting other non-perishable agricultural products. As
compared to roadways, through this time as well as money can be saved. There is no minimum
or maximum amount of consignment which can be booked by farmers. It may be as low as 50
kg. In case of loss of the commodities, a compensation mechanism has been developed. The first
Kisan Rail was made operational between Deolali (Nashik) and Danapur (Bihar).
Krishi Udaan scheme also has the same objective. However it has been launched by Ministry of
Civil Aviation. Under this scheme through airlines remote areas of domestic market will be
connected for the purpose of transportation of agricultural products. For Example- North eastern
states of India. Through this scheme even international destinations will be connected, which
will boost export of agricultural products and the income of the farmers.
Subsidies in Agriculture
Subsidies can be defined as financial assistance provided by the government in order to ensure
availability of essential goods and services at a price below the market price to the consumers.
Subsidies have always been used as an important tool in order to reduce the impact of poverty
over the general consumers. They can be classified into two important types:-
1. Indirect subsidies
2. Direct subsidies
In case of indirect subsidies the benefit is provided by the government to the consumers or the
beneficiaries but the payment is done by the government to someone else. For Example prior to
the scheme of Direct Benefit Transfer- DBT, even in case of LPG cylinders indirect subsidies were
given. The consumer was provided cylinder at a subsidized price but the payment was done by
the government to the oil marketing companies. Indirect subsidies may lead to misuse of
resources. It is mainly because all the beneficiaries may not be real.
On the other hand in case of direct subsidies the benefit of the subsidy reaches the consumer. At
the same time even the payment is made by the government to be beneficiary directly. For
Example -in case of Direct Benefit Transfer (DBT). Direct subsidies prevent misuse of resources,
which helps the government to reduce financial burden.
Even in agricultural sector subsidies have always been used by the government as a tool to
support the farmers. The centre and the states, both provide subsidies in agricultural sector.
However most of the subsidies are indirect subsidies. Because of this diversion of resources is
still a common problem in this sector. The centre and states provide subsidy to the farmers, with
respect to payment of a premium over crop insurance through scheme such as, Pradhanmantri
Fasal Bima Yojana. In case of loan through Kisan credit card and interest subvention is provided
as subsidy by the centre. Even on urea which is a nitrogenous fertilizer, subsidy is provided by
the central government. On the other hand the states provide subsidy on seeds, electricity etc.
PDS and Food Security Act can also be seen as subsidies related to agriculture but they are not
for the farmers but for the consumers.
Although subsidies are used as an instrument to support the farmers and to keep the cost of
agricultural down but they are meant for consumption eventually. Such subsidies are consumed
every year and the farmer will require them again and again. The subsidies have made the
farmers in India dependent rather than independent. These subsidies have continuously
resulted in increase in financial burden over the government. Because of which the government
has failed in the process of capital formation in agricultural sector.
In the interim budget 2019-20 this interest subvention on the use of Kisan Credit Card has been
extended even to animal husbandry and pisciculture. This interest subvention is of 2% and if the
repayment is done on time and additional interest subvention of 3% will be given.
The economics of Animal Husbandry

Animal husbandry is considered to be a part of the allied activities associated with agriculture. It
is an economic activity which can be conducted along with agriculture. Agriculture and animal
husbandry do not require separate infrastructure and can be done simultaneously without
affecting each other. Agriculture suffers from a number of uncertainties. Failure of Monsoon,
slight climatic change may affect agriculture instantly. Hence in such situation animal
husbandry serves as an alternative and become a source of additional income for the farmers.
That is the reason why, it is considered to be complementary to agricultural activities. Infact
through agriculture, availability of fodder can be ensured for animal husbandry and through
animal husbandry availability of of natural fertilizers can be ensured for agriculture. Therefore
they both are complementary to each other.
In order to strengthen animal husbandry as an important economic activity, in 2014 National
Livestock Mission was introduced. This mission had four important objectives:-
1. How to make agriculture and animal husbandry more and more complementary to each
other. To ensure the availability of fodder and natural fertilizers.
2. To protect livestock by enhancing their procreation.
3. To promote rearing of pigs in a North Eastern states.
4. To maximize use of technology in every possible way for the benefit of animal husbandry.

This mission has also yielded positive result and in terms of livestock India has achieved to the
top most position surpassing Brazil. In terms of climatic conditions India is a highly diversified
country. Hence it becomes a possibility to breed and rear almost every different type of livestock.
According to the Economic Survey 2021-22, the animal husbandry sector in the last five years,
has progressed at an annual growth rate of 8.15%. As per the latest Situation Assessment
Survey (SAS), this sector has emerged as a stable source of income for the agricultural
households. The animal husbandry sector contributes an average of 15% to the monthly income
of the farmers.
In the budget 2020-21, the concept of Sagar Mitras and Fish FPOs were introduced and it was
decided to promote these concepts. These Sagar Mitras are the rural youth living in coastal areas
of the country. Fish FPOs are just like the Farmer Producer Organisations related to agriculture.
The government had decided that with the help of 3477 Sagar Mitras and 500 Fish FPOs
production and export of sea food will be promoted, it will not only add to GDP of country but it
will also create new employment opportunities. Budget 2023-24 focus on launching a new sub
scheme of PM Matsya Sampada Yojana.
INDUSTRY
The economic activities in any country can be broadly classified into three different types:-
1. Agriculture and allied activities
2. Industries
3. Services
Industry can be further classified into:-
1. Manufacturing
2. Mining
3. Construction
The Economic activities in any society evolve from agriculture to industrial activities. Only after
reaching the peak of industrial activity, the economy moves towards service sector. In this entire
evolution, industry is highly labour intensive sector and it creates maximum employment
opportunities. Out of all these parts of industry, manufacturing is the most important sector.
However, in India even without reaching the peak of industrial activity, the economy shifted
towards service sector.
According to economic survey 2022-23, the share of Industry in India’s GVA is expected to be at
30%. The industry sector showed a double digit growth in FY 2021-22, with 10.3%. Due to Covid
pandemic the Industry sector showed negative growth in FY 2019-20 and 2020-21. The growth
rate estimate for 2022-23 is 4.1%.
With respect to Indian GDP an Output Gap is seen. It is the difference between the level of real
GDP and potential GDP. Potential GDP is an estimation of the amount of production the
economy would have generated if capital and labour had been used at their optimum level. This
estimated output should be achieved while maintaining a constant rate of inflation as well.

Shift towards Service Sector and the phase of Jobless Growth
Even without reaching the peak of industrial activities the economy started shifting towards
services because of the following reasons:-
1. Industrial activities are highly Capital Intensive, whereas services are not.
2. Industrial activities are highly Labor-Intensive, whereas services are not.
3. Industrial activities especially manufacturing and mining require large land acquisition. On
the other hand services don't require large pieces of land.
4. Profit margin in services is more as compared to manufacturing or any other industrial
activity.
5. Because of high number of English speaking population, Business Process Outsourcing
(BPO) industry florished in India.
6. Because of black money in the economy, the demand remained high leading to price rise.
High rate of inflation led to increase in GDP at market price.
7. Use of machines and tools replaced human resources. It again led to increase in production
but decline in employment opportunities.
8. The country failed to provide skill to the people. Because of which the dependency on
agriculture remained high and the people failed to engage themselves in other economic
activities.
So, service sector kept on adding to GDP but it failed to create sufficient employment
opportunities. Hence it was called a phase of jobless growth. According to the Economic Survey
2022-23, the contribution of industry to India's Gross Value Added (GVA) in the financial year
2022-23 is estimated to be arround 30%. In which the contribution of manufacturing is only
17.3%. Not only the contribution of industry is low but even the contribution of manufacturing
in Indian economy is also low. In a country like India the contribution of manufacturing in the
GDP should be more than 25%. In China the contribution of manufacturing in its GDP is more
than 40%.
Planning in India and related concerns
In India post independence the country was in the state of dilemma that in which direction it
should move. Hence after independence, planning was adopted as an instrument of directed
social change. For this purpose the Planning Commission was constituted and the Five Year
Plans were adopted as means. In planning socio-cultural goals were set up and even the means
to achieve these goals were prescribed.
Even before independence the country had started discussing the process of planning and its
nature. In this regard Bombay Plan was proposed, in which the industrialists such as G. D. Birla
J. R. D. Tata also played an important role. The Bombay plan suggested that India should not
try to become self-sufficient instantly. This approach was based on the way in which Japan
developed. It suggested that India should try to produce only those commodities in which it is
efficient. Such commodities should be exported throughout the world and foreign exchange
should be used to import other essential commodities. However, Post independence the Bombay
plan was not adopted.
India adopted Harrod-Domar Model in the first five year plan. Harrod and Domar were two
economists. They suggested that for any country to develop, capital and labour are the two most
important prerequisites. Since in a developing economy labour is in plenty but they lack capital,
so the government should play the role of an investor. This is what the government did in India.
In the absence of private investors, the government had to play the role of an investor. This led to
expansion of public sector. The government also had to invest because the private investors were
not willing to invest in those sectors where the profit was low. Also there was a sense of distrust
towards private investors.
Even after this the private sector survived in India and they were not completely thrown out of
the economy by the government. It was because the government itself lacked the resources and
expertise. The private parties were also allowed to continue because they had played an
important role in India's struggle for independence. So, India had to follow the Mixed Economic
Model of investment. It was a compulsion and necessity both. Mixed Economic stands for
coexistence of public and private investment both. Although we adopted mixed economy but the
tilt was towards public investment.
During the second five year plan India adopted Nehru-Mahalanobis approach. P. C. Mahalanobis
was a statistician. This approach is also regarded as a Trickle Down Approach. According to this
approach development should be done at a higher level the benefit of this development
automatically reaches the grass root level. For example- If large scale industries are set up small
scale industries will automatically flourish around it. This approach also suggested that India
should concentrate on becoming self-sufficient. Establishment of heavy industries were the focus
under this plan. As per this approach all the strategic sectors should remain under complete
control of the government. Hence a phase of Nationalisation was seen. This approach suggested
that India should remain closed for foreign investment and even Indian investors should not be
allowed to invest in any other countries. Because of these approaches the industrial sector in
India became public sector dominant which became a hindrance to development of Industrial
sector in India.
Factors which affected industrial development in India

Since the industrial sector was dominated by public sector companies, the problems associated
with the public sector companies affected the entire industrial sector. The problems were as
follows:-
1. Continuous interference of ministries affected the autonomy of the public sector
companies.
2. Inefficient leadership of the bureaucracy also affected the public sector companies.
3. The monopoly of the government in a number of sectors affected competition. It also
reduced efficiency.
4. The public sector companies also suffered from locational disadvantages. In order to
develop a region, industries were set up even without thinking that whether such
industries will be able to survive in that region or not.
5. In order to fulfill its social responsibility the government resorted to price regulation. This
price regulation also affected the profit of public sector companies.
6. The workforce of the public sector companies was also more than what was required.
Unwanted workforce was added in order to remain politically popular. Hence even the
burden of salaries affected the profit of the public sector companies.
7. Since the public sector companies were not able to upgrade themselves with new machines
and tools their Incremental Capital Output Ratio (ICOR) remained adverse. Incremental
Capital Output Ratio refers to that extra capital investment which is required in order to
increase the production by 1 unit. The less is the ICOR of a company the more efficient it
is. As compared to private sector companies, the ICOR of the public sector companies
always remained high which affected their economic health.
8. Even the adverse mentality of public sector employees affected the health of a public sector
companies.
9. Due to fear of Nationalisation, private investment remained low.
Measures adopted in order to improve the health of industries in India

Since the public sector and the private sector in India were not performing well, several
measures were adopted in order to improve their condition. Some of the important measures are
as follows:-
1. In 1987 Board for Industrial and Financial Reconstruction (BIFR) was constituted. The
main responsibility was to suggest that how a public sector company running in loss can
be reconstructed.
2. In 1991 India adopted LPG Model of development. This is stands for Liberalisation,
Privatisation and Globalisation. It was to ease rules related to business in India, to
encourage private investment in India and to open up the Indian economy for the entire
world.
3. National Disinvestment Commission was set up under the chairmanship of G.V.
Ramkrishna in 1996 to ensureprivatisation and disinvestment in public sector companies.
4. In order to provide financial autonomy to public sector companies in the year 1997 the
concept of Navratna and Miniratna was introduced. In the year 2009 the concept of
Maharatna was also brought.
5. In 1999 a separate Department of Disinvestment was set up. In the year 2016 it was
renamed as Department of Investment and Public Asset Management (DIPAM).
6. In order to prevent frequent interference of the government in the day to day working of
public sector companies the concept of Memorandum of Understanding was introduced.
Under this arrangement in the beginning of the financial year itself the public sector
company and respective ministry both set a target. If the company is able to meet the target
then on the basis of performance, the company is categorised into excellent, very good and
good. If the company is able to achieve the target the government will not intervene. The
government will intervene only if in case the company fails to achieve the target.
7. In order to give preference to the public sector companies in the process of procurement,
Purchase Preference Policy (PPP) was introduced. Under this policy, public sector
companies are preferred over private sector companies in the process of procurement. If a
department of the government or any other government entity is interested in procuring
something from a company and in the bidding process along with private sector companies
if a public sector companies are also involved then even if the public sector company quotes
a price which is higher but is within a range of 10% of the lowest bid then the public sector
company will be preferred over the private sector companies.
8. In order to reduce the workforce of public sector companies, Voluntary Retirement Scheme
(VRS) was introduced.
9. In order to enhance the percentage of manufacturing in Indian GDP, in 2011 under
National Manufacturing Policy the concept of National Investment and Manufacturing Zone
(NIMZ) was introduced. As a complementary to it, in the year 2014 the concept of Make in
India was launched.

10. In order to encourage investment in India and to promote export from India, Special
Economic Zone Act was passed.
11. Micro Small and Medium Enterprises are labour intensive and can create sufficient
employment opportunities. At the same time it is easier to set such enterprises, so MSMEs
are being promoted in India.
12. The Aatma Nirbhar Bharat Abhiyan can be seen in this regard only.
13. In the Budget 2021-22, the government declared National Disinvestment Policy.
14. In the Budget 2022-23, the government has announced the PM Gati Shakti National Master
Plan. Its objective is to promote infrastructure development in the country.
15. Budget 2023-24 announced an increase in capital expenditure on infrastructure
investment by 33 %. The 10 lakh crore capital expenditure on infrastructure is 3.3 percent
of GDP.
The concept of Maharatna, Navratna and Miniratna

In order to provide financial autonomy to the public sector companies, the concept of Navratna
and Miniratna was introduced in 1997. The concept of Maharatna was introduced later in 2009.
In order to categorise a company as Maharatna Company the following conditions have to be
fulfilled:-
 It should be a public sector company.
 It should be listed on the stock exchange.
 It should have a global presence.
 It should be an existing Navratna company.
 In last 3 years average annual revenue of the company should not be less than 25,000
crore rupees.
 In last 3 years average annual net worth of the company should not be less than 15,000
crore rupees.
 In the last three years average annual profit of the company should not be less than 5,000
crore rupees.
Maharatna company may do a capital investment of upto rupees 5,000 crore or up to 15% of its
net worth (whichever is less), in one financial year without seeking permission from the related
ministry. At present there are 12 Maharatna companies, they are as follows:-
1. CIL - Coal India Limited.
2. ONGC - Oil and Natural Gas Corporation Limited.
3. NTPC - National Thermal Power Corporation Limited.
4. BHEL - Bharat Heavy Electricals Limited.
5. GAIL - Gas Authority of India Limited.
6. SAIL - Steel Authority of India Limited.
7. BPCL - Bharat Petroleum Corporation Limited.
8. IOCL - Indian Oil Corporation Limited.
9. PGC - Power Grid Corporation of India Limited.
10. HPCL - Hindustan Petroleum Corporation Limited.
11. PFC - Power Finance Corporation.
12. REC – Rural Electrification Corporation.
Government of India accorded ‘Maharatna’ status to Power PFC in October 2021. Later in
September 2022 the status was accorded to REC.
In order to classify a company in the category of Navratna, following conditions have to be

fulfilled:-
 It should be a public sector company.

 It should be listed on a stock exchange.
 Out of the last five years, in any three years the company should be in the category of
excellent, very good, good based on the concept of MOU.
 Based on six different factors like profit, net value, income per share etc. a report card of
public sector companies is prepared. Company should be able to score at least 60% out of
the total score.
At present there are 14 Navratna companies. Navratna company may do a capital investment up
to 1,000 crore rupees in one financial year or up to 15% of its net worth (whichever is less),
without seeking permission from the related ministry.
For a company to be categorised as Miniratna company it should be:-
 A public sector company but listing on stock exchange is not essential.
 In the last three years the company should be in profit and during this period in none of
the year the companies net worth should be negative.
 Miniratna companies are again classified into two types:
o Miniratna Category 1 companies can invest an amount upto rupees 500 crore or up to
15% of their net worth (whichever is less) in one financial year, without seeking
permission from the related ministry.
o Miniratna Category 2 companies can invest in an amount upto rupees 300 crore or up
to 15% of their net worth in one financial year without seeking permission from the
related ministry.
Disinvestment and Privatisation

In a public sector company when the government retains the majority stake ownership as well as
management and sells only minority stake, then it is termed as Disinvestment. In
disinvestment government retains 51% or more shares of a company. On the other hand when
the government sells majority stakes (more than 51%) in a public company to a private company
transferring not only the management but also the ownership of the company, then it is termed
as Privatisation.
Both these tools are not only used to increase the revenue of the government or reduce the fiscal
deficit, but these tools are also used to fulfil some important policy based objectives. Through
disinvestment the government is not only able to raise funds but it also creates shareholders
which lead to transparency in the functioning of the company. Normally when the government
fails to run a company and a company continues to remain in loss then privatisation is used as
a tool. If the government lacks expertise and the future prospects of a company are not bright,
then also privatization is used as a tool.
Disinvestment and privatization are a part of the LPG model of development. For this purpose
Disinvestment Commission was constituted in 1996 under the chairmanship of G.V.
Ramkrishna. A separate Department of Disinvestment was set up in 1999. In the year 2005,
National investment fund (NIF) was constituted.
The capital raised through disinvestment and privatisation is maintained by the government in
NIF. The fund can be used only for specified purposes. The entire amount is divided into two
parts of 75% and 25%. The 75% part can be used by the government only for welfare schemes,
on the other hand the remaining 25% can be used for following purposes:
 For the purpose of expansion of public sector company.
 In order to buy back the sold shares of the public sector companies.
 For the purpose of expansion of Indian railway.
 For setting up metro rail services in different cities.
 For the purpose of providing fund to NABARD as well as EXIM Bank.
 To refinance the public sector banks.
 To provide fund to Uranium Corporation of India limited and Nuclear Power Corporation of
India.
In financial year 2008-09 because of the American recession, even the Indian economy was
affected to some extent. Hence it was decided that from 1st April 2009 till 31st March 2013, the
entire amount i.e., 100% of NIF will be used for welfare schemes. Again from 1st April 2013 the
same old arrangement has been adopted. The National Investment Fund has been made a part of
public account and hence in order to withdraw fund from it the government need not seek
permission from the parliament.
Strategic Disinvestment
Disinvestment is a process in which the government sells its stake in Public Sector
Undertakings. When the government transfers ownership or control of a government
undertaking to another entity, this process is called Strategic Disinvestment. The entity to which
the ownership or control is transferred can be another government entity or a private entity, but
most often this transfer takes place only to private entities. It can be considered as a form of
privatization, unlike normal disinvestment.
The Department of Investment and Public Asset Management (DIPAM), functioning under the
Ministry of Finance, has defined strategic disinvestment. According to DIPAM, transfer of 50% or
more stakes (as decided by the appropriate authority) and management control in a government
or central public sector enterprise comes under the purview of strategic disinvestment. DIPAM is
the nodal department for strategic disinvestment in India. However, NITI Aayog also supports in
identifying PSUs for this process.
Strategic Disinvestment Policy

The government has announced a strategic disinvestment policy in the budget 2021-22. The
Finance Minister said that the objective of this strategic disinvestment is to use the funds to
finance social sector and development programs and to introduce private capital, technology and
best management practices in public sector enterprises. It was announced in the budget that
this policy will lead a clear roadmap for disinvestment in all non-strategic and strategic sectors.
Fulfilling the commitments of the government under the Aatm Nirbhar package, the Finance
Minister talked about the disinvestment of the current central public sector undertakings, public
banks and public insurance companies. In the non-strategic sector, the government will get out
of all the businesses. The government will have its presence in only 4 major strategic areas,
these areas are:-
 Nuclear energy, Space and Defence.
 Transport and Telecommunications.
 Energy, Petroleum, Coal and Other Minerals.

 Banks, Insurance and Financial Services.
Apart from this, the central government will also encourage the states for disinvestment.
Rationalization of public sector undertakings will be possible with this disinvestment policy.
Also, the government's exit from the non-strategic sector will enhance competitiveness and
quality. The financial burden on the government will also be reduced by the disinvestment of
non-profit making companies.
Critics, on the other hand, contend that bridging the budget gap through disinvestment would
encourage a malpractise. Withdrawal of government will increase the private sector's
arbitrariness in several sectors. At the same time, the disinvestment process gets trapped in
administrative delays, indicating a lack of objectivity. Disinvestment of good enterprises will
reduce the government's long-term revenue. Furthermore, investment in loss-making businesses
is less appealing. As a result, appropriate pricing is unavailable.
National Investment and Manufacturing Zone- NIMZ

The idea of NIMZ was conceived under National Manufacturing Policy- 2011. It was aimed at
promoting manufacturing activities in India. NIMZ will be dedicated townships in which
manufacturing activities will be promoted. Along with manufacturing units, even colonies will be
set up for the people to live. Hence the services will automatically flourish there. It was decided
that for setting up a NIMZ, minimum 5000 hectare of land will be required. NIMZ will be green
field projects. It means that NIMZ will be set up in such pieces of land where nothing is in
existence. Different from Greenfield project, the Brownfield project refers to modifying or
dismantling an existing structure in order to set up a new structure. It was decided that through
NIMZ in next 10 years the contribution of manufacturing in Indian GDP will be increased to 25%
which was just 15 -16% at that point of time. It was also perceived that through NIMZ approx
hundred million job opportunities will be created in 10 years.
The government had decided that in order to set up an NIMZ world class infrastructure will be
provided to interested investors and single window clearance will be ensured in order to ease
investment. However, tax benefits will not be given. Initially it was decided that and NIMZ will be
set up around a dedicated freight corridor (Dadri to Jawahar Lal Nehru Port). However, the first
allotment of land for NIMZ was done in 2015 in Prakasam district of Andhra Pradesh.
The most serious challenge in case of setting up NIMZ is land acquisition. The second most
serious challenge is to encourage investment from domestic as well as foreign investors. The
banks in India are suffering from losses and even the corporates are facing adverse financial
situation. Hence foreign investment remains the only option.
In order to promote foreign investment and domestic investment in manufacturing sector Make
in India Programme as an initiative was adopted. It was started to complement the concept of
NIMZ. Make in India was also introduced to promote manufacturing sector. Under this initiative
India is being projected as a destination for investment in manufacturing activities. In order to
promote NIMZ as well as Make in India initiative, the country is trying to improve its ranking in
Ease of Doing Business Index published by World Bank. The announcement of Aatma Nirbhar
Bharat Abhiyan can also be linked to promotion of manufacturing sector in India.
There are some similarities and differences between SEZ and NIMZ.
Similarities-
1. Both are established as clusters of industrial entities.
2. Both are dedicated areas.
3. Both have the objective of increasing investment, trade and commerce.
4. Rules have been liberalized in order to promote both of them.
Differences-

1. SEZs are clusters in which infrastructure is developed for the purpose of setting up
businesses. On the other hand NIMZ are dedicated townships.
2. SEZs maybe Brownfield projects or Greenfield projects. Whereas an NIMZ will only be
Greenfield projects.
3. In a SEZ units related to service sector as well as manufacturing sectors can be set up.
Whereas NIMZ is dedicated for manufacturing only.
4. The units operating in SEZs are given tax benefits. Whereas the units operating in an NIMZ
does not get any tax benefits. The units operating in NIMZ are given relaxations related to
rules for investment.
5. Whatever is produced in SEZs, can only be exported and cannot be sold in domestic
market. Whereas whatever is produced in NIMZ can be sold in domestic market and can
also be exported.
New Economic Policy /Industrial Policy/LPG Model

In 1956 the economic policies which were formulated continued for long. Although the country
and economic conditions were changing but the policies remained the same. The existing policies
failed to fulfill the need of changing global and domestic conditions.
The East India Company had come to India in order to conduct the business but it ruled the
country for long. So the country was a scared. Foreign investment in the country remained
restricted under Nehru- Mahalanobis approach. Since India was not self-sufficient, its import
remained higher as compared to the export. For this India had to borrow foreign currencies in
order to bridge the gap. In order to repay the loan, the country had to borrow again. It became a
situation of debt trap. Because of not having enough foreign currencies, India fell into Balance of
Payment Crisis in 1990-91. This situation compelled India to borrow from IMF.
However, when IMF lends to a member country, it imposes a number of conditionalities. These
conditions are imposed so that the country does not face the same problem in future again.
Under these conditions Liberalisation, Privatisation and Globalisation are the most important
instruments. Hence based on this, India adopted New Industrial Policies in 1991. It was a
compulsion as well as a necessity for India. These policies were termed as LPG model of
development. It was also termed as Rao- Manmohan model of development.
The main objectives of the new policy were as follows:-
1. To prevent Balance of Payment Crisis situation in future.
2. To ensure inflow of foreign investment, so that the foreign exchange reserve remains
healthy.
3. To ensure Ease of Doing Business.
4. To make sure that India's GDP grows.
5. To enhance India's share in world trade.
6. To create more employment opportunities.
7. To make the country as much self dependent, as it is possible.
8. To ensure restriction free flow of goods and services as well as human resource.
Liberalisation refers to easing the rules related to investment and trade. It also refers to get rid
of Licence Permit Raj and to bring down Inspector Raj. Under this, gradually the provision of
compulsory licensing was eliminated with respect to several businesses. At present only some
sectors such as production of hazardous chemicals, explosives, tobacco products etc require
compulsory licensing. In order to reduce Inspector Raj, the arbitrary powers given to the
government officials have been gradually taken away.
Privatization refers to opening up even those sectors for private investment in which the
government had its monopoly. At present only in two sectors, Atomic Mineral and Atomic Energy
complete monopoly of the government exists. Privatization also refers to selling of those public
sector companies to private parties which are running in losses or which may not be managed by
the government. Disinvestment can also be termed as a part of privatisation. It ensures private
investment leading to competition which enhances quality of goods and services.
Globalisation refers to opening of the domestic economy for the entire world. It not only ensures
free flow of investment but also includes free flow of goods, services, technology and human
resources.
But due to economic liberalisation domestic producers were affected adversely in the initial
stages. They were completely thrown out of the competition. The process of globalisation gives
birth to Neo- Colonization. Under this the Multi National Companies of developed countries,
make the consumers of developing countries dependent on them. As due to globalisation the
exchange of technology became easier, domestic companies of organised sector who had
resources were able to get these technologies easily. This led to automation, reducing the
employment opportunities in the country. When employment opportunities in organised sector
start declining, the dependency on unorganised sector increases. In this process the economy
transformers from organised to unorganised sector.
Low Income Trap and Middle Income Trap

Based on per capita income countries are classified into high income, middle income and low
income countries. In order to bridge the gap with the high income countries, it is essential for a
low income or middle income country to grow at a higher pace as compared to the high income
countries. The process of decline in the gap of income of a high income country and low or
middle income country is known as Convergence.
If in case a low income country keeps on growing at a rate equal or lower than the growth rate of
high income countries, then it will continue to remain as a low income country. This is known as
a Low Income Trap. Similarly in case of middle income country, if its growth rate remains equal
or less than that of high income countries, then thay are considered as to be fallen into Middle
Income Trap. Some middle income countries grew at a rate higher than that of high income
countries and now they have per capita income higher than that of high income countries. India
is also a middle income country. Since the process of convergence is very slow, it has remained
in Middle Income Trap for very long.
Gross Capital Formation

In an economy in any financial year the sum total of all new assets created through investment
is termed as Gross Capital Formation. It may include construction of new buildings, roads,
dams, bridges etc. However the price of land is not included in its calculation. Gross capital
formation also includes procurement of new machines. However in the calculation of gross
capital formation, the cost of maintenance, repair etc. is not included.
Ease of Doing Business

Ease of doing business refers to the ease with which businessmen can do business in a country.
This annual report, released by the World Bank, evaluates how conducive a country is to
starting and running a business.
This report is prepared based on the following parameters:
1) Starting a Business
2) Permit for Construction
3) Power Supply
4) Registration of Property
5) Availability of Credit
6) Protection of Minority Investors
7) Paying Taxes
8) Doing business across Borders
9) Enforcement of the Contract
10) Resolution of Bankruptcy
In addition to these ten standards, the 11th standard is the Appointment of Workers and the
12th standard is A Contract with the Government. But these are not included while calculating
the marks.
India is ranked 63rd out of 190 countries in the Ease of Doing Business Report 2020. India has
improved 79 places in the last five years. In the year 2014, India was placed at 142nd rank in
this report.
In August 2020, the World Bank halted the publication of the Ease of Doing Business Report.
The World Bank said in a press release that data provided by some countries revealed
irregularities. Therefore, in December 2020, the World Bank, after evaluating and reviewing the
Ease of Doing Business report of the last five years, presented a new report.
The World Bank said in this revised report that China should have been 7 places down in the
report released in 2018. Apart from this, the World Bank has also improved the ranking of Saudi
Arabia, the United Arab Emirates and Azerbaijan. India's position remained unchanged in these
reports.
World Bank in September 2021 in a press release announced that after data irregularities in
Doing Business Reports 2018 and 2020 reported internally in June 2020, World Bank paused
the next Doing Business Report. The World Bank initiated a series of reviews and audits of the
report and its methodology. The internal reports raised ethical matters, including the conduct of
former Board officials as well as current and former Bank staff, management reported the
allegations to the Bank’s appropriate internal accountability mechanisms.
After reviewing all the information available on Doing Business Report, including the reviews,
audits and reports the management of world bank has taken the decision to discontinue
the Doing Business report.
Although India has made significant progress in this report, critics believe that there is a lack of
development at the ground level. Despite the improvement in India's position in this report,
foreign investment inflows have been relatively low.
Based on this report, the Department for Promotion of Industry and Internal Trade (DPIIT),
working under the Ministry of Trade and Commerce, in collaboration with the World Bank, has
started publication of Ease of Doing Business Report for the states to encourage healthy
competitive development among the states. The report, based on the Business Reform Action
Plan (BRAP), was launched in 2015.
In the latest report launched on 30 June 2022, Andhra Pradesh, Gujarat, Telangana, Haryana,
Karnataka, Punjab and Tamil Nadu are the states categorised as ‘top achievers’ in the ranking.
Himachal Pradesh, Madhya Pradesh, Maharashtra, Odisha, Uttarakhand and Uttar Pradesh
have been categorised as ‘achievers’.
The ‘aspires’ category includes seven states. They are Assam, Kerala, Goa, Chhattisgarh,
Jharkhand, Kerala, Rajasthan and West Bengal.
In the category of ‘emerging business ecosystems’, there are 11 states and UTs, including
Delhi, Puducherry and Tripura etc.
Investment Models
In India since independence investment in infrastructure has mainly remained the responsibility
of the government. However, gradually it was seen that the government not only lacks resources
but also lacks expertise. Hence, involvement of private parties became important. It came to be
known as Public Private Partnership (PPP). In 2014 in place of the concept of PPP, the concept of
PPPP was introduced. It refers to People Public Private Partnership. It shows that participation of
people is also important.
Public Private Partnership models of investment are mainly used in infrastructure sector. Under
this the most common models are as follows:-
BOT Model- Build Operate Transfer Model

In this model, which is mainly used for the purpose of construction of roads and bridges, land is
provided by the government and the responsibility of construction lies on the private party.
Depending on the length of the road or the bridge, its time period is decided. During this time
period, it is the responsibility of the private company to complete the project. Even the
maintenance is the responsibility of the private party. Once the time period is over the project is
transferred to the government and the private party exits. Since deadline is there and the
maintenance is also the responsibility of the private party, the project will be completed on time
and with better quality.
BOT model is again classified into two types:-
1. Build Operate Transfer Annuity Model
2. Build Operate Transfer Toll Model
In Annuity Model a private party completes the project but it is not allowed to collect to toll tax.
The company is paid an annual amount by the government directly. With the help of this the
company has to recover the investment as well as the cost of maintenance and its profits.
In Toll Model the company has the right to collect toll. Through this company recover its
investment cost, the cost of maintenance and even the profit.
EPC Model- Engineering Procurement Construction Model

This model has become one of the most popular models of PPP. Under this involvement of private
parties can be ensured in construction of buildings, roads, dams etc. Under this model the
responsibility of Engineering, Procurement and construction lies with private party. The land is
provided by the government and even the quality standards are also prescribed by the
government. A private company which is capable of completing the project at the lowest cost
with the quality standards is given the responsibility. Once the project is completed it is handed
over to the government. Payment is done by the government gradually during the process of
completion of project.
Swiss Challenge Model

It is being considered as one of the most efficient model. It is similar to EPC model but the
process is relatively different. In this model the lowest bidder is not given the contract instantly.
The lowest bid is disclosed publicly and the other bidders are given a chance to place a bid
which is even better.
Hybrid Annuity Model

This model is commonly used in construction of roadways. It is mainly used in those areas
where the flow of traffic remains low and the probability of toll collection remains low. In this
model 60% of the total investment is done by a private company, whereas the remaining 40% is
invested by the government. Once the project is completed, the private company is not
authorised to collect the toll. It is the government which may or may not collect the toll.
Whatever the case may be, the private company will be paid an annual amount by the
government. This payment will continue for a fixed time period.

BOO Model- Build Own Operate Model
In this model the project is not only completed by a private party but it is also owned by it. This
ownership is for lifetime. Hence, whatever is collected by the company in form of toll is not to be
shared with the government. Even in the future the project will never be transferred to the
government.
BLOT Model- Build Lease Operate Transfer Model

In this model a private party construct a road but it is not operated by the same company. The
project is given on lease to another entity. That another entity operates it and finally it is handed
over to the government.
Aatma Nirbhar Bharat Abhiyan (Self-Reliant India Campaign)

In his address to the nation during Corona pandemic lockdown in 2020, the Prime Minister of
India announceded the Aatma Nirbhar Bharat (Self-Reliant India) Campaign. Along with it he
also announced an economic package worth 20 lakh crore rupees, which was about 10% of
country’s GDP.
The Prime Minister said that in 21st century, India's dreams will be fulfilled only by making the
country self-reliant. He emphasized that the calamity like the Covid-19 pandemic needs to be
seen as an opportunity.
Meaning of Aatma Nirbhar Bharat- In his address, the Prime Minister clarified that in this
era of globalization, the definition of self-reliance has also changed. This Aatma Nirbhar Bharat
is different from the Self Centered state. This process of building a self-reliant India is not based
on promoting protectionism instead on the globalization and exclusion of the whole world. Self-
reliant India will continue to provide its contribution in the development of the whole world. He
stated that India adheres to the philosophy of Vasudhaiva Kutumbakam. As India is a part of the
world, if it develops, it will also contribute to the development of the rest of the world.
Pillars of Self-reliant India- Self-reliant India will stand on five pillars.
1. Economy - which brings in Quantum Jump, rather than Incremental Change.
2. Infrastructure – such infrastructure that becomes the hallmark of modern India.
3. Technology - based on the 21st century technology- driven business system.
4. Vibrant Demography - which is the source of energy for self-reliant India.
5. Demand - India's demand and supply chain must be harnessed to its full potential.
The economic package announced for the purpose of the success of the Self-Reliant India
campaign, is to focus on land, labour, liquidity and law. The objective of this campaign is to
reduce import dependency by emphasizing substitution. Under this, efforts will be made to
increase participation in the global market by improving safety compliance and promoting
quality products. It talks about promoting the importance of local products.
The reforms and support made under the package of 20 lakh crores were presented in 5 parts.
 In the first installment, announcements related to MSME, NBFC, Power Sector, Real Estate
Sector and Taxpayers were made.
 In the second part, provisions were presented for giving free food grains to the migrant
workers. Exemptions were provided to MUDRA Shishu loan borrowers. Provisions related to
MGNREGA, Affordable housing, One Nation One Ration Card were also announced in it.
 The main focus of the third part was on the announcements of the economic relief packages
related to reforms in agricultural marketing. In this, provisions regarding Inter-state trade,
Contract farming, end of regulation of agricultural products and agricultural infrastructure
were discussed.

 The fourth installment was related to the areas of Defence, Aviation, Atomic Research,
Space, Minerals etc. There was a great emphasis on privatization.
 In the fifth and final part, announcements were made related to Ease of doing business,
Promotion of e-learning, Health etc.
The Covid crisis exposed the limits of multilateral and regional institutions. It has also revealed
the ineffectiveness of trade barriers and separate economic models. In such situation, the slogan
of 'Vocal for Local' has been given in line with the expected geopolitical changes of the post-
Covid world.
Although, this campaign was also criticized. According to critics, the economic package was
presented exaggeratedly. The inclusion of RBI's actions in the government's fiscal package has
been criticized. Furthermore, this package looks to be insufficient to assist the demand side, as
it merely strengthens the supply side. Many critics saw it as a remodelling of Make-in-India.
World Bank, International Monetary Fund and

World Trade Organisation
World Bank and IMF, both are known as the Bretton Woods Twins. It is because the idea of the
World Bank and IMF was conceived during the Bretton Woods Agreement, which took place in
1944. Bretton Woods is the name of a place located in New Hampshire, USA. They both were set
up with the objective of reconstructing the entire world which was destroyed in World War II.
Initially, it was signed by 44 countries. Under this agreement, they both came into existence in
1945. World Bank started functioning in 1946, whereas the IMF started functioning in 1947.
WB and IMF, both have some similarities and they also have a number of differences. They both
have their headquarters located in Washington DC. A country that becomes a member of the IMF
automatically becomes a member of the World Bank. At present they have 190 members.
Andorra in October 2020 became the newest member of the World Bank. It is a small country
located on the border of France and Spain.
By convention, the president of the World Bank is always an American and the managing
director of the IMF is always a European. At present, David Malpass is the president of the World
Bank. He was chosen as the 13th president in April 2019. His tenure will be of 5 years.
Presently, Kristalina Georgieva of Bulgaria is the Managing Director of IMF.
World Bank
Initially, the World Bank was officially known as International Bank for Reconstruction and
Development (IBRD). World Bank was only its popular name. IBRD was set up to reconstruct the
entire world destroyed during World War II. However, when the responsibility was fulfilled, it was
officially renamed as World Bank, and IBRD was made a part of the World Bank.
In the 1960s, International Development Association (IDA) was set up and it was also made a
part of the World Bank. Hence, at present World Bank means IBRD + IDA.
Later on, 3 more organizations were brought under the purview of the World Bank. Which are as
follows:-
1. International Finance Corporation (IFC)
2. Multilateral Investment Guarantee Agency (MIGA)
3. International Centre for Settlement of Investment Dispute (ICSID)
When IFC, MIGA, and ICSID are clubbed together with World Bank, it is referred to as World
Bank Group.
So, World Bank Group means IBRD + IDA + IFC + MIGA + ICSID
International Bank for Reconstruction and Development (IBRD)
IBRD was set up with a total capital investment of 14 Billion dollars. It is jointly owned by all
member countries. It started providing loans with this amount and a large part of the profit
which is made is infused in IDA. Presently, it provides long-term loans to middle-income
countries for developmental purposes. For example, projects related to poverty, health,
education, environment conservation, etc.
Since 1959, IBRD has enjoyed the highest credit rating because of which it can also borrow from
other countries at a lower rate of interest.
International Development Association (IDA)

It also provides long-term loans to the member countries for the same developmental purpose.
However, it provides a loan only to the poorest of the poor country. Hence, the rate of interest is
extremely low.
It is funded mainly by IBRD, through its profits. Out of the total members of IBRD, 77 poorest
members are provided loans by IDA. Out of them, 39 belong to Africa. IDA provides loans with a
maturity of 25-30 years with an additional extension of 5-10 years. India came out of the preview
of IDA in November 2014. However, even today Bangladesh is the single largest borrower of IDA
and India is in the 2nd position.
International Finance Corporation (IFC)

IFC is the investment wing of the World Bank. It encourages the member countries to provide
investment and encourages private investors to invest in a member country. It even holds a
stake in such investment and hence it also shares profit. In order to raise funds for such
investments IFC as well as Private Sector Companies may issue bonds that can be sold in the
international market.
In order to give indigenous flavor to such bonds, IFC uses certain names for those bonds. For
example: - If the fund has to be raised for investment in India, then the bond is named as
Masala Bond. On the other hand, if it is to be raised for investment in Japan, the bond is termed
a Samurai Bond.
Multilateral Investment Guarantee Agency (MIGA)

MIGA is the insurance wing of the World Bank. It provides insurance coverage to companies
investing on the recommendation of IFC in different countries. However, the insurance coverage
is provided only against non-commercial risks such as forceful Nationalization.
International Centre for Settlement of Investment disputes (ICSID)

If a dispute related to investment takes place between two or more member countries and if
World Bank is also a party to that investment then the settlement is done by ICSID. The decision
of ICSID will be binding upon the member countries.
Note:- India has been a member of the World Bank as well as the World Bank group. However,
India is not a member of ICSID.
Masala Bonds
Masala Bonds are industrial securities that can be issued by the private sector or public sector
companies in order to raise funds from abroad.
Normal bonds that are issued in order to raise funds from a foreign source are mainly dollar
denomination, euro denomination, yen, or pound denomination bonds. They are sold to an
interested investor and the fund is raised in the form of foreign currency. It means that if the
domestic currency depreciates the outstanding debt will automatically increase. In the case of
normal bonds, this risk has to be borne by the borrower or the issuer.
However, in the case of Masala Bonds, it is just the opposite. Masala Bonds are rupee
denomination bonds i.e., the value is printed in the form of the rupee. When they are sold, a
fund in the form of a dollar or any other hard currency equivalent to the face value printed can
be raised. When on maturity, repayment has to be done then again hard currency equivalent to
the face value printed in the form of rupee has to be given back based on the current exchange
rate. Hence, there the risk rooted in the exchange rate is borne by the lender. So it is popular
among Indian companies.
International Monetary Fund (IMF)

IMF is referred to as the twin sister of the World Bank. However, the function of the IMF is
completely different from the World Bank. The most important responsibility of the IMF is to
provide short-term loans to the member countries in the Balance of Payment crisis situation.
The other responsibilities are to promote a single international accounting system to ensure
financial cooperation among the member countries, to ensure a stable exchange rate of different
domestic currencies, and to also promote private investment in the member countries.
The highest decision-making body in IMF is the Board of Governors (BoG). The BoG consists of
the Finance Minister of all the member countries. It also has an alternate Governor who is the
Governor of the Central Bank of the respective countries. For any decision to be taken at least
114 countries should vote in favor of the proposal. At the same time, at least 85% of the total
votes should be polled in favor of the proposal.
Since IMF is not an egalitarian body. The weightage of all member countries is not the same.
Different countries have differential weightage in which the GDP of the country plays the most
important role. Along with this, the contribution made by that country to IMF also plays an
important role. Based on this, presently the vote of the USA has a weightage of 17.44%, whereas
the vote of India has a weightage of 2.76%. Therefore, the USA, alone can reject any proposal
placed in IMF. That is the reason why the demand to reform IMF has continuously been made.
In order to lend to member countries, in case of the BoP crisis, IMF uses its own accounting
unit, which is referred to as the Special Drawing Right (SDR). It is also termed the currency of
the IMF. Since it is accepted by all the member countries, it is known as Paper Gold.
SDR is not a claim over IMF, but it serves as a claim over all the member countries i.e., the loan
taken in the form of any currency, can be repaid in the form of SDR and the member countries
will have to accept it. The exchange rate of SDR is determined against a basket of currencies. In
this basket prior to 1 October 2016 USD, Yen, Pound, and Euro were included. On 1st October
2016, even the Chinese currency Yuan/Renminbi has been added to the basket.
While including currency in this basket, several factors are seen. They are:-
1. Foreign exchange reserve of the country.
2. Share of that country in the world trade.
3. Stability in the exchange rate of that currency.
4. GDP of the country/size of the economy.
SDR was introduced in 1969 for the first time. During that time the price of 1 SDR and 1 Dollar
was equivalent to the value of 0.888gm Gold. This system of Price Determination with respect to
Gold was known as Bretton Woods System. But later in 1973, this system was discontinued. The
IMF started using the currency basket for the price determination of SDR.
Whenever IMF provides a loan to a member country it imposes certain conditions so that the
country may not fall into crisis. These conditions are:-
 Instructing the government to downsize the Bureaucracy.
 Downsize the Ministries.
 Adopt austerity measures in public expenditures.
 Discontinue welfare schemes that are irrelevant.
 Eliminate subsidies.
 Encourage privatization.
World Trade Organization (WTO)

WTO came into existence as a successor of GATT (General Agreement on Tariffs and Trades), in
the year 1995. GATT was an agreement that was signed in 1947, and it became effective in 1948.
It was not an organization but a mere agreement signed by a number of countries to ensure
restriction-free trade in goods. However, in the developed countries as the labor cost started
increasing, the production of goods started becoming costlier. Hence, manufacturing industries
started shifting toward developing economies. The economy of developed countries started
shifting towards the service sector therefore the existence of GATT would have helped only the
developing economies which had become manufacturing hubs by the early 1990s.
Hence, in the 8th and last round of GATT, which was held in Uruguay, the idea of WTO was
conceived. The then Director General of GATT Arthur Dunkel was given the responsibility to
prepare a blueprint for WTO. Hence under the Marrakesh (Morocco) treaty, WTO came into
existence. The last Director-General of GATT and the first Director-General of WTO was Peter
Sutherland.

WTO is a multilateral organization that aims at facilitating restriction-free trade not only in
goods but also in services among the member countries. The headquarters of WTO is located in
Geneva. At present, it has 164 members. The latest member to join WTO is Afghanistan and the
163rd member was Liberia. India has been the founding member of both GATT and WTO.
WTO is headed by a Director-General. The present Director-General of WTO is Ngozi Okonjo-
Iweala. She took the office in March 2021 as the 7th Director-General. She is the 1st woman and
1st African to hold this office. The highest decision-making body in WTO is the Ministerial
Conference which is held after every two years. Till date, 12 ministerial conferences of WTO have
been held.
1. 1996: Singapore
2. 1998: Geneva
3. 1999: Seattle (USA)
4. 2001: Doha (Qatar)
5. 2003: Cancun (Mexico)
6. 2005: Hongkong
7. 2009: Geneva
8. 2011: Geneva
9. 2013: Bali
10. 2015: Nairobi
11. 2017: Buenos Aires
12. 2022: Geneva (cohosted by Kazakistan)
The 12th ministerial conference of WTO was organized from 12th to 17th June 2022 at WTO
headquarters in Geneva, Switzerland. Earlier it was to be organized in Nur-Sultan the capital of
Kazakistan in June 2020 but was postponed due to Covid-19 Pandemic. It was postponed again
in 2021 due to the outbreak of the Omicron variant of COVID-19. Kazakhstan presided over the
12th conference.
WTO Director-General, Ngozi Okonjo-Iweala said “Not in a long while has the WTO seen such a
significant number of multilateral outcomes”, as it was the only conference in nearly 5 years that
too in this Post Covid world. The conference agreed to a series of deals relating to setting limits
on harmful fishing subsidies, temporary waivers on Covid-19 vaccines, a moratorium on e-
commerce trade, food security, etc.
A multilateral agreement was passed to curb ‘harmful’ subsidies on illegal, unreported, and
unregulated fishing for the next four years. It will protect global fish stocks.
Members agreed to temporarily waive intellectual property patents rights on Covid-19 vaccines
for 5 years. Countries can manufacture them domestically without the consent of the patent
holder.
Considering the global food shortages and rising prices due to war, members agreed to a binding
decision to exempt food purchased by the UN’s World Food Programme (WFP) for humanitarian
purposes from any export restrictions. However, countries would be allowed to restrict food
supplies to ensure domestic food security needs. India wanted the WTO should renegotiate
subsidy rules for food purchasing programs backed by the government specifically aimed at
feeding poor citizens in developing and poor countries.
India has asked the WTO to review the extension of the moratorium on customs duties on e-
commerce transactions, involving digital trade in goods and services. However, all members
agreed to continue the long-standing moratorium on customs duties on e-commerce
transmissions until the subsequent Ministerial Conference or until March 31, 2024, depending
on whichever comes first.
India has been vocal about WTO Reforms. Members reaffirmed the foundational principles of the
WTO. Which is the commitment towards an open and inclusive process to reform all its
functions, from deliberation to negotiation to monitoring. Notably, they committed to working
towards having a well-functioning dispute settlement system accessible to all members by 2024.
Piyush Goyal, Minister of Commerce and Industry and Minister of Consumer Affairs of India,
who participated in the conference said “India is 100% satisfied with the outcome.” And “I am
not returning to India with any worries.”
Here it is worth mentioning that, due to the constant disputes arising in the WTO conferences
and due to the absence of consensus among the members, its importance as a multinational
organization for promoting trade has steadily decreased. The organization has been divided into
three different opposing factions - underdeveloped countries, developing countries and developed
countries. The importance of this multinational organization has also decreased due to free trade
agreements and regional agreements between different countries. WTO aims at eliminating both
Tariff & Non Tariff barriers to promote trade. But due to different economic needs and problems
of different countries, WTO cannot formulate uniform rules for all member countries.
Tariff and Non-Tariff Barriers

In order to ensure trade without restriction WTO aims at eliminating the tariff as well as non-
tariff barriers. The countries generally impose barriers, which are in the form of tariffs or non-
tariff barrier, in order to restrict trade.
Tariff Barriers are always in the form of duty. They may be import duty or export duty. Import
restricts the inflow of goods whereas export duty restricts outflow.
On the other hand, non-tariff barriers are not in the form of tariffs. They may be broadly
classified into the following.
1. Social Clause
2. Quota/ Quantitative restriction
3. Environmental Clause
1. Social Clause
Under the social clause, social factors are used in order to prohibit trade. For example- A
country may blame that in the process of production of a commodity, child labor was used,
which is a social evil and hence, the import will be prohibited. Similarly, if the wages paid to the
workers are even below the base minimum level then again import may be restricted.
2. Quota Restriction
Under Quota or Quantitative restriction, a limit is fixed and a commodity is not imported by that
country beyond that fixed limit.
3. Environmental Clause
Under an environmental clause, a country may blame that the process of production used by a
company or technology is not environmental friendly. Use of pesticide, presence of a particular
weed, etc. they all may be used as a restriction.
These tariff and non-tariff barriers serve as a hindrance in trade therefore WTO aim at
eliminating them.
Most Favored Nations

Under WTO norms all the member countries have to provide MFN status to the other member
countries. It means with respect to trade, a member country cannot discriminate against any
other country. However, bilateral and multilateral FTAs are kept out of the purview of this
concept. It means two countries that have signed FTA with each other, can discriminate in each
other's favor.
Anti-Dumping Duty
This duty is allowed under WTO norms, in certain conditions. If a product is produced in a
country in huge quantity which is more than what is required for consumption in the domestic
market and at the same time even in the international market the demand of the product is not
optimum then surplus produce cannot be absorbed either in the domestic market or in the
international market.
In that case, if the exporter country starts exporting that product to other countries at a price
which is even below the production cost or which is even below the fair price of that product in
the international market, then it is known as Dumping. Such exporters may affect the domestic
producers of the importing country. Hence, in order to protect its domestic producers, the
importing country may impose additional duty on such imports which is known as Anti-
Dumping Duty.
However, the country which imposes Anti-Dumping duty will have to prove that it is a case of
dumping and at the same time it affects their domestic economy. A country may impose anti-
dumping duty on import of a product from a country only if in case the quantity of the dumped
product is more than 1% of the total quantity of the same product produced domestically in the
importing country.
Countervailing Duties
If the exporters of a country are provided export subsidy by the government then these exports
become cheaper, hence they acquire an edge over the domestic products of the importing
country.
In order to counterbalance the impact of the subsidy, the importing country imposes a
countervailing duty on the import of such products. A countervailing duty cannot be imposed on
an exporting country whose contribution in world trade is not more than 3%.
Doha Development Round

In the last round of GATT, three important issues were raised, they are as follows:-
1. Agreement on Agriculture (AOA)
2. Non-Agricultural Market Access (NAMA)
3. General Agreement on Trade in Services (GATS)
When WTO was established, these issues were inherited by it from GATT. However, for 6
consecutive years, no fiscal conclusion was drawn on these issues. Hence in 2001, it was
officially made part of Doha Agenda. However, even today these issues are yet to be resolved.

Because of this, as a multilateral organization, WTO is losing its relevance and the member
countries are resorting to bilateral and multilateral FTA.
1. Agreement on Agriculture
The developed and the developing countries provide a number of domestic support, as well as
export subsides which manipulate international trade in agricultural products. Even the buffer
created for ensuring food security may manipulate international trade. Hence, AOA is aimed at
ensuring the elimination of these trade manipulative subsidies and providing restriction-free
market access. The EU as well as USA alone, provides annual subsidies of more than 350 Billion
dollars to their farmers. Such subsidies under WTO are classified into three different colors of
boxes.
a) Blue box subsidy
b) Amber box subsidy
c) Green box subsidy
All the subsidies are trade manipulative in nature with varying degree. Some are more
manipulative some are less.
Blue box
Blue Box subsidies are provided by the government of developed countries for restricting
production to its farmers. Under this, the farmer is instructed to produce below the maximum
capacity. Any loss incurred by the farmer by producing below the capacity is borne by the
government.
The excuse given is that it is for the purpose of restoring the fertility of the soil by leaving some
parts of the land empty/unsown.
However, the downfall in production keeps the prices high in the international market.
Amber Box
It is the most manipulating and affects the international trade the most. All the domestic support
on the subsidy provided to the farmers, directly or indirectly by the government falls under the
Amber Box subsidy. Subsidized seeds, electricity, fuel, fertilizer, etc. even cash subsidy are
included in it. Such subsidies are most manipulative in nature.
Under WTO norms they are not to be eliminated completely. For developed countries, the value
of such subsidies has to be brought down to 5% of the total value of agricultural production. For
developing countries, it has to be bought down to 10%. Since such subsidies have to be bought
down to certain levels, it's called De-minimis Level.
Green Box
These are least manipulative in nature, hence can be continued. It consists of the subsidy given
for research and development.
2. Non-Agricultural Market Access

It aims at providing market access to non-agricultural products without any restriction among
the member countries. In other words, it aims at ensuring restrictions free trade in goods. For
this purpose only the MFN status arrangement was initiated.

3. General Agreement on Trade in Services
This objective differentiates WTO from GATT. It aims at ensuring restriction free trade in
services. For that purpose, even restriction-free movement of human resources has to be
ensured.
The concept of National Treatment was introduced for it. Under this, even a Foreign Service
provider in a member country has to be treated as a national company and it should not be
discriminated against.
Note:- The administrative services given by the government are out of its purview.
Bali Round of WTO

In Bali round of WTO which was held in 2013, three important issues were raised-
1. Food security
2. Trade facilitation
3. Package for Least Developed Countries
1. Food security
Food security was an issue concerning India. It has been a part of the Agreement on Agriculture,
which was raised during the Doha round. Under WTO norms a country can preserve food grains
for its subsidized distribution only to a certain extent of total production. Any buffer created
beyond that limit can be challenged in WTO. As per the rules, the value of buffer created for the
purpose of subsidized distribution cannot exceed 10% of the total value of production. However,
the problem is that the value of total production is calculated according to the average price of
food grains in between 1986-88. However, the value of buffer is calculated on the basis of the
current price of food grains based on Minimum Support Price. Because of the Food Security Act,
it is obvious that India’s buffer will exceed this limit. Hence, India demanded that till the time a
final decision has not been taken, the issue should not be raised in WTO. The member countries
decided to sign a 'Peace Clause' for four years during which the issue cannot be raised in WTO.
India rejected this proposal and finally, it was decided the Peace Clause will remain in place till a
final decision is taken.
2. Trade Facilitation-
It was an issue related to developed countries. It can be termed as a modified version of Trade-
Related Investment Measures (TRIMs). The developed countries have always complained that it
has been difficult to construct a business and invest in the developing economies like India. The
main concern is the infrastructural bottleneck. Others are the provisions related to export,
labors law, convertibility of currency, dividend payout, etc. Hence the developed countries should
demand that developing economies like India should ensure these facilities in a time-bound
manner. Although trade facilitation has been ratified, India signed it in 2017. The developing
economies have rejected the demand for ensuring these facilities in a time-bound manner.
3. Package for Least Developed Countries (LDCs)-

Including Afghanistan and Liberia, WTO has 36 LDCs (least developed countries) as its
members. The LDCs which have become the members of WTO have hardly benefited from it.
These LDCs account for 12% of the world population but only 2% of world GDP. After becoming
a member of WTO, these economies have been reduced to only a market. They have become a
dumping country for products produced in other parts of the world. Hence they were demanding
that they should also get some benefit.

In Bali round, it was decided that the manufactured goods produced by LDCs to other countries
which are members of WTO will attract zero import duty for the next 15 years.
Nairobi Round
The 10th ministerial conference of WTO was held in Nairobi. In this ministerial conference, three
important issues were discussed.
1. Issues related to food grains.
2. Issues related to Cotton export.
3. Issues to Non-Agriculture products from the least developed countries.
1. Food Grain Issue

Under this issue, three sub-issues were covered.
a. Export subsidy on food grains.
b. Food security
c. Additional duty on import of food grains
The export subsidy provided by the developed and developing countries to the exporters of food
grain is trade manipulative subsidies that have to be eliminated. In Nairobi round, it was decided
that the developed countries will immediately bring down such subsidies to zero. Whereas the
developing countries will bring it down to zero by 2018.
Food security and the buffer which is created for this purpose are also trade manipulative in
nature. The buffer may result in a short supply of food grains in the international market.
Hence, WTO norms restrict this buffer creation. In particular years a buffer of not more than
10% of the total value of the product can be created. However, the controversy is rooted in the
fact that the nature of the total produce is calculated on the average price of the food grains from
1986-88. But the total value of buffer is calculated on the basis of the MSP for the current years.
This provision may become a threat to India's Food Security Act. Hence, India, as well as other
developing countries, has been demanding that the calculation of total produce should be
rationalized. It was decided in the Bali Round itself that till the time a final decision in this
regard is taken, Peace Clause will remain in force for an unlimited time period, during which the
food security cannot be challenged. In the Nairobi round, no final decision was taken in this
regard.
In order to protect the domestic producers or farmers, the developing countries have been
demanding that they should be officially allowed to impose additional import duty on the food
grains being exported by the developed countries. It is mainly because the domestic support and
the other subsidies provided by the developed countries provide an edge to their products. In
this regard, it has been decided that if in the international market the food prices decline, the
developing countries as a Special Safeguard Mechanism would increase import duty on such
products.
2. Issues related to the export of Cotton

Some of the African countries have been leaders in the production of Cotton but their export has
remained low. It is mainly low because they failed to compete with the developed and developing
countries due to the export subsidies provided to them to the export. In this regard, in the year
2003 an organization known as Cotton-4 (C-4), was created by 4 African countries Mali, Benin,
Burkina Faso, and Chad. C-4 demanded that the developed and developing countries should
eliminate the export subsidy on cotton. This issue was raised in the Nairobi round.
Hence, it was decided that the developed countries will immediately bring down export subsidy
on cotton to zero. The developing countries will bring it to zero by 2017. The developed countries

will also bring down the import duty on cotton to zero but for the developing countries, it will be
optional.
3. Preference to manufactured products from the least developed

countries
Under WTO norms because of the reduction of duties, the LDCs have suffered adversely. Their
increase in imports affected the domestic producers and the exports remained low.
Hence, in the Bali round, it was decided that on the export of goods from LDCs the member
country will bring down import duties to zero for the next 15 years. However, their cost of
production being high even a zero import duty will be of no help. Hence they demanded that on
the basis of origin, their export should be given preferences by other member countries.
Therefore in Nairobi round, it has been decided that only products being exported from LDCs will
be considered to be a product of such a country if at least 25% of the value addition has been
done in that country. Such products will be given preferences.
Trade related aspect of intellectual property rights

These rights are granted under WTO norms. They protect intellectual properties. These
properties are products of the human mind, which are new, novel, and nonobvious and have
commercial utility.
The TRIPs laws cover the followings:-
1. Patent
2. Copyright
3. Trademark
4. Trade secret
5. Geographical indication
Patent
It is a right provided to the inventor of a technology, chemical, medicine or any other product
which is nonobvious, completely new and has a commercial utility. For example: - Microchips.
Patent right is granted for 20 years. During these 20 years, no other individual or company can
produce or sell the same product without any prior permission of the patent holder.
Prior to 2005 India only provided process patent and not product patent. It means that India
provided patent to only the process by which the product was produced. Since on the final
product, no patent right was guaranteed, any other company could produce the same product
with a different process.
However, under WTO norms, after 2005 all the member countries had to provide product patent.
Hence, accordingly since 2005, even India provides product patent. However, the Indian laws do
not allow evergreening i.e. a patented product is slightly modified by the patent holder and the
exclusive right of product is again renewed after its expiry. Developed countries argue that
patent rights are important for promoting R&D. It helps the patent holder to recover the cost of
R&D.
However, the developing and underdeveloped countries feel that they are an instrument for
creating a monopoly over newly invented products. It is just for the purpose of maximizing the
profit of such companies which mainly belong to western countries. Hence, India has the
provision of Compulsory Licencing as well.
Copyright
These rights are also granted under the TRIPs agreement. However, such rights are provided over
written and published materials such as books, poems, software, lyrics, etc. Such copyright
protected published material cannot be republished by any other individual or company without
the permission of copyright holders.
The rights are granted for a lifetime. After the death of the copyright holder, it may remain with
the successor for another 60 years.
Trademark
It is a logo or a symbol that becomes the identity of a company. That logo or the symbol can be
commercially used by the company only. It is granted for a lifetime but has to be renewed after
every 10 years.
Trade Secret
A company or a business entity can use certain secrets or private methods to enhance its
business. If it is not obvious and new then it can also be protected under the TRIPs laws.
Geographical Indication
These products have distinct quality, not because of innovation but because of local factors such
as soil, climatic condition or even skill of local workers. On such products, patent rights cannot
be granted.
They are identifiable with geographical area and on the packaging of such products Geographical
Indications Tag along with the name of the place are printed. It includes products such as
Basmati Rice, French Wine, Darjeeling Tea, Tirupati Ladoo, Kolhapuri Chappal.


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INTRODUCTION

Household or Family Management

Micro-Economics and Macro-Economics

1 Economics By: Kumar Amit Sir

Inclusive Development and Sustainable Development

2 Economics By: Kumar Amit Sir

Demand Pull Inflation

NAIRU (Non-Accelerating Inflation Rate of Unemployment)

1 Economics By: Kumar Amit Sir

2 Economics By: Kumar Amit Sir

Some important concepts related to inflation

100/- (10%) 110/- (20%) 132/- Inflation.

Wage price spiral

This particular relationship is not followed in the case of stagflation.

4 Economics By: Kumar Amit Sir

Producer Price Index

Wholesale Price Index

Wage price spiral

This particular relationship is not followed in the case of stagflation.

4 Economics By: Kumar Amit Sir

117 564 16 = 697

6 Economics By: Kumar Amit Sir

2) Pan Supari and Tobacco 2 4 % .

5) Fuel and Light 6 5 .

In this basket Food and Beverages have the highest weightage.

7 Economics By: Kumar Amit Sir

Refined Core Inflation

8 Economics By: Kumar Amit Sir

(1) Economics By: Kumar Amit Sir

Cash Reserve Ratio

Statutory Liquidity Ratio

(2) Economics By: Kumar Amit Sir

Open Market Operations

Market Stabilisation Scheme

(3) Economics By: Kumar Amit Sir

(4) Economics By: Kumar Amit Sir

Reverse Repo Rate

Marginal Standing Facility

Standing Deposit Facility

(5) Economics By: Kumar Amit Sir

Policy Corridor / Liquidity Adjustment Facility Corridor

Basis Points (BPs)

Cheap Money Policy and Dear Money Policy

Monetary Policy Committee

(7) Economics By: Kumar Amit Sir

Non Traditional Tools

Helicopter Money / Helicopter Drop

(8) Economics By: Kumar Amit Sir

Negative Interest Rate

(9) Economics By: Kumar Amit Sir

Exchange Rate Determination of Domestic Currency

Long-Term Repo Operation (LTRO) / Targeted Long-Term Repo

(11) Economics By: Kumar Amit Sir

(12) Economics By: Kumar Amit Sir

(1) Economics By : Kumar Amit Sir

Mechanism used in order to print fresh currency

A Brief History of Banking in India

(2) Economics By : Kumar Amit Sir

History of Nationalization of Banks in India

(3) Economics By : Kumar Amit Sir

(4) Economics By : Kumar Amit Sir

(5) Economics By : Kumar Amit Sir

Rules related to foreign investment in banking sector in India

(6) Economics By : Kumar Amit Sir